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.