AMERICA'S VAST middle class, the undervalued force that has stabilized and moderated American society and politics, is shrinking right before the worried eyes of economists.

During the 1980s, the rules that govern the economic fortunes of Americans were quietly and perhaps permanently rewritten. Economists now report that the boom years of the 1980s were a bust for fully half of all Americans. At the same time, the safety net of social programs for the nation's poor was replaced by a safety net for the rich, speeding the decline of the middle class.

The result: an extraordinary 20 percent shrinkage in the proportion of middle-income Americans during the 1980s, according to a new analysis of two decades of data that track the changing fortunes of American families.

These trends are already influencing the politics of the 1990s. From Pennsylvania to Louisiana, and from Capitol Hill to the White House, polticiians have suddenly discovered the plight of the increasingly beleaguered middle class.

A look at data collected annually since 1968 by the University of Michigan's Panel Study of Income Dynamics reveals social change that is nothing short of startling. While three out of four Americans could claim to be in the middle class just 15 years ago, barely six out of 10 could make that claim by the end of the 1980s.

"And it's still falling," said Timothy Smeeding, professor of economics at Syracuse University and one of those who analyzed the data. "What we are looking at is a permanent {proportional} decline in the size of the middle class."

The panel study began in 1968 with a random national sampling of 5,000 families. For every year since, the economic fortunes of those families -- and the new families that formed from parts of the original sample as children married or couples divorced -- have been carefully measured by researchers. Since 1968, more than 40,000 people have participated in the project. This year, researchers obtained data about 20,000 individuals in 7,300 families.

Researchers say that the makeup of study participants mirrors the demographics of the country as a whole. The results of these annual checkups are accepted by economists as a highly reliable indicator of the relative economic health of Americans.

What Syracuse's Smeeding and Greg Duncan, a Michigan economist who directs the panel study, saw when they looked at 22 years of accumulated data was little change -- until the 1980s, when the middle class began shrinking at an alarming rate.

They found that the percentage of Americans living in households earning $18,000 to $55,000 in 1987 dollars adjusted for inflation fell from 75 percent in 1978 to 67 percent in 1986. By the end of the 1980s, Smeeding estimated that only six out of 10 Americans fell in this income range, a standard economic definition of the middle class.

The abruptness of the drop startled researchers. "Between 1950 and the 1980s, income distribution was ho-hum," Smeeding says. "But with 1980, it changes, and now it's a brave new world out there."

Two factors sharply winnowed the ranks of middle-income Americans during the 1980s. And the implications of these ongoing changes are ominous.

The good news is that a larger proportion of the rich stayed rich during the 1980s than in the previous decade. And slightly more middle-income Americans moved into the higher-income group than moved up in earlier years. Together, those factors produced a 50 percent increase between 1978 and 1987 in the proportion of Americans earning more than $55,000 a year, Smeeding said.

While the rise in the number of affluent Americans is significant, other economic factors were also at work nearer the bottom of the income ladder. A smaller proportion of Americans moved out of poverty during the 1980s, compared to earlier years. Also, a larger share of the middle class slipped into the poorest category.

Those factors combined to swell the ranks of the poor and near-poor by more than one million men, women and children during a decade of unparalleled economic expansion.

"The elevator isn't working anymore," Smeeding said.

Among the study's key findings:

Between 1967 and 1980, 35.5 percent of the poor moved into the middle-income group. But during the 1980s, only 30.4 percent graduated to the middle class.

During that 13-year period ending in 1980, 6.2 percent of the middle-income individuals typically fell into the lower class. After 1980, the proportion increased to 8.5 percent.

Before 1980, 6.3 percent of the middle class became wealthy. During the 1980s, 7.5 percent of middle-income families made the transition to the high-income group.

These changes, the researchers noted, produced a dramatic 50 percent increase in the proportion of relatively wealthy Americans, which grew from 8 to 13 percent during the 1980s. "It was a dismal picture unless you happen to be part of the 20 percent who are well-to-do; they did and are doing quite well, thank you," Smeeding said.

