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The lost decade for the middle class

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U.S. Cenus Bureau

(Read caption) This chart shows the real median household income from 1967 to 2010. Household incomes have been in decline since 2007, the first year of the latest recession.

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The poverty and income results for 2010 came out this morning and they’re a) about what you’d expect, and b) pretty bad. Here’s some Q&A on what they show and what I think they mean, both in short-term (cyclical) and longer-term (structural) contexts.

What do the numbers show, both in the short run and over the longer term?

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The headline numbers are:

–the poverty rate increased to 15.1% in 2010 from 14.3% in the previous year;

–the income of the median household, the one right in the middle of the income scale, fell 2.3% in real terms, a loss of about $1,100; median income was about $49,500 last year.

–just about 50 million people lacked health insurance last year, about 16.3% of the population, which is about the same share as last year; but this steady share reflects loss of employer-based coverage and gains in coverage by a government plan.

These are very rich data allowing tons of different cuts, but for now, let me just reflect on some of the income trends, as they provide a pretty fascinating look at the plight of the middle class.

As I noted, the typical, or median, household’s income fell by a couple of percent last year…not unexpected given the tough job market. But what is remarkable and historically unprecedented is the breadth and depth of the loss of middle-class income. Since 1999, this indicator of middle class living standards has only gone up in 2 years—it rose in 2005 and 2007 (the 2006 increase was statistically insignificant).

Let me underscore this point: compared to its peak in 1999, median household income is down down $3,800 (2010 dollars), more than 7%. The decline is even more dramatic for non-elderly households, those headed by someone less than 65 years old. That value peaked in 2000, and rose only 1 year since then. It’s down $6,300, or 10% since then, including last year’s decline of 2.6% ($1,500), the largest on record going back to 1987.

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Economists talk about the lost decade in Japan, a period where the macroeconomy stumbled along for years. Well, with these 2010 data, we can confirm the lost decade for the American middle class. Though the economy grew most of these years in GDP terms, and productivity growth was notably robust, the middle class fell behind.

How can this be?

It is a mantra among economists that the growth of productivity translates into the an increase in society’s living standards. But what if that growth eludes the middle class and the poor? The productivity mantra is an average mantra—it does not account for the growth of income inequality.

Today’s Census data show that since median HH inc peaked in 1999, the amount of income loss you suffered was very much a function of where you were in the income scale…the higher the better, or the least worst, I should say. Here’s a little table of household income changes at various percentiles (not that these Census data leave out realized capital gains, which play a large and important role in the increase in inequality.

The data also show that in 2010, the bottom 40% of the household income distribution now hold the lowest share of household income on record (11.8%), with data back to 1967. The top fifth has held at least 50% for the past three years.

What does all this tell us about how the American economic model has worked for the middle class and the poor?

In many ways, the years since the median household income peaked back in 1999 have a something quite rare in economic analysis—a natural experiment testing an economic hypothesis such as these:

–if you cut taxes for the most wealthy, the benefits of their increased economic activity will trickle down, enriching the rest of the society.

–if you deregulate financial and labor markets, you will unleash innovation, investment, demand and again, the benefits will trickle down to the broad middle class and the poor.

–these markets will self-regulate—the inherent incentives in the deregulated system are all that’s need to ensure the best outcomes for everyone.

–gov’t interference in any of this, from unemployment insurance to labor standards to safety nets, will only serve to dampen innovation and broadly shared wealth creation.

Well, based on these results, not to mention the fallout from the Great Recession that was very much an outcome of that economic experiment, it is fair to say that from the perspective of the vast majority of Americans, the experiment has been a devastating failure.

Where does that leave us?

These Census results should force us to be very clear eyed in recognizing that markets sometimes fail and when they do so, the federal gov’t must fill two very important roles.

First, we must have countercyclical measures to protect the most vulnerable among us, those least able to withstand the loss of income or health care coverage, from the economic storm. Today’s results deeply underscore the need for countercyclical policies like Unemployment Insurance, nutritional assistance, and publically-provided health-care coverage (see here for CBPPs analysis of this point).

The second critical role for gov’t here is to help offset the contraction in private sector demand, with temporary measures to help people get back to work. In case we needed another reminder, these results underscore urgency of passing the jobs measures the President recently introduced.

Those are, of course, temporary measures meant to further offset the impact of the Great Recession—to pick up where the Recovery Act left off. These are cyclical measures. As such, they are warranted and important.

But as the income, poverty and inequality results of the last decade reveal, we have a structural problem that needs to be addressed. Otherwise, we could lose the next decade as well.