Middle Class

How the bubble destroyed the middle class By Rex Nutting

posted Jul 8, 2011, 4:34 AM by Take Back Country

WASHINGTON — A lot of people say they are deeply puzzled by the slow recovery in the U.S. economy. They look at the 9+% unemployment rate and the mediocre growth in national output, and they scratch their heads and wonder: Where is the boom that inevitably follows a deep bust, such as we experienced in 2008 and 2009?

But there is no mystery. What other result would you expect from the financial ruin of the once-great American middle class?

And make no mistake, the middle class has been ruined: Its wealth has been decimated, its income isn’t even keeping pace with inflation, and its faith in the American economy has been shattered. Once, the middle class grew richer each year, grew more comfortable, enjoyed a higher living standard. It was real progress in material terms.

Homeowners lost 55% of their housing wealth — more than $7 trillion — when the bubble burst.

But that progress has been halted and even reversed. In some respects, the middle class has made no progress in a generation, or two.

This isn’t just a sad story about a few losers. The prosperity of the middle class has been the chief engine of growth in the economy for a century or more. But now our mass market is no longer growing. How could it? The middle class doesn’t have any money.

There are a hundred different ways of looking at the economy, and a million different statistics. But if you wanted to focus on just one number that explains why the economy can’t really recover, this is the one: $7.38 trillion.

That’s the amount of wealth that’s been lost from the bursting of housing bubble, according to the Federal Reserve’s comprehensive Flow of Funds report. It’s how much homeowners lost when housing prices plunged 30% nationwide. The loss for these homeowners was much greater than 30%, however, because they were heavily leveraged.

In a WSJ interview, Goldman Sachs' chief U.S. economist, Jan Hatzius, says he sees a 15% to 20% chance of renewed recession next year. His baseline forecast is still for resumption of stronger growth in the second half of 2011 and into 2012.

Leverage is an amazing thing: When prices go up, the borrower gets all the gains. And when prices go down, the borrower takes all the losses. Some families lost everything when the bubble collapsed, others lost very little. But, on average, American homeowners lost 55% of the wealth in their home.

Most middle-class families didn’t have much wealth to begin with — about $100,000. For the 22 million families right in the middle of the income distribution (those making between $39,000 and $62,000 before taxes), about 90% of their assets was in the house. Now half of their wealth is gone and it will never come back as long as they live.

Of course, rich folk lost lots of wealth during the panic as well. Their wealth is mostly in paper not bricks -– stocks, bonds, mutual funds, life insurance. The market value of those assets fell further than home prices did during the crash, but they’ve mostly recovered their value now. The S&P 500 SPX +1.05%  lost 56% of its value when it crashed, but it’s doubled since then. Stocks are down about 13% from peak.

The rich recovered; the rest of us didn’t.

If losing half your meager life savings weren’t bad enough, the middle class has also been falling behind in terms of income for decades. Families in the middle make most of their money the old-fashioned way: Working their fingers to the bone for 40 years for wages and a modest pension.                                

The middle class has been getting a smaller and    smaller share of the pie over the past 40 years.

Their wages have been flat after adjusting for inflation. In the late 1960s, the 20% of families right in the middle were earning almost their full share of the pie: they had 17.5% of total income. Their share has been falling steadily ever since. Now, that 20% is earning just 14.6% of all income. Meanwhile, the top 5% captured a growing share, going from 17% in the late 1960s to 22% today.    

    The housing bubble was the last chance most middle-class families saw for grasping the brass ring. Working hard didn’t pay off. Investing in the stock market was a sucker’s bet. But the housing bubble allowed middle-class families to dream again and more importantly to keep spending as if they were getting a big fat raise every year.

I don’t think we’ve quite grasped how much the bubble distorted the economy in the Oughts, and how much it continues to distort it today. We’re still paying the bills from that binge.

During the last expansion from 2003 to 2007, according to an analysis by Fed economists, American homeowners took $2.3 trillion in equity out of their homes through cash-out refinancing and home-equity loans, and they spent about $1.3 trillion of it on cars, boats, vacations, flat-screen televisions and shoes for the kids.

