Average annual change in mean family income of US households by quintile & top 5% (Pew Research Centre)

Last week the Pew Research Centre published a report containing this simple but remarkable chart of the change in mean family income in the US over the last sixty years.

It’s only a simple graphic but it’s come up multiple times in social media over the last few days because it tells an important story clearly and directly.

As Jordan Weissman says, it captures the dramatic transformation of the US economy over the period in a single snapshot. It clearly shows the two distinct periods of income growth and (in)equality that Christopher Hayes and others have previously written about.

Between 1950 and 1970 the relative changes in family income by band were pretty even. In fact the incomes of the bottom 20% of families increased faster than any other income group.

This was the period Christopher Hayes describes as The Great Compression. It was an era of “historically unprecedented growth, mass affluence, and middle-class expansion” during which “income inequality markedly declined.”

The party came to an end after 1970 – incomes grew much more slowly thereafter. But even between 1970 and 1980, the poorest families still did better than the top 5% of income earners (the brown bar).

From 1980 to 2000 though, the wealthiest families – those in the top quintile – did better than other families. Those in the top 5% did particularly well, returning to the spectacular growth rates of the 50s and 60s. Weissman says what happened is:

The country backed off the postwar, center-left consensus – captured by Richard Nixon’s comment that “we’re all Keynesians now” – and tried Reaganism instead.

Between 2000 and 2010 the incomes of all bands went backwards for the first time in fifty years mainly due to the GFC. However the  bottom 20% of families fared worst.

Changes in wealth over this decade were even more marked. The Pew Centre estimates the median wealth (assets minus debts) of lower income households fell 45%, from $18,421 to $10,151, between 2001 and 2010.

That was a much larger loss than the 28% decline suffered by middle class households (from $129,582 to $93,150). But upper tier households held their ground – their net wealth increased 1% (from $569,905 to $574,788).

Hayes believes the evidence shows the greater equality of opportunity enjoyed by minorities in the US since the 1970s, while positive and desirable, isn’t by itself a route to a more economically just society. As I’ve noted before, he contends equality of opportunity does not inexorably produce equality of outcomes.

He thinks the ideology of meritocratic achievement stands in the way of social progress:

If you don’t concern yourself at all with equality of outcomes, you will, over time, produce a system with horrendous inequality of opportunity. This is the paradox of meritocracy: It can only truly come to flower in a society that starts out with a relatively high degree of equality. So if you want meritocracy, work for equality

Of course the top 1% of income earners in the US has done much better – spectacularly better – over the last 20 years than even the top 5%. Have a look at this chart (bottom of page) by Charles Murray.

Also have a look at the Great Gatsby Curve on the same page. It shows the economic prospects of the next generation are strongly correlated with the degree of inequality of the current generation. As Professor Alan B Kreuger says, the prospects for future generations in the US look bleak.

I should note that the Pew Centre’s report (The lost decade of the American middle class) is focussed on the decline of the American middle class rather than those at the very bottom of the ladder. This doesn’t mean though that it only looks at the reasonably well-off.

Pew defines the middle class as adults earning between two thirds to double the national median household income (adjusted for household size). That’s an income range from $39,418 p.a. to $118,255 p.a.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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