Is the middle class an endangered species?

After losing ground for four decades, middle America increasingly looks doomed. Here's how it happened

Published October 24, 2012 5:07PM (EDT)

This article originally appeared on GlobalPost.

Global Post BOSTON — Meet Mr. and Ms. Median America.

Or perhaps you already know them.

His name is likely to be Michael. Hers, Jennifer. They’re 37 years old, and live in a detached home, worth about $188,000 — 60 percent of which, on average, still belongs to the bank. A child or two run around on the lawn out back.

Jennifer and Michael have completed high school, but like 70 percent of Americans, they lack a Bachelor’s degree.

Family time is tight. They sleep 7.6 hours each night, work 8.6 hours, commute 25 minutes each way, and take little more than 20 minutes for each meal. Their paychecks are signed by the state or local government — which over the past decade surpassed manufacturing as America’s biggest employer. There’s a one-in-three chance that they work on the weekend, and they are more likely than couples elsewhere in the developed world to have dual incomes — a necessity these days, to cobble together their $50,000 annual household earnings.

Compared to the middle class in the developing world, Jennifer and Michael are living large. They own two cars and three TVs. She drinks wine; he prefers beer. They’re both somewhat overweight — he’s 5 foot 8, and weighs 196 pounds, she’s 5 foot 3 and weighs 164; there’s a one-in-three chance that they’re obese. Exhausted by the demands of labor and family care, they spend their average 2.6 hours of daily leisure time unwinding with "American Idol" and "Dancing with the Stars."

But compared to their parents, Mr. and Ms. Median America — a statistically representative middle class couple — are struggling. They are not quite an endangered species, but their numbers and lifestyle are threatened, and they are progressively losing ground. Some economists regard the trend as terminal.

The American middle class is more financially stressed and anxious than at any time since World War II. Unlike the “Leave it to Beaver” generation that enjoyed prosperity, growth and opportunity in the quarter-century after the war, today’s middle class suffers from a prevailing malaise, marked by declining wealth, rising debt, stagnant wages, and a mounting angst about their prospects.

“Middle class Americans look to the economic future — their own, their children’s, and the nation’s — with a mix of apprehension and muted optimism,” reported the Pew Research Center in an August 2012 study. They are increasingly preoccupied by wallet issues: a lack of job security, the challenges of paying for education and retirement, and even the formerly sacrosanct idea that the next generation would be better off.

“Only about one-in-ten [members of the middle class] say they are very optimistic about the country’s long-term economic future,” Pew reports.

How desperate is the average American?

Behind the anguish are a barrage of studies and indicators that point to decades of struggle and backsliding, beginning as early as the 1970s.

Of course, everyone knows about the 12 million-plus Americans swelling the current unemployment ranks. But they represent only a small part of an increasingly systemic jobless problem. More than 8 million have settled for part-time jobs because they can't find full time positions, according to the Bureau of Labor Statistics. And millions more have become so disillusioned that they've dropped out of the workforce altogether.

The long-term trend is truly worrisome. For the American worker, each economic downturn since 1981 has been more bruising than the last, with the jobs market taking progressively longer to recover pre-recession levels. In 1981, it took 27 months for employment to recover. The relatively shallow 1991 recession cost 32 months; 2001 took four years.

Now, more than five and a half years after the Great Recession, unemployment languishes 3 percentage points below normal. With some 50,000 US factories closing since 2000, the prospect for a quick turnaround is grimmer than ever.

“The danger is that full recovery does not come at all,” warned the Economic Policy Institute in a recent report, which blames Washington, not workers. “Nations have thrown away decades of growth because policymakers failed to ensure complete recovery.”

To the American middle class, it increasingly seems that the invisible hand of the market no longer values its formerly vaunted talents and work ethic.

Unemployment isn’t just a problem for those lacking a paycheck. It’s exacting harm across America. When too many workers are desperate for jobs, those who have them lose as well. Their bargaining power with employers declines, meaning wages languish.

