The Thinker

The end of the middle class

My thanks to commenter George who, five years after it was published, left the first comment to my 2003 post, The Dual Income Trap. George is one of millions of average Americans who has meticulously played by the rules and done all the prudent things. By doing so, he now finds his family preciously hanging on to its middle class existence. In a way, George is lucky. Millions of others are not so lucky. They have lost their houses and in many cases, their jobs too and are now scrambling. I hope that most have some place of refuge for hard times, perhaps just a spare bedroom in Mom and Dad’s house. Others have downsized their lives and are living in apartments, which hopefully are more affordable. It was clear that their house was not.

The pain Americans are going through can be understood not just in unemployment statistics but also by other shocking statistics. For example, one in ten Americans are receiving food stamps. Autoworkers are feeling in a particularly precarious position. It is not just the members of the United Auto Workers that are wondering how long they will be employed. Demand for cars, including foreign cars, is way down, despite gas prices at $1.60 a gallon. If you are a UAW worker, you have the sinking feeling that you are about to kiss a living wage goodbye forever. Yesterday President Bush approved $17.5 billion in emergency loans to GM and Chrysler. He did so not because he has any sympathy for the UAW and its workforce (whom you can tell he detests) but to ensure they do not collapse until after he leaves office. That way he cannot be blamed for their demise.

This economic crisis should pretty much kill off the middle class as many of us knew it. I define “middle class” as being able to own your own and maintain a single family home, have a car or two, raise a couple kids and live in a generally safe neighborhood. In reality, this life was going anyhow. George mentions that his family income is around $100,000 a year. The real price of admittance to the middle class these days is about $100,000 a year in family income. There are exceptions of course because there are parts of the country where the cost of living is remarkably low. Particularly if you live along one of the east or west coasts, if you do not have $100,000 in family income you can pretty much rule out a standard of living similar to the one (presumably) your family had growing up.

As for those with a family income in the $40,000 to $80,000 range, these people have now largely been priced out of the middle class. Unsurprisingly, they are the ones who have been predominantly getting the shaft during this severe recession. Our nation’s autoworkers have epitomized the collapsing middle class. However, their situation is hardly unique and is emblematic of a very broad problem.

There is little in the way of silver linings here. One lesson these people have learned is that they can no longer charge the difference between their desired standard of living and the standard of living they can afford. Now, assuming they are not in bankruptcy, many find that their credit limits have been reduced and their monthly payments have increased. Some sort of credit correction was probably due anyhow, but this is a hell of a time to go through it. Much of the economic shock we are now enduring is due to the collapse of credit. No wonder we are spending less. No one is willing to lend us the money to live beyond our means anymore. Frugality has become necessary. This means fewer dollars circulate, which translates into a large economic downturn.

Many of the formerly middle class are moving swiftly into what can charitably be called the lower middle class. I prefer to be more realistic and call them the working poor. You are in this class if you find that one or more of the breadwinners are working two or more jobs just to survive. Granted, finding any job in these times is going to be challenging. Good luck even finding a job paying starvation wages at your local Wal-Mart. Most likely, any health insurance, if you had it, has vanished. You may have been living paycheck to paycheck before this economic crisis. Now you are in survival mode, desperately trying to keep a roof over your head and your aging cars usable until the economy turns around.

Even when the economy does turn around, do not expect that your financial situation will markedly improve. Perhaps with the collapse of housing prices you will be able to afford a single-family house again. The dual income trap though will not be going away and is likely to only be exacerbated.

The middle class has been destroyed. It was not an accident because to kill it you had to move money from the middle class to either the poor or the rich. It went to the rich because, unsurprisingly, they have power. Starting in earnest with the election of Ronald Reagan, the rich pulled every lever to make sure they paid less in taxes and you effectively paid more. Government costs what government costs, after all. Whether by increasing taxes for those of modest incomes or through deficit spending, the effect either way is to push the burden on the rest of us less capitalized. If your taxes were cut too but deficit spending made up the difference, it meant that wealth was moving overseas. The effect was to move our collective wealth elsewhere and since most of it was vested in the middle class, the middle class lost wealth. That is one reason why unsecured credit card debt kept climbing. Think of it: when President Carter was in office, we were the world’s largest creditor nation. We owned much of the world. Now we are the largest debtor nation. We are owned by much of the world.

How to change the situation? I wish I could be as optimistic as our new president, but I think he is on the right track. We have to transform our country so that it is the engine of a new 21st century economy. We have to offer products and services that this new resource-constrained world will need. Being the leaders in manufacturing clean technologies will be key, because these will be new technologies will be in high demand, hence profitable, hence wealth builders. If we can do this then perhaps the broken middle class will reemerge.

Our middle class needs to reemerge because our nation cannot be wealthy if its wealth is vested mainly in its aristocracy. Ordinary people power an economy. Until ordinary people have money to power it again, the economy is likely to remain poor. Unfortunately, this transformation process, if it can be done at all, will take decades. We have no choice but to start now. Let us hope our competitors are less adept at creating this new economy than we may be.

 

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