The “race card” was once an effective ploy in electoral politics. Southern Democrats long used it to rally white voters. In the wake of the civil rights movement, the Republicans took possession of the race card. Nixon used it to strike fear in the minds of white voters, helping to transform a solid South into a Republican bastion. That card still gets played on occasion. But with white voters receding into the minority in so many jurisdictions, the race card is increasingly viewed as not just an unfair play, but an inefficient one as well (as Hillary Clinton learned).

The preferred ploy of Democrats these days is the “class” card. Democrats have increasingly tried to redefine the “them vs. us” struggle in terms of class rather than color. As they tell the story, economic prosperity is a zero-sum game. Income gains attained by the “rich” come at the expense of the “poor.” Corporations bestow lavish compensation on executive insiders while cutting salaries, benefits, and jobs for hard-working Americans. A massive flow of campaign contributions assures that elected officials will protect and serve the rich, while simultaneously cutting holes in the social safety net. Tax cuts for the rich not only fuel conspicuous indulgence among the elite, but diminish spending on health services, school, and the safety of the poor. It all boils down to “them” (the rich) vs. “us” (the poor and middle class).

All three candidates for the Democratic party nomination played the class card. John Edwards was the most blatant, enshrining his “Two Americas” vision as the central platform of his campaign. That vision became blurred in the glare of his multi-million dollar mansion and $400 haircuts. Hillary Clinton picked up the Two Americas theme, tirelessly railing against the Bush “tax cut for the rich” while bemoaning the stagnation of the working class. Even though she donned working-class duds and even sipped beer in a tavern, her credibility as the standard-bearer for the middle class was not helped by the revelation that she and Bill had taken in over $100 million in just five years. The “class card” has been passed to Barack Obama. He has used it relentlessly to enlist and energize his supporters. In fact, he has made the Bush tax cuts one of the central contrasts between his and McCain’s policy platforms. Ending the Iraq war and reversing the Bush tax cuts, Obama promises, will cure all of America’s problems.

Republican rebuttals

The republican rebuttals to the “tax-cuts for the rich” charge have been anemic. President Bush himself has emphasized that the 2001–03 tax cuts were a timely and much needed stimulus to an economy that was in recession at that time. A “reversal” of those tax cuts would now constitute a tax increase that the macro economy can ill afford. With the economy barely treading water amid vast uncertainty in the financial sector, the weight of a tax increase on aggregate spending could easily plunge the economy into the depths. Even the expectation of a tax increase could put a damper on spending plans, as both Bush and McCain have stressed.

Virtually every economist in the land would agree with these macro assessments. Liberals would have preferred more progressive tax cuts — or even increased social spending — as stimulus tools. But there is no question that the Bush tax cuts were stimulative and that ending them would have a contractionary impact on the economy. Unfortunately, the intricacies of macro theory don’t resonate with the general public. There is still a tendency to view the tax take-back as a free lunch, paid for by the overindulgent and undeserving rich. So the otherwise compelling macro agreement for leaving the tax cuts in place doesn’t win the electoral pr battle.

The second Republican rebuttal is equally true but just as anemic. President Bush has argued repeatedly that the 2001–03 tax cuts were proportionately greater for the middle class than the rich. In percentage terms, he is absolutely right. According to the Congressional Budget Office, the Bush tax cuts reduced middle-class tax bills by an average of 15 percent. By comparison, high-income taxpayers — those in the top 20 percent of the income distribution — got only a 10 percent tax break.

Although accurate, this percentage distribution of tax breaks fails to repel the Democrats’ contention that the Bush tax cuts overwhelmingly favored the rich. The Democrats have successfully portrayed the distribution of tax breaks in absolute terms rather than percentages. They note that the rich got an average tax break amounting to $30,000 for the years 2001–10, while the middle class got an average tax break of only $5,400. Low income households got a measly $744. Those are the kinds of statistics that capture voters’ attention.