Most studies do show it truly was the rich who got richer during the past decade. For example, the median net worth of high-income panel-study families grew from $167,700 to $305,400 between 1984 and 1989 -- an 82 percent increase -- while the wealth of those in the lowest income group declined 16 percent, from $3,700 to $3,100.

"The expansion of the 1980s lifted all of the yachts but none of the tugboats or rowboats," Smeeding said.

Part of the reason why the rich are getting richer is that the rich had friends in high places during the 1980s. The tax cuts of 1981 and 1986 let more affluent Americans keep more of their money, constituting a safety net of sorts for the rich. A capital-gains tax cut, some argue, would provide another layer of protection for the wealthiest Americans.

"What you've got during this period in question is obviously a government in which the public policy was biased toward the upward bracket," said Kevin Phillips, a political analyst and author of the much-praised book, "Politics of Rich and Poor: Wealth and the American Electorate in the Reagan Aftermath." "Take George Bush now, not wanting to disturb the bond market with a tax cut for the middle class . . . . It's fair to say the administration has been very solicitous of the upper-bracket investor and speculators."

Some economists have a more sanguine view of these changes. "To the extent that the middle class has shrunk because people have moved up, that's a good thing," said Marvin H. Kosters, director of economic policy studies at the American Enterprise Institute. "It is also true that there has not been much movement from the lower into the middle class and that is a cause for concern. But on balance, I believe what occurred in the 1980s was a net positive change."

To others, these are ominous changes. They fear the growing concentration of Americans in the high and low income ranges threatens to further exacerbate class and racial animosities.

"People are going to become angry with the small group of people at the top with the capital skills and education," Phillips said. "It's the Europeanization of American politics, a more class-oriented politics, a politics that produce a Harris Wofford on the one hand and a David Duke on the other." Phillips believes that these two faces of populism will play a major political role in this decade, and perhaps beyond.

The study by Duncan and Smeeding, as well as recent work by other economists crunching other data, also takes much of the bloom off of the economic boom of the decade just past.

Despite the lingering buzz about those Golden '80s, half of all America saw their incomes erode, not improve, during the past decade. "For those in the bottom half of the income distribution, the 1980s were one long recession," Duncan said.

Other economists also have noted that the wage gap between high and low earners, which had narrowed during the previous two decades, reopened in the 1980s.

Using data collected by the federal government, Gary Burtless, an economist with the Brookings Institution, reports that the hourly wage rates of men in the bottom fifth of the income distribution "have fallen by about one percent a year" between 1979 and 1989.

"Among men in the second fifth, their wage rates declined by a little more than one percent a year," Burtless said. "But in the top fifth, hourly wages for men have risen about six-tenths of a percent each year." (The numbers for women show roughly the same pattern, with those in the bottom fifth of the income distribution losing ground while those at the top flourished.)

It doesn't even pay to be young any more.

"Being young used to be a facilitator for moving from low- to middle-income groups," Duncan said. "This was part of a normal progression that occurred as an individual moved from their twenties into their thirties and gained enough training, or seniority, or perhaps married and acquired a second income and moved into the middle class. But in the 1980s, being young conferred no economic advantage at all."

These changes in income patterns have little to do with demographic or cyclical economic factors. "Rather, it appears that technological changes in the workplace have led to the stagnation of real earnings among the young and less educated, and growth in earnings among better and more experienced workers," Duncan and Smeeding reported.

The recession may further worsen these income trends. Although the recession will slow the upward mobility of middle-class workers, it may also be wiping out many white-collar jobs -- perhaps forever.

"Recessions tend to reduce upward mobility," he said. "This recession has been described as a white-collar recession, and I fear that these white-collar jobs that have been lost aren't going to come back. That's going to cause more people to fall from the middle class. The well-educated will still do well."

Economists do believe the elevator up from poverty can be fixed.

One approach is to tax those who benefited most from the fat years of the 1980s. "There's room to raise income-tax rates and start talking about a wealth tax," Smeeding said. "Federal taxes on estates and gifts, possibly to fund things like long-term care for the elderly" and increased education and training programs, are needed to extend the chance for upward mobility to all income classes.

"Basically, we have to make some investments in people," he said. "We're not doing that."

Richard Morin is The Washington Post's director of polling.