There’s been much discussion lately of a lost decade, with housing prices slumping, stock market indices struggling to regain dot-com era highs, and US median earnings falling below 2000 levels.

In fact, experts increasingly date the financial gloom back to the 1970s, when globalization, technology and politics first started rewriting the social contract.

After stripping out factors that artificially elevate earnings — such as health care inflation and additional hours worked — “middle-class incomes grew just 4.9 percent across the 28 years from 1979 to 2007, with most of that growth occurring just in the late 1990s,” according to a recent Economic Policy Institute study. That means despite the advent of computers, the 24/7 work week and all the productivity gains achieved over the past third of a century, when adjusted for inflation, a family earning $50,000 under President Carter could be expected to earn $52,450 today — and the bulk of that gain actually came in a few prosperous years in the late 1990s.

So even though the real economy expanded by an average of more than 2.6 percent annually over the past three decades, middle class earnings benefited from essentially none of this.

American nest-eggs are at risk as well, with the typical family getting poorer, fast. In 2010, median family net worth stood at $77,300 according to the Federal Reserve, down nearly $50,000 from the pre-Great Recession high, and almost $30,000 less than in 2001.

Meanwhile, debt is mounting. Mortgage and credit card debt owed by US households soared to more than $13.5 trillion in 2007. That's roughly equivalent to the entire size of US output that year — more than double the rate in 1979. (The debt burden has declined incrementally since the Great Recession, but still stands at nearly $13 trillion.)

And the middle class population is shrinking, prompting the Pew Research Center to report a ominous “hollowing of the middle.” Specifically, the number of middle class households — earning two-thirds to twice the median income (or about $33,000 to $100,000 in 2011) — has progressively shrunk, from 61 percent of the population in 1971 to 51 percent today. Moreover, that diminished middle now collects 45 percent of national income, down from 62 percent four decades ago.

The news is not entirely bad: 6 percent of the population has graduated to upper income status (although a stagnant median income figure has lowered the upper-income bar). But it is greater evidence that the country is divided, and that one of America’s greatest assets, its celebrated middle class, is being gutted.

“Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some — but by no means all — of its characteristic faith in the future,” Pew concluded. “Fully 85 percent of the self-described middle-class adults say it is more difficult now than it was a decade ago for middle class people to maintain their standard of living.”

To the coastal elite, middle America’s slump might seem like someone else’s problem. Not so, says Mark Rank, an expert on poverty and inequality at Washington University in St. Louis. After crunching decades of income data, Rank has determined that while Americans aren’t nearly as upwardly mobile as they once were, chances are poverty will afflict our families before retirement. Between the ages of 25 and 60, some “54 percent of Americans will experience at least one year of poverty, and 75 percent will experience at least one year of significant economic distress” requiring use of a welfare program, unemployment or subsisting on income below 150 percent of the poverty line, he says.

And Rank says this risk of dropping into poverty has gone up — beginning in the 1970s.

America’s greatest social achievement

A generation ago, being average in America was the envy of many in the world. The American Dream was something rare: an attainable ideal, based on the notion that if you worked hard and played by the rules, you could earn a comfortable, secure livelihood, and enable the next generation to do even better.

The world’s huddled but ambitious masses uprooted themselves in search of employment that was meaningful, where effort and merit were rewarded, and where they could be part of something bigger than themselves.

America by no means invented the middle class, nor was it the first to recognize its importance for national strength. In Politics, Aristotle wrote “Those states are likely to be well-administered in which the middle class is large, and stronger if possible than both other classes.” The modern middle class emerged in industrial revolution Britain, when merchants and managers used market power to demand social progress.

But America transformed the middle class like no other nation.

Experts generally trace America’s prosperous middle to 1914, when Henry Ford vowed to pay workers the generous wage of $5 a day, hoping that workers would spend that money on his cars. It worked. Other manufacturers followed, triggering to a virtuous circle of consumer-driven prosperity.

