It’s no surprise to anyone in America that being middle class isn’t what it used to be. Even though we have more gadgets, middle class workers in the 1950s and 1960s could afford to have stay-at-home wives. For mort households, it takes more hours of paid labor, and more borrowing, to support a bourgeois lifestyle.
This article by Christopher Caldwell in the Financial Times, “The lazy, crazy middle class,” does a good job of providing an overview of middle class decline, but steers clear of articulating the causes. For that, we can consult Thomas Palley:
America’s economic contradictions are part of a new business cycle that has emerged since 1980…The new cycle rests on financial booms and cheap imports. Financial booms provide collateral that supports debt-financed spending. Borrowing is also supported by an easing of credit standards and new financial products that increase leverage and widen the range of assets that can be borrowed against. Cheap imports ameliorate the effects of wage stagnation.
This structure contrasts with the pre-1980 business cycle, which rested on wage growth tied to productivity growth and full employment. Wage growth, rather than borrowing and financial booms, fuelled demand growth. That encouraged investment spending, which in turn drove productivity gains and output growth.
The differences between the new and old cycle are starkly revealed in attitudes toward the trade deficit. Previously, trade deficits were viewed as a serious problem, being a leakage of demand that undermined employment and output. Since 1980, trade deficits have been dismissed as the outcome of free-market choices….
The new business cycle also embeds a monetary policy that replaces concern with real wages with a focus on asset prices. Whereas pre-1980 monetary policy tacitly aimed at putting a floor under labor markets to preserve employment and wages, it now tacitly puts a floor under asset prices. This is not a matter of the Fed bailing out investors. Rather, the economy has become so vulnerable to declines in asset prices that the Fed is obliged to intervene to prevent them from inflicting broad damage.
All these features have been present in the current economic expansion. Wages have stagnated despite strong productivity growth, while the trade deficit has set new records. Manufacturing has lost 1.8 million jobs. Prior to 1980, manufacturing employment increased during every expansion and always exceeded the previous peak level. Between 1980 and 2000, manufacturing employment continued to grow in expansions, but each time it failed to recover the previous peak. This time, manufacturing employment has actually fallen during the expansion, something unprecedented in American history.
Now to Caldwell on how this is playing out. From the Financial Times:
Two years ago, several prominent economists gathered in Italy to debate the wide gap in annual working hours that separates the workaholic US from leisure-obsessed Europe. The conference was called: “Are Europeans Lazy? Or Americans Crazy?”…. But sometime in the intervening years, ordinary Americans – without stinting on craziness, of course – appear to have made their peace with laziness. On Wednesday, the Pew Research Center, based in Washington, DC, published an eye-opening study on the economic attitudes and prospects of middle-class Americans. Inside the Middle Class: Bad Times Hit the Good Life found that Americans’ number-one priority – named by 68 per cent of respondents and topping children, marriage, career, wealth and religion – was “having enough free time to do the things you want”.
The American middle class is not playing to type these days. The go-getting engine of the global economy is less work-obsessed than it looks and less confident. The percentage of middle-class people who say their life is better than it was five years ago is the lowest in almost half a century, according to Pew. Average Americans feel as though they are barely clinging to their position on the social ladder; 78 per cent say it is harder to maintain a middle-class lifestyle than it was five years ago. A middle-class squeeze (rising healthcare costs, rickety pensions, the collapse of housing prices and so on) has been at the heart of debates in both parties this presidential campaign season.
Low economic morale is a problem even when it is illusory. In this case it is not, US census data show. A majority of Americans of all races and regions tend to identify themselves as middle class (the figure is 53 per cent today). There are not enough perches in the middle class to accommodate all of them. A standard measure defines “middle-income” households as those earning between 75 and 150 per cent of median family income, now about $60,000. Where 40 per cent of American households met that definition in 1970, only 35 per cent do today. (Using “income” as a synonym for “class” is crude, but that is how US social scientists do it.)
This “hollowing out” of the middle class is an old story. It has been going on for three decades. But there are a couple of new twists. Rising inequality was always accompanied by rising prosperity. Certainly gains were unevenly apportioned: the rich, black people and single women gained disproportionately while high-school drop-outs and single men suffered disproportionately. But the system was thriving and so was the ordinary US worker, even if the meaning of “ordinary” was changing. The system was not managed to egalitarians’ liking – but it retained the resources to set more egalitarian priorities if politicians chose. Now, even the resources are in doubt. For the first time since statistics have been gathered, the adjusted median family income actually declined from one economic boom to the next, from $61,227 in 1999 to $59,493 in 2006.
