Democrats find themselves in a state of confusion. Not only is there no clear favorite for the party’s 2020 presidential nomination, it’s uncertain what economic policies the party’s eventual nominee will put forward. Among the ideas currently being argued and discussed by progressive activists and wonks are free college tuition for all, expanding Medicare, heavily regulating or breaking up the big-tech platforms, and a universal basic income or jobs guarantee.
Yet wherever Joe Biden, Kamala Harris, Elizabeth Warren, Bernie Sanders, and whoever else might climb the greasy pole come down, they will likely agree on at least one thing: While Trump and tax-cutting Trumponomics may be the immediate target of their ire, they will also argue that the U.S. economy has been on the wrong track for decades. Forget Ronald Reagan’s famous question to voters in 1980, “Are you better off than you were four years ago?” As Democrats see things, the American middle class is worse off than it was before Reagan took office. In their eyes, the pro-market tilt in U.S. economic policy since Reagan’s time—lower taxes, lighter regulation, freer trade—has resulted in little more than higher inequality, lower upward mobility, and middle-class income stagnation. The claim is no longer even remotely controversial on the left and is frequently repeated by its politicians as an incontrovertible fact. This 2011 speech by Barack Obama is typical:
There is a certain crowd in Washington who, for the last few decades, have said, let’s respond to this economic challenge with the same old tune. “The market will take care of everything,” they tell us. If we just cut more regulations and cut more taxes—especially for the wealthy our economy will grow stronger…. But here’s the problem: It doesn’t work. It has never worked…. [Over] the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk…. This is about the nation’s welfare. It’s about making choices that benefit not just the people who’ve done fantastically well over the last few decades, but that benefit the middle class, and those fighting to get into the middle class, and the economy as a whole.
Or as Sanders summed it up at the 2016 Democratic National Convention: “This election is about ending the 40-year decline of our middle class.”
Interestingly, President Trump makes pretty much the same argument. As he said in his inaugural address: “For many decades, we’ve enriched foreign industry at the expense of American industry. . . . The wealth of our middle class has been ripped from their homes and then redistributed all across the world.” And again in his 2017 joint address to Congress: “I will not allow the mistakes of recent decades past to define the course of our future. For too long, we’ve watched our middle class shrink as we’ve exported our jobs and wealth to foreign countries.”
Trump has never been a Reagan fan, particularly on trade. As he said in March at a rally for congressional candidate Rick Saccone, “I loved [Reagan’s] style, his attitude. He was a great cheerleader for the country. But not great on the trade.” And in 1991 he testified to Congress against the 1986 Reagan tax cuts, calling them an “absolute catastrophe for the country.”
It shouldn’t be surprising that Sanders and Trump agree on America’s supposed 40 years of economic woe. They’re both populists, and populists, whether in Venezuela or the United States, need to make a political case that goes beyond complaining about current circumstances. They must argue that the failure of the nation’s elites has been total, purposeful, and long-standing. The problem isn’t just Obamanomics, but Clintonomics, Bushonomics, and Reaganomics.
Economic facts, properly understood, simply do not support the argument that the broad American middle class has been stuck in neutral for nearly two generations. Now, it is true that Census data show real median incomes rising at an almost imperceptible 0.3 percent a year from the mid-1980s through 2013. At the same time, real per-person economic growth rose at a much quicker rate, nearly 2 percent a year. The difference between those figures reflects widening inequality. The rich got richer while others stayed relatively the same.
But only partisans think those numbers truly reflect the economic realities of the typical American family.
A University of Chicago poll of top economists found that 70 percent agreed with the proposition that the Census Bureau’s conclusion “substantially understates how much better off people in the median American household are now economically, compared with 35 years ago.” The economist Martin Feldstein, for instance, argues that the agency fails to take into account shrinking household size, the rise in government-benefit transfers, and changes in tax policy. It also measures inflation in a way many experts think overstates the actual rise in living costs. The Census Bureau uses the common consumer price index, but many economists favor something called the personal-consumption-expenditures price index, viewing it as a more reliable and comprehensive measure. And the PCE typically shows a lower inflation rate than the CPI.
One organization that does take all of this into account is the Congressional Budget Office. In March, CBO released a study that calculated much stronger gains for the broad middle class—which I’ll define here as the 21st to 80th income percentiles. One way to look at how that group is doing is by calculating “income before transfers and taxes”—roughly, market incomes plus social-insurance benefits such as Social Security and Medicare. Measured in this way, middle-class incomes rose 28 percent from 1980 through 2014. So this may not be blazing-fast growth, but it’s nearly five times larger than the number offered by the Census Bureau.
Then the CBO looked at “income after transfers and taxes”—market income plus social-insurance benefits plus means-tested transfers (Medicaid, food stamps) minus federal taxes. This more fully captures all the economic resources the American middle class commands. And it finds middle-class income increased 42 percent since 1980. More impressive still: Incomes for the bottom fifth are up nearly 70 percent. This is not the stagnated America that the populists have been telling us about.