The simple arithmetic of tax burdens explains the enormous difference in tax breaks. The richest 20 percent of U.S. households pays a whopping 86 percent of federal income taxes. Their average tax bill amounts to $34,000. By contrast, the middle class (middle quintile) pays only 4.5 percent of federal income taxes, with an average bill of only $2,000. Low-income households, on average, pay nothing. Since people who pay little or no taxes can’t really get a further tax break, tax cuts must overwhelmingly favor the rich.

The arithmetic of tax cuts doesn’t get much pr traction. Yet, the Democrats still haven’t won the game with their class card. Opinion polls not only register continued opposition to tax hikes in general, but also substantial skepticism about raising taxes on the rich. Remarkably, the public is even overwhelmingly opposed to raising the federal estate tax — a levy that truly affects only the very richest U.S. households.

The truth about economic class

What frustrates the Democrats’ use of the class card is the fluidity of class boundaries in the United States. Successful use of a splintering card requires a clear delineation between “them” and “us.” The race card has a physiological advantage in that regard. But the class card has no such evident demarcation. First of all, perceptions of “rich,” “poor,” and “middle class” keep changing. Luxury items that were once hallmarks of the rich often evolve into “necessities” for the middle class (e.g., flat-screen tvs, global positioning systems, even air conditioning). Second, and more importantly, the ranks of the “rich” and “poor” keep changing. With the exception of Michael Jackson, people rarely change their color — or even try to. But people do change their economic status with amazing frequency. So it’s never entirely clear who’s with “them” and who’s with “us.” Which makes it very difficult to wage class warfare.

Escaping Poverty. Democrats want us to believe that a large section of the U.S. population is trapped in poverty and/or toiling at minimum wages just above official poverty lines. This is presumed to be the core constituency of the “us” team — the people who are permanently left behind as the economy grows and incomes of the rich rise to dizzying heights.

Superficially, the notion of a permanent underclass appears to have some credence. When George Bush took office, there were roughly 33 million poor Americans. Since then, the economy has grown by more than 20percent. But the government itself still counts over 37 million Americans as poor. So it looks like all the benefits of economic growth went to “them,” not “us.”

But this impression is deceiving. First of all, the U.S. population keeps growing. In the last eight years alone, the U.S. population has increased by more than 20 million people. So there are more people at every point in the income distribution, including its lowest points. What really matters is the incidence of poverty in this growing population. By that measure, poverty increased only modestly between 2001 (11.7 percent) and today (12.5 percent).

Any increase in the incidence of poverty is unwelcome. But much of that increase was fueled by immigrants. Every year at least 1 million immigrants enter the United States, both legally and illegally. Most come seeking work and higher pay. Overwhelmingly, they enter our labor markets at the low end of the wage scale. They are “poor” by American standards even if significantly better off than they were in their home countries. Since Census surveys don’t differentiate between legal and illegal immigrants, these immigrants become part of America’s poverty population. As homeland security concerns have tightened border security, these poor immigrants have remained in the United States longer (rather than risk multiple entries). The incidence of poverty among immigrants is about 25 percent higher than among nonimmigrants.

The influx of immigrants into the poverty population creates substantial churn in the “us” ranks. As past immigrants climb out of poverty or return home, they create a net outflow from the “us” ranks. This outflow is augmented by the ever-changing circumstances of the native-born poor. People fall into poverty for a variety of demographic and economic reasons. Job loss, divorce, and injury top the list of poverty-creating forces. Even in the best of economic times, these forces push people into poverty. But they don’t necessarily keep people in poverty. Divorced moms hook up with new partners. Dependent children grow up. Unemployed workers find jobs. Injuries heal. So there is a constant outflow of poverty households as well. In fact, two out of every three households that fall into poverty in any given year escape poverty the following year. In other words, most American poverty is temporary, not permanent. Less than 2 percent of America’s poverty population is poor for as many as ten consecutive years.

Moving up from minimum wage. Another rallying point for the class-warfare strategists is the minimum wage. Democrats decry the fact that the federal minimum wage stays so far below average wages. Even with the recent wage hikes (to $6.55 this July, $7.25 next year) minimum-wage workers won’t be able to keep a family of four out of poverty. Working long hours at such dead-end jobs supposedly solidifies the position of minimum-wage workers in the “us” ranks.

