Getting Squeezed in the Middle

The Wall Street Journal has a report that should surprise no one if they’ve been paying attention:

The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants.

Health-care spending by middle-income Americans rose 24% between 2007 and 2013, driven by an even larger rise in the cost of buying health insurance, according to a Wall Street Journal analysis of detailed consumer-spending data from the Bureau of Labor Statistics.

That hit has been accompanied by increases in spending on other necessities, including food eaten at home, rent and education, as well as the soaring cost of staying connected digitally via cellphones and home Internet service…

Consumer spending continues to make up just over two-thirds of the U.S. economy. But where households spend that money has shifted significantly.

To see how it has moved, the Journal analyzed Labor Department data on 2013 out-of-pocket spending for the middle 60% of the population by income—households earning between about $18,000 and $95,000 a year, before taxes.

The data show they are losing ground. Overall spending for the group rose by about 2.3% over the six-year period from 2007, even as inflation totaled about 12%. At the same time, income for the group stagnated, rising less than half a percent…

“Part of the story is that your income growth is slowing,” said Steven Fazzari, an economist and chairman of the sociology department at Washington University in St. Louis. “They’re spending more on necessities, cutting back on other types.”

It’s tempting to blame the Affordable Care Act for the increase in health care costs, but as the article points out, health care costs were soaring before ACA was enacted. While health care costs is probably one of the bigger issues faced by middle class Americans, probably the biggest is wage stagnation combined with fewer benefits.

Higher health are costs in and of themselves wouldn’t be as big a deal if people were making more money and still had “Cadillac” benefits from their employers. What we’ve been seeing, and what the Journal’s report highlights, is that the middle class is being hit from all sides and they’re truly feeling the squeeze. Employers have been scaling back health coverage for years, often requiring employees to pay higher percentages of their own premiums and paying 100% of the premiums on their dependents, which adds up to hundreds of dollars a month in added expenses. Tack on higher food costs, housing costs, communications costs, transportation costs, etc. and the expense side of the ledger grows very quickly while the income side stays where it is. Taken all together what you get is a middle class that is being squeezed to the point that many will be pushed into a completely different category – the working poor or just plain poor.

That’s not good for any of us.

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