Government spending helped as well. Following World War II, the GI Bill gave the middle class a massive financial jolt. Veterans could suddenly attend college, start businesses and buy homes. Suburbs sprawled as the ultimate symbol of middle class status. In 1947, developer William Levitt would convert 4,000 acres of Long Island potato fields into a vast middle class haven, cranking out 30 new homes daily, each with a tree in the yard.

Meanwhile, a post-war social contract was forged between workers and managers, under which corporations offered decent pay and generous benefits, in return for peace and cooperation from labor. Between 1947 and 1979, income for Americans in the middle quintile (earning between the 40th and 60th percentiles of the population) grew by a robust 2.4 percent annually. That growth freed families to spend, which in turn boosted the economy, making the quarter century following World War II the most broadly affluent in American history.

As the century progressed, many countries sought to replicate America’s success, and the prosperous masses became a critical weapon in American soft power. As Nixon’s famously contentious 1959 kitchen debate with Khrushchev illustrated, kitchen appliances were not just “to make life easier for women,” as Nixon stated. They had become symbols of America’s strength, weapons of Cold War superiority.

In the end, middle class strength arguably played a greater role than intercontinental ballistic missiles in defeating the Soviet threat.

The beginning of the end

The post-war social contract worked miracles until the 1970s. Then the middle class’s fortunes began to change, along with country’s. In 1971, the US recorded its first post-war trade deficit, a relatively modest $1.3 billion. With the exception of one year (1973), the US would never again sell the world more than it bought. The cumulative outflow of wealth from the US trade in goods and services is now nearing $10 trillion.

Those first trade deficits shocked the US public. In fact, in the decades following World War II, the US had explicitly handed subsidy and tariff advantages to foreign trading partners, explains James B. Steele, co-author with Donald L. Bartlett of The Betrayal of the American Dream. "The US was a great believer in free trade after World War II," opening up its borders to foreign products, often unilaterally, Steele explains. "Underlying this was the idea of reciprocity — that when they got back on their feet they would take our products, leading to true free trade. But reciprocity just didn't happen." Japan and Europe kept up trade barriers to US products, and by the early 1970s, this was harming many US manufacturers — long before China embraced capitalism.

Congress vowed to act. It crafted legislation ostensibly to defend the American worker and demand fairer trade policies. Bills were passed in 1974, 1979 and again in 1984. But by the 1970s, American companies became hungry for profits from outsourcing — high margins that would have been impinged by tougher trade legislation. And so each of bills, explains Steele, was hijacked by corporate lobbyists, eager to further open the door to foreign markets.

By 1993, when Congress adopted the North American Free Trade Agreement (NAFTA), lawmakers dropped the pretense that they were protecting American workers. Rather, despite pitting US jobs directly against low-wage Mexican workers, President Bill Clinton and politicians from both parties claimed that the pact would actually create many thousands of high paying jobs to replace the low-paying ones lost. On the contrary, NAFTA's net effect was to eliminate more than 650,000 jobs, according to the Economic Policy Institute.  Sixty percent were in manufacturing.

Globalization put the American middle class on a level playing field with workers everywhere. Even for those whose jobs weren’t outsourced, the shift tilted the power balance decidedly in favor of the employers, at the expense of workers. While capital could flee across borders in search of a better or cheaper opportunity, labor was stuck at home. That made it far harder for Americans to demand higher wages. With Wall Street focused on quarterly returns, bosses no longer recognized the self-interest in generous pay. Henry Ford’s virtuous circle had been transformed into a downward spiral.

The jobs didn’t flee abroad immediately. Instead, they have dissipated with time, at an increasingly rapid pace. Since 2000, US multinationals — which pay higher wages, and employ more than one in five US workers — sent millions of jobs overseas, slashing 2.9 million domestic jobs, while adding 2.4 million abroad, according to the Federal Reserve. In the 1990s, the multinationals added 4.4 million at home and 2.7 million abroad.