All that spending circulated through the economy, creating millions of jobs here and in China, where they make those TVs and shoes.

During that period, the economy grew at an annual average rate of 2.7%, which is about typical for our economy. But growth would have been closer to 2% if we hadn’t had a housing bubble; if we hadn’t had the extra consumption financed by the bubble and if we hadn’t built millions of surplus homes. That’s a huge difference. At 2.7%, the economy can create a significant number of jobs. But 2% is stagnation, not even keeping pace with population growth and productivity improvements.

Now that the bubble has burst, homeowners are putting money INTO their homes, not taking it out. The impulse to pay down the mortgage and the credit card is reducing the amount of money we’re spending on other things. Since 2007, instead of taking $2 trillion out of their house, homeowners have put $1.3 trillion into them.

You think that might be having an impact on consumer spending?

The amount of debt held by U.S. households is still very high, at 115% of disposable income.

Even with trillions in debt being paid off or written off, very little progress has been made in deleveraging. The debt-to-disposable income ratio has slipped from 130% at the height of the bubble to 115%, but that’s still far more than the 90% recorded in 2000 or the 80% of 1989 or the 60% of 1976. No one knows how far it needs to fall before American families are comfortable with how much they owe.

The slow growth in the economy is no mystery: Most families don’t have any extra money to spend. It will take a long time for the middle class to rebuild its wealth, especially if we don’t find some work.

The crazy thing is that our leaders aren’t even talking about this crisis. With the upper classes prospering and global markets booming, they don’t need the U.S. middle class any more. The market is up, profits are soaring, and the corporate jet is fueled and ready for takeoff.

And if the middle class can’t buy bread? Let them eat cake.     

Getting by Without the Middle Class

posted Jul 1, 2011, 3:41 PM by Take Back Country   [ updated Jul 5, 2011, 4:08 AM ]

NEW YORK — The big mystery in the United States today is why the job crisis is not at the center of the political and economic debate. After all, the numbers — and the human tragedies they reflect — could not be bleaker.

Nearly 14 million Americans — 9.1 percent of the working population — are unemployed. That’s just a couple of a million shy of the populations of Greece and Ireland, Europe’s two problem children, combined. Another 8.5 million would like to work full time, but can only find part-time jobs. A further 2.2 million have been so discouraged by the grim labor market that they have given up looking for jobs altogether.

It is hard to blame them — those still actively looking for work have been unemployed for an average of 39.7 weeks. These are cruel numbers, and they depict an unemployment crisis that is deeper and more sustained than at any time since 1948, when records first started to be kept.

Yet the debate in Washington is focused on deficit reduction, rather than job creation. The news media are following the same playbook. A recent database analysis by The National Journal found that over the past two years, the leading newspapers in the United States had dramatically shifted their attention from unemployment to the deficit and were now publishing more than three times as many stories about the budget as they were about jobs.

Politicians and pundits on the left have begun warning that this relative indifference to joblessness is worse than a crime, it is a mistake. In a blog post this month, Robert Reich, the former labor secretary, said that “the economic burdens of America’s vast middle class may be catching up with the Street.” Unless more jobs are created soon, he warned, “American consumers will not have enough purchasing power to buy what the private sector can produce.”

But the reality may be even more chilling: Perhaps U.S. business is learning to get by just fine, thank you, without middle-class U.S. consumers. And while that may be good news for chief executives and shareholders, it could be the beginning of a new and socially wrenching political logic that leaves the great American middle behind.

Wall Street, which is paid for smarts, not sentiment, has this figured out. In a newspaper interview this month, Robert C. Doll, chief equity strategist at BlackRock, the largest money manager in the world, pointed out that the fortunes of U.S. companies and the fortunes of the country as a whole were diverging: “The U.S. stock market and the U.S. economy are increasingly different animals.”

