Income mobility, wealth and standards of living

Great American Dream Machine

By STEPHEN MOORE and LINCOLN ANDERSON December 21, 2005; Page A18

New reports by the Census Bureau and the Federal Reserve Board on the economic well-being of the typical American family reveal that over the past three decades, the vast majority of families have experienced a rapid growth in their income and wealth. Now that nearly six out of 10 households own stock and two out of three own their own homes, the average family -- for the first time ever -- has net worth (assets minus liabilities) of more than $100,000. Median family income has climbed to more than $54,000 a year.

Almost no one in the national media has taken notice of this good news, which has been camouflaged by a barrage of misleading and gloomy stories on "stagnant wages," "the growing income gap between rich and poor," "the disappearing middle class" and "rising poverty in America." The reality is that if the economic growth, employment and family-finances numbers get any better, the media will soon have to start calling this the "Clinton economy."

What the reports tell us is that the vast majority of Americans have not bumped into income glass-ceilings, but rather are experiencing an astonishing pace of upward income mobility. The Census data from 1967 to 2004 provides the percentage of families that fall within various income ranges, starting at $0 to $5,000, $5,000 to $10,000, and so on, up to over $100,000 (all numbers here are adjusted for inflation). These data show, for example, that in 1967 only one in 25 families earned an income of $100,000 or more in real income, whereas now, one in six do. The percentage of families that have an income of more than $75,000 a year has tripled from 9% to 27%.

But it's not just the rich that are getting richer. Virtually every income group has been lifted by the tide of growth in recent decades. The percentage of families with real incomes between $5,000 and $50,000 has been falling as more families move into higher income categories -- the figure has dropped by 19 percentage points since 1967. This huge move out of lower incomes and into middle- and higher-income categories shows that upward mobility is the rule, not the exception, in America today.

It is true that the median-income numbers have fallen slightly in recent years. But this has been the pattern during virtually every recession and immediate post-recession period of the last 40 years. Median-income growth stalls, and then when the recovery picks up steam, incomes resume their inexorable march upward. That is why the long-term trend is what we should be paying attention to. And examining this data leaves no room for argument: The middle class has not been "shrinking" or losing ground, it has been getting richer. For example, the Census data indicate that the income cutoff to be considered "middle class" has risen steadily. Back in 1967, the income range for the middle class (i.e., the middle-income quintile) was between $28,000 and $39,500 a year (in today's dollars). Now that income range is between $38,000 and $59,000 a year, which is to say that the middle class is now roughly $11,000 a year richer than 25 to 30 years ago. This helps explain why middle-income families can buy things like cable TV, air conditioning, DVD players, cell phones, second cars and so on, that were considered mostly luxury items for the rich in the 1950s and '60s.

The upper-middle class is also richer. Those falling within the 60th to 80th percentile in family income have an income range today of between $55,000 and $88,000 a year, which is about $24,000 a year higher than in 1967. This rapid upward income mobility indicates that the great American Dream, in which each generation achieves a higher living standard than their parents, is alive and well.

Turning from income to wealth, data from the Fed provide further confirmation of family economic gains for the middle class. The total net worth of Americans rose to just shy of $50 trillion in 2004. The Fed has not yet calculated the median household wealth for 2004, but we estimated that number by taking the average ratio of mean wealth to median family wealth over the past 10 years. This yields an estimate of $105,000 in 2004. This is almost double the median family-wealth level of 1983 and nearly triple the level of 1962. Until very recently, for a family to attain six figures of wealth was considered quite rich. Despite all of the groans about the over-indebtedness of American households, the new Federal Reserve Board data suggest that the family balance sheet is not highly levered. The ratio of debt to assets is only 18.3%.

Finally, we need to address the issue of whether the poor are being left behind in this era of wealth and income gains. It is true that there is one income category -- $0 to $5,000 a year -- where income mobility is hardly observable. This very low income group has stubbornly fluctuated between 2.3% and 3.6% of American families. We certainly think driving down the percentage of these "have nots" is a critical national priority, but we do not think their poverty is a result of a macro failure of the U.S. economy. Indeed, a very large percentage of these families do not even have a full-time worker participating in the labor force. We think poverty is best addressed by real competition-based reforms in education, by fighting crime and addiction, and by rebuilding American families.

The media and the poverty lobby have seized upon the news that the poverty rate has spiked upward to 12.7% in 2004, up from 11.3% before the recession. This rise was widely reported and condemned, but again this is a short-term phenomenon attributable to the aftershocks of the recession. What was not widely reported was that the 12.7% poverty rate was the lowest coming out of any recession in the last 25 years, and that the poverty rate has been lower than 12.7% in only five of the last 25 years. It certainly is better than the 15.1% rate poverty-rate peak in 1993.

The Census family-finances data corroborate the common-sense notion that by far the best long-term anti-poverty program is growth and avoidance of recession -- because the downturns invariably hit the poor hardest. That's why President Bush's tax cuts should be extended: They have created a positive investment, jobs and growth climate that will, if history is any guide, reverse the recent uptick in poverty levels.

We can say with certainty that most working Americans are achieving levels of wealth and income that far surpass those of their parents. It's reassuring to know that the U.S. is still the pre-eminent meritocracy, where economic success is still predominantly powered by hard work and saving, not inheritance and privilege.

Mr. Moore is senior economics writer and a member of the Journal's editorial board. Mr. Anderson is chief economist at LPL Financial Services.

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