Correction to "Where the Middle Class Went"

Yesterday I posted two charts and drew some implications about "where the middle class went" based on US Census Bureau numbers.  My gut feel had been that the inflation adjustment wouldn't make much difference, but that wasn't correct.  This article fixes the charts and revises the implications I'm drawing from them.  [Anyone interested in the adjustment details should read the end note.] 

Revised implications
Of the total increase of 5 million families (from 72.4 million to 77.4 million):
• The number of families under $50K increased by 3.1 million;
• The number of families between $50 and $150K increased by 2.6 million;
• Big surprise: the number of families making above $150K decreased by 0.6 million.

In short: Fewer rich, more non-rich.  [I wonder if part of that is explained by a few ex-execs from Enron, WorldCom, and Global Crossing?]   

Here's the corrected chart of the change in the number of families (2005 vs 2000). 

And here's the corrected chart of the total number of families, '05 vs '00. 

===============
End note:

To adjust the year 2000 ranges to constant 2005 dollars, I used the CPI-U inflation (13.4%) between those two years.  Then I used straight-line interpolation to approximate the range cutoffs.  A hassle, but necessary; I should have waited the extra day to get that done properly before posting. 

Yesterday I guessed that the "middle class" was the two ranges spanning $50K-$100K family income.  I heard from a few people who think the next higher range, $100K-$150K, should not be classified as "rich," and others who think $25K-$50K is not exactly "poor."  I compromised, and shifted the $100-$150K range to the middle group for these charts.  From now on, I'll wait for the official definitions of  rich, middle class, and poor; until those are available, I'll just describe the ranges by using the endpoints.

I've left yesterday's article up for anyone who'd like to compare this correction to yesterday's too-hasty post.  Comments are open, so let the flogging begin. 

Comments

[Bob]

Steve, I love your blog as I check it daily. I deeply appreciate the work you do as it helps me have a better understanding of economics and the world in which we live.

[Counter Revolutionary]

Aw shucks, now I have to fix it over at my house!

[Bob( the frequent commenter)]

Flog, Flog.

Quite a few people got whacked after the bubble burst. Some because the businesses weren't sustainable, some because of consolidation (which is still occurring)and some because of productivity.

It wouldn't matter at all which party was in power or who the President was/is when this happens because the government cannot prevent it from happening.

It occurred to me that rather than looking at macro numbers which are the result of what is going on we should ask some questions:

Is current or proposed policy encouraging or discouraging income and wealth creation?

Is new business formation and capital acquisition fostered or hindered by current policy?

What are the smart goals and objectives of policy and do we have any reasonable method to track success?

I'm beginning to move with pawnking....more libertarian in terms of government and the economy. Government has gotten too fat and the economy increasingly more complex to think we can tweak this or that and tune things.

[Steve]

CR:
Sorry; yesterday I was thinking "he who hesitates is lost" but should have been thinking "haste makes waste."

Bob:
If we can just get a quorum talking about wealth creation instead of wealth redistribution, it's a victory -- I don't care which party does it. I've already noticed a lot fewer headlines about "deficits" and "debt" so maybe some journalists are thinking a little harder these days. Maybe a coincidence, though; Paris Hilton is a far more important news item, looks like.

[Devin]

I think that those who argue that the middle class is "disappearing" are failing to see that their standard of the middle class is just getting higher.

For example, I grew up in a solidly middle class family. We had a modest house in a nice neighborhood, 1 old TV that was so dim you could hardly see the picture, my dad drove a 20+ year old car, and my mom drove a 10+ year old car. Family vacations meant piling in the sedan and staying at the cheapest highway motel possible. Eating out was rare, and when we did go out it was cheap fast food, and water to drink.

Contrast that with what people consider to be "middle class" today. TV's in every kids room, probably a big screen in the family room. 2 newer cars, and possibly a 3rd for the driving teenager. Vacations to Disneyworld, or maybe even a cruise.

You even see some of this stuff in the lower income neighborhoods. $1500 rims on cars parked at the housing project, etc.

So I don't think that the middle class is going anywhere - just what people define as middle class.

[Bob]

Tall order, Steve. In other words, how does everyone win? Lots of definitions, opinions and, may I suggest, erroneous information on both sides of the debate.

[Jan S.]

Steve: It would be interesting to do this back to say 1970, and then make a movie of the changing income distribution! I'll even volunteer to help with the calculations.

[Steve]

Jan:
I'd love to be able to go back that far, but it's full of pitfalls. I used the full range of tables available with the data in that format (2000-2005). Besides that, Alan Reynolds warned me (and everyone else) to be very careful of "income" time series data going back before 1993, when there was a major change in the definition of income. The year 1986 is also a problem, because of a change in the relative tax rates, business vs individual, which made millions of filers report as personal income what they would otherwise have reported as business income; it created a false "windfall" on the personal income side, exploited adeptly by the single-entry accountants advancing their political agendas.

[Jan S.]

Steve, some historical data on income distribution is contained in this report:

http://www.census.gov/prod/2000pubs/p60-204.pdf

[Micah]

Steve,

I was really impressed by your willingness not only to do your own review of the data but to go back and revise your analysis, even though it proved your previous point to be in error. That's something few have the guts to do.

There's a definite break in ideology between people who are more concerned with wealth creation than wealth distribution. I'm someone who thinks we need to be concerned with both. In my own life I'm concerned with wealth creation: I'm 23 and just started my own real estate company. Wealth creation is linked closely with innovation (technological advances, industry growth, etc)and increases quality of life, for those whose wealth is increasing.

I think wealth distribution is important to look at because a lopsided distribution can lead to social instability (i.e. Roman empire collapse, french revolution, communist revolution). Furthermore, a lopsided distribution is not good for economic growth. You need both a cheap supply of money and a demand for goods in order for an economy to keep moving. During the depression there was supply, but no demand. Redistribution of wealth fixed this creating a booming economy.

Those are my realistic views. I think a lot of people need to look primarily at things realistically instead of ideologically.

The question is how to redistribute wealth in a way that is most fair. I personally think income taxes are inherently an unfair way of doing it, punishing those who work harder (or smarter). Most importantly, I think there is a more fair way available that would be better for the economy as well as society as a whole.

But to get back directly onto the point of the article. The middle is shrinking. I consider the middle class to be the middle 50%, to me this is the most logical way of calculating it. Every examiniation of the numbers I've seen, says that its getting smaller and more are actually moving into the "poor" class rather than "rich". This includes your analysis. Although I believe that overall the standard of life has been going up, humans are a comparative creature. Right now the poor live better than kings did 1000 years ago, but that's not going to make them feel better if they're living less well than everyone else is right now. More importantly, that's not going to make our society more stable (i.e. crime rates).

Every society goes through periods of concentration of wealth and then redistribution. Its human nature to want to amass wealth, we always want more. More wealth gets into fewer and fewer hands until there is a redistribution. The question is only how that redistribution takes place. It can be through income tax and spending, i.e. the great depression and World War 2. Or people can start getting their heads chopped off or short, i.e. the French and Russian revolutions.