A transitional economy is sometimes hard to measure. Americans have trusted that the hard-to-measure bits concealed strengths, not flaws. True, they reasoned, the incomes of the poorest have fallen since 1970, but that included many of the 35m immigrants the country has added since then and the US offered them a way up. True, houses were growing more expensive, but the average new house is bigger, fancier and more efficient than the places the poor lived in decades ago.
Today, though, a large swath of Americans is being priced out of what the Pew authors call the “anchors of a middle-class lifestyle”, starting with housing, medical care and education. And one of the economy’s hard-to-measure phenomena (the housing boom) has become an easy-to-measure one (debt). The debt-to-income ratio for the middle class has risen from 0.45 in 1983 to 1.19 now. Some of this shift is due to the rise in house prices: the percentage of middle-class income spent on housing rose from 26.8 per cent in 1981 to 33.7 per cent in 2006. In 1970, people tended to pay twice their family income for a home; now they pay five times. That money did not seem to be lost because it could be spent – you just had to borrow against your home to get it. Americans borrowed too much. In a world of “ownership” without equity, the difference between ownership and rental is not obvious.
The US middle classes have always had an empathy with the rich that is anomalous in a world context. They oppose milking high earners, thinking that they themselves might be rich someday. But that empathy is eroding. Only 42 per cent of the middle class think that “rich people achieve their wealth through hard work and ambition”; 47 per cent chalk up wealthy people’s fortunes to “connections and family ties”.
Who is to blame for this debacle? The answers will tell you a lot about the politics of this presidential election. The Pew analysts find a certain ambiguity. The middle class is more conservative than the very rich and the very poor, but it is tending towards the Democrats. Its sympathies are split – to borrow the terminology of that Italian economic conference – between a Lazy party and a Crazy party. Republicans, the Crazy party, are twice as likely (by 17 per cent to 8) to blame “the people themselves”, who thought they could use their home-equity loans to live like the rich. Democrats, the Lazy party, are twice as likely (by 35 per cent to 16) to blame the government. At least they blame the Republicans who thought the government, too, could somehow borrow without incurring debt. For now, the smart money is on the Lazy, rather than the Crazy, party. But, of course, they could both be right.
With all due respect to Pew, survey research has to be taken with a handful of salt. The fact that 68% of the respondents said having enough free time to do the things you want” was their top priority is probably aspirational and a symptom of ever-worsening time stress. I doubt that many of the participants would accept a job with lower pay and better hours.
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My wife and I joke about the lousy service we get almost everywhere – we have a service economy without the service. But can you really expect employees to care that much when they don’t get paid enough to keep up with food prices?
The United States economy is becoming like the Soviet economy: they pretend to pay us, and we pretend to work.
This spreading ennui probably explains much of the finding that “doing what I want” is such a much-tallied response. “They don’t pay me enough, the system is rigged, only the most brutish and selfish get to the top, so screw “them.” (In other words, screw The Man.) I’m doing what I want.”
Exactly, commenter 1. How do you get motivated to do anything if you are a realist in this economy?
The game is rigged.
The system rewards those who game the system, not those who work hard. In fact, those that game the system and are financially reckless are bailed out or given a slap on wrist.
Debt once had a real social stigma attached to it. Now those of us who *don’t* go seriously into debt (I personally have no debt of any kind) are suckers in a way. There’s something seriously wrong with that.
All the things that would provide equality of opportunity have become largely unaffordable. Health care? For most people in this country, you either get it through your employer or you don’t get it at all – and more and more employers are dropping plans because of the exorbitant cost.
Education? Tuition keeps rising and rising and student loans and grants haven’t kept up. On top of that, living costs are astronomical. To attend a public college full-time here in NY as an adult (with no family to pay rent for him!) it’d cost me over *$100,000* to go to school for 4 years – and I live in a closet sized apartment and eat like a bird. Work while going to school? Did that once. You walk out of there not remembering a thing because you’re so exhausted from work, which defeats the purpose.
Housing costs? Like I said, I live in a tiny little apartment that many would consider little more than a closet, and I pay over half my monthly take-home for it. I shopped around for this to get a good deal, and do not live in an upscale location. Wasn’t it like 20-30% in the 70s?
