How are you doing? On a treadmill to nowhere? Bailing as fast as you can, but still sinking?
How we answer such questions depends a lot on what we see around us and how things are measured. If we judge by any number of media reports, the American middle class is endangered and suffering.
A new study, however, suggests something different. It shows that the big growth is in people who are “upper middle class” and “rich.” Those who are “middle class,” “lower middle class,” and “poor or near poor,” are actually shrinking as a percentage of the population. More people are moving up than moving down, not more people moving down than up.
Surprised? I was too. It’s definitely not the conventional wisdom.
Yet the study comes from the Urban Institute, a think tank more inclined to worry about the poor than celebrate the rich. Stephen J. Rose, the author of the study, is an accomplished labor economist with a Ph.D. from City University of New York.
Rather than dividing all of us into quintiles and examining income changes in each quintile, Rose starts with a level of inflation-adjusted income and examines how different slices of income have done over time. In this case, he has examined 1979 through 2014, a period believed full of economic duress for most working Americans.
He divides us into five income classes:
- The Poor and Near Poor, with incomes from $0 to $29,999 in 2014.
- The Lower Middle class, with incomes from $30,000 to $49,999.
- The Middle class, with incomes from $50,000 to $99,999.
- The Upper Middle class, with incomes from $100,000 to $349,999.
- The Rich, with incomes of at least $350,000.
All of these incomes are for what he calls a “three-person equivalent family.” A single person could have less income and be in a group, but a family of four or more would need more income to be in a particular group.
The big change is in the middle class. Yes, it shrank in size. It dropped from 38.8 percent of all classes in 1979 to 32 percent in 2014. But the lower middle class and the poor and near poor also shrank in size. Together, they fell from 48.2 percent of all households to 36.9 percent, a drop of 11.3 percentage points.
The big surprise is that the upper middle class and rich more than doubled in size. The rich accounted for only 0.1 percent in 1979 but 1.8 percent in 2014. The upper middle class soared from 12.9 percent to 29.4 percent, a gain of 16.5 percent. Basically, the “losses” for the middle class were gains higher on the income ladder.
So why are so many people so unhappy?
One possible explanation is income visibility. If you were middle class in 1979, you saw a lot of people like yourself, 38.8 percent of all households. More important, you were clearly doing better than an even larger group, the lower middle class and the poor/near poor. They were 48.2 percent of all households.
Those better off were scarce. The upper middle class was only 12.9 percent of all households and the rich, at 0.1 percent, were a seldom seen trace element.
Today, that’s flipped. The more affluent life of the upper middle class is visible everywhere. The group is nearly the same size as the middle class. And the number of people visibly worse off has shrunk. If you’re still middle class, you’re closer to the end of the line--- and you’re reminded every day.
Another important factor is that the real income gains for the rich and upper middle class dwarf the income gains of those lower on the income ladder. Today, whole categories of retail goods--- and the ubiquitous advertising that moves it--- are focused on the upper middle-income household. Luxury automobiles, Rose points out, now account for 13 percent of all new car sales compared to only 5 percent in 1979.
But luxury cars are just the tip of the iceberg. Consider the super-sizing of refrigerators, miraculously quiet dishwashers, bar-b-que grills large enough to cook for a full platoon, 85-inch television sets, McMansions and the proliferation of mini-luxuries such as Starbucks shops, spas, and better dining venues.
The dilemma for the (smaller) middle class is that what-you-see-isn’t-what-you-get because, well, you can’t afford it. The glass may be half-full, but it isn’t your glass.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.