Tag Archives: middle class

Squeezing the Middle

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The Wall Street Journal, that bastion of the liberal press <sarcasm>, has the story behind the squeeze on America’s middle class. In a nutshell the economy has rebounded nicely and consumer spending is up, but when you dig into the numbers you find that the spending is happening at the high and low end. Some interesting excerpts from the article:

Since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household, according to Mr. Cynamon, a visiting scholar at the bank’s Center for Household Financial Stability, and Steven Fazzari of Washington University in St. Louis, who published their research findings last year.

The spending rebound following the recession “appears to be largely driven by the consumption at the top,” Mr. Cynamon said. He and Mr. Fazzari found the wealthiest 5% of U.S. households accounted for around 30% of consumer spending in 2012, up from 23% in 1992…

Revenue for such luxury hotel chains as St. Regis and Ritz-Carlton rose 35% last year compared with 2008, according to market research firm STR Inc. Revenues at midscale chains such as Best Western and Ramada were down 1%…

For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak.

Total sales last year, however, were up just 1% compared with 2013, and more than 50% below their average from 2000 to 2002, before the housing bubble…

There are some real issues with this kind of market, not the least of which is that it doesn’t do enough to create the kind of economic ripple that benefits everyone. For instance the fact that builders are focusing on fewer, but larger and more expensive houses definitely has a down side:

Homes are generally the biggest purchase Americans make. Housing dollars ripple through the economy by triggering spending on appliances, furniture and landscaping.

Fewer homes means fewer new buyers and that means fewer appliances, furniture and other household goods and services sold. In the end that means fewer jobs. Fewer new homes being built also means that demand for existing homes will rise, which leads to higher prices and thus even more would-be buyers are priced out of the market. That puts more demand on rentals which leads to higher rent; higher rent means less money to save each month which helps put a down payment ever further out of reach. In other words a very nasty cycle.

Of course markets are inherently cyclical and at some point in the future this will all turn around, but what’s become very apparent is that the Great Recession continues to have a negative effect on our country long after it officially ended. The middle class has been bearing the brunt of it, and it looks like people are starting to figure it out. It will be interesting to see if anyone in the political field figures out how to use that to their advantage; someone like, say, Elizabeth Warren.

Getting Squeezed in the Middle

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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.

Taxing the Middle Class

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It doesn't matter which party sponsors it or which party fights it tooth and nail – any tax package that causes taxes to rise significantly on the middle class should prompt a "throw the bums out" campaign that will jolt Congress indiscriminately. It should, but given America's private history it probably won't even if some of the numbers in this Washington Post story end up becoming reality.

So although households earning $100,000 to $200,000 a year would save about $7,000 from the lower tax rates in the GOP plan, those savings would be swamped by eliminating major deductions, according to the report by the Democratically controlled congressional Joint Economic Committee.

The net result: Married couples in that income range would pay an additional $2,700 annually to the Internal Revenue Service, on top of the tax increases that are scheduled to hit every American household when the George W. Bush-era cuts expire at the end of the year.

Households earning more than $1 million a year, meanwhile, could see a net tax cut of about $300,000 annually.

“According to this report, while millionaires will receive a huge tax break, earners making under $200,000 will see their taxes rise significantly,” said Sen. Robert P. Casey Jr. (D-Pa.), who chairs the Joint Economic Committee.

If you read the whole article you'll see that the analysis is based on some assumptions about likely tax breaks for the wealthy and the elimination, or reduction, of certain tax breaks for the middle class. That's why there's a healthy dose of the unknown tied to the story, but given the past history of the parties involved some of those assumptions are likely accurate, and given the proclivity of the powers-that-be to rob from the middle to pay the very-rich it's a safe bet that those making less than $200k a year are looking down the barrel at a healthy screwing.

Here's a nice table to drive that point home:

Middleclassscrew

The Coming Collapse of the Middle Class

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Below is a video of a speech Elizabeth Warren gave at the University of California about the stress on today's middle class families.  She provides lots of interesting data, but what I found most compelling was her comparison of a middle class family of four (two parents, two kids) in 1970 and 2003:

  • In 1970 most families had a single earner, in 2003 the vast majority were two-income families.
  • Average incomes were up in 2003 compared to 1970 due to the second worker, but fixed expenses (mortgage, health care, taxes, child care, cars) were 50% in 1970 and rose to 75% in 2003.
  • Discretionary expenses for items like clothes and food actually went down significantly between 1970 and 2003.  

It's a long video (almost an hour), but it really is worth a look to see how much pressure is on the middle class these days.  Even if you aren't a fan of Warren's it is still worth watching to get a sense of how things have changed in just one generation.

Last point I'll make is that this speech was given in 2007, before the economy tanked. I wonder how some of these numbers would look now.