Sep 17, 2016 at 2:21PM
The United States is often thought of as a country built upon the backbone of working, middle-class Americans. But truth be told, the middle class is stuck in neutral, if not outright disappearing.
According to an analysis released by Pew Research Center earlier this year, 203 of the 229 major U.S. metropolitan areas it surveyed between 2000 and 2014 showed a decline in middle-class families. In other words, families are either ascending the rungs of the socioeconomic ladder into more specialized jobs with higher income, or they're falling into lower-income groups. This is a nationwide trend that's pretty much been ongoing for at least the past three decades.
What's really wrong with the middle class likely boils down to these seven issues.
1. Stagnant wage growth
One of the biggest challenges for middle-class families is they've watched their wages grow on a nominal basis but stay relatively stagnant on an inflation-adjusted basis. Based on data provided by the Bureau of Labor Statistics and interpreted by the Pew Research Center, nominal wages for average hourly workers jumped better than 700% between 1964 and 2014 to $20.67 an hour. However, when factoring in the effects of inflation over those 50 years, real wages grew by less than 8%.
Meanwhile, the cost to attend college or get medical care is handily outpacing wage growth. Between 2005 and 2015, medical care inflation outpaced the Consumer Price Index (a measure of inflation that wage growth is often tied to) in all but one year. College tuition costs have jumped even faster, with a nominal increase observed between 1978 and 2008 of 1,120%. A college degree can be vital to obtaining a well-paying job and having advancement opportunities, while access to medical care can lead to a healthier and longer life. Both access to college and medical care are being challenged by their rapid rates of inflation relative to wage growth.
2. High levels of debt
Another issue for middle-class families is that they're getting too liberal when it comes to their usage of credit.
A survey commissioned by the Federal Reserve every three years, known as the Survey of Consumer Finances, observed that the debt burden of the average middle-class household in 2013 was 122% of annual household income. Although this is down from a peak of more than 140% in 2010, it's nearly double the debt burden of American families in 1989.
High levels of debt can be a major concern for middle-class families, since high debt can divert dollars that should be saved for retirement to paying bills instead. Without a balanced budget and some wherewithal to stick to it, middle-class families could struggle to dig themselves out of a large debt-driven hole.
3. Historically low lending rates
The Federal Reserve's interest-rate policy has been great news for existing and new homeowners looking to take advantage of great rates, and businesses that've used the access to cheap capital to expand their operations, hire, and even acquire.
Who hasn't particularly appreciated the Fed's monetary policy since December 2008 is the middle class. Though some middle-class families have benefited from low mortgage rates, the overall effect on "America's backbone" has been negative, with yields on bank CDs, savings accounts, checking accounts, and U.S. Treasury bonds tracking near all-time lows. Middle-class consumers have counted on the guaranteed income of interest-bearing assets for years, but they've been let down recently by nominal growth rates that are underperforming relative to inflation, leading to real money losses and reduced purchasing power.
With the stock market plunge during the Great Recession still fresh in the minds of some middle-class families, some simply can't find a way to generate positive real returns.
4. Poor savings habits
Another bit of self-sabotage from those in the middle class is their inability to save a sufficient amount of their annual income. According to the St. Louis Federal Reserve, the personal savings rate in the U.S. as of July was a meager 5.7%. This is half of what the U.S. savings rate was 50 years ago. However, this figure takes into account all workers.
Based on a working paper titled "Wealth Inequality in the United States Since 1913: Evidence From Capitalized Income Tax Data," written by Emmanuel Saez and Gabriel Zucman, the bottom 90% of Americans in terms of income have historically saved just 4% of their annual income. It could be that high debt levels are preventing middle-class Americans from saving, or it could be something as simple as households operating without a working budget. Either way, the middle class doesn't get a passing grade in the savings department.
5. Growing income inequality
Building a bit on the aforementioned point is the that income inequality between the upper-class and middle-class is widening in America. The 2015 Credit Suisse Global Wealth Report found that while the middle class in the U.S. has the highest total wealth of the 21 countries it individually examined, the U.S. middle class ranked dead last of the 21 countries in terms of the total share of wealth held, with 19.6%.
