On Sept. 23, 1999, NASA lost contact with the Mars Climate
Orbiter as it entered its orbit around the red planet, because the $193.1
million spacecraft disintegrated in the planet’s atmosphere.
A review found that a simple mathematical mistake caused the
mission’s failure: Lockheed Martin, which developed software for the mission,
reported altitude using U.S. standard measures (feet and miles) while the NASA
computers interpreted the reports in metric measure without converting the
numbers – thus three feet could become three meters, or almost 10 feet, inside
NASA’s computers, and what was mathematically expected to be a perfect orbital
insertion instead flamed out in the Martian atmosphere.
I cite this example to note that numbers and reported data
aren’t the only things that matter: Metrics matter. Context matters.
Conclusions matter.
I think that Pew Research, one of the best polling and data
analysis agencies in the country, may have forgotten that lesson in a recent
study.
Pew Research, using American census data, has concluded that
for the first time since they started measuring socioeconomic class, “middle class”Americans are no longer a majority.
Since the report’s publication, blog posts and articles have
proliferated about the demise of the American middle class, Pew even framed the
results as evidence that the middle class is “losing ground,” but that may not
be what the article is telling us.
For one thing, Pew wasn’t measuring socioeconomic class
based on net worth or investible assets, the researchers were measuring income.
For their purposes, they defined ‘middle’ incomes as households whose annual
net income is between two-thirds and double the national median income for
similarly-sized households. While Pew chops their data up by household size, we
can use the U.S. Census Bureau median for the sake of ease:
If $51,939 is the U.S. median household income, middle class
households make between $34,626 and $103,878 according to Pew's assumptions.
That’s where I have a problem with the conclusions drawn
from this research. Let's start by saying that using national averages to convey a sense of wealth and poverty is foolish. Mississippi, our lowest income state with a household median around $36,000, is at 79 percent of the national median, while our highest income state, Maryland at around $69,000, is at 138 percent of the national median. A median Maryland household makes almost twice as much as a median Mississippi household not just because Mississippi has historically high levels of poverty, but also because Maryland families endure astronomical costs of living by comparison to Mississippi families.
In some places, $35,000 may qualify one for middle income, and $33,000 a
year may make one lower income, but there’s no way that a paltry $103,878
should be considered ‘upper income’ no matter where you live. Around 20 percent of households in the
U.S. make more money than that.
By comparison, most academic definitions of socioeconomic
class have ‘upper’ class consisting of the top 1-6 percent of American
households. To be in the top 6 percent, your family would have to make around
$175,000 annually – certainly more deserving of upper-class than $103,878
households. To be in the top 1 percent, a household would need a net annual
income of more than $250,000.
But that’s a small issue. I think Pew and the pundits may
miss the greater message behind the statistics.
The overall decline in American wealth can be attributed to
three issues: The Great Recession and its related factors, the baby boom
retirement, and an increased focus on wealth inequality as a form of social
inequality.
Boomers were the big gainers in income, mainly because
they’re living the last years of their working lives and have finally reached
peak income. The most competent among them have also been saving in retirement
and investment portfolios that are likely paying a nice dividend to replace
income that they would otherwise get from bonds or CDs. However, they could
also be starting to contribute to Pew’s ‘lower income’ numbers as they
transition from income generation to living off of Social Security and
retirement accounts.
If I recall correctly, an average retiree lives off of around
$40,000 annually, but as retirees age past 70 that number drops to under
$30,000 per year. They’re not taking huge disbursements from their retirement
accounts, many are living off of social security and little else. As the
percentage of the population over 65 and 75 increases, the percentage reporting
within Pew’s “lower income” bracket should also increase.
The Great Recession undoubtedly had an impact, especially
for younger people. I’m about to turn 35. People my age and younger have been
competing for jobs in one of the worst job markets the country has seen since
the 1930’s. It doesn’t shock me, then, to find that 18-29 year olds and 30-44
year olds who report ‘upper’ income levels have declined precipitously over the
last 45 years. As millennials, the nation’s largest generation, enter the
workforce, they’ve had to take lower-income jobs not just because few options
existed, but also because boomers have been slow to retire. That’s beginning to
turn around.
It’s more controversial to say that our efforts to address
social inequality have led to greater inequality of wealth, but it’s hard to
deny that some of our educational and economic policies are pushing artificial
bubbles and concavities when it comes to affluence.
In the past 40 years, black households have experienced
greater income growth than white households, women have experienced greater
income growth than men, and the elderly have experienced greater income growth
than youth. These three groups are commonly targeted for federal and state
entitlements and scholarships over more white, male and young citizens. While
there is ample evidence that the economic well-being of these populations is
increasing, there’s still a widespread perception that they are socially
disadvantaged, thus they continue to receive social welfare at inordinately
high rates.
