Friday, November 04, 2005

What Middle Class?

I've been wondering about this for some time.

I really think we're in for a period of stagflation for a variety of reasons. But looking at it from another angle, there seems to be a real disconnect between the current statistics of the economy vs. the perceptions of the economy by U.S. citizens.

In general, economists, Greenspan, stock market watchers and Gross Domestic Product numbers indicate that the U.S. economy is vibrant and growing. I believe last quarter, GDP grew at a robust 3.8% No one would dispute that a GDP such as this shows a very strong economy.

But then there's this from Slate:
Fifty-eight percent of respondents in the Post's poll said they do not think the president is "honest and trustworthy." Sixty-eight percent said the country is heading in the wrong direction. The reason most-often cited for feeling that way: the economy.
People perceive that we're enduring, or are in for, and bad economy. I think there are a couple of reasons for this disparity.

From MSNBC :
"Greenspan told Congress yesterday the U.S. economy is poised for continued growth." - Bloomberg

But Greenspan also "acknowledged" federal data "that suggests wage inequality is growing dramatically in the U.S., with the 20% of workers who are managers and supervisors enjoying wage gains of 10% a year, while the rest, mainly production workers, see gains of less than 4% a year, barely keeping up with inflation."
The rich are getting richer, the poor are getting poorer, and the middle class is disappearing. The GOP's tax policies, spending policies and regulatory stance has been chipping away at the middle class for years. Add to this the huge disparity in wealth between the first world countries, and third world countries where goods can be produced for almost nothing, and you have a problem.

Take a look at this chart (via Angry Bear, link below) of jobs:

click to enlarge

Remember when looking at the chart, it takes somewhere around 100,000 + new jobs just to keep up with population growth.

Kash at Angry Bear:
The period shown in the graph corresponds to what may well be the strongest economic growth of this business cycle. As a bit of context, note that during the six years of economic boom between 1995-2000, the average net job creation in the private sector was about 208,000 per month, with 10% of that job growth coming from construction. So far in 2005 the corresponding numbers are 144,000 and 16%.
Lots of construction jobs for the housing boom have made up new employment in this "recovery". And new jobs have barely kept up with population growth. Not much glee for the average American trying to get a job, or trying to get ahead.

So how do we grow the economy with so few new jobs? It's likely happening as people milk their savings, retirements, and home equity to spur consumer spending. In other words, we've been eating our assets to maintain the economy and it can't keep up.

Now, everything I've written above has been reported widely. However, I think economics is one of the most difficult items for people to understand, mostly because there's so much contradictory information provided by economists. But the implications of what is happening are enormous. The economic policies of George Bush and the GOP have had the effect diminishing the middle class. And I think the net effect of a continuation of these policies will be the elimination of the middle class.

Consider this summary from a report by Christian Weller of The For American Progress:
* In 2005, the average two-earner family needs to work 31.5 weeks to pay for taxes and a range of middle-class items (health care, housing, college, and transportation). That is an increase from 30.2 weeks in March 2001, and from 28.7 weeks in March 1979.

* In 2005, after paying for the items outlined above, the average two-earner family had about $19,542 left to pay for basics—such as clothing, food, and utilities—to save for retirement, to improve their economic well-being, and to spend on any leisure and recreation. That is $951 less than families had in 2000 and $1,702 less than in 1980.

* While families spend less today on taxes than in 2000—the tax cuts were real—those tax cuts do not offset the cost increases of expenditure items, particularly housing, health care, and education.

* Middle-class families have addressed the economic squeeze by working longer hours. This has meant less time to spend with children and higher out-of-pocket expenditures for child care and for food outside the home. [more two wage-earner families]

* Over time, middle-class families have also maintained their consumption levels by borrowing more money. Household debt soared to a record 116 percent of disposable income in March 2005. Average debt service burden levels have remained high throughout the current business cycle.

* The economic squeeze tends to be worse for minorities than for whites. Specifically, income declines have been larger for Hispanics than for African-Americans and greater for African-Americans than for whites.
These conclusions are a continuation of a trend that goes back to the early 1980's.

The existence of a "middle class" is a uniquely modern phenomena. Prior to WWII, and more broadly the industrial revolution, there really was no "middle class". Beginning with Franklin Roosevelt and the New Deal, a middle class developed primarily through the assistance of governmental programs and veterans benefits. Think about it. The wide availability of homes, health care, education, quality public health, an effective transportation system, and just about any of convenience that we now take for granted, began as a result of liberal governmental programs. Yes, all these programs cost money. But the net result was a vast consumer class that has powered our economy to levels of affluence never before attained. Put another way, you have to invest in your national resources for the future. When you invest well, you get a nice return. We now are, in essence, removing from that asset bank and investing less and less. Just one relatively minor example. We have the finest weapons of any army in history while some tax rates have gone down. But have you driven on a freeway lately?

What is the fundamental economic goal of Republicans? Cut taxes. Cut entitlement programs. Cut "discretionary" spending. Increase defense spending. Continue large deficits that will require further non-defense budget cuts while pandering to the simple greed of people wanting more tax cuts.

And it's not just the Republicans or any politicians. We, the American public bear a large measure of responsibility. I particularly blame those of my generation, the baby-boomers. Through the successes of the post WWII era in the U.S. we were led to believe that we could have everything without sacrifice. As we face hard choices, we turn away and put off inevitably difficult choices that will require sacrifice, eventually. Perhaps the perception of the economy being in trouble is a harbinger of a public awakening?

I'm not sure where it will end. We are on a steady path to the gilded age and the elimination of the middle class. Don't think this will happen without having serious consequences to vast numbers of citizens with many unintended consequences, to our national economy. Meanwhile, those who are wealthy will just continue to acquire while a large number of citizens seem to continue voting based on issues such as prayer in the school or flag burning.

Ok.......Rant over.


At 6:55 PM, Blogger Lynne said...

The three people who live in my house agree with you on the disappearance of the middle class.
We used to be middle class. Now my mom, aunt, and I live together because none of us can afford to live alone. I have no credit cards and haven't for 3 years now. I'm on the edge of disaster constantly. If I needed a new car (mine is 5 years old and has over 179,000 miles on it) I would have to get a 2nd job to make the payment. I have $300 in savings, no 401k or any of that. I make less than $30k per year and am well aware that there are many people who would love to make even that much.
No one in my household thinks anything will get better anytime soon, if at all. My aunt believes we are slowly lurching toward third world status. I think that may take a while but that we are headed for a depression if things don't change.
Okay, rant over!

At 2:12 PM, Anonymous Blue Cross of California said...

The health care system does have many issues and we need to work on improving health insurance.


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