The Washington Post has recently published a series of articles arguing “America’s middle class is lost,” citing problems that go far beyond the recent recession. Take the accompanying graphic, which shows the year median income peaked in each U.S. county. In most, that happened in 1999 or earlier. The Post argues that over the past 25 years “the typical family’s income hasn’t budged.”
It’s a powerful story. It’s also wrong.
Congressional Budget Office (CBO) data shows market income in the middle quintile rose by one quarter between 1989 and 2007. The middle class had done quite well—until the recession and anemic recovery.
In coming to the opposite conclusion, the Washington Post made several mistakes. It:
1. mixed data from different surveys;
2. used a less-accurate measure of inflation;
3. did not account for demographic changes; and
4. ignored the rising value of certain benefits.
5. Each of these mistakes makes the middle class today seem poorer than it actually is. America has had a far better economic past—and hopefully future—than the Post reports.
1. Juxtaposing Different Surveys
The Washington Post did something understandable. It combined older income data from the censuses conducted every 10 years with figures from the Census Bureau’s new yearly “American Community Survey” (ACS). The Census Bureau introduced the ACS in the mid-2000s to replace many questions formerly asked on the decennial census, including those about income. Anyone wanting to compare census data over time virtually has to do this.
However, the ACS asks respondents about their income differently than the old census forms did. These differences cause the ACS to report about 5 percent less income. For this reason the Census Bureau recommends using caution when making such comparisons. Juxtaposing ACS data with census figures automatically makes Americans look poorer today, even if nothing has changed in the economy.
2. Incorrectly Adjusting for Inflation
To make meaningful comparisons over time, analysts must adjust for inflation. The Washington Post used the Consumer Price Index (CPI) to do this. However, the CPI suffers from several biases that cause it to overstate inflation by about one percentage point a year.
One of these biases comes from the CPI taking years to account for changes in what Americans buy. This problem alone overstates inflation by approximately 0.3 percentage points a year.
The Bureau of Labor Statistics understands this problem. Congress, though, has blocked efforts to correct it. Congress has tied both tax brackets and Social Security checks to the CPI. Any change to its methodology would both raise taxes and trim entitlement spending—political hot potatoes.
For this reason, both the Federal Reserve and the Congressional Budget Office prefer a different measure of inflation, the Personal Consumption Expenditures (PCE) deflator. The PCE accounts for some of the biases in the CPI and generally shows less inflation. Year to year, these differences matter little. Compounded over a quarter-century, they matter a lot. Overestimating inflation makes inflation-adjusted income appear to have grown substantially slower than it actually did.
3. Demographics Have Changed
America has changed a lot demographically since 1989. The Baby Boomers have been retiring, and household sizes have fallen. Americans have begun taking longer to get married, and single parenting has increased. These demographic changes affect household incomes.
Such changes say relatively little about the opportunities the economy provides. Retirees usually have lower incomes than workers. Two single workers mechanically have individually lower income than their joint household when they get married. The Washington Post did not adjust the Census and ACS data for these demographic changes.
4. Benefits Have Grown
Benefits have grown as a share of workers’ paychecks. The average worker now collects between a fifth and a third of his or her income in non-cash benefits, depending on which survey analysts look at. Nonetheless, the Washington Post’s figures included only cash wages. It omitted benefits.
In the Post’s defense, it couldn’t include them if it wanted to look at county income changes. The government does not estimate their value at the county level. Yet omitting them paints an incomplete picture of compensation growth.
5. CBO Data Shows the Middle Class Prospering Until the Recession
Each of these biases make the middle class of the past appear wealthier and the middle class of today seem poorer. They collectively produce a distorted view of how middle-class incomes actually changed. Fortunately, the CBO produces estimates of household income that correct for these problems. The CBO bases its estimates on a series of consistent data sources, uses the PCE deflator, includes benefits, and adjusts for changes in household size. It also breaks out elderly and non-elderly households.
The CBO data paints a very different picture of the health of the middle class than the Post reported. Consider just non-elderly childless households, a category the CBO identifies. Looking at these households removes the effects of the aging baby boomers. It also avoids conflating social changes—mothers of young children work more frequently today—with rising pay rates.
The CBO data shows the after-tax income in the middle quintile of this group rose by 35 percent between 1989 and 2007. Some of that came from tax cuts and increased government benefits, but higher market earnings made up most of it. Real market income in the middle quintile rose $10,000 a household—23 percent—during that time. The middle class did quite well until the recession and weak recovery hit. The bottom quintile saw even greater gains.
Then things went south quickly. Between 2007 and 2011 (the most recent year of data), the market income of households in the middle quintile fell by more than $5,000. Over half the economic gains of the previous two decades disappeared.
Opportunities for the middle class have contracted recently. But this is a recent phenomenon. Contrary to the Washington Post’s reporting, most Americans thrived in the decades preceding the recession. Low unemployment and steadily rising incomes improved the lives of tens of millions of Americans. The middle class would benefit far more from returning to the pre-recession system than from replacing it.
- James Sherk is a senior policy analyst in labor economics at The Heritage Foundation’s Center for Data Analysis.
Originally appeared in The Federalist