The Middle Class Squeeze

Many observers have reported on a growing sense of economic anxiety among middle class Americans. Surveys tell us they feel the nation is "on the wrong track" by margins of three to one. Consumer confidence indicators show pessimism at the highest levels in nearly thirty years. For the first time since the Great Depression there is a negative savings rate in the U.S., which is to say that average Americans are spending more than they earn and simply piling up debt.

These conditions go beyond the current slowdown or possible recession, whichever the final statistics officially determine it to be. Instead they appear to be part of an overall squeeze that has been building since the mid 1970s. It is not just a perception. The American middle class is in trouble-deep trouble.

In an important analysis in the Financial Times of London, "America's Middle Classes Are No Longer Coping," of January 29, former Labor Secretary Robert Reich writes, "The fact is, middle-class families have exhausted the coping mechanisms they have used for more than three decades to get by on median wages that are barely higher than they were in 1970, adjusted for inflation. Male wages today are in fact lower than they were then: the income of a young man in his 30s is now 12 per cent below that of a man his age three decades ago. Yet for years now, America's middle class has lived beyond its pay cheque. Middle-class lifestyles have flourished even though median wages have barely budged. That is ending and Americans are beginning to feel the consequences."

I find my community college students stunned to learn that from the 1950s-1970s it was customary for even blue collar American families to afford a home based on the earnings of one income. Judging from the conditions that have prevailed their entire lives this is inconceivable to them. Even with two incomes, home foreclosures are at record highs, millions are being priced out of health coverage, income and asset inequity are the greatest since the 1920s and the affordability of a four-year college education-the surest ticket into the middle class-continues to grow beyond the reach of more millions every year.

Americans have tried three successive strategies to stave off inexorable decline in their standard of living. Reich explains, "The first coping mechanism was moving more women into paid work. The percentage of American working mothers with school-age children has almost doubled since 1970 - from 38 per cent to close to 70 per cent. But we reached the limit to how many mothers could maintain paying jobs."

Yet things continued to tighten. "We turned to a second coping mechanism. When families could not paddle any harder, they started paddling longer. The typical American now works two weeks more each year than 30 years ago. Compared with any other advanced nation we are veritable workaholics, putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese."

Not even that was enough. "As the tide of economic necessity continued to rise, we turned to the third coping mechanism. We began to borrow, big time. With housing prices rising briskly through the 1990s and even faster between 2002 and 2006, we turned our homes into piggy banks through home equity loans. Americans got nearly $250 billion worth of home equity every quarter in second mortgages and refinancings. That is nearly 10 per cent of disposable income. With credit cards raining down like manna, we bought plasma television sets, new appliances, vacations. With dollars artificially high because foreigners continued to hold them even as the nation sank deeper into debt, we summoned inexpensive goods and services from the rest of the world. But this final coping mechanism can no longer keep us going, either. The era of easy money is over. With the bursting of the housing bubble, home equity is drying up."

With housing prices rising much faster than incomes, there came the inevitable point at which most people could no longer afford to buy homes at these inflated prices. "As Moody's reported recently, defaults on home equity loans have surged to the highest level this decade. Car and credit card debt is next. Personal bankruptcies rose 48 per cent in first half of 2007, probably even more in the second half, which means a wave of defaults on consumer loans. Meanwhile, as foreigners begin shifting out of dollars, we will no longer have access to cheap foreign goods and services."

Reich summarizes: "In short, the anxiety gripping the middle class is not simply a product of the current economic slowdown. The underlying problem began around 1970. Any presidential candidate seeking to address it will have to think bigger than bailing out lenders and borrowers, or stimulating the economy with tax cuts and spending increases. Most Americans are still not prospering in the high-technology, global economy that emerged three decades ago. Almost all the benefits of economic growth since then have gone to a small number of people at the very top." (emphasis added).

With an eye toward the 2008 election, Reich advises, "The candidate who acknowledges this and comes up with ways not just to stimulate the economy but also to boost wages - through, say, a more progressive tax, stronger unions and, over the longer term, better schools for children from lower-income families and better access to higher education - will have a good chance of winning over America's increasingly anxious voters."

To this I would add the effects of soaring energy costs. This long period of pain began with the first energy shocks: the Arab oil embargo of 1973 and the Iranian Revolution of 1979, two events that led to the effective consolidation of the OPEC oil cartel. Much of the earlier prosperity was fueled by dirt cheap energy. It is imperative that we pursue energy independence, particularly with renewable sources, as though our economic future depended on it. It does.