Middle-class wages: Are they really sinking?

Yes, the Middle Class Really Is Sinking

Yes, the Middle Class Really Is Sinking

Moneybox
A blog about business and economics.
Nov. 11 2014 3:25 PM

Yes, the Middle Class Really Is Sinking

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American anxiety, in sculpture.

Photo by Robyn Beck/AFP/GettyImages

Most Americans sense that the middle class is in decline. And why wouldn’t they? Wages are stagnant. The income of the typical family is lower today than at the turn of the century. We just lived through a recession that crushed middle-class wealth into drywall dust. By most obvious measures, there doesn’t seem to be much cause for optimism.

Jordan Weissmann Jordan Weissmann

Jordan Weissmann is Slate’s senior business and economics correspondent.

Richard Reeves, a researcher at the Brookings Institution, begs to differ. “Certainly the golden years of income growth enjoyed after World War II are behind us,” he writes at the Atlantic this week. “But it is simply false to imagine that the American middle class is sinking.” Before taxes, the median household makes less money today than it did at the end of the dot-com boom. But after taxes, Reeves points out, middle-class incomes actually grew between 2000 and 2010, at least if you count employer benefits like health insurance and government transfers. Between tax cuts and the welfare state, he argues, the government is pulling up regular families faster than the economy is pulling them down.

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In the end, Reeves is making a political point. He thinks liberals are too lugubrious for their own good—that they tend to exaggerate the problems in the economy in order to justify new safety-net programs but just end up convincing voters that government doesn’t work instead. He thinks the left would be better off trumpeting Washington’s successes and asking: “What’s the next problem we can help solve?”

Progressives probably could do a better job explaining how the government already improves the lives of most Americans. But it also doesn’t serve anybody’s interest to deny that the middle class is in trouble. It is, and we need to reckon with it.

First, about those rising incomes. Part of that growth, as Reeves writes, has been delivered in the form of health insurance paid for by the government and employers. The problem is that health insurance isn’t the same as cash. You can’t save it for a down payment on a house or put it away in your retirement fund. You can’t use it for groceries or gas. Meanwhile, employers and the feds are spending more on health coverage not because Americans are getting better and better care, but because the same care is getting more and more expensive. That’s not a sign of improving living standards. It’s just inflation.

How badly is health care eating into paychecks? According to Reeves’ Brookings colleague Gary Burtless, health insurance and noncash benefits from the government made up 17 percent of after-tax income for the middle fifth of American households in 2010. In 1980, it was just 6 percent.

Then there’s the housing crash. Income is important, but savings are what actually provide some semblance of financial stability for families. And on that score, the middle class is still recovering from crises. Thanks to the collapse of home prices that led to the recession, the median household’s net worth is now lower than in 1984, according to the Russell Sage Foundation.

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You can argue that this is just a temporary setback, that eventually home values will recover and restore vast swaths of the country to financial health. But families spent two decades counting on perpetually rising home values to support their lifestyles, taking out second mortgages when they wanted to make big purchases, and hoping that their real estate would provide a nest egg in old age. That’s all done. And with cash incomes relatively stagnant, it’s worth worrying about how Americans are going to save for the future, especially at a time when traditional middle-class occupations in industries like manufacturing are in decline and being replaced by low-wage service work.

The cost of health care is weighing down middle-class incomes. The recession made mince meat of middle-class savings. The government has been a buoy. But it hasn't actually stopped families from sinking completely.