America's Middle Class Is Unlucky

President Obama's tax plan is Piketty-lite, aimed at reversing years of economic rot among America's poorest 50 percent.

Lucas Jackson/Reuters

At this stage in Obama's presidency, ambitious tax proposals to soak the rich are the political equivalent of desert rain dances—sometimes impressive, often well-meaning, always doomed, and essentially ceremonial. The administration's latest tax-modification ritual would raise taxes on wealthy estates and large banks to pay for larger tax breaks for middle-class households, particularly those with two working parents and kids. The plan is Piketty-lite, skimming the wealth of the 1 percent to redistribute among the incomes of poorer workers.

Why should America's richest families have to withstand yet another tax increase to benefit poorer Americans? The short answer is that the United States has, since the turn of the century, cemented its status as the best place in the world to be among the working rich, while poorer workers have suffered compared to those in other advanced countries.

Here's the longer answer: Twenty-five years ago, the United States was the richest country in the world, for richer and for poorer, for both the 10th percentile and the 99th. Although America's richest 50 percent is still the richest top half of any country, our distinction as the land of opportunity is eroding from the bottom up, as The Upshot elegantly showed. American superiority is rotting from the bottom up.

Which Countries Had the Highest After-Tax Income at Each Income Level, Since 1980
The Upshot

A bit of erosion was always inevitable. Not only is there no law dictating that the richest countries should stay the richest countries, at every level of income, forever; but also there is a principle of convergence, which says that less-rich countries should eventually catch up, either by trade, mimicked technology, or the casual discovery of trillions of dollars of subterranean resources on their property (hey, Norway!).

To understand why it's been such a rough few years for the American middle class, it's more useful to find closer comparisons than small, northern European countries. A new report from the Center for American Progress finds that Australia and Canada "have experience continuing middle-class growth," while for the U.S. it has halted. Indeed, when I used the World Top Incomes Database to compare the income growth of the "bottom" 90 percent (not the most precise metric for "middle-class families," perhaps, but a fair approximation for "not-rich families"), I got this:

The Income Growth of the "Bottom" 90 Percent, Indexed to 1980 Incomes
World Top Incomes Database

So, a bunch of squiggles followed by a great divergence around 2001, when the United States falls off a ledge, Canada takes a massive step up, and Australia takes one of those proverbial marsupial hops.

There is no question that policy differences between the U.S., Canada, and Australia play a role (the U.S. does not do as much as other rich countries to redistribute wealth to poorer households), but the fact that our middle-class fortunes have forked so dramatically in just a decade suggests that perhaps there is more to the picture than tax rates. Australia, for example, avoided recession during the financial crisis because a voracious Chinese economy was busy gobbling up its iron and coal exports. Mining accounts for as much as 25 percent of the Australian economy, and the U.S. has no similar crutch. Meanwhile, Canada has been throwing a debt-fueled house party at the very time that the United States has suffered a housing crash. Canada and Australia are lucky—in geography, resources, and business-cycle timing—in ways that the U.S. has not been in the last 15 years.

Indeed, the U.S. middle class in 2015 is the victim of both chronic and acute maladies. Chronically, the bash brothers of globalization and technology have clobbered middle-class jobs, hacking away at manufacturing employment and hollowing out routine-based work that paid okay wages. (At the same time, low-skill immigration in the late 1980s and 1990s reduced the average income of the poorest American families.) More acutely, the Great Recession delivered the mother of all housing crunches, which has been terrible news for the lower and middle classes. Five years into the recovery, construction and manufacturing employment is still in a six-million-job hole (24 million in 2000; 18 million today).

The fall-off among the American middle class can't be fully explained without mentioning the devastating effect of housing's collapse. U.S. construction employment (RED line in the next graph) has fallen by a quarter, while it's continued to grow in both Canada (BLUE) and Australia (GREEN).


Yet despite these challenges, the United States is still significantly richer per capita than either Australia or Canada:


So this is a composition problem. The median Canadian is richer than the median American, even though the average income in the U.S. is higher. That's because the United States remains perhaps the best place in the developed world to be among the richest percentile, as income (and, even more, wealth) is bunching near the top.

Percent of National Income Received by the Top 1 Percent, 1950-2012
The World Top Incomes Database

With construction weak, manufacturing evaporating, and routinized work going digital, has the U.S. economy run out of crutches for the middle class? The White House cannot replace America's housing crash with a new Canada-style housing boom; it cannot wave a wand and reclaim 6 million manufacturing and construction jobs; and it cannot easily mimic Australia's resource-rich relationship with China. The president is stuck, like the rest of the country, with a middle class that has suffered a severely unlucky decade on top of a not-all-that-lucky previous generation.

The United States has been, and will quite surely remain in the foreseeable future, the best place in the world for the very rich and an increasingly difficult place to earn a rising inflation-adjusted salary for the country's bottom half. The road out is not hopeless, and the CAP paper on how the U.S. can learn from the rest of the world offers fine solutions across education, infrastructure, and working with cities to develop talent clusters. But this sort of ambitious policy landscaping is purely fanciful with today's Congress. In this government, all big ideas are rain dances.