Mr. Doll’s explanation for the shift was the increasing importance of international markets rather than the domestic one — of the rising middle class in emerging markets, rather than the stagnating one back home. He said that over the next five years, 70 percent of the incremental earnings of S.&P. 500 companies would come from outside the United States.

Among the most high-ranking executives, capitalizing on that shift has become standard operating practice. Speaking this week in Washington at an Ernst & Young conference on emerging markets (disclosure note: I moderated some sessions), Steve Taylor, a senior executive at the energy and water company Nalco, explained, “In most cases, it is dismantling something you have in mature markets to build in emerging markets. So you have to take that step. It is very painful, but you have to take that step.”

The move to consumers from emerging markets is just part of the story. Within the United States, the advertising agencies on Madison Avenue are discovering that the age of the American mass consumer may be drawing to an end. Instead, a new white paper by Ad Age, the industry’s trade journal, argues that growing income inequality means the only buyers who count are those at the top.

“Simply put, as the discrepancy between the rich and poor has become more and more stark, a small plutocracy of wealthy elites drives a larger and larger share of total consumer spending,” the paper concludes, citing research that shows the top 10 percent of U.S. households account for nearly 50 percent of all consumer spending. “It appears that mass affluence may be a thing of the past — and that luxury marketers should reconsider how their products appeal to elite consumers.”

It is hard to overemphasize the importance of this business shift from the U.S. middle class to the rich at home and the hundreds of millions graduating into the middle class in the emerging markets.

Twentieth-century American capitalism was built on what you might call the Henry Ford model — generously compensated workers (Ford paid double the existing rate) created a mass middle class that bought the products of the country’s entrepreneurs. That virtuous circle made the United States the world’s economic behemoth, and created a society and a political discourse defined by a proudly acquisitive middle class — the United States’ much admired and much maligned consumer culture.

But today, for the first time since the Industrial Revolution, that link between keeping up with the Joneses and the rising value of the Dow Jones industrial average may be breaking. Unemployment remains stuck above 9 percent, but since March 2009, when stocks hit their post-crisis bottom, the Dow has risen more than 85 percent.

When the chief of General Motors, Charles E. Wilson, told a Senate confirmation hearing in 1953 that he believed that what was good for the country was good for G.M. and vice versa, he took some flak for uttering such a self-serving line. But we all remember it because Mr. Wilson captured something axiomatic about the connection between the fortunes of U.S. business and the welfare of the country as a whole.

The creative destruction of 21st-century capitalism seems to be requiring U.S. companies to learn to prosper with fewer U.S. workers and with fewer U.S. middle-class consumers. We do not know yet how American democracy — where the middle class has the votes, but the business class has the money — will respond to this tough new economic logic.

Chrystia Freeland is global editor at large at Reuters.

War Against the Middle Class - by David Korten

posted Jul 1, 2011, 3:38 PM by Take Back Country   [ updated Jul 5, 2011, 4:20 AM ]

As did most Americans of my generation, I grew up in the post-World War II years believing that America was defined by a strong middle class supported by a durable bipartisan political consensus.

In fact, the American middle class was created in the space of just a few years by New Deal legislation that established Social Security and other safety-net programs, implemented a highly progressive taxation of income and estates, supported unions, and raised the floor on wages to narrow the wealth and income gap between the upper and lower economic classes.

Perhaps because I was living abroad during most of the 1970s and 80s, even into the 1990s, I believed until the mid-1990s that the middle class is a universal American ideal. It was quite a shock when I eventually came to realize that America is governed by an owning class that considers government intervention to maintain an equitable distribution of wealth anti-American, socialist, and a threat to individual liberty and national prosperity.

In the 1970s, an alliance of elite interests began preparing to roll back the measures that created the American middle class and launched a full-scale class war during the 1980s under the banner of the Reagan revolution. Corporate interests provided the money and controlled the real agenda. Religious fundamentalists provided votes in return for lip service to a conservative social agenda opposing abortion, family planning, and gay marriage. Libertarians provided an ideological framework removing constraints to the unlimited concentration of wealth in the name of market freedom. Neo-conservatives provided justification for wars and outsized military expenditures to swell the profits of the defense industry and secure corporate access to the world’s resources and markets. 