The trend is obviously bad for American workers. It is ominous for American prosperity.

The rise of the machines

The other major source of job loss in the late 20th century was the advent of technology. Millions of secretaries, clerks, bank tellers, toll takers and others were replaced by machines. Fueled by innovation and by low interest rates that enabled companies to invest cheaply, technology cut through factory ranks as well. And for good reason: Machines don’t go on strike or get sick or demand pensions in old age.

Like globalization, technology brought enormous rewards to shareholders and executives, slashing costs and reaping efficiencies. Many citizens remain unaware that even as workers and the middle class struggle, America's exports are stronger than ever. The $1.3 trillion in goods the US exported in 2010 was second in the world behind China's $1.6 trillion, according to World Trade Organization figures. And despite the many factories closing down, US manufacturing grew rapidly prior to the Great Recession. The US would actually report a trade surplus if not for energy, which makes up more than 55 percent of imports.

Even as the Great Recession was battering middle class living standards, the past five years have been remarkably strong for American corporations, according to the US Federal Reserve. Corporate after tax profits have repeatedly broken records since 2000, and are on pace to set a new high, exceeding $1.6 trillion, in 2012. As a percentage of national income, that's higher than any time since World War II.

American workers, however, are no longer participating in this prosperity. The share of GDP going to salary and wages has sunk to the lowest level since the Great Depression.

Crippling a piston of global growth

The fate of the middle class not only affects the 150-odd million people who count themselves members. It has a profound impact on the US as a whole, and on the broader global economy.

That’s because when the work day is done, the American labor force goes by a different name: the US consumer. And as shoppers, homebuyers, sports fans, weekend revelers and the like, Americans spend more than $10 trillion a year.

Consumption — whether it entails buying coffee at Starbucks, or shelling out $1.8 million for an Aston Martin One-77 — accounts for more than two-thirds of the US economy. In 2010, in the midst of the Great Recession, American consumers spent more than $10 trillion, according to World Bank statistics. That’s about one out of every seven dollars in the global economy — more than 50 percent larger than China’s entire output that year.

The world, in other words, largely depends on America’s love affair with material comfort and modern services.

“The middle class is the engine of demand,” explains economist Steven Fazzari, of the University of Washington in St. Louis. “The rich have a lot of money, but they don’t necessarily spend it. The poor would like to spend more, but they don’t have the money.”

The problem: middle-income America has been spending more than it earns for decades. Beginning in 1980s, as household incomes stagnated, families borrowed to fuel the retail addiction. By 2000, the debt had become unsustainable, Fazzari says, but rising home values and exotic Wall Street innovations — now known as toxic assets — masked this by freeing up more credit than ever. Americans ran up enormous credit card and mortgage bills. The nation’s household debt grew from about $1.4 trillion in 1980 (50 percent of GDP) to a staggering $13.7 trillion in 2007 — nearly equivalent to the entire US economy. As that load became unsustainable, debtors defaulted en masse, triggering the financial meltdown of the Great Recession.

Since then, Americans have begun deleveraging, erasing nearly $1 trillion in debt over the past five years. And so, saddled with dual burden of arrears and stagnant earnings, America’s middle class consumers are no longer the engine of demand they once were. Increasingly, corporations are being forced to seek profits by cutting workers, selling assets and doing more with less, not by collecting greater revenues.

Some experts contend that middle America’s role as a driver of global growth will never recuperate. “In my view, the US middle class is basically stagnant,” says Homi Kharas, an expert in the global middle class at the Brookings Institution. “There are some people in the US middle class who are doing quite well, and are graduating to become rich. And there are other people who are doing much less well, and they are falling out of the middle class.”

