Something’s changed in America. Your parents bought a house on a single income. You can’t. They had one steady career; you’ve had four jobs since college. They assumed each generation would wind up better off than the last; you assume you’re going to be on an all-ramen diet deep into your 40s. If it seems like the middle class in America is shrinking … that’s because it is. But … not for the reasons you think. [OPENING SEQUENCE] Spend enough time on social media these days and you’re likely to get depressed. Not because of the CEOs crying on LinkedIn, although … what is that? Rather, you’re going to be told by an avalanche of influencers that we are living in an economic hellscape; what some of them even call a silent depression. And the idea here is pretty straightforward: where a family with one earner used to be able to easily afford a comfortable middle-class life – good house, good car, occasional vacation – today that paycheck barely covers the rent. And it’s not just the internet. You hear this all the time from politicians of both parties. And when politicians who agree on absolutely nothing all reach for the exact same phrase … you should be nervous. Because here’s the thing about this story: it’s wrong … and also kind of right. It’s complicated. We should explain. Start here: The middle class really is shrinking. In 1971, 61 percent of Americans were middle class. By 2023, it was 51 percent – a 10-point drop. Which makes it sound like all this gloom is justified. Except … there’s a pretty big complication here. You hear the middle class is shrinking and you assume people are getting poorer. But, what actually happened in that 50-year window? The share of lower-income Americans didn’t move much – it went from 27 percent of households to 30 percent. But the share in the upper class went from 11 percent of households to 19 percent. In other words: yes, fewer people are in the middle class – but that’s mostly a story about them getting wealthier. And this isn’t just a story about a handful of rich people. Every segment of society got wealthier across those five decades – incomes went up by 78 percent for the wealthy, but also 60 percent for the middle class, and 55 percent for the low-income. Now, some of that is a second income – far more families have two earners today than they did in 1971. And while the fact that more families have both spouses working is sometimes cited as proof that times have gotten tougher, that’s not what the research shows. The Nobel Prize winning economist Claudia Goldin concluded that what really happened was a revolution in which women wanted to enter the labor force largely to establish their own careers instead of out of financial necessity. And the story of how we got wealthier isn’t just income going up; it’s also that the cost of a lot of everyday items was going down. From 2000 to 2022, the cost of cell phone service went down by over 40 percent. The cost of toys went down by over 70 percent. And the cost of TVs dropped by 97 percent. And unlike the old TVs, these ones are a lot less likely to throw out your back. Even the exceptions here kind of prove the rule. A new car costs about the same as it did 25 years ago – except now even a cheap model likely has a backup camera, a dozen airbags, and almost no chance of bursting into flames when someone taps your bumper. By almost any historical standard, we’re drowning in affordable, high-quality stuff. That’s all true. But it’s also not the whole story. Because the things a middle-class life is actually built on – the ones you can’t opt out of – went in the other direction. So, while the average paycheck grew about 100 percent between 2000 and 2022, childcare went up by 115 percent. College tuition went up by 178 percent. And hospital care went up by 220 percent.ix In other words, your paycheck might have doubled – but you’d still feel poorer when it came to affording those essentials. This is especially true when it comes to housing. In the 1990s, a typical home cost a little over three times what a typical household earned in a year. By 2024, it was about five times as much.x And that national average actually understates the damage. Take a look at some of the American cities with the highest-paying jobs. In Boston, a typical home costs about six-and-a-half times a typical income. In New York, it’s over seven. In Los Angeles, it’s nearly 11. And in San Jose – the heart of Silicon Valley – it’s 12. Which means the places with the most opportunity have quietly become the places the middle class can least afford to live. The big-city raise is real – it just goes straight to your landlord. All of which points to an obvious question: how do both of these things happen at the same time? How are some sectors of the economy getting more affordable while some of them are only growing more expensive? The affordable stuff is not that hard to figure out. Lots of companies are competing to sell you TVs or toys. Over time, companies that can get you good value at a reasonable price win out. Prices come down. As for the stuff getting more expensive … there are two major theories. The first one is what scholars at the Niskanen Center refer to as cost disease socialism. And we promise you that’s not as complicated as it sounds. The idea here is that the government intervenes in all of these expensive sectors, but in two opposite ways. First, it helps people pay – with things like loans, subsidies, or tax breaks. Second, it also makes it harder to add more supply – more doctors, dorms, daycares, or homes – through a thick stack of regulations. The result? Well, you have more money chasing a supply that can’t grow – which means prices go up. Take the example of hospitals. In most states, to build one – or even add beds to an existing one – you first need the government’s permission. And one of the groups that the government consults about whether your services are really needed … is your competitors. One economist has compared this to McDonald’s needing Burger King’s approval to open. And, as a result – contain your shock – we do not have enough hospitals. Or take college. For 60 years, Washington has made student loans bigger and easier to get in order to make college affordable. Over those same 60 years, tuition climbed at about twice the rate of inflation. Some economists think that’s no coincidence: flood a fixed number of seats with borrowed money, and schools just raise the price to match the opportunity. Then, in 2025, Washington tried the opposite – it capped how much it would lend for a graduate degree. And almost immediately, one major business school cut its MBA price by $ 30,000 – to slip just under the new cap. The second theory is what’s known as Baumol’s cost disease – which, yes, sounds like an 18th-century term for leprosy. The idea behind Baumol’s is that some work simply can’t be made much more productive. A string quartet takes the same four players and the same 20 minutes it did 200 years ago. And yet they get paid a lot more than they did 200 years ago. Why? Because as the rest of the economy gets richer, those workers expect raises too – or they’ll leave for the better-paying jobs. So, anything built on human hours – which includes things like education and health care – keeps getting pricier, even when the work itself never changes. Which of these theories is right? Economists disagree among themselves. And many of them think there is probably some truth in both camps. But in a weird way … that should reassure us. Because if the whole economy is rigged and the middle class is dead, the only thing left to do is be angry. But … that’s not the world the research actually shows us – one where life overall got dramatically better, a handful of essential things got dramatically worse, and – importantly – there are lots of ideas for how to make those expensive things more affordable. We can build more housing. We can rethink how we fund higher ed. We have viable options. We don’t have to succumb to despair. Well … except for this guy. Probably not escaping despair anytime soon.
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