According to a recent blog post in Washington Monthly “underneath the surface in many discussions of growing inequality and the shrinking middle class is a specter of futility,” namely that despite six years into an economic recovery, wage growth stagnates.
“Even highly educated millennials in booming Washington, D.C., are having a hard time seeing a path to middle-class financial stability.”
This cohort is economically challenged in ambitions to start businesses and purchase homes. Further, “The mass downward mobility… is not a new phenomenon, either… Every generation born after 1953 has done less well than the one that preceded it.”
But historical analysis provides insight. Examination of ancient Greece shows “stable, democratic political institutions and a competitive but rules-based economic system produced benign patterns of growth and wealth distribution for something like a half-millennium.”
History lessons suggest ways to “achieve growth with equality.” Today’s struggling middle class may not be resigned to stagnation or extinction with the incorporation of various growth-nurturing policies. In fact, the middle class can be a center for economic growth.
This week we look at the middle class: Are consumers “stuck in the middle?” Or does the middle erode? What events and policies might provide solutions?
‘I worry a lot about taking care of my dependents—all those perfectly ordinary middle-class preoccupations.’—Orson Welles
Gallup says, “Fewer Americans Identify as Middle Class in Recent Years.” Today, 51% of Americans believe they are middle or upper-middle class, compared to an average of 60% who felt this way from 2000 to 2008. Forty-eight percent of today’s consumers identify as lower or working class.
“Middle-class identification dropped the most among Americans in their middle-age years, showing that the shifting economy and job market may be most likely to affect the class perceptions of those who are more anchored in their careers, rather than those just starting out or at retirement.”
Real-life situations provide evidence of a declining middle class.
“Dying Penniless: It’s Not Just the Poor,” says Bloomberg. Because middle- and working-class consumers lose defined-benefit pensions, long-term care costs require consumption of all assets in order to qualify for Medicaid.
But there’s a cruel irony: The wealthy, with larger savings, tend to have longer lifespan than the poor.
“Because many people who die young are poor, they’re likelier to die penniless. But… people who are well off still risk dying poor, especially by the time they are 85.”
Also, “The Middle Class is Struggling to Make the Rent,” according to money.cnn.com.
A new Harvard report reveals one-fifth of renters earning $45,000-$75,000 annually are “cost-burdened” as 30% of income is earmarked for the landlord. In pricier cities like New York, nearly 50% of renters at this income level confront “disproportionately” large payments.
Why? The rent bill rises faster than wages.
Things aren’t better for low-income renters. “The cost burdens are so high… that they really can’t rise anymore; they are at their limit,” says a research associate.
Perhaps not surprisingly, “The Middle Class Has a Debt Problem,” says Bloomberg. “Absent reform, it presents one of the gravest threats to the prosperity of the typical family.”
Past easy credit access allowed consumers to amass debt to buy homes, cars, a college degree; facilitating earning power and stability.
But debt levels escalated as consumers tried harder to keep up. In 2013, average debt of the middle three-fifths by earnings equated to 122% of yearly income, down somewhat from pre-2008 but still double 1989 debt levels.
“Research and the lasting repercussions of the subprime mortgage crisis suggest the U.S. is pushing the limit,” and banking crises and slow recovery result as consumers save to rebuild wealth.
“This financial fragility undermines long-term growth in jobs and incomes that’s needed to support a prosperous middle class.”
Finally, from livingwage.mit.edu, “New Data, New Geography, Message Still the Same: American Families Struggle To Get By.” In 2014, 37.3% (19 million families) earned below a living wage, and 20.3% slipped below the poverty line.
“Over 8.6 million families… earn above the poverty line but less than the living wage, leaving them potentially ineligible for benefits including the Supplemental Nutrition Assistance Program.”
Single parents are most challenged, as 86.5% of them and 89.9% of single moms have incomes beneath a living wage.
‘I have to live for others and not for myself. That’s middle-class morality.’—George Bernard Shaw
Note “How Inequality Affects Growth,” according to The Economist.
Governments ought to be concerned as “a one percentage point increase in the income share of the top 20% will drag down growth by 0.08 percentage points over five years, while a rise in the income share of the bottom 20% actually boosts growth.”
The article says some inequalities will prompt growth. Economist Arthur Okun noted societies will not achieve perfect equality and efficiency, “but must choose how much of one to sacrifice for the other.”
Most economists agree, but the “recent rise in inequality has prompted a new look at its economic costs. Inequality could impair growth if those with low incomes suffer poor health and low productivity as a result… or if the poor struggle to finance investments in education.”
Know Causes and Consequences of Income Inequality: A Global Perspective by the International Monetary Fund. This data-rich report shows why policy needs to focus on the poor and middle class for growth and sustainability. “Benefits do not trickle down… An increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth.”
Another article suggests “How to Save the Middle Class.” “What’s required is a strategy that applies different ideas in a coherent way so that hardworking Americans can once again expect to share in the country’s success.”
“America’s debt troubles make it clear that the U.S. financial system could better serve the vast majority of families,” notes Bloomberg. “There’s plenty that can be done to make sure it does,” including new types of debt contracts, regulation of predatory lending, shared-equity loans, and the curbing of debt subsidies at taxpayer cost.
Such measures will also increase resiliency of the financial system.
In the words of Arianna Huffington, “It’s no longer an exaggeration to say that middle-class Americans are an endangered species.”
Consider that our society may be on a precipice. We can learn from the past to improve the future—we need not remain “stuck in the middle” of problems.