Cost of Thriving Index Tracks Middle-Class Struggles

One of the key debates in poverty and opportunity policy circles is how best to measure the economic health of working families and whether the buying power of the middle-class has eroded over time. American Compass, in its newly updated Cost of Thriving Index, compares five major expenses (food, housing, health care, transportation, higher education) in 1985 and in 2022 to make the case that middle-class security is increasingly out of reach for many American families. American Compass Executive Director Oren Cass spoke with Spotlight recently about the new version of the Index. The transcript of that conversation has been lightly edited for length and clarity.

Why don’t we start with some background on this latest edition of the Cost of Thriving Index?

Sure. The Cost of Thriving Index is a project I actually started back in 2020, when I was wrapping up my time at Manhattan Institute and then we released it just as we were starting American Compass. The initial impetus for it was a lot of the debates that are going on about what has happened to wages for American workers in recent decades. So much of the fight has focused on which inflation adjustments should you use — if you use CPI (Consumer Price Index), it looks worse, but PCE (Personal Consumption Expenditures) is better and it’s down a little bit, or it’s up a little bit, so on and so forth. And so, I initially was trying to make sense of all of those different options but came quickly to discover that none of them were actually appropriate and that inflation measures are hugely important macroeconomic indicators, but they are not measures of the cost of living.

If you want to know what’s happening to the price level of the exact same goods, they give you all sorts of important information. But if you’re asking what it costs to raise a family in America, not just at some material standard of living, but building in socioeconomic status and participation in the society, then inflation can’t really give you the answer. Since inflation adjusted wages in 2022 are roughly what they were in 1985, is it logical to say people can afford the same things that they could in the past? What we’re saying is, in 2022, you can still buy a 1985 car and house and healthcare for what they cost in 1985 — which is impossible.

That led me to wonder, what if you actually were to define a basket of things that you could characterize as middle-class essentials? So, using 1985 as the starting point just because that’s when the data sets go back to, let’s look at what a health insurance premium costs. Let’s look at the typical cost of a three-bedroom home, which has absolutely gone up as homes have gotten bigger. Let’s look at what it costs to operate a vehicle for a year. Let’s look at what it would cost to be saving for college for your kids. And the least surprising part was that that is not affordable on a typical income today.

Now, I think most people would say, well of course, a family trying to get by on one income for a worker with a high school degree isn’t going be paying themselves for a full insurance premium and saving to pay the full cost of college for their kids. Of course, that’s not possible. What’s fascinating is if you rewind back to 1985, it actually was extremely achievable to afford all of those things and still have plenty of money left over for other things as well. What we wanted to do was to capture that trend and to demonstrate that something has really changed in the reality for a typical worker. If you’re looking from the perspective of the family that exists and is trying to make ends meet, it is just empirically the case that you could quite comfortably afford a broad set of things in the 1980s. And today we almost laugh at the idea that you could afford that set of things. Inflation measures are super important and tell us something useful, but this I think tells us something at least as important and probably more salient to the political and policy challenges we have.

That’s a great overview. Are there particular regional or demographic differences that jump out at you?

That’s a great question, as in this update, we also were able to provide the data for a wide range of demographic groups. I think it’s especially interesting to look at younger workers at that core family formation period because those wages have lagged. One thing that we take for granted when we look at median wages is we ignore that wages rise over people’s careers. That’s a good thing in all sorts of ways, but if you’re trying to understand why people are putting off marriage and having kids and buying a home and so forth, what your wage is going to be in your late 40s doesn’t really help you. In looking specifically at the 25 to 34 age group, I think you see how much worse the squeeze is for younger workers.

When you look at the state and regional breakdown, there’s something really interesting that pops up that we had not expected, which is the two worst states are California and West Virginia. In almost any analysis you do, those two states are at the opposite ends typically, but what they have in common is that they have both been on unsustainable economic trajectories.

