Middle Class Shrinkage

Play the tape machine
Make the toast and tea
When I'm mobile
--The Who

In his discussion of why the middle class is shrinking, Prof Steve Horwitz shares an interesting graphic developed by the Financial Times using data from a recent Pew Research study.

The theme of both the FT and Pew pieces is that the middle class is losing ground--a message that is popular at the present time.

However, the graph indicates that since 1971 the distribution of wealth has gradually become less skewed to the right, meaning that the middle class has generally moved up, rather than down, the income ladder. Watch the graph and observe an overall increase in the fraction earning more than $80,000 and an overall decrease in fraction earning less than $80K.

Prof Horwitz suggests that this progress should be expected. Indeed, while all will not realize the benefit equally, incomes should generally improve as productivities and income mobilities increase.

What he misses, however, is that, as indicated by the FT graphic, nearly all of the reduction in the income distribution skew occurred in the first 25 or so years of the graphic. By the early 2000s, little further improvement in income can be observed--save for the extreme right end $200K+ wage earners (which, naturally, captures the attention of the envious).

Why the slowdown in progress? Because interventionary forces have been applied at increasing frequencies and magnitudes, and since the early 2000s have been building to extreme levels. These forces hamper markets and serve to skew incomes and wealth in unnatural manners. Monetary policies and other interventions have impaired general economic progress and granted windfalls to the wealthy.

In unhampered markets, the middle class becomes more mobile and gets richer. In hampered markets, the condition of the middle class stagnates and declines.