David Leonhardt and Kevin Quealy introduce the graphic above (click to enlarge):
In 1980, the American rich and middle class and most of the poor had higher incomes than their counterparts almost anywhere in the world. But incomes for the middle class and poor in the United States have since been growing more slowly than elsewhere.
The accompanying article goes into more detail:
The findings are striking because the most commonly cited economic statistics — such as per capita gross domestic product — continue to show that the United States has maintained its lead as the world’s richest large country. But those numbers are averages, which do not capture the distribution of income. With a big share of recent income gains in this country flowing to a relatively small slice of high-earning households, most Americans are not keeping pace with their counterparts around the world.
“The idea that the median American has so much more income than the middle class in all other parts of the world is not true these days,” saidLawrence Katz, a Harvard economist who is not associated with LIS. “In 1960, we were massively richer than anyone else. In 1980, we were richer. In the 1990s, we were still richer.”
That is no longer the case, Professor Katz added.
Douthat considers what this change means for politics:
If we get back to where we were in the 1990s, with an economy that’s delivering for the 40th-through-the-60th percentiles but a welfare state that isn’t as generous as the social democracies to the 10th-through-30th, most Americans will probably be inclined to say, well, that’s just our system’s traditional “growth over fairness, opportunity over equality” trade-off working as expected, and there will be more support for efforts to keep the tax-and-transfer share of the U.S. economy close to historic norms. (Though it would help, obviously, if there were more mobility out of the 10th and 20th percentiles than we’re currently seeing.) But if the advantages of the American system are only visible from, say, the 70th or even 80th percentile up, then the case for the low-tax model will seem weaker relative to how its been received and debated in the past, and American politics will probably shift leftward on size-of-government issues (as it already has among the rising generation).
Derek Thompson, meanwhile, looks at why Canada’s middle class is becoming richer than ours:
How did we lose the lead? The authors blame three broad factors: (1) Canada’s education attainment is outpacing the U.S. and most of the world; (2) American middle-class market wages aren’t keeping up with overall economic growth; and (3) Other governments are doing more to redistribute income to poorer families in other countries, particularly in western and northern Europe. One word that doesn’t appear in the article, however, is housing. The U.S. is emerging from a catastrophic collapse of the housing market that obliterated household wealth for millions of middle-class families. Canada, however, is in the midst of a delirious housing boom and a personal debt craze that reminds some economists of the U.S. market exactly a decade ago (before you-know-what happened).
Reihan also focuses on housing:
[H]ere’s the thing: If the U.S. had done more to address the wealth destruction that followed from the housing bust, it is hard to deny that middle- and low-income households would be in a much better position. Indeed, the really scary thing is that, as Mian and Sufi have argued, it’s not clear that low- and middle-income Americans are in a less vulnerable position now than they were before the bust. And if Canada ever does see a house-price correction, as seems at least plausible, it is not clear that the contrast between Canada and the United States will look quite so favorable a few years down the road.
And finally, I’ll make a brief political point. Many conservatives believe that to win Latino voters, they need to take a particular position on immigration reform. They might instead consider paying more attention to the fact that Hispanic household wealth fell by 66 percent from 2005 to 2009, and that many Latino families, and indeed many middle-income families of all backgrounds, are still reeling from the wealth destruction of that era.
Update from a reader:
I own a small Real Estate company in Calgary, Alberta, Canada. The quotes from Derek Thompson and Reihan seem to elude that the housing situation in Canada is similar to that in the US in 2007 and that the risks for Canada are the same. This is simply not the case and shows a lack of understanding of our system here in Canada.
First off, in Canada in order to qualify for a mortgage you must have at least a 5% down payment in cash. There are also qualifying “Gross Debt Service” and Total Debt Service” ratios that ensure any mortgage payment is, on its own and in conjunction with your other monthly debt payments, below a certain percentage of your income (I think 39% and 44% respectively). Part of the problem in the US prior to the collapse was that people were financing 100% (or more) of the cost of the home.
Second, the biggest problem in the US prior to the collapse was the so-called “Adjustable Rate Mortgage”. To my understanding, this instrument kept rates very low and then unexpectedly raised the rates drastically either at a certain point or upon a default thus leaving many homeowners unable to pay and forcing foreclosure. In Canada, this simply does not exist. Mortgage rules here prohibit such practices. You can get either a “fixed rate”, “variable rate” or some combination of the two and that’s it. A fixed rate mortgage is just like it sounds, the rate never changes during the duration of the term. Variable rate mortgages rise and fall with the prevailing prime rates. While this has some risk, these risks are low because prime rates charged by the banks are derived from the rate set by the Bank of Canada (our “FED”) and typically are slow, predictable adjustments.
Thirdly, and most important, banks in Canada are largely protected from the effects of default and foreclosure because here, any person who obtains a mortgage with less than a 20% down payment (what we call a “high ratio mortgage”)is required by law to buy mortgage insurance (between 0.5% and 3.0% in most cases) . The lower the down payment, the higher the insurance premium. This insurance is typically bundled into their monthly mortgage payments. This insurance protects the banks and promotes lending as there is zero risk to them. When homeowner with a high ratio mortgage defaults, the typical foreclosure process occurs, but any shortfall of the amounts recovered are covered by the insurance.
Further, mortgage insurance is not offered outside of your principal residence so investors and speculators must have at least 20% down payment to buy a property and expensive homes (I think those over $1M) are also not covered by mortgage insurance, so again, 20% down payment would be required.
This is why Canada fared better than any G7 country during the global recession. Property values decreased here in 2007/2008 and in fact have only just recovered from that in the last year, but the difference is that here, prudent policy kept risk prone people (those who couldn’t save at least 5%) out of the market to begin with, prevented predatory lending from even occurring in the first place and protected the banks while promoting access to home ownership to the population.
Canada will continue to be able to weather housing bubbles better than the US too. Since the recession, our government has further increased this protection by limiting a mortgage refinance to a maximum of 80% of equity, capped mortgage amortization to 25 years and has put pressure on the banks not to lower mortgage rates too much.