One tells the story of very low costs, but even lower wages that aren’t able to support the cost increases that have occurred. In West Virginia in particular, it’s very interesting to see it has among the highest healthcare costs in the country because it has a very unhealthy population. And then at the other extreme you have California, which relatively speaking has among the highest wages in the country but has seen costs skyrocket both for regulatory reasons and housing reasons. We have a shaded map that has this funny U shape where the coasts and the deep South have the worst results and the upper Midwest comes out the best. Milwaukee, Bismarck and Fargo, N.D., and Des Moines scored very well and that speaks in my mind to this idea that what generates middle class prosperity isn’t just pedal to the metal growth and dynamism. It is a different mix of economic development plus broader social conditions that actually makes life livable.

That’s a perfect segue because I wanted to get you to talk a little bit about the context into which this data is coming and any particular policy proposals you would like to see flow out of it. You and American Compass were mentioned in the New York Times story recently about this policy debate on the right.

I think there are two levels on which to answer that. At the more specific level, the data really points to cost-related issues and that’s nothing new. There’s a very good understanding that we have a housing cost problem, that we have a healthcare cost problem, that we have an education cost problem. I think where we’ve gone off the rails a little bit in those debates is to conclude that, to the extent that we just provide larger subsidies for those things, we’ve therefore solved the problem. Because, you know, it’s particularly funny when I see folks on the right of center criticize this work by saying, oh, but that’s not true, people get public assistance now for healthcare in college. Well, yes, they do, but the question is, should we want that? Is that what we’re aspiring to?

I prefer focusing on how do we bring the cost of those things down, not just by accepting that the costs are out of control and we’re going to have to use subsidies, but by recognizing that even if it means worse products, lower prices can actually mean better outcomes. Defining health insurance as what today’s upper middle class wants in a health insurance package that they can afford probably isn’t the right way to do it. I think the exact same thing goes for higher education, although there’s a more compelling policy rationale that government should play a role. Certainly, when you think about public universities, they are inherently subsidized even before you get to the sticker price, and I think that is reasonable. But I think the goal of offering a high-quality, four-year, in-state public education that is affordable to a family should be the non-negotiable starting point.

On the education front, it also speaks to the importance of non-college pathways. We do a lot of work on this exact point and some people have said it’s a little contradictory that we argue not everyone should be trying to go to college and then also define saving for college as a sort of core part of the middle-class package. And in my mind, those two things are entirely consistent. We are descriptively talking about what people do feel they need to do today and normatively talking about how the world should be. And so, to the extent that a lot of money spent trying to send kids colleges is just wasted, if you had better non-college pathways that got people connected to good jobs sooner with more on-the-job learning and so forth, it would both solve on the cost side for some of those education costs and solve on the wage side, or start to, for that question of younger workers in particular.

I think my primary interest in this work is that it confirms that the economic trajectory we have pursued is not actually a sustainable or desirable one. We have had this model essentially of, we want aggregate economic growth so that “the pie grows,” and then either we just assume that will reach everybody or else on the back end we will sort of redistribute it to everybody. And whereas a lot of the formal economic data says —”Tada, look, it worked!” — in fact, I think what we can see is it has not worked. It speaks to the need to be skeptical of the standard economic models coming from both the right and left. An actual successful, prosperous economy is one that is generating jobs for actual people who live across the country and ensuring that wages rise faster than costs.

The last thing I would say and that I think is an interesting policy implication is that the opportunity narrative just doesn’t hold anymore. In the past, for example, if you moved from a rural place to an urban place, you could expect to earn a much higher wage. And while that has remained true for college educated workers, it isn’t really true anymore for non-college-educated workers. Our regional data kind of gets at that as well in showing that the places that we think of as booming are still not the answer for those who have been left behind in the modern economy.

It gives some empirical foundation for this anger and frustration that we see playing out in a multitude or unpredictable political ways.

I think that’s right. I’ve been fascinated ever since the aftermath of the 2016 election, when the response from analysts, after a significant swath of the country turned to Donald Trump, was not, “Wow, there must be real challenges that we have been missing.” Instead, it was, “Wow, we must have a real marketing problem and have failed to show everybody how great things are.” There was kind of a “who are you going to believe, me or your lying eyes” dynamic to the lectures that were being given, especially from the right of center.

When you have this disconnect between what the economic data are saying and what people are saying, you have to have the humility as an economist or a policy analyst to say, there must be something wrong with our data. Let us go try to understand what that is and find better ways to understand it.