By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health, and wholesale/retail combined.
Once in power, the Reagan administration rolled back taxes on the wealthiest Americans, ended robust antitrust enforcement, and launched a stunningly successful campaign to make finance the U.S. economy’s dominant and most profitable sector. This process continued seamlessly through subsequent Republican and Democratic administrations.

In 1950, arguably the peak of U.S. global power, manufacturing accounted for 29 percent of the U.S. gross domestic product and financial services for 11 percent. By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health, and wholesale/retail combined. This weakened unions, put downward pressure on wages, and increased the power of the owning class.

Bigger than Unions, Bigger than Wisconsin
How Americans of all stripes are uniting in opposition to Wisconsin's anti-union bill—and cultivating a movement that reaches far beyond the state border.
In 1999, on the recommendation of Wall Street insiders, Congress “modernized” the country’s financial system by repealing Glass-Steagall, a Depression-era law that limited commercial banks to commercial banking activities. In 2004, the established requirement that investment banks maintain a 12-to-1 leverage ratio of debt to equity was repealed, leaving them free to make much greater use of borrowed money.

Between 1980 and 2005, there were some 11,500 bank mergers in the United States, an average of 442 per year. As the banking system consolidated, its focus shifted from providing financial services for productive activity on Main Street, to funding speculation on Wall Street.

Hedge funds, the high rollers that led the speculative frenzy responsible for the 2008 financial collapse, proliferated from a few hundred in the early 1990s to some ten thousand in mid-2007, by which time they had more than $1.8 trillion in financial assets under management.

The richest 2 percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only 1 percent.
Wall Street used its political influence and control of the money supply to ensure that its players captured virtually all the benefits of productivity gains in the Main Street economy as interest, dividends, financial service fees, and inflated asset prices.

This effort to achieve an upward redistribution of wealth was so successful that from 1980 to 2005, the highest-earning 1 percent of the U.S. population increased its share of taxable income from 9 percent to 19 percent. Most of that gain came from the bottom 90 percent and went to the top tenth of 1 percent. In 2007, the top 400 U.S. tax returns reported an average annual income of $345 million—compared to an average of $12.7 million for the top 427 returns in 1955, adjusted to 2007 dollars.

As Wall Street exported its modernization plan to the world, the wealth gap widened almost everywhere. In 2005 Forbes magazine counted 691 billionaires in the world. In 2008, only three years later, it counted 1,250 and estimated their combined net worth at $4.4 trillion. According to a United Nations University study, the richest 2 percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only 1 percent.

Efforts to fix Wall Street miss an important point. Wall Street, as we know it, is an instrument of class war that poses a mortal threat to the middle class and democracy. For the sake of our most cherished American ideals, it must be dismantled and replaced.

Middle Class Squeez

posted Jul 1, 2011, 3:37 PM by Take Back Country   [ updated Jul 5, 2011, 4:18 AM ]

The middle class squeeze is the situation where increases in wages fail to keep up with inflation for middle income earners, while at the same time, the phenomenon fails to have a similar impact on the top wage earners. Persons belonging to the middle class find that inflation in consumer goods and the housing market prevent them from maintaining a middle class lifestyle, making downward mobility a threat to counteract aspirations of upward mobility. In the United States for example, middle class income is declining while many staple products are increasing in price, such as energy, education, housing, and insurance.
One groupsummarizes the middle class squeeze in this way "Being middle class used to mean having a reliable job with fair pay; access to health care; a safe and stable home; the opportunity to provide a good education for one’s children, including a college education; time off work for vacations and major life events; and the security of looking forward to a dignified retirement. But today this standard of living is increasingly precarious. The existing middle class is squeezed and many of those striving to attain the middle-class standard find it persistently out of reach."
As noted by the British historian and journalist Godfrey Hodgson,
"On the basis of such evidence I myself have written that “by all statistical measures . . . the United States, in terms of income and wealth, is the most unequal country in the world. While the average income in the United States is still almost the highest in the world . . . the gap between wealth and poverty is higher than anywhere else, and is growing steadily greater”."

