What Happened To The Middle Class?

By Beth Riggott-Turnage

Introduction

Eighty-five percent of the middle class believe that it is more difficult than ever to maintain their standard of living. (Tuggle 2012). Other people believe that the problem with the middle class is perception, that a weak economy has the middle class feeling cheated that they are not getting richer. (Housel 2012). Yet the problems of the middle class can not be so easily dismissed. In four decades the number of people who claimed middle class dropped from 61% of the population to 51% while the number of people in the lower income category has increased from 25% to 29%. (Tuggle 2012) Clearly, the number of people within the middle class is dwindling.

There are significant problems with a shrinking middle class. Long the tax workhorse of the United States, this socioeconomic class provides 50% the federal tax base in the country (Jeffrey 2010). A disappearing middle class means a decline in the number of dollars garnered from taxes. In addition, as people are pushed farther down the economic scale there is a greater demand on social programs such as food stamps for relief. (Applebaum and Gebeloff 2012) Beyond these however, failure to foster the middle class has grave implications for the future. A strong middle class is shown to foster economic growth, provides a stable consumer base, that drives investment, and fosters more egalitarian government while by inference a weak middle class will not (Madland 2011).

Defining Middle Class

Some believe that the ‘middle class’ is a fictional construct. Citing differences between income and acquired wealth in different parts of the country, as well as wide variances in family sizes weighed against income, some economists claim that people who are speaking to the middle class don’t know to whom they are speaking. (Stodola 2010). Indeed there is a big gap between the lowest tier considered middle class to the higher tier, nearly eighty thousand dollars per year. The Pew Research Center defines middle class as having annual incomes of $39,000 to $118,000. (Fox News 2012)

It must be noted, however, that at the bottom edge of middle class there is fluidity between middle class and poverty depending on family size. Federal guidelines show that a family eight with an income of $38,800 is officially classified as in poverty. (Health and Human Services 2012).

The Reasons for the Shrinking of the Middle Class

The loss of middle-income jobs is widely cited as the main cause of for the dwindling of middle class America. During this last recession the bulk of the jobs lost, over 60%, were mid-wage jobs. (NELP 2011). Yet the drain of American jobs began 4 decades ago and for different reasons than are popularly stated.

In 1971, the United States went off the gold standard. For the first time the value of the dollar was pegged off speculation (Wilson, 1999) rather than the value of a commodity. The importance of this act cannot be understated. Massive wealth could and was created by speculation instead of by production. This became a business model for what followed in the next decade. During the 1970’s and 1980’s the prime interest rate rose to unprecedented heights (Money Cafe, no date) bringing record profits to the banks. With these profits banks had money to lend and lend they did. Even with these high interest rates, corporate America figured out a way to wring short-term profits via leveraged buyouts, speculation instead of production. Bigger companies would force a smaller company with good cash flows to sell to the bigger company. The bigger company would borrow most of the money needed from the banks to complete the sale. After the sale the bigger company would strip the smaller company of its assets, laying-off workers to manage costs on paper. (Hasan 2012) Despite record profits corporations stripped America of its jobs to create more short-term gain (Moore, 2009).

Encouraging these corporate raiders, the tax rate for upper income earners was reduced during the 1980’s from 70% to 28% (Scully 1991) thus spurring the widening of the income inequality between the top 1% and the rest of the population. In 1980 the top 1% controlled 25% of the wealth, today they control 43% of the wealth (Sherman and Stone, 2010). With favorable tax rates and record profits the rich got richer at the expense of the beleaguered middle class.

Ronald Reagan in the 1980’s and George Bush, Sr. in the early 1990’s governed the political scene. These two presidents advocated smaller government, deregulation, and big business. Regan signed legislation that ended long-standing regulations on mortgage lending. (Krugman, 2009) which led to the institution of sub-prime loans. The loosening of credit and standards by Regan opened the gate for the sub prime mortgage loan crisis. When the dotcom bubble burst in 2000, banks around the world scrambled to stimulate the economy. Riskier loans were approved in greater numbers. Sub-prime lending hit an all time high in 2005 leading to the sub-prime meltdown in 2006. Loan defaults led to a record number of foreclosures souring the secondary investment market where loans were packaged as investment vehicles. (Investopedia 2007). This secondary market, where people were making millions on speculation of the worth of these loans was the tipping point that sent the banking industry into a downward spiral. When defaults ran too high it was clear that these loans would not generate the income on which their worth was predicated. Most investors don’t put in the full amount of money on a stock or security. They buy the stocks on credit, and then claim the full worth of the stock as an asset. It’s a nice shell game with essentially fake money, but when the secondary market came down, all that fake money dried up, businesses were scrambling to find the funds to cover the assets they claimed. What happened when Wall Street crashed in September of 2008 is that all this fake money disappeared and no one had the funds with which to trade.

Who suffered the most was the middle class whose 401K funds lost value. Worst yet, in the wake of the Wall Street crash, banks refused to extend the credit on which Middle America business depended to fuel their business activities. More people were laid off, this time by critical necessity, sending many of the middle-class home jobless without good prospects for the future.

The State of the Middle Class Now

We know that the dividing line between poverty and middle class is around $39,000 per year. U. S. Department of Labor statistics (2011) shows us that the annual mean wage is $45, 230. However, the statistics also show (Appendix A) that 75% of American jobs are below this average mean wage, with 58% of all jobs below $39,000 dividing line between middle class and poverty. That leaves only 25% of all jobs at a self-sufficiency wage. A self-sufficiency wage is what one adult needs to earn to support herself and two children covering the basics, i.e. food, shelter, child care, health care. (Center for Women’s Welfare, no date). While the self-sufficiency wage varies from economic region to economic region and by family composition, it is clear that in America today, 75% of the available jobs will not buy you a middle class income.

Conclusions

While it is true that in theory we can change our social class upward, the current economic reality is that the middle class is losing ground steadily each year. More people are being pushed into the lower socioeconomic classes by a sheer lack of mid-wage employment. It is no longer possible just to work hard, save your money and play by the rules to attain economy security. Legislation that has favored wealth acquisition for the wealthiest of us has damaged the middle class significantly. Continued lay-offs have drained America of the mid-wage jobs on which the middle class relied. Today, for many Americans, we can only dream about the American Dream.

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