CEP Symposium: Economics of the Middle Class

Edited by Maude Toussaint-Comeau and Brad Humphreys

Symposium Introduction

A solid middle class is the cornerstone of a vibrant economy. However, households at the middle of the income distribution have faced many challenges that raise the question of whether middle-class living standards are within reach for middle-income Americans in today's economy.

The past decade has been sobering. Years after the Great Recession, middle-income families still had not fully recovered wealth lost during the Great Recession due to declines in asset prices and persistent increases in unemployment caused by the crisis. Now the Covid-19 pandemic deals another severe blow to their already precarious financial conditions.

The Federal Reserve System convened a Community Development Research Conference in 2019, Renewing the Promise of the Middle Class, to address the challenges and identify opportunities to maintain the middle class and keep alive the heart of the American dream. This Contemporary Economic Policy symposium reflects the research presented at that conference. These original articles have been double-blind reviewed, and cover many pertinent issues that speak to the promise of the middle class and the challenges faced by these households.

Wolff's paper, “The declining wealth of the middle class,” provides a sobering sketch of the contours of the overall level of wealth declines experienced by the middle class, which started in the 1980s and became even more pronounced during and after the Great Recession. Wolff also analyzes savings rates over time and argues that differential leverage represents a critical factor in explaining wealth inequality trends for middle-class households compared to high-wealth households.

Toussaint-Comeau's paper “Liquidity constraints and debts” shows the widespread prevalence of liquidity constraints and low savings rates in the middle class. Toussaint-Comeau's results show that heavy reliance on credit to meet (un)expected expenses is pronounced for the middle class in particular. This heavy use of credit hinders their ability to save for wealth-building essentials, such as a first-home purchase, savings for their children's education, or have a stock of cash to pay for unexpected medical expenses. The paper's findings echo the research sounding an alarm that the opportunity for many households to reach financial security may be receding and calls for policies to encourage appropriate wealth-building strategies, strengthen consumer protection, and propagate transparency regarding debt costs.

Darity Jr., Addo, and Smith's paper, “A subaltern middle class,” argues that Black households face extreme challenges in obtaining middle-class living standards because of persistent racial gaps in wealth. Immense disparities exist between Blacks in the middle of the Black income distribution and Whites in the middle of the White income distribution. The gulf in financial wealth translates into a lower likelihood that Black middle-income households survive economic downturns and financial shocks to the same extent as White households. The authors discuss several policy recommendations to foster a vibrant Black middle class and reduce racial wealth inequality. The authors argue that to end Blacks' subaltern status in American society, we must design a comprehensive national program to close the wealth gap.

Azomahou and Yitbarek's paper, “Intergenerational mobility in education,” expands upon a critical mechanism through which inequality of opportunities persist in an international setting. In their study of intergenerational transmission of education in Africa, they find that, despite drastic changes in educational systems and investments in human capital accumulation since the 1960s in the region, and after former colonies gained independence, parental education remains a strong determinant of children's educational outcomes, especially of daughters. Their results make a strong case for the importance of targeted redistributive policies and the expansion of secondary education to improve economic mobility, especially for women.

Angrisani, Barrera, Blanco, and Contreras, in their paper “The racial/ethnic gap in financial literacy in the population and by income,” continues on the topic of education, and more precisely on financial literacy, which according to the National Financial Education Council, is a global “illiteracy epidemic.” The authors find substantial racial/ethnic gaps in financial literacy in the US population that further correlate with childhood family circumstances and income class. The authors document alarming rates of financial illiteracy among the middle class. This result is especially concerning because this group of households faces liquidity constraints and difficult savings choices. The authors' results underscore the need for policies and initiatives that would remove barriers to financial literacy in order to improve the management of available financial resources, promote financial inclusion, and reduce the declining economic mobility in the middle class.

Hartmann and Hayes' paper, “Estimating benefits: Proposed national paid family and medical leave programs,” evaluates several programs that provide income support during periods of family care needs, important policies in terms of reducing income inequality. The authors develop evidence on how such policies could benefit families more equitably. They find that programs preventing asset depletion in difficult times are necessary for households to maintain or achieve a middle-class standard of living.

Many working-age middle-class individuals lack health insurance or are underinsured. They struggle with medical bills and debt. The paper by Fitzpatrick and Fitzpatrick, “Health insurance transitions and use of fringe banks,” addresses the rising use of fringe banking and the high costs associated with those financial products, as well as the heavy use of these services by the low- and middle-income households uninsured before the passage of the Affordable Care Act (ACA). The authors find that that ACA afforded individuals in lower-to-middle income groups to acquire health insurance. In turn, the changes generated by the ACA correlates quite significantly to changes in the use of fringe banks. Health insurance improved the poor's financial stability, offsetting the need to use costly financial debt products.

There are few instances where an economic journal has devoted a large symposium to the middle-class topic. This group of papers documents the ongoing economic crisis faced by middle-class households and offers germane and timely policy prescriptions for this important issue. I am particularly pleased to guest edit this symposium and hope it will encourage more economic research focused on the middle class.

I thank CEP editor Brad Humphreys for his help on this project, especially for his editorial handling of my paper in the Symposium.

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Symposium on the Economics of the Middle Class