The sad part is that it’s ideology that keeps this country this way. The blind worship of misguided dead economists/philosophers (Hayek, Rothbard, Friedman, Rand, Spooner, Mises, etc.) is what prevents us from getting Universal Health Care, Universal Higher Education, or working social safety nets that aren’t laden with perverse incentives.
Blech.
The fact that 68% of the respondents said having enough free time to do the things you want” was their top priority is probably aspirational and a symptom of ever-worsening time stress. I doubt that many of the participants would accept a job with lower pay and better hours.
I’d trade the pay for less hours. But then again, like poster #2 I have no debt of any kind, my house is even paid off so I don’t feel that I need to trade as much time for money. Problem is that most professions (I’m an engineer) want your all – they don’t know how deal with part time workers. Ideally I’d like to work 3 days/week and I’d be willing to take the 40% pay cut – but I don’t think many employers would go for this… It’s not that I wouldn’t do anything with those extra 2 days; I’d do a lot more vegetable gardening and perhaps try to do a startup. Things that would offset the paycut.
The “8” hour work day has to go! It is a relic of the late 1800’s and it is time for a change.
Now historically (a hundred years ago or more, before the Industrial Revolution), there wasn’t a hell of a lot to do for entertainment after work. You could read a book/newspaper/magazine (and this only after the development of the Gutenberg printing press around 1400), get drunk, have sex, play a board game and similar pastimes.
Most people woke up at sunup and worked until sundown. Those in the hitherlands worked on the farm or in agribusiness. City workers worked in small stores, businesses or government offices. So 10-14 hour workdays, 6 days a week were not uncommon. Most people worked locally, very close to where they lived.
Then came the “Industrial Revolution” which was supposed to make everyone’s life easier. While it did change much, people still worked from dawn to sundown (or longer with the advent of electricity). Child labor and working on Saturday’s for miserly wages was a reality. Eventually unions were created and laws were passed to restrict working hours, employment of children and assure minimum wages.
Fast forward tot he computer age, say 1970 forward, when again, we were all told that technology was to be our savior, that we would work less hours and produce more product and value with less effort.
But working less hours never came to pass. USA business still adhere’s to the mythical 8 hour “work day”, despite people living extended distances from their workplace and having to daily fight ever increasing traffic on poorly maintained infrastructure.
In today’s world, with prep & commuting time, many people are putting in 12-14 hours tied to work. If you are a normal person who needs about 7-8 hours of sleep, when you finally get home you’ve got maybe only 4-5 rushed hours for your personal life (family, friends, chores, shopping for food, making/eating dinner, reading, entertainment, thinking, managing your finances, etc.).
But even with these 10-12 hour days, non-union, white collar worker’s don’t get paid more. They are instead expected to put in the extra hours or risk being replaced by someone “hungrier” (i.e willing to to put in the hours and be more productive so the executive staff can make the big bonuses).
If you are working in corporate America, there is just not enough time anymore to kick back and simply relax. I think France was on the right track when they cut the max work week back to 30 actual work hours. Unfortunately, this policy was attacked by their corporate interests and has, to the best of my knowledge, been rescinded.
Technology has not made the work day shorter, as many opined 20-40 years ago, but has instead increasingly complicated our lives, making us work harder and longer hours. Hell, keeping a desktop computer running smoothly and up-to-date almost seems like a half-time job in and of itself. Sometimes has to change.
I think the work day should be no more than 6 hours per day or 7.5 hours across 4 days. Of course, the pay will have to be the same as now or we will need a good deflation to reduce the costs of living so we stay in step with the reality of eeking out an existence. In fact, with outsourcing moving business overseas to cheaper environments, illegal immigration running rampant and unemployment increasing, we may be forced to do this, just to make sure than their are jobs for more people or risk the spectre of widespread social unrest. Idle hands and minds can be dangerous combination.
