The Middle Class, its Makeup and Decline

Today there is much talk about the shrinking of the middle class and the growth in income inequality. I believe both are not only true but an existential problem. Here is my take on what may be some underlying causes. First I am not sure there is anything close to a common definition of what is the “middle class”. I’ve heard the term “middle income” used interchangeably with “middle class but it does not have the same meaning. It is strictly a mathematical definition as either the median or average income with the median being closer. For the sake of this discussion I will define the middle class as follows: People who derive their income either from wages working for others or from wages/profits working for themselves who can afford to own a modest house or rent a modest apartment, send their kids to college, retire without sinking into poverty and if they forgo many extravagances, have a small vacation home to retire in. At the height of our middle class, this could be achieved with only one member of the family working. Today it takes two incomes. In general I think that it takes income between $50K and $150K, depending on where one lives. (It may be much to low an estimate. It is only my guess based on nothing.)
The problem started decades ago but was not obvious for reasons described by Robert Reich in the December 6th Huffington Post.
“For many years, credit cards and home equity loans papered over the harsh realities of this new economy. But in 2008, the house of cards collapsed. Exactly. But the first papering over was when large numbers of women went into paid work, starting the in the late 1970s and 1980s, in order to prop up family incomes that were stagnating or dropping because male wages were under siege -- from globalization, technological change, and the decline of unions. Only when this coping mechanism was exhausted, and when housing prices started to climb, did Americans shift to credit cards and home equity loans as a means of papering over the new harsh reality of an economy that was working for a minority at the top but not for most of the middle class.
We all know the story by now: Mortgages sold to people who couldn't afford them, or sometimes even understand them. Banks and investors allowed to keep packaging the risk and selling it off. Huge bets -- and huge bonuses -- made with other people's money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn't have the authority to look at all.
It was wrong. It combined the breathtaking greed of a few with irresponsibility across the system. And it plunged our economy and the world into a crisis from which we are still fighting to recover. It claimed the jobs, homes, and the basic security of millions -- innocent, hard-working Americans who had met their responsibilities, but were still left holding the bag.”
What is the makeup of this “middle class”? Following are a few examples.
People working for others
Local, state and federal government workers represented by unions such as janitors, teachers, firemen, policemen, garbage men, etc.
Production workers in low to moderate skill level jobs in manufacturing in unionized shops.
Medium to high skilled technicians working in technology companies
Mid grade management staff in manufacturing
Unionized construction workers
Mid grade engineers and scientists
Nurses and medical technicians in not-for-profit medical facilities
Upper management in the restaurant and tourist trade
Lower management in industry
People working for themselves
“Mom & Pop” shops & gas stations
Restaurant owners
Beauticians
Building sub-contractors
Small “Family” farmers
Very small factory operators

Reich pointed out in his post that the decline in the “middle class” and the resulting income inequality (he is talking about the US) is attributable to globalization, technology and decline in unions. The first two are natural consequences of Free Market activities. As I have mentioned in numerous posts, the market knows no boundaries, has no conscience and its benefit to society, which indeed exists, is strictly coincidental. This is not a criticism but a statement of fact. Indeed, over time, the quest for profits has created products and services that make life easier and more interesting for an ever-increasing segment of the population. In a free market, enterprises seek the highest profits. They achieve this through lower costs and the ability to differentiate. Since labor represents much of the cost in manufacturing, enterprises seek locations with the lowest labor costs. Within the United states, companies migrate from Northern high wage regions with strong union representation and strict regulations to poor Southern States with cheap labor and lax regulation. The same thing happens on a global scale. In the fifties much of manufacturing went from the industrialized West to Japan which in turn lost it to Singapore and Malaysia who are now struggling to hold on to as much as they can with China’s ascendance as the new manufacturing juggernaut with India on its heals. All this is good for the poorer regions and bad for the richer. Years ago a colleague told me about a mural of a swamp in the cafeteria at Colby College entitle “alligator heaven, frog hell”. When viewed from a global perspective, the middle class has been and continues to grow. Worldwide more and more “poor” people are moving into the middle class and are better off today. In the Industrialized West, however, that is not the case. Some, though by no means all of the improvements seen in the “Third World” come at the cost of conditions in the industrialized countries.

This flow of jobs that once allowed for a middle class standard of living here in the US will not be able to be stemmed without disrupting the Free Market significantly. It is a natural and for the most part a desirable consequence of Free Market activities. This disruption would be ultimately to the detriment of everyone. Representing those earning wages from their labor/profits and business in general, the Right wants to move retreat back to the golden era of the twenties. To try to stay competitive, there is a strong effort on the Right to bust unions to drive down wages and benefits of workers make it easier to compete (ironically while at the same time increasing wages and benefits for upper management). The same people are also trying to undo health and safety regulations to bring down costs. It is interesting that the strategy a couple of decades ago was to “level the playing field” by forcing Third World countries to raise their standards up to our level. Now, in a panic, we are even talking about possible repealing child labor laws. (Although I don’t believe Newt’s comments are taken seriously) This is a poor strategy. Maybe in the very short term effective but in the long term as the middle class in the developing world grow the same regulations that were imposed in the West will, for the same reasons be imposed elsewhere and in the process we may have gone back in time so far, creating social turmoil that we may not be able to recover from and in the process get left in the dust.

Another thing leading to the decline in the middle class, also a natural outcome of a free market has nothing to do with globalization. Driven by the quest for profits, in an attempt to bring an ever-wider range of commodities at lower prices to a broader segment of the population, mega retailers such as Wall-Mart are making it difficult if not impossible for the “Mom & Pop” shops to compete. Haircuts that cost $50 in a beauty parlor can now be had in places like Super Cuts for $12 or $8 with a coupon. While the broader society benefits from lower costs, like the workers in the manufacturing sector, the small shopkeepers and businesses suffer.

Technological advances, also a natural consequence of free market activities, driven by the quest for profits leading to a need to differentiate, have changed the workplace. Information technology has eliminated many administrative jobs and ready availability of information eliminates much of the middle management responsibility.

The reasons for the decline described above are unavoidable. Some of the pain, however is self-inflicted. There are well paying jobs in the public sector and some in the private that cannot be exported and are of no significance in international competition. Teachers, firemen, police officers etc have to remain near the public they serve and cannot be exported. The Right is working hard to bring down their wages and benefits. Maybe it is because they feel that it makes it easier to bring down the wages of industrial workers if the public sector worker’s wages and benefits are reduced. Unlike manufacturing, here there is no economic necessity to do this. Relatively small increases in taxes on people who benefit most from globalization can easily allow this group to again live a “middle class” life.

In the next post I will discuss my thoughts of what can be done to maintain a decent standard of living for a large portion of the US population.