Causes of the Middle Class Squeeze

Income Changes
In a study conducted in 2006 by The United States House of Representatives there were some interesting income findings that show the effects of the middle class squeeze. According to the study, not only is real income decreasing for the middle class, but also the gap between the top wage earners and the middle earners is widening. Between 2000 and 2005 real median household incomes in the United States has declined by 2.5%, falling each of the first four years of the Bush Administration, falling by as much as 2.2% annually. Overall real median income has declined since 2000, by $1,273, from $47,599 in 2000, to $46,326 in 2005. According to the survey, working class families headed by adults younger than 65, have seen even steeper declines. Although they had seen an increase in real median household income from 1995 to 2000 of 9%, since 2000 their income has fallen every year and a total of 5.4%. In actual money terms this correlates to a decrease of $3,000 from $55,284 to $52,287. The other way in which income has an impact on the middle class, is through increases in income disparity. Findings on this issue show that the top 1% of wage earners continue to increase the share of income they bring home, while the middle class wage earner loses purchasing power as his or her wages fail to keep up with inflation. Between 2002 and 2006, the average inflation adjusted income of the top 1% of earners increased by 42%, whereas the bottom 90% only saw an increase of 4.7%.

Changes in the price of Staple Consumer Products

Insurance and Health Care
Insurance and Health care is an important factor regarding the middle class squeeze because increases in these prices can put an added strain on middle income families. This situation is exactly what the House of Representatives survey shows regarding Health care prices. In 2000, workers paid an average of $153 per month for health insurance coverage for their families, however, by 2005 these numbers had increased to $226 per month. The effects of the price change in health care can be seen in many ways regarding the middle class. The number of people who are uninsured has also increased since 2000, with 45.7 million Americans now without health insurance, compared to 38.7 million at the start of the millennium. Also, 18% of middle income Americans, making between 40,000 and 59,999 dollars were without health insurance during 2007 and more than 40% of the 2.4 Million newly uninsured Americans were middle class in 2003.
The rise in prices also causes a harm to working middle class Americans because it makes it more costly for employers to cover their employees, as shown by the fact that in 2007 60% of companies offered their workers health insurance down from 69% in 2000. Also the number of Americans who reported skipping treatment due to its cost has increased from 17% to 24% during the same time period.

Energy Products
Like health care, increases in energy products can put added stress on middle class families. Energy Prices have been rising since 2000 as well, including gasoline, home heating, and other forms of energy. Since 2000 the U.S. has seen a 52% real increase in gasoline prices, a 69% real increase in natural gas prices, a 73% real increase in heating oil costs, a 59% real increase in propane costs, and a 8% real increase in electricity cost. Overall, adjusting for inflation, this results in a cost for American families of $155 more in 2006 then they spent in 2000. Along with these direct cost increase, Americans also face indirect cost associated with higher energy prices, such as higher jet fuel prices, higher gas and diesel prices for commercial airliners, and higher natural gas prices for commercial and industrial users, and assuming these cost are passed on to consumers of these companies, it will cost the average American household $1,150 per year. Taken together these indirect and direct factors cost American middle class families $2,360 more in 2008 than in 2000.

The benefits of higher education is something that clearly correlates to higher income in later life, with findings showing that the average high school graduate earns $31,286, while the average college graduate makes $57,181, and education is often considered the gateway for upward mobility for the middle class. However, because of increases in college education costs, many middle class Americans are missing out on a college education because of high prices, or caused them to leave college with massive amounts of debt, not allowing the middle class to enjoy the full benefits of a college education. Studies show that the average cost of a four year college or university has increased by 76% since 2000, adding to this the middle class faces struggles because of decreasing financial aid. There has been no increase in government Pell grants, while at the same time interest rates for student loans has increased to a 16 year high. These price increases don't just affect middle class Americans trying to get into college, but they also continue to affect those who attain a college education using the high interest rates of student loans. Two out of three college graduates begin their careers with student loan debt, amounting to $19,300 for the median borrower. These debts have a long term impact on middle class Americans, as 25% of Americans who have college debt claim it caused them to delay a medical or dental procedure and 14% report it caused them to delay their marriage.