Here’a story from Businessweek a few years back that I dug up:
http://www.businessweek.com/magazine/content/05_40/b3953601.htm
Read the interview with Elizabeth Warren, who is the Leo Gottlieb Professor of Law at Harvard University on the plight and collapse of the American middle class.
http://globetrotter.berkeley.edu/people7/Warren/warren-con0.html
Palley’s piece is very interesting, and futher boosts my general estimation of his insight as he points out the unusual lack of interest in wage growth by the US middle (and lower middle and working) class over the last generation. I’m sorely tempted to post up a long sermon on historical shifts in preference between wage growth and asset appreciation by the non-rich in US history, but nah, I’ve stifled myself (for now). Consider this, though: we are highly likely to have a major asset price depreciation in the US across most and perhaps all classes while at the same time the decline of the $ boosts costs and erodes present wage values (not technically inflation but it feels the same at street level). Our macroeconomic recovery strategy can favor asset re-inflation or favor wage-and-demand support—but not both, or so I would see it. Who will win, the rich or the rest? Two years from now, this will be a VERY hot political potato, and I’m interested to see the outcome.
I do take exception to one point in Palley’s discussion; in the last paragraph he refers to “the recent economic expansion.” It is still accepted wisdom that we _had_ and expansion: we did not. Nothing that happened in ’01-’07 tracks with an ‘expansion.’ Job growth was stagnant, and that achieved only by cooking headline unemployment even beyond the egregious norm. Wages were stagnant and may actually declined. Productivity was stagnant, and ended up declining. Exports only grew after the $ begain to decline, and even then the thick part of the nickle there may be from increases in the value of commodity exports. Manufacturing continued to decline. What we had in ’01-’07 was a severe asset price bubble and a massive increase in debt. We got a bump in revenue, but this the result of negative real rates and unprecedented borrowing: we just loaned each other more of China’s money. I suggest that we can use references to ‘the expansion [sic]’ as a test of the credibility and competence of pundits going forward. Those who continue to speak of ’01-’07 as ‘a boom’ or ‘an expansion’ lack credibility, competence, or both. Those who use some other term are worth listening to on the possibility that they might have something useful to say.
Caldwell: “The go-getting engine of the global economy is less work-obsessed than it looks and less confident.” Uh, gee, think there’s a linkage there, maybe?
Through the last fifteen years, the notion has been current in the US that if you, Cuthbert Cubicleson, would work like crazy and put it into dot-bomb stocks . . . er, reboot . . . work like crazy and buy _real estate_, you would fer sure make a killing and then retire by 30 (or 40) ‘to do what you want.’ Now, in ’08, anyone who reads the news [not TV, that’s broadcast Prozac] or sniffs the wind knows that’s all bunco. Cuthbert Cubicleson will not be retiring at 30+; he’ll be working past 70. He’s up to his ears in debt, has no savings, and if he bought any bit of an asset during these market top times he’s about to get dumped upside down. If he’s median income or below, his asset is already wiped. The best thing he has to look forward to is decades of rolling the peanut with his nose down the worn track in the hallway carpet in Cubicleville with his arse in the air ready for the toe of his feckless boss at anytime. Is it any wonder that Cuthbert would kinda like more time ‘to do what he wants’ instead?
I’ve always been impressed my one rarely discussed but not un-reported statistic: That being the fact that, during the 2001 thru 2007 “boom”, annual mortgage
equity withdrawal averaged 4% of GDP, or about the average rate of growth in GDP. I believe it was Archimedes who is reputed to have said, “Give me a large enough lever and a place to stand, and I can move the earth”. In 2008, the house is no longer that place.
The question is:
Is the average American happier than they were 20 years ago or 40 years ago?
Is anybody out there measuring this? Or is this “not worth measuring”?
An excellent post and the comments are all right on, as well. The only thing I take exception to is this irritating phrase, “wage stagnation”, which suggests some sort of unfortunate, impersonal activity that nobody could help, really. This bit of semantic jiggering hides the fact that wages did not “stagnate”, they were actively suppressed, via various mechanisms, most obviously outsourcing and the encouragement of illegal immigration. In future discussions of our current economic collapse, I hope to see the phrase “wage suppression” instead …
To Anon of 6:38, labor markets and their wage rates are simply too big and too diverse to be covertly suppressed _directly and in the entirety of their change_ in the way that you suggest. Direct competition from lower wages in other national economies yields its own downward effects as well independent of any overt and deliberate manipulation. That said, I agree completely with what I see as your basic point, that there has been an active and substantially successful effort to erode and where posssible suppress wages in the US. ‘Wage impedence’ anyone?
Maybe I think the discussion here is so good because I agree. The last seven years have been a leveraged orgy. The country’s savings were spent on a senseless real estate boom to hide the destruction of the US economy by lopsided trade and domestic policies. The Walmartization process.
