The Middle Class, Inequality, and the United States of America’s Struggle

The other day I was thinking…”What exactly does it mean to be in the American middle class?” Even with the news of the middle class dissolving into the abyss, we still hold on to our dream of the post-World War II ideal American family, with a single family suburban home, a car, and some form of a furry, domesticated animal (Thanks to the GI Bill! But let’s be honest, with discriminatory policies such as redlining, this American dream was not exactly equally accessible to everyone.)! But, this dream has been moving further and further out of reach for the overall American population. So, what does it mean to be a member of middle class America? Where is the disappearing middle class going? How did we get to this point and what are we doing about it? The State of the Middle Class

The middle class is both shrinking in size and in the amount of wealth and earned income. The Pew Research Center found that people who self-identify as middle class declined from 2008 to 2014 from 53% to 44%, while the percent of people identifying in the lower class has increased from 25% to 40%.  But as middle class wages remains stagnant (some argue it’s actually decreasing), the cost of living continues to increase.

The data presented in “The Lost Decade of the Middle Class,” supports the finding that the income of middle class is decreasing.

a decade of decline

(image from Pew Research Center’s “The Middle Class: Key Data Points from Pew Research”)

Further, the share of income for the middle class is decreasing. In 1970, the middle class earned 62% of the US aggregate household income, while the upper class earned 29%. In 2010, the middle class earned 45% of the US aggregate household income while the upper class earned 46%.

percent distribution

(image from Pew Research Center’s “The Lost Decade of the Middle Class”)

In her TED talk, Chrystia Freeland stated that “our countries are getting richer, our companies are getting more efficient, but we’re not creating more jobs and we’re not paying people as a whole more.” According to an EPI study, CEO’s compensation grew faster than the income growth of the 0.1% highest income earners and faster than the “typical” workers' income in the industries of the 350 biggest American public companies being analyzed.

This study finds that in 1965, the CEO to worker compensation was 20 to 1. In 2013, the CEO to worker compensation was 295.9 to 1! And, this is excluding the Facebook outlier, which would then change the ratio to be 510.7 to 1. Pretty hard to picture? Check out this clip to try to understand what this means.

Another issue concerning middle-tier compensation is “job polarization.” Job growth is high in less-valued and high-valued industries. However, it is not very strong in middle-valued industries. Specifically, between 1980 and 2009, less-valued jobs increased by 110%, highly-valued jobs increased by 100%, and middle-valued jobs increased by only 46%.

How Did We Get Here

One of the greatest controversial questions that provides polarizing answers…who broke it? Well, the middle class has some ideas.

blame

(image from Pew Research Center’s “The Lost Decade of the Middle Class”)

Of the “self-described middle class adults [who] say it’s more difficult now than it was a decade ago for middle-class people to maintain their standard of living,” 62% blames Congress, 54% blames banks and financial institutions, and 47% blames large corporations “a lot” according to the results from the Pew survey.

Chrystia Freeland looks at how “crony capitalism,” globalization, and the shift in technology impact income inequality. Crony capitalism refers to political corruption leading to political decisions that “benefit a group of well-connected insiders but don’t actually do much good for the rest of us.” One may consider deregulation of the financial sector as an example. As for globalization and technological advances, Freeland is clear in stating that these things have positive impacts on our lives! However, she highlights negative aspects such as the global economic and political power large global companies gain. Another concern she presents is the disappearance of middle class jobs as a result of technological advances and globalization.

Shall We Fix It

Another great question that leads to polarizing answers is what are we going to do about it? And the answer is so polarizing because, of course, someone is not going to be happy with the changes proposed. How should we face the challenge of reducing inequality and bringing back the middle class?

There are varied proposed solutions. David Madland presents quite a few (35) in “Making Our Middle Class Stronger.” To keep it brief, I’ll present his categorized summary. Overall, the 35 policy proposals aim to build up and strengthen the middle class by lowering college costs, lowering costs and other barriers to job training, helping “workers do well when companies do well,” lowering costs associated with losing a job or being sick, increasing the capacity for workers to be caregivers for their elderly parents and their kids, improving retirement saving options, stabilizing housing costs, reducing cost of transportation and energy, increasing number of middle-class jobs, and creating institutional changes so policy makers focus on the middle class daily.

In “The American Middle Class is No Longer the World's Richest,” David Leonhardt and Kevin Quealy highlight that the United States’ economy is indeed growing—the struggle of the United States is a result of the poor distribution from which “a small percentage of households is fully benefiting from it.”  In this article, the director of the LIS, Janet Gornik, stated that the disposable income inequality in the United States is higher than elsewhere because of relatively low redistribution to people from lower economic classes and relatively low taxation on the people from the upper economic classes.

Of course, there’s the option of just adapting to the current state of our economy, which is what some businesses are doing now. In “The Middle Class is Steadily Eroding. Just Ask the Business World,” Nelson Schwartz highlights how businesses are adapting. Ninety percent of the increase in consumption between 2009 and 2012 resulted from the consumption of the top 20% of income-earning households. The top 5% of income-earners made up 38% of domestic consumption in 2012. To respond to the changing consumer base, some businesses are “chasing richer customers with a wider offering of high-end goods and services, or focusing on rock-bottom prices to attract the expanding ranks of penny-pinching customers.” Businesses targeting middle-income earners are struggling; “shares of Sears and J.C. Penney have fallen more than 50 percent since the end of 2009, even as upper-end stores like Nordstrom and bargain basement chains like Dollar Tree and Family Dollar stores have more than doubled in value over the same time.”

Bringing the Frog to a Slow Boil or Actively Ignoring the Problem

Concerning addressing the problem as we are faced with it, Chrystia Freeland questions how we’ve gotten to this point. The “boiled frog phenomenon” suggests that we didn’t recognize the smaller, marginal changes over time even though the overall change is large. She presents, as well, an idea of living in a culture of “symbolic equality.” For example, we don’t have a uniform for socioeconomic classes as were present in the past (“billionaires wear jeans”)! She also highlights that discussing inequality may be uncomfortable, or even “threatening”, for some due to the role of income redistribution in solving the problem.

How long have there been signs of the middle class struggling, in reality? A Time article from 1986 states “The American Middle Class, the provocateurs contend, is no longer so great. It is shrinking steadily, goes the theory, and shedding its numbers into the economic extremes of wealth and poverty.” 1986. Has America been ignoring the signs of the disappearing middle class? Is America going to sufficiently address the clearly growing inequality now, or are we too comfortable/apathetic to change our lifestyles and policies? Will a political system heavily influenced by money even allow for the necessary changes? Or will we allow for inequality increase to the point in which the United States will no longer be recognizable? Only time will tell…

Curious about the state of the middle class in Sarasota County? Wondering how we line up with the rest of the nation? Well, look out for SCOPE’s Community Report card! The Economics section will provide data on income distribution in Sarasota County, as well as other important economic indicators! In the meantime, what do you think we can do as individuals to help bring back a strong and thriving middle class?