American Middle-Class Deal Then and Now

From the 1950s starter home to today’s cost-of-thriving economy where one average paycheck no longer buys basic security.

There’s a paradox at the core of the American economy. The charts say people have never been wealthier. The average household feels like it’s one bad month away from collapse.

This isn’t because people don’t understand economics. It’s because there’s a gap between what the data measures and what life actually costs.

Whether real wages are up depends almost entirely on whether the Consumer Price Index is telling the truth. If the CPI understates what things cost, then wage growth is just statistical sleight of hand.

The Bureau of Labor Statistics uses hedonic quality adjustment to account for product improvements. If a product gets better and the price goes up, that’s not really inflation, because you’re buying a better thing.

On paper, that sounds reasonable.

In practice, it hides something important. A 2024 car has safety systems and fuel efficiency that didn’t exist in 1990. If the price goes up but the government decides those features explain most of that increase, the CPI barely moves.

For a statistician, that’s elegant.

For someone who just needs a car to get to work, the entry price has exploded. You cannot buy the old car without the screens and sensors. The floor has risen even if the quality-adjusted price hasn’t.

The same logic applies to phones, laptops, and TVs. If a new model is faster with a better screen, the method says a higher sticker price isn’t fully inflation because you’re getting more. But you don’t get the option to buy the cheap, worse version. You either pay the new floor price or you’re out.

This creates a world where people are richer in toys but poorer in security.

The economy has split in two.

Globalization crushed the cost of manufactured goods. Televisions are down something like 97% between 1997 and 2024 in quality-adjusted terms. Meanwhile, healthcare, education, and childcare exploded. Hospital services are up well over 200% in the same period.

You can shift TV production to a low-cost factory. You can’t outsource a surgery to Shenzhen.

This is Baumol’s Cost Disease in action. In manufacturing, technology drives productivity. In services, productivity barely moves. A string quartet playing Beethoven still needs four musicians. To keep those musicians from becoming software engineers, their wages have to rise anyway.

Higher costs, same output.

Education works the same way. Universities pay professors and layers of staff more, but they’re not graduating twice as many students per classroom hour. The productivity gain isn’t there, so the cost just climbs.

Housing is where the whole system stops pretending.

In 1985, the median home cost about 3.5 times median household income. By 2024, that ratio is around 5.0. In cities where the good jobs are, it can exceed 10x. Higher wages don’t make people secure. They just get captured by landlords and sellers.

Elizabeth Warren called this the Two-Income Trap. Women entering the workforce was supposed to double household security. Instead, it launched a bidding war for housing in good school districts. Families spent that entire second income competing for access to decent schools.

The 1950s family had a safety valve. If dad lost his job, mom could enter the workforce.

The modern family has no slack. Both parents already work. One income disappears and bankruptcy is suddenly on the table.

College tuition has risen roughly 170 to 200% after adjusting for inflation between 1980 and 2020, depending on the measure. A student in 1980 could realistically fund a large share of a degree with summer work. Today, annual costs can easily run north of twenty thousand dollars.

Where does the money go? Administrative bloat. Between 1993 and 2009, administrative positions at colleges grew far faster than tenured faculty. Students are funding resort-style amenities and bureaucracy. Graduates drag that cost into adulthood as debt service, quietly discounting their real wages for decades.

Healthcare mirrors this. The U.S. spends nearly 18% of GDP on healthcare, up from about 5% in 1960. Administrative costs eat a huge share of that. Physicians spend more time on paperwork and billing than with patients. Even when employers pay premiums, that money comes out of the raise that never shows up. It’s an invisible tax on labor.

The CPI doesn’t capture this squeeze.

Oren Cass proposed the Cost of Thriving Index to track housing, healthcare, transportation, and education as a bundle. In 1985, a typical breadwinner could cover these costs with about 40 weeks of income. By 2022, the same basket required over 62 weeks.

It is mathematically impossible for a single average earner to cover the basics in a 52-week year.

Nostalgia for the 1950s usually focuses on culture and aesthetics. It misses a simpler point: that lifestyle is now illegal. You can’t build a 900-square-foot, two-bedroom house with minimal insulation on a small lot. Zoning rules, building codes, parking minimums, and safety standards have banned the true starter home that made that era affordable.

Society regulated a higher cost of living into existence. Yesterday’s luxuries became today’s legal requirements.

The economy split into a cheap sector of manufactured goods and an expensive sector of essential services. Americans can survive cheaper than in 1950 thanks to inexpensive calories, clothing, and entertainment.

But they cannot thrive cheaper.

The real wage data is correct that purchasing power for things has risen. The popular sentiment is also correct that purchasing power for security has collapsed.

The modern household is trapped in a zero-sum competition for status and stability. Property-rich but security-poor.

Both the data and the despair are telling the truth. The question isn’t whether Americans are richer on average, but whether a normal household can still buy what actually matters: margin for error.