Well, there is no more credit slack to be consumed to obscure the issue. The moment of truth is at hand. Is the US wealthier from lopsided trade than if we had insisted on balanced trade ? Is it better to have a strong middle class than a bipolar economy of working poor and an elite plutocracy. Will asset prices persist or ultimately devove into deflation.
All the jaw boning in the world has been inneffective in dissuading American politicians from the path we have chosen. All that is left are the safety nets and the school of hard knocks. If only we had diverted Social Security withholdings to wall street all would have been fine. I guess it’s not too late.
Let’s be sure to have the Bushco push through a bunch of trade agreements and legislation before slinking out of office.
Of course, RKline, when I say wages were actively suppressed, I don’t mean a cabal of men in black hats sat around in a dark room somewhere twirling their moustaches and plotting to control the world-wide labor market (while, perhaps, spearing canapes off the backs of naked women.) (If only it were that colorful:)) But on the other hand, that does not mean that employers did not actively and consciously look for ways to decrease their labor costs, via various mechanisms such as outsourcing and the large-scale use of cheap undocumented aliens in previously strong bastions of unions (and good wages) such as construction. I hate the phrase “wage stagnation” because it suggests employers are just standing around wringing their hands helplessly while some impersonal force of nature prevents them from paying decent wages. The bottom line is, the people at the top make more money when the people underneath make less. And less. And less. The fact that this policy is short-sighted and ultimately disastrous didn’t stop them.
Most of these “the middle class is shrinking” studies makes many core mistakes.
1. A large number of people in the lowest tier are new immigrants. Their standard of living is much higher than their previous one in their countries of origin. This gives the numbers a tremendous skew downwards. ie, for the median worker the total standard of living is higher than their parents’, but not shown because of the demographic change.
2. The basic conveniences of life that we take for granted today such as restaurant food, home appliances, etc, were not available or cost-prohibitive in the 50’s and 60’s. This changes the profile radically of who will want to work and the value of their time.
3. Our consumption desires have changed drastically. If you want 50’s quality medical care (penicillin), transportation(Chevy Pinto), and housing (median home size of 1500 sq ft), then you can most likely have that very easily on one low income earner. But, I don’t think anyone wants that.
NY Times
April 9, 2008
For Many, a Boom That Wasn’t
By DAVID LEONHARDT
How has the United States economy gotten to this point?
It’s not just the apparent recession. Recessions happen. If you tried to build an economy immune to the human emotions that produce boom and bust, you would end up with something that looked like East Germany.
The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500.
This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?
Full article:
http://www.nytimes.com/2008/04/09/business/09leonhardt.html
The annual Parade magazine annual report on “What People Earn” came out this Sunday. Make what you will of this information, but I always find it interesting how much people REALLY make.
http://www.parade.com/articles/editions/2008/edition_04-13-2008/1What_People_Earn
The admonition that the middle class is doing fine and that we could all go back to living off a single wage earner if only we lived in smaller houses and drove Pintos, circa 1955, sounds like negative nostalgia to me. The world of a half century ago was much more user friendly for low income worker — suburbanization hadn’t distanced jobs from residences, the insecurity of outsourcing wasn’t ever-present, and fundamental good and services like health care and housing were relatively cheap.
In contrast, it takes a lot more work (and time) to be poor nowadays. Cities, transportation systems, financial institutions, the work place have all been made over to benefit the top 10% to the detriment of lower bracket Americans. Anybody who thinks being poor is simple hasn’t been out much. For those without sufficient cash in their pockets, negotiating our society nowadays is an endless obstacle course of bus stops and Medicaid forms and layoffs.
What makes this all the more galling is the moralization of wealth that the discourse of the economic Right is now promoting full force. The subprime crisis (which is the direct result of the low wage policies conservatives have put into place over the last two decades) is recast as “people living beyond their means.”
In the new vision of the America offered by the economic Right, living in a home, having access to health care and educating your children is living beyond your means. Time to change policies to promote high wages, financial security, and cash in the pocket of the lower brackets, where real investment begins.
I couldn’t agree more with all your points, Landru, and your post also brings us back to the issue of Yves’ original post: there is a poverty not just of wages, but also of time. The ability to cheaply buy certain minor consumer goods such as clothes or toys (relative to the 50’s) doesn’t change the fact that buying the larger necessaries–housing, education, health care, and food–is becoming an increasingly scary and threatened enterprise for all but the wealthiest. And, we have much less time. The worst of all possible worlds.