5 Myths About the Poor Middle Class

By Stephen Rose
Sunday, December 23, 2007

The American middle class is fighting for its life -- or at least that's what Lou Dobbs would have you believe. The CNN anchor's rants about "the war on the middle class" are probably the most prominent examples of such economic doom-saying, but he isn't alone. Democratic presidential candidates pepper their debates with references to the assault; leading liberal thinkers argue that supply-side conservatives captured the Republican Party during the Reagan administration and implemented policies that continue to privilege the super rich today. They tell a compelling tale of middle-class decline. Pity it isn't true.

1. The middle class's standard of living stagnated while the dot-com boom made the super rich even richer.

Not really. In fact, the U.S. economy hands out wealth far more evenly. Per capita gross domestic product has increased by more than 65 percent since 1979 -- growth that translates to $26,000 per household. If all that money had gone to the richest 10th of the population, it would now hold more than 60 percent of the national income. That's nearly twice as much as the super rich actually have, according to the best census surveys available.

To be fair, demographic changes have sparked many misunderstandings about the economic health of the middle class. For example, Americans today are more likely to live in single-adult households than they were 30 years ago. Adjust incomes to take into account this shift, along with increasing employer contributions to retirement savings and to health insurance premiums, and you find that the real middle-class median income has risen 33 percent, or $18,000, since 1979. Of course, that's a third less than the $26,000 that those households would have gotten if the growth had been distributed equally. But the middle class didn't stand still, either.

2. The middle class is shrinking.

True, fewer people today live in households with incomes between $30,000 and $100,000 (a reasonable definition of "middle class") than in 1979. But the number of people in households that bring in more than $100,000 also rose from 12 percent to 24 percent. There was no increase in the percentage of people in households making less than $30,000. So the entire "decline" of the middle class came from people moving up the income ladder. For married couples, median incomes have grown in inflation-adjusted dollars by 25 percent since 1979.

3. The only way people cope with the middle-class meltdown is by falling into debt.

You've probably heard that the average U.S. household carries $9,300 in credit card debt. But that misleading statistic includes the debt of the self-employed and some small businesses. The 2004 Survey of Consumer Finances, which does not include business debt, showed that 54 percent of households had no credit card debt after paying their monthly bill and that the average household credit card debt was just over $2,300.

Mortgages, which represent 79 percent of all debt, are the more pressing concern. But even according to the most pessimistic estimates, only 1 to 2 percent of homeowners will be forced into foreclosure in the next few years. Assets have grown faster than debts for most middle-class families. Median net worth has grown 35 percent since 1989, according to the Federal Reserve Board, and only 15 percent of households have debt payments worth more than 40 percent of their income or are 60 days late on any debt payment.

4 With the rise in trade with China and India, the United States has become a nation of low-paid service workers destined for a high rate of unemployment.

The claim that automation and international trade will create a large class of permanently unemployed American workers remains as fuzzy as ever. Certainly, in the churn of the modern economy, more firms are closing or reducing their labor forces. Every week for the past several years, nearly 1 million workers either quit or lost their jobs. But a slightly higher number were also hired in a typical week. At the national level, overall employment has grown slowly but steadily. And Commerce Department data show that even at the state level, including in Midwestern "Rust Belt" states, employment is up at least 14 percent since 1993, the year the North American Free Trade Agreement was passed.

Blue-collar manufacturing job losses were offset by the rise in what I call the "office economy" -- jobs in administration, sales, finance and other business services that sprouted nationwide. The health care industry also created lots of new jobs, many of them filled by college graduates who have experienced the largest gains in earnings. Per capita income has increased by at least 15 percent in every state since 1993 -- a good sign that state economies are large enough to adapt to the changing economy.

5. Companies are walking away from their commitments to workers by cutting pension and health insurance benefits.

Yes, companies are requiring more co-pays and higher deductibles in health-care plans. But medical costs are also on the rise, and employer contributions for health insurance jumped from 3.5 percent of wages in 1979 to 7.2 percent in 2005, according to the Commerce Department.

Virtually every large company provides coverage and pays more than 75 percent of employees' premiums. The rise in the number of uninsured workers over the past decade comes from cutbacks by small businesses and the self-employed.

U.S. companies are being reasonably generous with retirement benefits, too. They've remained steady over the past 30 years; the difference is that employers contribute to 401(k) accounts instead of traditional pensions. Workers lose the security of a guaranteed income in retirement, but they gain the flexibility to carry their investments with them when they change jobs, which Americans do more frequently now than in the days of old-school pensions.

Just look at the ever-proliferating suburbs, the high rate of home ownership, and the thriving market for new cars, HDTVs and videogame consoles. Inequality is certainly up, but it's the bottom 20 percent of the population, not the middle class, that's really struggling. Just don't tell the presidential candidates.


Stephen Rose, an economist, is at work on "Mythonomics: Ten Things You Think You Know About the Economy That Are Wrong."

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