The assignment of minimum-wage workers to the ranks of the downtrodden is at odds with the realities of minimum-wage experience. Most young people do in fact have first jobs that pay wages at (or below!) the federal minimum wage. Even Brad Pitt started at that level, hawking fast food in a chicken costume. But those entry-level jobs don’t last long. Two out of three minimum-wage entrants are consistently earning wages above federal thresholds within two years of labor-market entry. After three years, only 15 percent of minimum-wage entrants are still toiling away at such low wages. There may be a subset of jobs in the U.S. labor market that will always pay low wages; but few workers get stuck in those jobs. The low-wage entrants into the “us” ranks move out and up. The few who stay at dead-end jobs are by far the exception, not the rule.

Rags to Riches? The relative absence of permanent poverty implies that the “us” ranks are pretty fluid. In extreme cases, people at the very bottom of the income distribution even move to the very top. Horatio Alger stories are more common than most people recognize. Oprah Winfrey — one of Obama’s most visible and ardent supporters — herself rose from the bottom to the very top of the food chain. Bill and Hillary Clinton made a similar move. Obama himself didn’t start so low nor rise so far up the income ladder, but he clearly joined the ranks of “them” when he started collecting million-dollar book royalties. When these self-appointed champions of “us” play the class card, they must be biting their tongue.

Turnover at the top. Oprah’s ascension from poverty to the pinnacle of wealth reveals that even positions in the ranks of the rich aren’t permanent. Every year Forbes magazine compiles a list of the richest 400 Americans. The “Forbes 400” always arouses a lot of envy, energizing class warfare strategists. You needed at least $1.3 billion in assets to join the Forbes400 club this year. With the median U.S. household having net assets of less than $200,000, the Forbes list underscores the gap between “us” and “them.”

But there’s another dimension to the Forbes400 that gets little attention — the turnover in its ranks. Among the top 100 people on this year’s Forbes list, fewer than 50 were on that list at all eight years ago. As in other years, there was a rash of newcomers who had made their fortunes in technology, investments, and entertainment. Some, like Oprah, had roots in poverty; most emerged from the “struggling” middle class that Hillary and Obama bemoan. They switched sides in the projected class warfare.

Mobility in the middle. The most newsworthy team-switching occurs at the very top and bottom of the income distributions. But there is a lot of income mobility in the middle of the distribution as well. The Social Security Administration tracks people’s wages throughout their working life so as to compute an individual’s retirement benefits. Those earnings histories allow one to ascertain where a person resides on the income ladder in any given year and to observe how often people change relative rankings over time. Successful deployment of the class card depends on people staying on the same income rungs over time, thus maintaining a clear delineation between “us” and “them.”

In reality, people don’t stay on the same rungs very long. A great deal of upward mobility accrues to experience. Like the minimum-wage entrants, the typical worker’s productivity tends to increase with experience. As a result, wages tend to increase with age. This age-experience momentum is what transforms a lot of “us” into “them.”

All incomes don’t increase at the same pace, of course. Within any given age group there is another mobility phenomenon. Some people rocket up the income ladder; others take a tumble. Cyclical forces, technological breakthroughs, diverse investments, and pure luck all contribute to this intra-cohort income volatility. Think of successive high school reunions. At graduation, some seniors are picked as “most likely to succeed.” One of the reasons we go to the reunion is to discover who really fared well — and who didn’t. If you go every decade you’ll be surprised how the line-up changes. The quiet nerd who everyone tagged as a loser just sold his hi-tech start-up for millions of dollars. The math wiz is on probation for computer fraud, and that wannabe real-estate tycoon is now working at Wal-Mart. Such dramatic reversals of fortune are witnessed at virtually every reunion. The recent turmoil in financial markets is sure to produce even more reversals of fortune at the next one.

