The State of the American Middle Class: Are We Thriving or Sinking?

Summary: One function the FM website performs for readers is assembling data into pictures that show how our world works. Today we look at three factors of American households: income, spending, and debt — and how they relate to one another. It’s not a pretty picture, but one we can change if we work together.

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One powerful measure of America’s recovery from the crash is real disposable personal income (aka after-tax income). Let’s look at it in pure form, after adjusting for population growth and inflation: Real Disposable Income per capita. It has risen a pitiful 0.7% per year over the five years from the start of the recession. Slow movement in the right direction.

Real Disposable Income per Capita

But that’s an aggregate number, and such numbers hide as much as they reveal. How has this tiny income gain been shared? Have all classes gained income? Note inflation (CPI) was 1.5% in 2010, so gains less than that are negative in real terms.

CBO: Income Gain by QuintileCBO, December 2013

Let’s take a longer perspective on income distribution. Anyone paying attention knows that the 1% have gained massive economic and political strength, starting with the Reagan Revolution — continuing year after year since then. It’s paid off big for them, as shown in this graph (it shows growth in real after-tax income).

CBO: Income distributionCBO, December 2013

How has the top 1% done so well? By grabbing a larger share of the national income from the bottom 80%.

CBO: Income Gain by QuintileCBO, October 2011

How has the middle class coped? By increasing spending faster than their income. The following graph looks at percent change YoY in Disposable Personal Income minus Retail Sales (including food services).  Income and spending grew roughly together in 1994 – 2007. Spending crashed faster than income in 2008. Since then spending has increased faster than income. When the going gets tough, Americans borrow.

Spending Balance - long term

For more about this see Rising consumer debt driving the recovery: boon or bane?, 10 November 2013.

This strikes me as quite mad (but then so many aspects of US public policy look mad). But it works well for the 1%. Borrowing to maintain our lifestyle keeps the people quiet and the factories running. Our debts make us work hard.

How will it end? With a bang or whimper? Boom or bust?  We get to write the ending to this story.

For More Information

(a)  Authoritative report:

(b)  Other posts looking at the economy today:

  1. A look at the state of the US economy. Join me in confusion!, 13 July 2013
  2. Let’s reflect on the course of the course of the US economy. Not a pretty picture., 8 September 2013
  3. Do you look at our economy and see a world of wonders? If not, look here for a clearer picture…, 21 September 2013
  4. The great monetary experiment enters a new phase, with America as the stakes, 27 October 2013
  5. The key to understanding the future of QE3, and the future of our economy, 12 November 2013
  6. Larry Summers gives us the bad news. Worse, the only solution is more of the same., 20 November 2013
  7. The astonishing news about the December jobs report: it shows continued slow growth, 13 January 2014

(c)  Other posts about US debt

  1. A certain casualty of the recession: the US Government’s solvency, 25 November 2008
  2. America is rich and powerful because we can borrow. Will this debt build a stronger America?, 5 June 2012
  3. America’s strength is an illusion created by foolish borrowing, 10 October 2012
  4. Rising consumer debt driving the recovery: boon or bane?, 10 November 2013

This piece is cross-posted from Fabius Maximus with permission.

One Response to "The State of the American Middle Class: Are We Thriving or Sinking?"

  1. windriven   January 16, 2014 at 1:56 pm

    It really is time to reassess capital gains and inheritance. We are drifting toward de facto oligarchy.