Home Ownership
Home-ownership is often seen as an arrival to the middle class, but recent trends are making it more difficult to continue to own a home or purchase a home. 1 in 33 American homeowners are projected to lose their homes to foreclosure in the next few years due to sub-prime loans, and more than 40.6 million homes are projected to drop in value. Also homeowners are more frequently having to cash out the equity on their homes to meet basic living expenses, causing homeowners equity to fall, which means American homeowners now own less of their homes than they actually did in the 1970s.

Other Factors

Increases in American Debt
Americans have built up a record $956.9 billion revolving debt as of 2008, that consist mainly in credit card debt that is more than a 70% increase from a decade earlier. With the average middle-class American family carrying more than $2,200 in credit card debt. Also the nations personal savings rate has become negative in 2005 for the first time since the great depression, with the average household spending more than they earned.

Job Security Changes
More than 92% of the 1.6 million Americans who filed for bankruptcy in 2003 were middle class.Along with this, manufacturing jobs have decreased by 22% between 1998 and 2008 largely due to outsourcing of American businesses.

Retirement Security Changes
The squeeze on the middle class is also causing difficulties when it comes to saving money for retirement because of decreased real incomes and increases in consumer prices. In 2007, 1 in 3 American workers said they hadn't saved at all for their retirement and of those who have started saving, more than half claim to have saved less than $25,000. There has also been a shift in employer retirement plans, with a shift from traditional defined benefit pension plans to 401k plans, in which there is no individual guarantee about the amount of retirement income that will be available.

What is the American Middle Class?

posted Jul 1, 2011, 3:32 PM by Take Back Country   [ updated Jul 5, 2011, 4:13 AM ]

The American middle class is a social class in the United States.
While the concept is typically ambiguous in popular opinion and common language use, contemporary social scientists have put forward several, more or less congruent, theories on the American middle class. Depending on class model used, the middle class may constitute anywhere from 25% to 66% of households.
One of first major studies of the middle class in America, White Collar: The American Middle Classes, was made by sociologist C. Wright Mills in 1951. Later sociologists such as Dennis Gilbert of Hamilton College commonly divide the middle class into two sub-groups. Constituting roughly 15% to 20% of households is the upper or professional middle class consisting of highly educated, salaried professionals and managers. Constituting roughly one third of households is the lower middle class consisting mostly of semi-professionals, skilled craftsmen and lower level management. Middle class persons commonly have a comfortable standard of living, significant economic security, considerable work autonomy and rely on their expertise to sustain themselves.

Everyone wants to believe they are middle class...But this eagerness...has led the definition to be stretched like a bungee cord — used to defend/attack/describe everything...The Drum Major Institute...places the range for middle class at individuals making between $25,000 and $100,000 a year. Ah yes, there's a group of people bound to run into each other while house-hunting.
—Dante Chinni

Members of the middle class belong to diverse groups which overlap with each other. Overall, middle class persons, especially upper middle class individuals, are characterized by conceptualizing, creating and consulting. Thus, college education is one of the main indicators of middle class status. Largely attributed to the nature of middle class occupations, middle class values tend to emphasize independence, adherence to intrinsic standards, valuing innovation and respecting non-conformity. Politically more active than other demographics, college educated middle class professionals are split between the two major parties. Income varies considerably from near the national median to well in excess of $100,000. Household income figures, however, do not always reflect class status and standard of living, as they are largely influenced by the number of income earners and fail to recognize household size. It is therefore possible for a large, dual-earner, lower middle class household to out-earn a small, one-earner, upper middle class household. The middle classes are very influential, as they encompass the majority of voters, writers, teachers, journalists, and editors. Most societal trends in the US originate within the middle classes.

1-5 of 5