It is difficult today to pick up an economics publication, political publication, or visit a website covering either of those subjects without seeing an article lamenting the demise of the American middle class. While the articles throw around charts with multitudes of numbers and, in the case of the political journals, presume to offer policy prescriptions for what ails us (usually the same policies that they have been offering for the last 30-40 years), nobody seems to have a good grasp on what it means to be middle class nor do they seem to have a really compelling idea for what has gone wrong.
So what has gone wrong? Before we can answer that, we need to ask ourselves what was this mythical middle class Eden from which we have supposedly descended? If one looks at tables on Wikipedia (http://en.wikipedia.org/wiki/Household_income_in_the_United_States), one sees that the 50th percentile (or median) of real household income in the U.S. has risen from $45,595 in 1976 to $50,054 in 2011 (in 2011 dollars). While stagnating real wages have been spoken of for some time, the key word in that expression is ‘real’. The middle is keeping up with inflation (or even a little better than inflation), so in theory it should not feel like it is falling behind. So why does it feel that way?
While this is a subject too complex for one blog post to do it justice, I suspect the reason stems in large part from expectations that have been disappointed, increased economic insecurity that now exists, the effort that must now be expended to maintain a middle class lifestyle, the lack of visible improvement, the sense that upward mobility is increasingly difficult and sub-standard public services all contribute to the sense of unease. To take a simple example, a fellow who has nothing and wins $2,000,000 in the lottery after taxes and a rich fellow who lose 80% of his wealth and is left with $2,000,000 are both objectively at the same spot financially, but one is much happier than the other.
So what has caused the disappointment in expectations? To understand this, we have to accept that what it means to be middle class was largely defined for us in the 1950’s: a secure job, a family (complete with 2.5 kids), a house, a car, good schools, and a secure retirement. One could add to this the sense that tax dollars were being used wisely, and that you could, with enough hard work, get ahead if you wanted to.
So what changed? The short answer is that the external conditions that allowed this world to exist have changed irrevocably and with it likely contributed to the sense of unease now being felt. In the 1950’s, the U.S. accounted for nearly 70% of all manufacturing, roughly half the world was communist and insular (meaning that U.S. workers weren’t having to compete with those workers), Europe was still recovering from the war, Latin America, Africa, and the Middle East were unstable (meaning nobody was going to be offshoring jobs to those locations), trade protection was still high, along with transportation costs. Add to this the fact that the workforce was being populated by the generation born in the 1930’s (a baby bust generation), along with high rates of private sector unionization (something that can only happen in protected industries), and you had a worker who was largely insulated from global competition and could work 8 hours, provide for his family, and have weekends off to enjoy himself.
This world no longer exists. Today, the U.S. accounts for 18% of the world’s manufacturing, trade barriers have gone down, transportation has become easier (and less costly), manufacturing has become more automated (costing jobs), the world has become a more stable place (meaning more inviting for off-shored jobs), communism has collapsed (meaning that U.S. worker have to compete with these workers) and unionization (in the private sector) has weakened as a globalized world has eroded the bargaining position of U.S. workers.
These effects on U.S. households have been somewhat offset by women entering the workforce. It is important to remember that the median household income of $45k in 1976 was in a world populated by a large share of single breadwinner households whereas the $50k median household income in 2011 consists of a large share of two breadwinner households. So while the numbers may look similar, the quality of life that they represent is not. The 1976 family was likely to have mom at home with the kids, while the 2011 family is not. If the 2011 kids are young, the family may have to spend money for daycare resulting in more money going out the door (in real terms) than what the additional breadwinner is bringing in, thereby leaving the 2011 family in worse shape financially and socially than the 1976 family. In addition, building restrictions in many areas have driven up the cost of housing. In 1970, the median home price was 1.72 x’s the median household income, while the same number was 3.4 in 2009. Although the average house built in 2009 is around 50% larger than one built in 1970, the expectation of having a house hasn’t changed (also adjusting the 1970 number for the larger house would, all things being equal, result in 2.58 x’s, still significantly lower than 3.4 x’s nearly 40 years later). Meanwhile, the average price of a car has gone up relative to median household income from 33% in 1970 to 50% in 2009.
To this one also needs to add that pensions were more prevalent in 1970, whereas today a large share of the labor force (outside of government) is on their own where retirement is concerned (meaning that the pressure to save is greater leading to either a lower lifestyle in the present or a lower expected one in the future), and the fact that jobs are not as stable as they once were. Take all of these factors together, and you have a situation in which the middle class feels less affluent than it once did. If both husband AND wife now have to work to achieve a lifestyle roughly similar to what a husband could provide a generation ago, and retirement and jobs are less secure than before, then it is no wonder that the middle class ain’t what it used to be.