Tuesday, August 3, 2010

Yes, the middle class is being destroyed

A little while ago, I wrote about the slow destruction of the middle class. Some commenters quibbled with the statistics in the article--surely things weren't really that bad?

Now a new article in the Financial Times contains similar data (hat tip: Rod Dreher):
What is most troubling about the Freemans is how typical they are. Neither Mark nor Connie – his indefatigable wife, who is as chubby as he is gaunt – suffer any chronic medical conditions. Both have jobs at the local ­Methodist Hospital, he as a warehouse receiver and distributor, she as an anaesthesia supply technician. At $70,000 a year, their joint gross income is more than a third higher than the median US household.

Once upon a time this was called the American Dream. Nowadays it might be called America’s Fitful Reverie. Indeed, Mark spends large monthly sums renting a machine to treat his sleep apnea, which gives him insomnia. “If we lost our jobs, we would have about three weeks of savings to draw on before we hit the bone,” says Mark, who is sitting on his patio keeping an eye on the street and swigging from a bottle of Miller Lite. “We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”

Mention middle-class America and most foreigners envision something timeless and manicured, from The Brady Bunch, say, or Desperate Housewives in which teenagers drive to school in sports cars and the girls are always cheerleading. This might approximate how some in the top 10 per cent live. The rest live like the Freemans. Or worse. [...]

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed “median wage stagnation” by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

But doesn't this "median wage stagnation" idea only reflect what's going on right now, in a recession? Weren't middle class wages just fine before that?

Not really, according to this economic article written in 2007:

As of Labor Day 2007, the economic recovery that began in 2001 is six years old, and the economy has consistently expanded over this period. Productivity growth, though slower of late, has been particularly strong, and after a long, slow start, employment has been consistently growing, albeit slower than past recoveries.

But most American workers have not shared in the growth and prosperity they have been helping to create. Surely, one measure of the success of an economic growth period is how much of that growth finds its way into workers' paychecks. In a period of sharply rising inequality, however, this is no "slam dunk." In fact, as much of the data in this brief reveal, many workers' wages have been stagnant for a number of years, after adjusting for inflation, particularly those at the middle and lower end of the pay scale. For example, while productivity is up nearly 20% since 2000, the real median hourly wage is up 3% overall and 1% for men, with none of this growth occurring over the three-and-a-half years since 2003. At the top of the wage scale—at the 95th percentile—real wages are up 9%.

The statistics available in that article concur with what the Financial Times article says: in real terms, wages of 90 percent of American workers have only increased by 10 percent. Has the cost of living, in real terms, risen only ten percent since 1973? I'm not an economist, so I don't know, but it doesn't seem likely.

My maternal grandfather was a middle-class man of his day. On a blue collar salary, he could, and did:

--build his own home on a piece of land he owned (and when I say build, I mean that he personally built it)

--send all five of his children to Catholic schools (yes, in those days parishes supported the schools and tuition wasn't the five to ten thousand dollars per year that it is here where I live now)

--own an extra piece of land in a different state that was to be his retirement property (alas, my grandmother's early death changed those plans)

--retire fairly young, and purchase a camping trailer with which to travel around America,

--travel and live in various places, sometimes with family, for much of the rest of his life.

How many of us middle-class people now have that much freedom? How many of us own our homes and land outright (not to mention an extra piece of property)? How many of us could afford to travel extensively after an early--or even an age 65, which is starting to be considered early--retirement?

How many of us have made a good start on retirement savings? How many of us put $10,000 per year into our savings, or have saved at least two years' worth of income by the time we're in our forties, as most retirement savings experts suggest? How many of us, with families and single-incomes and other obligations, could even begin to do either of those two things?

As the economy stutters and falters, and as more and more people face possible job losses, the reality that the middle class is being squeezed out of existence may begin to hit home for a lot of people. We can't compensate forever for rising prices, higher taxes, stagnation of income, and the like--not to mention the pervasive loss of freedom that impacts us as much, if not more, than any of these things.


Deirdre Mundy said...

Erin-- One thing about the FT article-- it's highly anecdotal.

For the couple living in the DC suburbs whose kids can't afford a home of their own on working class salaries--- In many parts of the country, they could buy a house for about 60K...and be walking distance from downtown. Fairfax county Virginia is NOT a good data point-- it's an outlier. (A modest home there costs about 400K -- that would buy you a mansion with acrage where I live!)

The family in Minneapolis was more confusing--if the state pays for their autistic son's services and she makes 70K, how can they NOT afford the mortgage on a house they bought 20 years ago for 50K? There are some big holes in this story.

My family is defined as 'working poor' income wise, yet we have a house, a stay at home mom, health insurance, etc. etc. (No cable. Only one car. No AC.) If we didn't have student loans, we'd have quite a bit more cash to spare.