As an aside, there is an argument that these increases and
the policies that have allowed them represent a move towards greater equality.
Equality is a subjective term. The only thing we should be concerned with is
equality under the law – as long as the law extends preferential treatment,
greater monetary assistance or support-in-kind to some citizens in lieu of
others on the basis of their gender or their minority status, we’re moving away
from, not towards equality.
Pew’s message is also wrong. Rather than sliding into
poverty, more middle class Americans than ever before are ascending into the
upper class.
The proportion of American adults living in the middle-income
tier decreased from 61 percent to 50 percent from 1971 to 2015. During that
same time, the proportion of households considered lower income increased from
25 to 29 percent, but the proportion of households considered upper income
increased from 14 to 21 percent. So 4 percent of Americans went from middle
class to lower class by Pew’s definition, but another 7 percent ascended from
middle income to upper income in the same time period.
The seven percent are almost undoubtedly part of the sizable
segment of the American population known to financial advisors as “the emerging
affluent.”
For those of us who have read Thomas Stanley’s and William
Danko’s 1995 book “The Millionaire Next Door,” this is even less surprising.
Stanley and Danko found that, for the most part, millionaires come from middle
class backgrounds and up to 80 percent still live middle class lifestyles –
their net worth, however, and the income they derive from it has pushed them
past the definition of middle class.
These aren’t eccentric billionaires like Elon Musk or Warren
Buffett. They aren’t caricatures of wealth like Richie Rich or Tony Stark.
They’re people who own small businesses who are making their ideas work.
They’re middle-level professionals who have learned to live simply and to sock
money away for the future.
Stanley and Danko’s research found that these, by and large,
aren’t the people buying up mcmansions, Ferraris or Armani suits. The most
popular car among millionaires? The Ford F150. Why? Because they’re cheap to
own, cheap to maintain, last a long time, and are useful for independent
contractors, who as it turns out, are the Americans with the most socioeconomic
mobility.
Since even Pew, further down their report, mentions that
socioeconomic class is more a ‘state of mind’ than a strictly defined income or
asset bracket, who is to say that these humble, self-made millionaires aren’t
middle class? They live in middle class neighborhoods, buy middle class
products from middle class – or even thrift – stores, and their wealth confers
no immediate special benefit other than peace of mind.
For another matter, the measurement of income as a sign of
wealth is less relevant than ever before, and that in part is due to some of
the differences in millennials and to a lesser extent generation X. Millennials
aren’t placing as much emphasis on purely generating income, but more on
lifestyle independence. Now that the economy is loosening up and the job market
is strengthening, fewer millennials are opting for the 35-to-40-year career at
a single company or long periods of full-time employment. They’re the force
behind the growing ‘gig economy’ where more individuals work part-time,
on-call, on contingency or when they want.
As we move away from traditional careers towards a gig
economy, I think the number of these emerging affluent, self-made upper-income
households is poised to increase. According to Pew, in 2014, 10 percent of
American workers were self-employed, and another 20 percent worked for a
self-employed person.
Much of this income is recorded as ‘miscellaneous income’
for tax purposes and ends up on a 1099 form, which is where companies report
payments to contract, temporary, or contingent workers. In 2014, 91 million
1099 forms were filed, and a lot of them are likely from middle class or
upper-middle class workers with side hustles or work-from-home projects.
In the future, income inequality will become even more
difficult to measure using Pew’s source data, the U.S. Census Bureau’s Current
Population Survey – not because of the research methods behind the survey,
which are sound, but because respondents won’t know how to report the money
they’re making.
While inputs like Social Security payments, retirement
account distributions, interest and ‘miscellaneous’ income are supposed to be
reported in the current data, there’s little evidence that respondents are
accurately reporting that data now, let alone 10-20 years in the future when it
will likely make up a larger portion of their annual income.
The measurements we’re using and the ways we’re interpreting
them can’t provide elegant solutions to put us precisely into orbit, but convey
very rough, incomplete pictures of reality that, if used as a basis for policy,
might hurl us out into space or slam us into Mars.
I’ve digressed several times, so let’s close with a few
takeaways:
- Socioeconomic class is subjective and more related to lifestyle choices than it is to income.
- Pew might be right in saying that the number of ‘middle income’ Americans is declining, but they’re using an overly-narrow definition of middle income.
- These assertions are losing meaning not just because they’re subjective, but because the metrics we’re using to support them are becoming meaningless.
- The American dream is not dead, but it has been redefined by the emerging generations to mean more than the simple accumulation of wealth and property.
