Middle Class Shrinks to Half of US Homes

My Comments: Amid all the hubbub about The Donald, ISIS and Christmas, this report has gone mostly unnoticed, but it has huge implications for our children and grandchildren.

Since 1946 and the ending of WW2, American society has grown more prosperous and economically successful than any society on the planet. If you measure success by financial gain, we have been the envy of people around the world.

That is now ending. I encourage you to explore this train of thought as we struggle to find equilibrium in our lives going forward.

Sam Fleming and Shawn Donnan on December 9, 2015

America’s middle class has shrunk to just half the population for the first time in at least four decades as the forces of technological change and globalisation drive a wedge between the winners and losers in a splintering US society.

The ranks of the middle class are now narrowly outnumbered by those in lower and upper income strata combined for the first time since at least the early 1970s, according to the definitions by the Pew Research Center, a non-partisan think-tank in research shared with the Financial Times.

The findings come amid an intensifying debate leading up to next year’s presidential election over how to revive the fortunes of the US middle class.

The prevailing view that the middle class is being crushed is helping to feed some of the popular anger that has boosted the populist politics personified by Donald Trump’s candidacy for the Republican presidential nomination. “The middle class is disappearing,” says Alison Fuller, a 25-year-old university graduate working for a medical start-up in Smyrna, Georgia, who sees herself voting for Mr Trump.

Pew used one of the broadest income classifications of the middle class, in a new analysis detailing the “hollowing out” of a group that has formed the bedrock of America’s postwar success.

The core of American society now represents 50 per cent or less of the adult population, compared with 61 per cent at the end of the 1960s. Strikingly, the change has been driven at least as much by rapid growth in the ranks of prosperous Americans above the level of the middle class as it has by expansion in the numbers of poorer citizens.

Jason Furman, chairman of President Barack Obama’s Council of Economic Advisers, says: “You have seen a hollowing out of the middle of the income distribution, and there’s neither one cause for it nor a single answer. It’s a big problem, it is decades in the making, and it will require a lot of solutions.”

Recent political debate has been dominated by the view that US society has been distorted by staggering gains for the top 1 per cent of the country at the expense of the remaining 99 per cent.

Pew’s research gives a more nuanced picture however. Better off households — defined by Pew as earning more than $125,608 a year — account for more than one-in-five of the US population. That is the highest share the study has found, as well-educated Americans from finance to computer programming and biotech enjoy strong prospects. “On balance, there is more economic progress than regression,” the report says.

But the campaign of Mr Trump, the real estate tycoon, has fed off concerns at the other end of the scale. The Fullers have a three-bedroom home but about $100,000 in student debt. While Ms Fuller is uneasy with some of Mr Trump’s policies, she says she thought “Trump overall would be good for this nation,” arguing he is likely to reduce the tax burden on the middle class.

While Democrats and Republicans have vowed to revive the middle class, they have not settled on the term’s meaning. Pew divides the population into two lower groups, the middle, and two upper tiers. Pew defined the middle as being a household income from two-thirds to double the median. For a three-person family, that is $41,869 to $125,608 a year.

Since 2008, the number of adults in households in the upper two tiers has grown by 7.8m, outpacing the growth in the number of adults in households in the lower two tiers, where the number of people grew by 6.8m. The middle class grew by 3m over the same period.

The research also tracks different demographic groups to find the winners and losers in recent decades. Older Americans were the biggest gainers by far in terms of their progression up the income tiers during the current century, and also when compared with the start of the 1970s, it finds. The group aged 18-29 has seen the biggest slide.

A key factor driving the wedge between successful Americans and those who are struggling is the outsized premium the labour market places on skills and higher education. College graduates are eight times likelier to live in the upper income tiers than adults who did not finish high school, and twice as likely as an adult who has only a high school diploma, Pew finds.

“Those Americans without a college degree stand out as experiencing a substantial loss in economic status,” the report says.

David Autor, a professor at Massachusetts Institute of Technology, has found that the earnings gap between the median college-educated US male and the median male with a high school education doubled between 1979 and 2012, underscoring the mounting premium placed on educational achievement.

“There hasn’t been a lot of wage growth, but it is still the case that the return on educational investments is incredibly high for people who go to reasonable colleges and complete them,” he says.

Focusing entirely on the disparity between the top 1 per cent and the 99 per cent is therefore misleading. “It gives people the wrong message that if you are not Mark Zuckerberg or Bernie Madoff you are kind of out of the game,” Mr Autor adds. “That is not correct.”

The sense of polarisation in US society is underscored by the rapid growth seen at the extreme rich and poor ends of the spectrum. “The distribution of adults by income is thinning in the middle and bulking up at the edges,” says Pew’s report. Households above the middle class are on the cusp of holding more income than all other households combined, suggesting earnings are getting concentrated in fewer hands.

Upper income Americans more than doubled their wealth gap against the middle from three times as much to seven times, according to the report.

Pew’s data, which draw on official numbers, adjust for inflation and put everyone in a three-person household to make figures more comparable. Their research finds that the hollowing of the American middle has been under way steadily since the 1970s, rather than being a sudden phenomenon that emerged recently.

The FT interviewed Americans around the US to hear their views on the state of the middle class and their place in it. Their comments range from the insecurity felt by public sector workers, whose numbers were cut sharply after the Great Recession, to the optimism of high-tech workers who have been among the big winners in a jobs market that prizes skills and high educational attainment.

Together, they represent a society that is looking increasingly fractured.