Of course, we're just an anecdote too. But I'm not sure the FT article actually adds data-- just 'local color.'

And I'd argue that our parents and grandparents were partially more financially stable due to THRIFTINESS. They had fewer things, they stretched what they had further, they worked instead of taking advantage of easy credit.

For instance, 'working your way through college' has been replaced with 'borrowing your way through college.'

And who saves up to buy a house or car anymore?

If the middle class is dying, I think it's partially because we're abandoning the old 'middle class values.'

Red Cardigan said...

But, Deirdre, how many people can save up to buy a home these days?

Not every area of the country has available homes under 100K, and some places like you mention, with homes around 60K, don't have any jobs for the majority of people. As for college, how many college students working for under $10 an hour can manage to save the cost of tuition, when even state colleges run between five and ten thousand a year? Can a person working for minimum wage, or just over, earn enough to save $20,000 to $40,000?

Grocery prices, according to one link I put in the article, have risen about 12% in three years, while incomes have remained stagnant (and eating out costs more too, but people who are struggling financially have already cut that out). When prices continue to rise while incomes remain the same, the middle class is as liable to economic strife as anybody--and when you add our increasing tax burden which will start hitting most families as of Jan. 1, that's even more true.

Rebecca in CA said...

This is scary stuff. Thanks for posting.

c matt said...

About the 60K houses - where are they located? Are they a reasonable distance from employment opportunities? Houston was just ranked as one of the best places for employment opportunities, but a 60K house would require you to live either 50 miles (or more) from downtown, or in neighborhoods more dangerous than the Korean DMZ.

Acerbica said...

This is a good article, but I think it's worth pointing out that frequently when groups point out that incomes only rose X%, or that the real cost of living has gone up Z%, they are miscalculating the data. I know that in the Tightwad Gazette, Amy Daczyczyn interviews an economist who explains the miscalculation, and that couples on today's dollars can afford what their parents had, if they're really trying to buy what their parents had. He shows how income left available after taxes is higher, accounting for inflation, but that our "needs" are much higher than our parents' needs were. For example, houses now are much bigger, many people want new ones, need two car garages, skylights, cable, AC, etc. They need two or more cars, cell phones and landlines, and internet and alarm systems, etc. Our parents had no garage, maybe one car, and possibly a landline.

My husband and I are the thriftiest people we know, and it is finally hitting a point where we are paying off loans and snowballing those payments into other loans. This has required us to switch to prepaid emergency cells only, no TV, slow internet, cooking everything from scratch, doing all home improvements ourselves, buying almost everything secondhand. We don't mind because we value freedom from debt and "having" to work more than we value better material goods.

I know many people who earn more than we do and can't make ends meet because they think giving up certain "necessities", like vacations, nice cars, salon haircuts, lawn service, etc. is impossible. Sometimes people do give up all of the obvious stuff, like eating out, but then fritter away money with lots of little purchases.

On the other hand, I think taxes are out of control, and will get worse. Taxes are the primary reason that we don't have more economic growth hitting the lower classes. Companies have to pay matching social security taxes, and the higher wages are, the more SS tax they pay. Lots of things like that leave companies with less money to pay employees. (Also, perhaps this is controversial, but as a 26-year-old teacher, I can assure you that the quality of smarts in the average younger worker is a lot lower than it used to be, thanks to prolonged adolescence and the mediocrity of schools. Why would businesses pay top dollar to people reading at a 4th grade level?)

And I agree, we have lost a lot of freedoms, and a lot of privacy, which is a far greater cost. Red light cameras where YOU pay court fees if you *dare* contest the fact that the yellow light is shortened at those intersections, cameras in any location the government decides needs some supervising, no tort reform to protect businesses and individuals from frivolous lawsuits, etc. There are many things eating away at our ability to do as we wish without getting a ticket for what time of day we did so, or where we parked our car on our own driveway, how tall our grass is, blah blah blah. We're being regulated well beyond what is constitutionally permissible.

So on the one hand, Americans need to buckle down and save like squirrels, and on the other hand, they need to challenge the Nannies in Congress who want to take our money and spend it for us babies.

Freedom isn't free. Financial freedom, for people without astronomical incomes, comes from sacrifice and smarts. The government can't give it to you, because to try would be to undermine actual economic growth.

I always worry a little bit when I see liberals ranting about the disappearing middle class, since clearly their own policies are causing that. Should we have a permanent bail out for people who "deserve" to be middle class? Who will pay for that?

When conservatives do it, I tend to trust that they mean we need to build wealth by turning off the wealth-vacuum in DC.

Siarlys Jenkins said...

Without a strong union movement the middle class is doomed.