American families are stuck in a lost quarter century

Reuters/Jim Young

September 16, 2014

Mark it down as another bleak milestone for the American middle class.

The US Census Bureau just published its annual update on income and poverty in the US. The data amount to one of the best report cards on the economic health of the US middle class.

At first blush, the news on incomes doesn’t look so horrible. Inflation-adjusted US median household incomes was essentially flat 2013—the Census Bureau said the rise to $51,939, wasn’t a statistically significant increase from 2012’s $51,758. (The median income is exact midpoint of the US income distribution. In other words, half the US households have incomes that are higher, and half have incomes that are lower.)

But the bigger picture is not great. Effectively, inflation-adjusted US median household incomes are still about 1% below where they were in 1989. That’s nearly 25 years ago. And median household incomes are still 9% below the all-time peak back in 1999, when they were $56,895. (They are also 8% below their recent high water mark in 2007, when they hit $56,436.)

For anyone who’s been following economic data over the last few years, this shouldn’t come as much of a surprise. While the US economy has finally filled in the giant jobs crater left by the Great Recession, real wage growth remains virtually nonexistent.

On the other hand, salaries on the high end of the spectrum have rebounded quite nicely. Today’s Census data shows that the bar for entry into the top 5% of income rose to $196,000, up 2.5%. And those folks took home more than 22% of US aggregate income, essentially the same as in 2012.

It’s important to note that median household income numbers don’t account for, among other things, the stock market surge that has generated very large capital gains, the vast majority of which go to the richest American families. So this vastly understates to share of total US wealth that the richest families control.

The inequality debate has been a hot one in the US in recent years. French economist Thomas Piketty’s Capital in the Twenty-First Centurybecame a best-seller in the states, with its argument that the degree of inequality in the developed world is flirting with extremes not seen since the late 19th century. But the issue is far from academic. Blue-chip US companies that have long depended on the American middle class are having trouble generating revenue and profit growth. Wal-Mart,McDonald’s, and Coca-Cola are all facing challenges, as are the discount retailers with “dollar stores” that are laser targeted on the least-affluent US consumers.

On the other hand, auto sales are booming—but that’s largely because it’s so easy for consumers to get loans. In a consumption-dominated economy like the US, consumers need to spend. And if consumers don’t have the wages to spend, the only way to keep the consumption engine going is by extending debt to people with extremely shaky finances. That’s a recipe for a future full of financial crises.