Social Security earnings histories document these intra-cohort changes in income position. Over a 15-year period, 70 percent of the workforce changes relative income position. The average move is 20 percent up or down the earnings hierarchy. Less than half of the workers who are at the top of the wage heap in one year are still at the top 15 years later. The same pattern is evident on the lowest rungs of the ladder: Only 35 percent of the workers who were at the bottom 15 years ago are still in the lowest position now. This kind of musical-chairs mobility is what makes school reunions so much fun. This same intra-cohort mobility further blurs the distinction between “us” and “them.”

Mobility expectations. The phenomenon of income mobility is so pervasive that it is near impossible to rally an army of “us” to do battle with “them.” The task is made even more difficult by even loftier expectations of switching sides. Public opinion polls reveal that a lot of average citizens expect to get rich. According to recent polls, one out of three American adults expects to be rich some day. If the “us” people expect to be among “them” in the future, they are certainly not going to rally to the side of “soak the rich” proponents today. Why raise income or estate taxes that might come back to bite you after you finally make it? This pervasive belief in the American Dream — the notion that everyone has a shot at the brass ring — is the most formidable constraint on the effectiveness of the class-warfare card.

The middle-class “squeeze”? The back-up strategy for playing the class card is to bemoan the economic stagnation in the ranks of “us.” Even if one concedes considerable fluidity across class boundaries, one can still excoriate the forces that depress the well-being for those residing (even temporarily) in the “us” ranks. You can’t win elections without the mainstream, middle-class vote. So promising a chicken in every pot is always an effective strategy. If you can convince voters that the pot will otherwise remain empty, this strategy takes on a sense of electoral urgency. That is why Obama and Clinton regularly depicted the middle class as “struggling.” As they tell the story, middle-class working families (the largest voting bloc) have actually seen their incomes decline in the past eight years. Hillary repeatedly referred to “seven years of stagnant wages, declining incomes and increasing inequality.” Obama echoed this theme by repeatedly bemoaning the “middle-class squeeze.” Voting for Obama, they contend, is the only way to raise working wages, increase health benefits, reduce tuition costs, and maintain home ownership — i.e., reverse the Bush-led economic decline of the working class (“us”).

The current slowdown in the U.S. economy and the crisis in the finance sector has made audiences more receptive to the “struggling middle class” thesis. As gdp growth has slowed, so has wage and income growth. But the economy has not yet receded into recession: Household incomes and wages continued to creep upwards even in this economic slowdown. Over the longer term of the last eight years or so, the economic status of the middle class has risen significantly.

Distorted Census pictures

Obama and clinton scoff at the notion that the middle class has experienced economic gains during the Bush years. In rebutting that claim, they point to the government’s own statistics. Hillary’s favorite statistic is the median household income. According to the U.S. Census Bureau, the median household had an income of $50,233 in 2007 (the most recent year available), only a few hundred inflation-adjusted dollars more than it had in 1998< ($49,397). To the Democrats, that is the definitive proof of their “stagnation” thesis.

Household splintering. The statistical foundation for the “stagnation” thesis is not as definitive as Obama and Hillary would have us believe. The Census data originate from an annual survey of households. The data do not track individual households from year to year, but instead just take a snapshot of the households in existence in March of each year. From these annual snapshots, we try to infer what is happening to the typical household over time.

The “typical” household, however, keeps changing. Since 1970, there has been a dramatic rise in divorced, never-married, and single-person households. Back in 1970, the married Ozzie and Harriet family was the norm: 71 percent of all U.S. households were two-parent families. Now the ratio is only 51 percent. In the process of this social revolution, the average household size has shrunk to 2.57 persons from 3.14 — a drop of 18 percent. The meaning? Even a “stagnant” average household income implies a higher standard of living for the average household member.

A closer look at household trends reveals that the percentage of one-person households has jumped to 27 percent from 17 percent. That’s right: more than one out of four U.S. households now has only one occupant. Who are these people? Overwhelmingly, they are Generation Xers whose good jobs and high pay have permitted them to move out of their parental homes and establish their own residences. As any parent knows, this transition can bring joy and relief to both parties. But it depresses statistics on average household income. Suppose a 20-year old child leaves the home of a $60,000 family. She moves into her own apartment and takes a $20,000 a year job at Starbucks. Presumably, everyone in this picture is better off, both economically and psychologically. But the Census data won’t reflect those gains. Instead, they will show that the average< household income has fallen from $60,000 to $40,000.

