A new study co-authored by one of President Trump’s economists shows that middle-class incomes have fallen since 1969 but that government benefits have more than made up the difference, such that middle-class living standards have risen substantially.
The study, unusual for a paper written by Republican-aligned economists, makes the case that analysts, even left-leaning economists, substantially understate the positive effect of government policies on people’s economic well-being.
The new paper is meant in part to rebut the narrative laid out by prominent liberal economists, such as French economist Thomas Piketty and Berkeley professor Emmanuel Saez — also an outside adviser to Democratic presidential candidates Elizabeth Warren and Bernie Sanders — that inequality is soaring in the United States because the top 1% of earners have benefited while the middle-class has stagnated.
Yet it also shows that the middle class have fared poorly in terms of their earnings and that the government has filled in the gap, a result that complicates conservative arguments about welfare.
“Leftists should be happy because government transfers and services dramatically offset the decrease in incomes,” said Richard Burkhauser, a co-author of the study, former member of Trump’s economic council, and a professor emeritus at Cornell University. “The irony is leftists are not happy about this, but they should be.”
The study, co-authored by Kevin Corinth, currently a member of Trump’s economic council, and James Elwell, an economist with Congress’s Joint Committee on Taxation, was circulated by the National Bureau of Economic Research in November and examines trends in income and its distribution from 1959 to 2016, before the start of the Trump administration.
It concludes that median individual wages, pre-tax, have only gone up 6.4% between 1959 and 2016 — next to nothing, and declining since 1969. The economists also estimate, though, that the lack of wage growth was offset significantly by an increase in nonwage compensation and government benefits. If one measures the post-tax income of households along with the benefits of government programs such as Social Security, Medicare, Medicaid, etc., during the same time period, the median growth is 153.7%.
That growth in median incomes contrasts with the conclusions of Piketty and Saez, who in a 2003 paper argued in part that the richest 1% have gobbled most of the rewards of economic growth, making society less equal.
The major difference in the Burkhauser paper is that it factors in taxes, government welfare programs, and employer-sponsored health insurance in measuring income, not just monetary compensation.
The study also suggests that, although the U.S. has relatively high living standards, it still has a large number of people who are not self-sufficient and depend on government programs. In other words, the social safety net created by the federal government since President Lyndon B. Johnson’s War on Poverty has lifted living standards but has not created the kind of economic independence envisioned for poor and working-class people.
One of the clearest examples of the effects of government welfare programs, according to the study, is the fact that there are many more people without any income today than in 1959, but they survive because of the help of government programs.
There are a “hell of a lot more people today who are surviving without work,” Burkhauser told the Washington Examiner, such as the large number of elderly people who rely on Social Security, Medicare, and other government programs.
“Now, we give to the poor and take from the rich. I’m for that, too, as a conservative. But that changes [economic] behavior, so we have to keep that in mind,” Burkhauser added.
Saez, in an email to the Washington Examiner, responded to Burkhauser’s claims by saying that he and Piketty have “already addressed these critiques in our recent 2018 paper … where we have computed incomes including all in-kind transfers and other government transfers and spending (what we call post-tax incomes).”
Burkhauser said the new study he co-authored mostly pushed back against Piketty and Saez’s 2003 paper, not their most recent study from 2018. He added that he planned to respond to their 2018 paper in the near future.
Saez added that the post-tax income of the bottom 50% of the middle class in particular only grew 20% and about 0% on a pre-tax basis. He pushed back against Burkhauser, saying that government welfare programs and transfers “fill in only one-third of the [income] growth gap.”
Furthermore, he emphasized that most of the economic growth for the average middle-class citizen has come from healthcare benefits (Medicaid and Medicare) “whose cost[s] have exploded.” The post-tax income of the bottom 50% of those aged 20-45, he said, has “pretty much stagnated.”