As a result, Kharas says, the global economy will suffer during the current decade. He foresees slow global growth until about 2020, when legions of workers in countries like India and China acquire disposable income of above $6,000 a year, fueling a new surge in consumption. At that emerging market middle class threshold, families begin to buy homes, and regard consumer durables — such as washing machines, refrigerators and cars — as necessities. Meanwhile, Kharas predicts, US consumption will peter out to relative insignificance by 2050.

The flip side of middle class woes

While globalization and technology may have eroded employment, catalyzing middle class decline, they have undeniably contributed to America’s quality life.

Globalization advocates argue that outsourcing has kept store shelves stocked with goods that may otherwise be unaffordable to the masses. Given the high cost of labor and the elevated living standards in the United States, for instance, it’s unlikely that iPhones or iPads could ever be manufactured domestically. So without China’s low-cost production, the US wouldn’t benefit from the billions in earnings and Apple’s thousands of high quality engineering and marketing jobs.

“Globalization has increased the intensity of competition,” points out Dr. Robert J. Shapiro, co-founder and chairman of Sonecon LLC, and former undersecretary of commerce for economic affairs under President Clinton. “We now have hundreds of thousands of new companies employing literally tens of millions of people in developing countries, doing much the same as our corporations do at home. That competition is so fierce that it makes it very hard for companies to raise their prices, which is why we've had very little inflation.”

The impact has been even more pronounced outside the US — especially in terms of raising living standards for the most world’s most hard-pressed people. Workers abroad don’t enjoy a standard of living approaching that of the US middle class. Yet cross-border trade has pulled legions out of destitution and provided relative hope and security. In the fight against economic hardship, trade has dwarfed the achievements of trillions of dollars of post-war foreign aid.

“Roughly speaking, 1 billion people have been lifted out of poverty since 1990, in China, India, Vietnam, Indonesia and even now in sub-Saharan Africa,” says Kharas, who formerly served as chief Asia-Pacific economist at the World Bank. “In the last decade, we've had the most rapid reduction in poverty in history.”

And although growth overseas came at a high cost for US workers, it also created greater opportunities for American exporters — helping to fuel the rapid growth of US exports.

The bottom line: Americans live longer, fuller lives, with greater conveniences and access to information, entertainment and educational opportunities that were unthinkable a generation ago. Despite the staggering cost of college education, for example, more Americans graduate than ever before. In 2012 for the first time, 30 percent of the population held a Bachelor’s degree.

It's difficult to fight progress. As Harvard professor Kenneth Roggoff has written: “Two hundred years of breathtaking innovation since the dawn of the industrial age have produced rising living standards for ordinary people in much of the world, with no sharply rising trend for unemployment. Yes, there have been many problems, notably bouts of staggering inequality and increasingly horrific wars. On balance, however, throughout much of the world, people live longer, work much fewer hours, and lead generally healthier lives.”

That brings up the question, could we have had it both ways? Could America and the world have cashed in on the benefits of global trade, outsourcing and technology without gutting the middle class?

Many experts argue that the answer is “yes.” At a minimum, we could have done a better job of softening the blow and assuring our own future prosperity.

What caused middle class decline? 

It was inevitable that globalization and technology would disrupt America’s employment market. The jobs of bank tellers and secretaries could never have been saved. Likewise, the work of stitching jeans was bound to shift to lower cost countries, with the textile mills employing thousands in places like North Carolina doomed to extinction. And now as lawyers and other professionals compete for work with highly educated individuals in places like India, professions that were once considered highly secure are facing softer wages and potential layoffs.

But globalization and technology didn’t emerge in a vacuum. Instead, they coincided with a major shift in the way that politics and power work in America, a market Darwinism experts say harmed middle class prospects, and reduced the chances that a displaced worker would land on her feet.

The 1970s began an era in America that tilted the balance toward the wealthy. In Washington DC, deregulation fostered a freewheeling, often reckless brand of capitalism that benefited the elite, and particularly bankers, at the expense of the masses. This was most acute in the mortgage meltdown of 2008, when millions lost their homes while banks that engineered the crisis dished out hefty bonuses.