The same kind of statistical distortion occurs when Baby Boomers retire. Early retirement is made possible by rising wages, benefits, and asset values: it is a byproduct of rising affluence. Earlier generations couldn’t afford to retire early. In fact, they often worked until they died, “dying with their boots on.” Statistically, working until you expire buoys statistics of median household incomes; retiring early depresses them.

To the extent that retiring seniors flee their extended families and establish their own residencies, the Census statistics on median incomes decline still further, and for the same reasons. All these transitions are evidence of rising affluence, not increasing hardship. Yet this splintering of the extended family exerts strong downward statistical pressure on the average income of U.S. households. Had the Generation Xers and their affluent grandparents all stayed under the same roof, the average household income would be higher, but most of us would be worse off.

Those immigrants again. Another depressant on household income statistics (but not actual incomes) is that continuing influx of immigrants. As noted earlier, these immigrants overwhelmingly enter at the lowest rungs of the income ladder. Although there is an ongoing and intense debate about whether these immigrants take jobs away from American workers, the statistical impact is unambiguous: measured median and average household incomes decline as immigrants enter the country. The same kind of thing happens when Clinton or Obama enters a working-class tavern: The average income of bar patrons goes up even though no one’s income actually increases. Now imagine what happens to the average income of the bar patrons when an immigrant farm worker walks in. With over 1 million immigrants coming in to the economy each year, this statistical distortion is significant.

Rising standards of living

All these statistical complications imply that Obama’s “middle-class squeeze” is substantially exaggerated. The typical American household has in fact experienced a rising standard of living over the past eight years, the current macro slowdown notwithstanding. The total output of the economy — the economic “pie” from which we all draw slices — has grown by over $4 trillion per year since 2000. The Obama/Clinton stagnation thesis implies that the rich got all this added output. “They” got ever-larger slices of the pie while the rest of “us” got smaller portions every year. Were that true, “they” would be phenomenally rich. If all the added output had gone to the top 10 percent of U.S. households, then their incomes would have increased by a whopping $350,000 per household. Yet, the Census Bureau tells us their average income (including recent increases) is closer to $200,000. So “they” didn’t confiscate all the economics gains of the last eight years. A good many of “us” got larger slices of the pie, as well.

That broad swath of economic advancement shows up in personal consumption. According to the Labor Department, personal consumption spending has risen by $2.5 trillion since 2000. More Americans own homes and new cars today than ever before, despite slowdowns and financial crises in both industries. Laptop computers, iPhones, and flat-panel TVs are fast becoming necessities rather than luxury items.

Self-assessed gains. The average American isn’t oblivious to these economic gains. In the 1980 election, Ronald Reagan asked voters to decide whether they were better off at the end of the Carter administration than they had been at its beginning. Bill Clinton used that same pocketbook ploy to win the 1992 election. In both instances, a late-term recession turned the answers negative.

Polls now register increasing anxiety about both the future of the economy and personal finances. But even in the midst of this economic insecurity, most voters realize they are better off today than in earlier years. According to the most recent Pew Research surveys, two-thirds of all adults recognize that they are better off than their parents were. A plurality also claims they are better off now than five years ago, despite the current slowdown. A majority of Americans told Gallup they expect to be better off financially next year.

Trumping the class card

The economy iscertainly not a strong suit for Republicans this year. As Professor Ray Fair of Yale University has documented, voters do vote their pocketbooks. Or, as Bill Clinton’s campaign more famously proclaimed in 1992: “it’s the economy, stupid!” According to Professor Fair’s more detailed calculations, only a “Good News” quarter of per capita GDP growth above 3.2 percent can salvage a Republican victory this year. But, clearly, the Democrats are not willing to place all their bets on the (weak) performance of the macro economy. They are hedging their bets by playing the class card — making the election look like an epic struggle between “us” (the vast middle class and poor) vs. “them” (the rich). It is a hedge that so strains credulity that it might just end up costing them the game.