By Karen Petrou
When we started this blog in 2017, we began with a plea for the Federal Reserve to factor inequality into its monetary and regulatory policy equation. We showed at the start, here, here and here, that the Fed’s focus only on averages and aggregates obscures sharp polarization at each end of the U.S. income and wealth distribution. It is these polarizations, as we’ve repeatedly seen in blog posts that undermine the Fed’s ability to set the U.S. economy on a forward trajectory of shared prosperity and stable growth – i.e., to meet its dual mandate as Congress expressly defined it in the Humphrey-Hawkins Act of 1978. The Fed is still resolutely crafting monetary policy with its eyes firmly averted from increasing inequality.
However, at a conference last week, Chairman Powell and Governor Brainard at least now have acknowledged that the U.S. middle class has gone missing. We take a look at what they say they know now and if anything will be different now that they know it.
The Middle-Class Abyss
That America’s middle class has been emptying out to larger and larger populations of lower and lower income households is not news. We have detailed prior findings to this effect by the IMF looking at lost income, Fed staff research on lost wealth, an important look by Fed staff at income, wealth, and consumption baked into a multi-dimensional – not to mention depressing – assessment. The OECD has also recently put out a study of the middle class’ sorry plight across advanced economies, concluding that the U.S. middle class is disappearing faster than anyone else’s. We have numerous quibbles with the OECD methodology, but its cross-border comparison is nonetheless noteworthy – and also depressing.
In Gov. Brainard’s speech, she lays out her definition of the middle class, establishing a useful marker not only for debate, but also as a threshold by which to assess policies such as those of the National Credit Union Administration purporting to help low-income households. The agency’s definition of “low income” applies to anyone with a family income that is the greater of eighty percent of the relevant area or the national median income. The Fed’s definition of middle class is anyone in the 40% to 70% band around national median income. Although the Fed’s definition is of course more generous than the NCUA’s, it is defining the middle- – not lower- – income stratum around the median.
Where’s the money?
Using the Fed’s definition, Ms. Brainard then builds on recent Fed staff work creating a distributional U.S. financial account to assess an array of recent studies. All of this research shows first that middle-class income has increased about one percent a year adjusted for inflation; over the same period, real GDP went up 2.6% a year. As we’ve said, GDP isn’t the best way to judge economic growth if one cares about equality. The Fed also notes that the top income decile doubled its income over the last thirty years.
What else do we know?
- The crisis did a lot of damage to the middle-class. The wealth of the top 10% is 19% higher than it was before the crisis, even taking stock-price declines late last year into account. Middle-income family wealth is still below where it was before the financial crisis, lower-income families lost 16% of their pre-crisis wealth (not much to start with, of course).
- The average wealth of the top 10% is 13 times higher than that of the middle class; it was only 7 times higher in 1989 when inequality had already been rising for at least a decade. Now, the top 10% has more wealth than the remaining 90% of the U.S. population.
- Liabilities of the average middle-income household (i.e., debt) have nearly doubled in thirty years; assets have increased only 50%.
- In 2016, the average wealth of white households ($933,700) was seven times the average wealth of black households ($138,200) and five times that of Hispanic households ($191,200). Even among households at the middle of the income distribution, 2016 average white-household wealth ($277,200) was roughly one and a half times that of black households ($179,700) and nearly three times that of Hispanic households ($95,400).
- Only about 25% of middle-income households could handle expenses for six months in the absence of regular income. One-third of middle-class households cannot handle an unexpected $400 expense. One-fourth of middle-class households also skipped some medical care because they couldn’t handle its cost. Anyone doubting this should look at the immediate distress of millions of government workers and contractors during the last government shutdown.
- On the positive side, middle-class retirement savings increased 2.5% a year over the past thirty years, giving these households a better retirement cushion than ever before. Interestingly, retirement savings are about double the wealth percentage for middle-class households as equity in a home, refuting the nostrum that the largest source of wealth for this sector is in a home. Average middle-income household home equity peaked at $90,200 in late 2005 and declined by almost two-thirds through 2011. By the end of 2018, average middle-class home equity was still below pre-recession peak and not much above the value in 1989.
- Importantly, retirement-savings data are not adjusted for age; when they are, a third of non-retired households have enough on which to retire and 16% have no retirement savings; the Fed believes this shift largely reflects the change-over from defined-contribution to defined-benefit plans over the past thirty years – i.e., the older you are, the more likely you are to have a pension and the better your wealth accumulation.
Despite all these compelling data, Chairman Powell only bemoans them; he suggests no issues that the Fed might wish even to consider. Gov. Brainard is more forthcoming – she suggests that middle-class hollowing out could well alter consumption patterns and thus redefine macroeconomic growth. Next up, though, is just more work by the Fed to understand distributional differences. Whether even this will be part of the Fed’s ongoing examination of monetary policy is left unsaid but it has so far not figured in the Federal Reserve Board’s work plan to reassess U.S. monetary policy in light of its weak post-crisis results and enormous cost to the Fed.