In the name of job creation, Congress and the White House have repeatedly slashed taxes on upper income families, cutting the highest rates from 70 percent or more to 35 percent today — with an effective rate for the super rich that is far lower than the middle class. “The wealthy are taking home a larger share of income than they have in 80 years,” explains Robert Reich. “The top 1 percent is getting more than 20 percent of total income,” Reich says.

“You can’t tax the job creators” is a political mantra that has taken on an patina of indisputable fact. But countless studies have shown that tax cuts for the rich don’t generate employment. On the contrary, higher taxes in the 1990s and in the decades after World War II coincide with prosperity and faster growth. “The real job creators are the American middle class, whose spending spurs business to add jobs,” Reich argues. “And the real reason that unemployment is so high is that so much of the nation’s earnings go to the rich.”

Beginning in the 1970s, corporate executives began to take a far more narrow view of their responsibilities. Inspired by economists such as Milton Friedman, they increasingly focused their decisions on maximizing near-term shareholder returns, even if that meant sacrificing employees or compromising future earnings. And so in the decades of the 1990s and 2000s, CEOs like GE’s Jack Welch and Scott Paper’s Al “Chainsaw” Dunlop slashed tens of thousands of jobs, for which Wall Street rewarded them lavishly.

“Middle class Americans are worse off because of deliberate decisions made by business leaders and by the pro-business policy tilt in Washington,” comments Hedrick Smith, author of Who Stole the American Dream, a masterful autopsy of the US middle class. “We literally had an economy in the 40s, 50s, 60s and 70s in which the business leaders in America believed in sharing the gains of economic growth and productivity. CEOs of companies like Standard Oil, General Motors, General Electric — the big mules of American industry — they believed they had to support the stakeholders, not the shareholders alone, but labor, management, suppliers, creditors, customers and the communities they lived in. We've moved to a situation in which the business leaders believe it's their job only to support the shareholders, and pay good dividends and run the stock price up. That's been a disaster.”

Smith points to Germany as an example of how to maintain good middle class jobs while competing in the world. German wages have grown five times faster than in America. The country has run a $2 trillion trade surplus over the past two decades, compared to America’s $6 trillion deficit; and manufacturing still employs 21 percent of the population, compared to 9 percent in the US, he notes — largely due to policies and a business culture that sees value in a strong middle-class workforce.

Is there hope for middle America?

Jennifer and Michael, America’s median couple, undoubtedly face an uncertain future. Gone is Henry Ford’s ideal that companies profit when workers are paid fair wages and treated well. Gone is the social contract, under which working hard and playing by the rules ensures a comfortable, secure livelihood for your family. And gone is the mythical American Dream of equal opportunity, under which anyone could rise to prosperity through merit and determination.

At a minimum, Jennifer and Michael have political rhetoric on their side. As GlobalPost's Jean MacKenzie notes, both Republicans and Democrats speak volumes about rebuilding America’s middle class. But doing so won’t be easy.

One of the ideas widely touted as a path to recovery is to upgrade America’s outdated infrastructure — rebuilding roads and constructing high-speed rail. But with a yawning budget gap and a reluctance to raise taxes, that plan seems politically unlikely. Moreover, as GlobalPost found in looking at the Bay Bridge, infrastructure construction can be outsourced as well.

Another common idea is to embrace green technology — which could employ a broad range of engineers and workers, and could help the country address its massive energy trade-deficit. But China already dominates green tech, under-cutting competitors, and efforts in Washington to support the sector have resulted in politically-damaging financial losses.

America has lost ground, but it remains the world’s richest and most powerful nation. It has proven skeptics wrong in the past, and there’s little chance that the Mr. and Ms. Median America will merely be jettisoned at the hand of progress.

By David Case

David Case is a senior writer and editor at GlobalPost. Follow him @DavidCaseReport.

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