And remember, these numbers compare the middle class today with that of decades ago. But these are not the same families and households. A 2016 Urban Institute study by Stephen Rose found that 38 percent of American families in 1979 were middle class (defined as households earning between $50,000 and $100,000 annually, adjusted for inflation) vs. 32 percent in 2014. That sounds terrible. What happened to all those middle-class families?
The study divided households into five income groups: poor, lower middle class, middle class, upper middle class, and rich. Of those groups, the bottom three got smaller over the decades while the top two grew. The ranks of the poor shrank by 4.5 percentage points, the lower middle class by 6.8, the middle class also by 6.8 points. But the upper middle class got a lot bigger, expanding by 16.5 points, while the rich grew by 1.7 points. So what happened to the middle class? It disappeared because it got richer. There has not been a middle-class meltdown. There’s been a melt-up.
Confronted with these statistics about income, stagnationists tend to narrow the focus and say that what really counts is worker wages, good old-fashioned take-home pay. And they will often produce charts showing that the typical American worker makes no more than in 1975. But they are choosing the wrong inflation measure, which makes a tremendous difference when evaluating the true purchasing power of workers. A 2017 study by the Dartmouth economist Bruce Sacerdote, for instance, finds that real wages grew by at least 24 percent since the Ford administration, and perhaps much more. “Estimates of slow and steady growth seem more plausible than media headlines, which suggest that median American households face declining living standards,” Sacerdote concludes.
And that steady growth continues to allow most American to live the American Dream, if you define the Dream as each generation being wealthier than the one before. You would be forgiven for thinking this is not the case. Last year, the superstar economist Raj Chetty and his team made headlines with a study that compared the incomes of 30-year-olds starting in 1970 with the earnings of their parents at the same age. The researchers found that in 1970, 92 percent of American 30-year-olds earned more than their parents did at a similar age, versus just 51 percent in 2014. “The likelihood that young adults will earn more than their parents has plummeted”—that is how the Associated Press summarized the findings.
Yet this is really a worst-case interpretation of the data. Other economists raised issues concerning the study’s assumptions about inflation, the role of taxes and transfers, and whether looking at adult children at age 40 might have been more relevant than age 30 given that more Americans are starting their working life later than they did decades ago. Indeed, a follow-up analysis by researcher Scott Winship finds that “roughly three in four adults—and the overwhelming majority of poor children—live better off than their parents after taking the rising cost of living into account.”
But set the data aside for a moment. The idea that most Americans are worse off than they were in the 1970s seems intuitively nonsensical to those of us who were living back then. As former Obama economic adviser Jason Furman once put it: “ignore the statistics for a second and use your common sense. Remember when even upper-middle-class families worried about staying on a long distance call for too long? When flying was an expensive luxury? When only a minority of the population had central air conditioning, dishwashers, and color televisions?”
Or look at smartphone ownership. Nearly 80 percent of Americans have amazing panes of glass in their pockets, something that didn’t exist in 1980 or 2000. How many of us would choose to live in a pre-smartphone era even with a substantially higher income? A thought experiment by Washington Post reporter Matt O’Brien neatly gets at the issue: “Adjusted for inflation, would you rather make $50,000 in today’s world or $100,000 in 1980’s? In other words, is an extra $50,000 enough to get you to give up the Internet and TV and computer that you have now? This might be the best way to get a sense of how much better technology has made our lives—not to mention the fact that people are living longer—the past 35 years.”
Of course the median or typical family isn’t every family or every person. Some groups, such as working-class men, may well have seen their living standard stagnate. And then there are the communities hurt by changes in world trade patterns that never really bounced back. But that is a narrower argument than the one the stagnationists are making—it’s not the 1-percent-versus-99-percent argument that progressives and populists have been making. Their point is that pro-market policies have failed for most Americans for two generations and are thus discredited. Or as Vice President Mike Pence has put it, “the free market has been sorting it out and America’s been losing.” Bernie Sanders couldn’t have said it better.
The populists of the left and right agree that America’s golden age was in the immediate postwar decades when taxes were high, unions were strong, and economic growth was rapid. It is against that period that populists judge the economy of more recent decades. But policymakers can’t just dial up the Wayback Machine and return to the supposed Baby Boomer paradise of the 1950s and 1960s. The post–World War II decades were affected by a host of unrepeatable factors, the most important of which was that America’s economic competitors were recovering after a global war. A National Bureau of Economic Research study described the situation this way: “At the end of World War II, the United States was the dominant industrial producer in the world,” at one point responsible for nearly 60 percent of the world’s output. “This was obviously a transitory situation.”
Not only have our competitors since recovered and thrived, but globalization has brought billions of new workers into the global labor market and raised their standards of living more rapidly than the world has ever seen. Fixating on the past and drawing the wrong lessons from economic history will only leave American workers ill-prepared to meet those challenges. And if that happens, the stagnationists of the populist left and right may finally be correct.