Monday, January 11, 2016

Defining the “Disappearing Middle Class”

Michael J. Perry
(Image source: sacbee.com.)
On December 30, 2015, economist Mark J. Perry published in his American Enterprise Institute blog Carpe Diem a couple of charts purporting to show that the American middle class, so far as it can be said to be disappearing, is doing so into higher-income households. Said Perry:

Over the last nearly 50 years the biggest gain for US households has been the 16.6 percentage point increase in the share of high-income households earning $100,000 or more per year, which accounts for the declining share of low-income and middle-income households (by two different measures). Yes, the middle-class has been disappearing over the last generation or more, but they have moved into higher-income categories of household income, not moving down into lower-income categories of household income.


“Cooking the Books”

Of course, Perry is a recognized economist, and I’m just a smart-aleck with a computer and three credit-hours in Econ 201. But I’m also a son of a bookkeeper, and have seen many interesting tricks people can play with numbers. Science is heavily dependent for its effectiveness on the honesty by which it applies numbers to phenomena, and is therefore vulnerable to anyone who knows how to “cook the books”. And the “dismal science”, like the others, tends to suffer when the numbers collide with policy preferences.

The picture Perry paints is of a middle class that was better off in 2014 than it was in 1967 — at the very least, that said middle class is making more money even after inflation is taken into account. However, to get an apples-to-apples comparison, he has to account for inflation. And here’s where the problem begins: there are a number of tools an analyst can use for inflating and deflating number … but none of them are 100% accurate. (For a comparison of four common price indexes used in policy analysis, see this post in The FRED Blog.)