Why's this a problem? As mentioned earlier, having a lower income can make it difficult to afford the things that make it possible to climb the socioeconomic ladder, such as a college education. Upper-income folks also tend to live longer because their income isn't an obstacle to receiving medical care, whereas it can be for everyone else.
6. Lingering Great Recession woes
The middle class can also probably point to the lingering effects of the Great Recession for why they're stuck in neutral.
Home prices, which historically outpaced inflation by a very narrow margin between 1890 and 1997, surged in the decade between 1997 and 2007, only to come crashing back down. In many instances, the net wealth of middle-class families was predominantly derived from their equity in their primary residence. With home prices still well below their 2007 peak, the net worth of middle-class families has taken a hit.
Between 2000 and 2014, median income for middle-class households dipped by 4%. However, when taking into account growing debt, stagnant income, and falling home prices, the actual median wealth of American middle-class households dropped by 28% between 2001 and 2013.
7. Growing reliance on part-time work
The final issue for the middle class is that the opportunity to land a well-paying job is spotty, at best.
Based on data from the U.S. Bureau of Labor Statistics, more than 6 million people in August 2016 were part-time workers for economic reasons. In layman's terms, these are people who works under 35 hours a week but aren't part-time by choice. They'd rather be full-time workers but can't seem to find a job to suit their needs and skills. Though this figure has fallen from a peak of more than 9 million during the Great Recession, we'd have to go back to 1993 to find the last time more than 6 million people were part-time for economic reasons.
If businesses continue to seek highly skilled workers, but those jobs are either isolated in certain parts of the country, or middle-class consumers don't have access to a college education to obtain the appropriate skills because of the rising cost of college, it makes landing a well-paying job very difficult.
If the middle class doesn't get smarter with its money (i.e., budgeting, saving more, and investing in the stock market for the long term), this former backbone of the American economy may continue to wither away.
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No comment, but some ideas.
If I had the political power, this is what I would do.
1. Stagnant Wage Growth
Now I'm not talking about incentive raises, or raises because of promotions, but ordinary cost of living raises. I would require by law employers to key wages to the Comsumer Price Index. The CPI is an indicator of the cost of living. If the cost of living goes up, then wages would go up. If the cost of living is stable, then no cost of living raise because it isn't necessary. If you want a raise anyway you'll have to get a promotion or something. Mom and Pop operations would be exempt because they are small and may be financially unable to comply with the law. But to keep the record straight they would have to apply for an exemption.
2. High Levels Of Debt
I would do away with all usury lending. All loans would be interest free. A flat rate would be charged. How much would be dictated by the amount of the loan. All junk fees would be abolished. There is no justifiable reason to charge a $35 late penalty. Five dollars seems fair to me. After all if there were no late penalties at all, most people would not bother to pay their loans back. This would apply to credit cards as well. There would be an annual fee but no interest. Said fee would be set according to the credit limit.
3. Historically Low Lending Rates
This is an easy one. The Central Bank would be government owned, and not private for profit businesses like the Federal Reserve.
4. Poor Savings Habits
This is one I can't do anything about. Some people can't afford to save. But others who can often don't and blow the money they could use for savings. I can't do anything about stupidity.
5. Growing Income Inequality
Since a college education is a critical factor in this, college would be free for all. There would still be private colleges, but there would also be a public college system like there is with grades K-12.
6. Lingering Great Recession Woes
If we can transform our unsustainable economic system into a sustainable one, this problem will fix itself in due time. People will eventually have confidence in the new system and fears of inflation, deflation, recession, and depression will fade.
7. Growing Reliance On Part Time Work
Once we change the system there will be plenty of jobs for all and reliance on part time jobs for a living will no longer be a problem. Part time jobs will once again serve their original purpose: As a source of extra income for someone who has a full time job, a spouse who is basically a homemaker (no gender assigned here) but wants to earn extra money, or for teenagers who want to earn some money and gain work experience.
Now I've already admitted I'm no financial expert. If I were in charge, I'd appoint experts who would know how to make all of this work and make any minor adjustments as is practically necessary.
In a nutshell, the system will put a strict leash on unbridled greed and lust for power. I believe that greed and a desire for power are natural instrincts. No matter what it is, we always seem to want more. The only solution is to regulate and control these impulses by law.