What Democrats get wrong about the middle class

Obamanomics and the modern Democratic Party are constructed around this core economic claim: America's three-decade, free-market experiment of tax cuts and deregulation was a failure for the middle class.

Democrats claim that from Ronald Reagan through George W. Bush, the 1 percent got even richer, while the other 99 percent of us saw incomes stagnate. That's why it's time for a new economic direction, they say, away from conservative "trickle-down" economics and toward a progressive "middle-out" economics based on higher public spending and taxes, more regulation, and redistribution.

As President Obama has put it, "Over the last few decades, the rungs on the ladder of opportunity have grown farther and farther apart, and the middle class has shrunk." Earlier this year, Obama economic adviser Jason Furman publicly lamented the "40-year stagnation in incomes" for the middle class. Hillary Clinton said much the same thing in a recent speech, though making an exception for her husband's presidency.

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Strong claims, yes. The evidence for them, however, isn't quite as strong.

Stagnationists often point to U.S. Census Bureau data as proof that the typical American family is little better off than when Reagan took office in 1981. As economist Martin Feldstein recently pointed out, that data show real median incomes rose just 0.3 percent a year from the middle 1980s through 2013, or about 10 percent total. Not flat, exactly, but pretty darn close. And that performance looks especially weak when one considers real per person economic growth rose by 1.8 percent annually over the period, reflecting widening inequality. Again, the rich got richer, everyone else not so much. It sounds convincing.

The problem is that Census data paints an incomplete picture. A University of Chicago poll of top economists earlier this year found that 70 percent agreed that the Census conclusion "substantially understates how much better off people in the median American household are now economically, compared with 35 years ago." How far off are those numbers? Maybe quite a bit. Feldstein argues that they fail to take into account shrinking household size, the rise in government benefit transfers, and changes in tax policy. They also measure inflation in a way some experts thinks overstates the true rise in living costs. He notes that when the Congressional Budget Office took all those factors into account, it found median household income had risen by 53 percent since 1980, five times as much as the narrower Census figures.

And it could be even higher. A lot higher. A growing number of economists are questioning whether our existing measures of economic growth and inflation are suited to the digital economy. A recent Goldman Sachs analysis suggests we may be understating annual economic growth by nearly a third due to our inability to accurately measure how vastly improved software and hardware are boosting productivity. Likewise, government data ignores the consumer value of free internet services like Facebook, Google, and Twitter. Put it all together, and Feldstein thinks real median household income may have risen by 2.5 percent a year over the past 30 years, not 0.3 percent. That would suggest a doubling of living standards over the past generation. And even those figures ignore welfare gains from rising life expectancy, which economists Charles Jones and Peter Klenow think could equal a full percentage point a year.

If you're still not convinced, consider this simple thought experiment from Washington Post reporter Matt O'Brien: "Adjusted for inflation, would you rather make $50,000 in today's world or $100,000 in 1980's?" Is that added dough enough for you to give up your flat-screen television, smartphone, and internet access? If it isn't, or if the answer isn't obvious, that would suggest living standards aren't stagnant or anything close to it. Indeed, before Furman joined Team Obama, he wrote that Americans "are substantially better off than they were 30 years ago."

Getting the story right matters because there are policy lessons to be drawn from economic history. Taxes matter. Regulations matter. The size of government matters. And innovation-driven productivity is critical to developing a more prosperous, flourishing America. It's not that we should simply duplicate the policies of the past. Times change. Technology and globalization are presenting new challenges and opportunities. But those lessons should inform what policymakers do in the future to make sure sustainable economic growth is as rapid as possible, and its fruits broadly shared.

Democrats pride themselves as rationalists who live in the "reality-based community." If that's true, they should stop denying that Americans are a lot better off in the Age of the iPhone than they were in the Age of Atari.