No Obits for Middle Class, but Poor Fall Further Back

Considering all that has been written about the vanishing middle class, you might think that we have a good idea about what has happened and why. Well, we don’t. It’s fairly clear that Americans’ incomes have been growing slightly more unequally since the early 1970s. But the extent of the change and the causes are controversial and unsettled.

Democrats portray the 1980s’ economic recovery as benefiting only the wealthy. Not only is the middle class said to be disappearing, but most Americans’ living standards are described as stagnating or declining. Republicans minimize gaps in today’s prosperity, emphasizing the number of new jobs (15 million since late 1982) and the recovery’s length (now 5 1/2 years). Both views oversimplify reality.

Two new studies, one from the Labor Department and the other from the Congressional Budget Office, paint a more complex picture. The middle class isn’t disappearing, and living standards aren’t declining. But the young and those at the bottom of the economic ladder haven’t fully shared in the recovery’s gains. Why? The causes appear to be broad economic and social trends: the increase of single-parent families; the baby boom’s effecton wages of the young, and the lingering effects of the war against inflation.

Defining income classes is arbitrary. There are two usual approaches. One is to determine an amount of money that supports a “middle-class” life style; the lower and upper classes are what’s left over. The other approach is to define middle class as a range of incomes around the median--the income that divides all families in half.

Labor Department economists Michael Horrigan and Steven Haugen used both approaches. They tested dozens of definitions of lower, middle and upper classes. What they found is that the decline of the middle class has been slight. More important, most of the shrinkage involves families moving into the upper class.

In one comparison they defined middle-class families as those having between 68% and 190% of the median income. In 1986 their incomes ranged from $20,000 to $55,999. By that standard the middle class had dropped from 60.2% of all families in 1969 to 53% in 1986. At the same time, though, the proportion of families in the upper class rose from 11.1% in 1969 to 15.3% in 1986. The proportion in the lower class rose from 28.7% to 31.7%.

These figures don’t justify obituaries for the middle class. They don’t show Americans steadily becoming impoverished. Many class definitions indicate no increase in the lower class at all. The CBO study tells a similar story. Since 1970 the median family income has risen 20%, it found.It adjusted incomes for inflation and for the fact that families are getting smaller.

The bad news lies at the bottom of the income spectrum. It’s not simply that these families have low incomes. They’re not keeping up, as the CBO study shows. In 1986 incomes of the poorest fifth of Americans had barely recovered to their 1980 levels, even though the median family income had risen more than 7%. The median income for those under 34 was below its 1980 level.

What happened? It’s hard to blame the “service economy,” which has been expanding for decades. Even in 1955 service jobs accounted for 61% of the total. Nor do President Reagan’s tax and spending policies seem responsible. These income statistics are before taxes, so they don’t reflect tax changes. There have been some cuts in welfare benefits, but--as the CBO study points out--they haven’t been large enough to cause these shifts.

The Labor Department study finds that the shifts in income distribution have been under way since at least the early 1970s. This makes it more likely that the basic causes are broad changes in the economy and population. For example:

- Single-parent families--Since 1970 they’ve doubled to 6.9 million, the CBO says. They now represent one-fifth of all families with children, and are often headed by women with low incomes. The median annual salary of full-time women workers is about $16,200.

- The baby boom--Americans born between the mid-1950s and the early 1960s entered the labor market in the late ‘70s and early ‘80s. Because they were competing with each other for jobs, their large numbers depressed their wages.

- The fight against inflation--When unemployment rose in the early 1980s,the unskilled and the young were hit the hardest. Either they were looking for jobs or were the first fired. New jobs paid low wages.

Government can’t reverse the baby boom, undo the forces that lead to single-parent families or quickly train all the unskilled. It could push the unemployment rate so low that the incomes of the un-skilled and the young would rise. But this would worsen inflation. Inflationary policies in the ‘60s and ‘70s disguised income inequality by creating an overheated economy. Improvements in income equality were temporary: They were lost in the fight against inflation.

What government can do is to provide tax reductions for the working poor. With huge budget deficits, that isn’t easy. But there remain tax loopholes that could be closed. Those revenues might be used for tax relief. Democrats and Republicans ought to be debating how best to do this. They’re not. It’s a subject that belongs on the next President’s agenda.