Shrinking Middle Class And The Rich

Speaking to an audience in Racine, Wisconsin, on June 30, 2010, President Obama repeated a winning theme from his 2008 campaign—the theme that the economic policies of the previous administration had failed those of us who consider ourselves middle class:

Nearly a decade of tax breaks for millionaires and billionaires led to little more than sluggish growth [and] a shrinking middle class. Your paychecks flatlined. Wages and incomes did not go up. Even when the economy was growing, it wasn't growing for you.

This has become unchallenged conventional wisdom.

What is actually true? Is the generality or lumping together producing a real picture?

Let's start with facts, over a substantial amount of time so that short term fluctuations in the economy don't temporarily over-influence the numbers.

AFTER-INFLATION, AFTER TAX INCOME

All quintiles real income increased.

1979-2005 Change In Average Real After-Tax Income

Bottom Fifth 6% (Global competition is significantly impacting lower skilled areas.)

Second Fifth 17%

Middle Fifth 21%

Fourth Fifth 29%

Top Fifth 69% (Higher skills are more valued)

Top 1% 176% (Wealth compounds the income)

Source Congressional Budget office

A SIGNIFICANT BREACH IN INFORMING THE PUBLIC; AND WRONG TARGETING

The top income earners increased faster because of compounding and the ability to more highly leverage themselves for greater growth, which didn't hurt other people but benefited them from the increase overall economic growth due to more investing.

All people on average, after inflation and taxes were better off, not worse of!. The bottom income people were affected by international competition at the lower skill levels, by declining cultural and industriousness factors.

It is absurd to imply that people getting richer caused other people to be poorer, whereas the opposite effect is the truth, that the greater investing by the wealthier added more to economic growth than would have been otherwise true. The implication is at the very least bad thinking and poor logic by the President and others who say the same. It is also misleading not to fully inform the public of other factors. This, I think, is a significant breach of ethics, where politics predominates above doing good for the people, as we need to target the right things. I would not vote for people who are repeating this for either political reasons or because they lack understanding and rigor.

The significance of having increasing after-inflation and after tax incomes is even greater given the context of what was going on, as global competition began to really rev up in about 1980, having greater and greater effect as more of the developing countries were able to provide cheaper labor and compete for business (before that they could not take advantage of cheaper labor costs).

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OTHER BACK UP STATISTICS

AFTER-INFLATION (=REAL) INCOME INCREASED

Per Capita

Growth 1970-2008

Real Per Capita GDP 108%

Real Per Capita Income

Bottom 99 percent 80%

Bottom 90 percent 60%

Source:

2000's INCOME GROWTH

The top income earners declined between 2000 and 2007, while the mid 60% increased 2.6% (.37/yr compounded) and for the mid 80% increased 2.9%.

Income Per Full-Time Equivalent Worker

Growth Rates (per year) '00 to '07

Mid 20% .2 %/yr

Mid 40% .32

Mid 60% .37

Mid 80% .41

Top 20% .16

Top 10% - .01

Top 5% - .63

Research source

HOUSEHOLDS ARE SHRINKING, THEREFORE A DOWNWARD EFFECT ON INCOME GROWTH

Since household size decreased, the increase in income per household would have been affected downward, so people who use this measure may be using numbers that are not really validly comparable(!).

Households

Upper limit of each fifth

Lowest Second Third Fourth Top 5%

1990 19,223 36,389 55,671 84,899 145,711

2000 21,576 39,733 62,819 98449 174,850

2007 20,291 39,100 62,000 100,000 177,000

Census.gov

HOUSEHOLD SIZE DECREASED, SO HOUSEHOLD INCOME WENT UP LESS