The 'squeeze' play.(taxation and the middle class in presidential campaigns)

IVORY-TOWER economists have a mathematical model for just about any occasion. They even have one--the "median voter" model--that predicts how successful politicians will compete to craft tax plans pandering to the middle class.

This pandering tendency does, however, present something of a challenge to politicians. If previous governments enacted policies that were designed to bring bliss to homo medius, then politically attractive changes to current policy become more difficult to devise, for there are fewer gifts left to give. The income tax today is a nice case in point. According to the latest numbers from the Congressional Budget Office, the top 20 percent of the population pays a whopping 82 percent of all income taxes, while the middle 20 percent pays only 5.2 percent. Lowering rates at the top might make everyone better off, but no politician has stepped forward and argued that 5.2 percent is too small a burden on the middle class.

Nevertheless, the latest rhetorical twist on the campaign trail is that there is a "middle-class squeeze." Sure, the economy has turned around, the story goes, but the poor guy in the middle is not seeing the benefit. Amillion new jobs have been created this year, but the jobs are "bad jobs with low wages." And what's worse, health-care costs are so high that folks in the middle just can't make ends meet. Other necessary expenditures are being postponed. What follows is that new non-tax policies, such as the $2 trillion in new social spending offered by Senator Kerry, are needed to rescue the middle class from all that trauma.

If there were a middle-class squeeze, it would be most helpful to political challengers, who could claim that incumbents paid too little attention to the middle class. But the notion of the squeeze is a stretch. As measured by GDP, the economy has now grown every year since 1991. It even grew three-quarters of a percentage point during 2001, the recession year. Before 1991, one has to go all the way back to 1982 to find another year when the economy shrank. If the economy on average is getting richer and richer, how exactly can the middle class be squeezed at the same time?

The latest squeezologists support their claims by alluding to a narrow set of facts. Most cite recent work by Jared Bernstein of the Economic Policy Institute that reports that the real (adjusted for inflation) income of the median family declined in the two most recent years for which we have data. Bernstein has also shown that real family incomes have increased over time, but much of the increase is attributable to second earners. The implication is that individuals, like runners on a treadmill, are working harder just to stay in place.

But these observations provide an incomplete view of the current welfare of the middle class. Bernstein's most recent numbers are for 2002. The economy has, however, accelerated significantly since then. For example, it grew 4.8 percentage points over the past twelve months, a growth rate that was not exceeded in any one-year period during President Clinton's two terms in office. Presumably, this healthy growth has led to improved welfare for the typical denizen of our economy.

More important, incomes vary across individuals for many reasons. Many retirees have high wealth but not a lot of current earnings. The welfare of such people is poorly approximated by their income. There are others who can expect to have high lifetime wages but experience transitory shocks in a recession. If they plan ahead, their standard of living might hold up nicely despite bad news.