“The middle class has shrunk,” said President Obama on the campaign trail last month, and I agree. In fact, I was delighted to read confirmation that the middle class is shrinking today in an editorial by Henry Nau. While a majority of Americans likely disapprove of my position, I wish more people actually understood the economic data before forming opinions.
Gentle reader, let us have a look: Between 1980 and 2007, the world’s total output of goods and services more than doubled. As measured by gross domestic product (GDP), it expanded by about 145%, or roughly 3.4% a year. During this time more than 50 million new jobs were created in the United States, “massively expanding a middle class of working women, African-Americans and legal as well as illegal immigrants,” according to Henry Nau.
During this time, the percentage of middle-class households (with incomes between $35,000 and $105,000) declined from 24% to 11% of the population of the United States. However, the percentage of poor households (earning less than $35,000 per year) remained the same.
Where did this missing middle class go? They got richer. The middle class grew smaller during that time because more people made more money in the era of privatization of government, reduced protectionism, NAFTA, and lower marginal tax rates. In fact, during this period an estimated 600-800 million people entered the middle class in China, India, Brazil, and other developing countries.
I am glad for them, because their children were hungry too. Remember, when in an economy creates wealth, it is not a zero-sum game. Pillaging other people to get rich was what the Vikings (and a lot of other cultures) did long ago, but now ethical global trade can make everyone better off at the same time.
In this light, what would be the best policies in the future to start shrinking the percentage of poor households in the world?