Protesters hold signs that read “ Middle Class Over Millionaires” on the grounds of the U.S. Capitol in Washington, D.C., U.S. (Photographer: Jay Mallin/Bloomberg)

Middle-Class Doldrums Don’t Add Up to a Crisis

(Bloomberg) -- The U.S. economy is back to normal again. Unemployment is low. Business investment is up. Wages are slowly rising. The traumatic memories of the Great Recession and the global financial crisis are finally beginning to fade.

The absence of pressing crises means that it’s a good time to step back and take stock of deeper issues in the U.S. economic system. For several years, there has been a rising outcry over inequality. The income accruing to the world’s billionaires, a new report from charity Oxfam International claims, could end extreme poverty seven times over, and salaries of chief executive officers are breaking the $100 million mark. Meanwhile, pundits and economists alike tell us that the average American worker hasn’t seen a wage hike since the early 1970s. Adjusted for inflation, wages for production and nonsupervisory workers fell from their peak until the early 1990s, and haven’t yet climbed back to their former heights: 

That’s a warning sign that capitalism has a systemic failing. If even a return to the good economic times of the 1980s and 1990s won’t raise living standards for normal Americans, then the system is deeply broken.

But the story isn’t quite true. The average American has, in fact, seen modest gains since the early 1970s; the falling wages of production workers don’t tell the whole story. A more comprehensive measure is median real person income. This, it turns out, has risen substantially since 1974 — though at a slower pace than in the past decades. If the consumer price index is used as the inflation measure, real income has gone up by about a third. If personal consumption expenditure inflation — which covers more goods and takes greater account of changes in consumption habits — is used instead, the rise is more than 40 percent: 

This one graph tells much of the story of the last four decades. The median American’s income fell in the late 1970s, then began a steady multidecade rise, interrupted by recessions in the early 1990s and early 2000s. In the 2000s, incomes began to stagnate, then took a disastrous beating during the Great Recession. But the recovery beginning in 2013 was robust, and by 2016 income was at a record high.

Personal income looks at individual adults. But other measures, such as median family income, tell the same story of a slow and bumpy rise:

What explains the difference between wages and income? Two things. First, wages aren’t the only way Americans make money in the market. Income from assets, like retirement accounts and pensions, is increasingly important, as are nonwage compensation like employer contributions to retirement accounts. Second, the income numbers include government transfers, which have shifted more and more income from rich Americans to those who earn less in the market. These factors are all bigger than in the 1970s:

Increased redistribution has been helping the poor as well as the middle class. Recent calculations by the Center on Budget and Policy Priorities show that child poverty in the U.S. has fallen to record lows once government assistance is taken into account.

Meanwhile, gains in income haven’t come from increased toil. Despite women’s increased labor force participation, working-age Americans in 2014 tended to labor little more than their predecessors in the late 1970s:

In fact, the working hours data makes the 2000s and 2010s look less awful in comparison to the ’80s and ’90s. Gains in those earlier decades came partly from women entering the workforce en masse. But those gains were preserved in recent decades despite Americans working fewer hours on average.

The income numbers also weaken the case that the middle class is failing to share in productivity gains. From the mid-’70s through the financial crisis, real median personal income roughly tracked the rise in total factor productivity, a broad measure of an economy’s level of efficiency:

It was during the early 1970s that total factor productivity growth began to slow down. It accelerated again in the 1990s and early 2000s, only to fall back to a crawl about the middle of that decade.

It’s therefore possible to interpret the slower growth of Americans’ incomes as the result of slowing productivity. Inequality has certainly contributed as well, but increasing government transfers have helped cancel out some of that. But with slowing productivity growth, there’s simply less to redistribute than if productivity had maintained the torrid pace of the early and mid-20th century.

Capitalism may not be in crisis, but it’s troubling that a few super-rich individuals have managed to amass vast fortunes even as productivity has stagnated. That is a phenomenon whose cause must be carefully investigated. For the typical American, gains in living standards have continued at a slow, steady pace. Increasing that pace should be a top priority.

©2018 Bloomberg L.P.

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