A Healthy Middle Class for a Healthy Economy?

BY Paul Solman  September 20, 2012 at 10:47 AM EDT

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Photo by Michael Melford via Getty Images

Paul Solman answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Here is Thursday’s query:

Jeff Tuttle: I have always heard a healthy economy needs a healthy middle class. Why?

Making Sense

Paul Solman: Because what we mean by “a healthy economy” is presumably one in which resources are optimally employed to create the greatest total satisfaction for the population as a whole. So imagine an economy without a middle class. A bunch of folks would then be “upper class”; another bunch, “lower class.” Now if the uppers were numerous and the lowers few and far between, this might conceivably be deemed a “healthy” economy. Total satisfaction would be high and the unhappy few, well, as we used to say in high school in the ’50s, tough noogies. And if their basic material needs are met, a defender of such an economy might argue, what’s the problem?

Unfortunately, the class proportions of “upper” and “lower” have historically divided less happily. The usual economy has featured a great many more lowers than uppers. The extreme case: a pyramid-shaped economy with a pharoah at the top and masses of day-laborers or slaves lugging the boulders at the base. One guy and his family: way happy. Everyone else: pretty miserable. Think “Hunger Games.” Think: suboptimal.

But if there’s a substantial middle class, you’ve got an economy of mostly satisfied customers. Elizabeth Dunn and Michael Norton recently reported, in the The New York Times, that beyond $75,000 a year, satisfaction plateaus for most American families. (We’ll leave Manhattan and Bel Air out of this.) In general, the research suggests that the greatest good for the greatest number is an economy with most folks within shouting distance of this number.

The problem is that median household income in the U.S. — 50 percent below the number, 50 percent above — is just $50,000 a year, according to the Census Bureau, and falling. It’s back down to where it was in 1996 and fully 8 percent below its inflation-adjusted peak in 2006. Table H-6, “All Races.”

From another table in the Census report, H-1, it looks like two-thirds of American households now lie below the magic $75,000-a-year number.

This is evidence for the much-reported “vanishing middle class.” It would not, by conventional standards, be the sign of a healthy economy.

As usual, look for a second post early this afternoon. But please don’t blame us if events or technology make that impossible. Meanwhile, let it be known that this entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions