Pew Study: The Economy is lagging because the middle class is broke

http://finance.yahoo.com/blogs/daily-ticker/middle-class-broke-pew-study-reveals-real-problem-155018682.html

by PaulHoule • 14 years ago

67 78 14 years ago

finance.yahoo.com

njharman• 14 years ago

Employees of corporations should be co-owners by default.

bdunbar2• 14 years ago

Why?

zxypoo• 14 years ago

To share in the profits and success? The majority of wealth generation happens when you own equity.

bsphil• 14 years ago

I think you'd be surprised at how many people don't want to shoulder that risk.

alxp• 14 years ago

Working full time for a single company is a huge risk.

bdunbar2• 14 years ago

My present employer did offer stock as an incentive. It was a great program.

Past tense: FASB changed the rules, the discount changed, employee participation (naturally) dropped, it stopped being cost effective to offer this plan.

parsnips• 14 years ago

Surely the wealth problem of the middle class has nothing to with the purchase of overpriced homes on large margin...

douglasisshiny5• 14 years ago

Well, all homes, whether they were overpriced or beyond a person's means, have gone down in value. As a home is an average's person's largest means of equity, their assets have decreased as a result of the housing bubble crashing.

woodchuck643• 14 years ago

The argument that "wages aren't growing therefore workers are being taken advantage of" does not reconcile with this chart: http://research.stlouisfed.org/fred2/series/COMPRNFB

Benefits are also a large part of compensation.

Leon• 14 years ago

Can you compare that against the increase in the standard of living, college, housing, vehicle, and food costs? This by itself doesn't mean anything if everything else is increasing in costs faster than the increase in wages...

yummyfajitas• 14 years ago

The graph purports to do that comparison by measuring in inflation adjusted dollars.

In reality, since inflation tends to be overstated, real wages have probably grown by even more than the graph indicates.

lmkg• 14 years ago

Benefits don't translate as directly to consumer spending. If my company pays more for my health insurance, that doesn't affect my ability to pay off my mortgage or purchase electronics. If I get more vacation days, that means I do less work, but the money I get remains constant. Certainly, there are some benefits that do translate to economy-stimulating actions (such as subsidized purchases or memberships), but I'm under the (possibly misguided) impression that a large portion of the increase in benefits is just health insurance costing more.

ctdonath2• 14 years ago

Paying more for health insurance does affect your ability to pay off your mortgage and purchase electronics - when you get slammed with an enormous unexpected medical bill, and don't have to route mortgage & electronics money into the staying alive fund. Trust me.

bunderbunder2• 14 years ago

Maybe, maybe not. It could very well be that the argument is talking about the median situation, whereas the chart shows a mean.

woodchuck643• 14 years ago

For median, I would recommend this article: http://www.american.com/archive/2011/september/middle-class

smartician• 14 years ago

There are multiple problems with this chart:

1. It looks like it tracks the average compensation, which is easily skewed by a few high income earners whose wages grew disproportionately (investment bankers, lawyers).

2. It doesn't say anything about the hours worked. Even when hourly compensation is up, total income can be down if the number of hours worked goes down.

A better analysis: http://www.epi.org/publication/ib330-productivity-vs-compens...

woodchuck643• 14 years ago

Taking the median has problems just as serious. A better analysis is: http://www.american.com/archive/2011/september/middle-class, demonstrating that the real story may not be so bad for the middle class. As for hours worked, this graph suggests that the value rises and falls with recessions: http://data.bls.gov/pdq/SurveyOutputServlet?request_action=w...

muzz• 14 years ago

But I thought trickle-down economics worked...

forinti• 14 years ago

It does, but you have to make sure that you are in the right neighbourhood for it to rain down on you. Tax havens work best.

http://truth-out.org/news/item/10710-super-rich-holding-21-t...

rprasad• 14 years ago

Trickle-down economics has never worked. People don't become obscenely rich by spending their money; they get to that point by hoarding it.

Only a few bastions of wealth are associated with trickle-down economics: NYC, Switzerland; Beverly Hills, etc.

lotharbot• 14 years ago

> "they get to that point by hoarding it"

The ones who get obscenely rich are the ones who invest -- that is, they create or sustain productive businesses. Those who merely hoard don't make it nearly as far up the ladder.

sp332• 14 years ago

It works when the people getting the money are motivated to invest it in businesses and people "downstream". But if the richer people just hold on to the money, nothing happens.

w1ntermute2• 14 years ago

The only reason Ronnie Reagan was able to sell the American people on his trickle down snake oil was because the middle class sees itself as temporarily-not-rich. So they believed his bullshit not because it would benefit them in (what they saw as) the short term, but because they believed they would soon be rich.

There are advantages to the fact that the American middle class sees itself as temporarily embarrassed millionaires, namely that it encourages the sort of risk taking that has put American companies at the top of the global economic charts. However, for every Gates and Zuckerberg, there are hundreds and thousands of people who actually end up struggling to make ends meet. Unable to accept their failure, they continue to believe in low taxes for the wealthy, thinking they'll be in that group as well one day soon.

mindcrime• 14 years ago

And that's not necessarily a bad thing. If individuals are willing to accept tradeoffs where they have a certain probability of winding up less well off, versus a certain probability of becoming very wealthy, who is to tell them which choice they should make? I mean, if a given person is quite fine with a boom or bust scenario, and says "I'll either be rich and successful or die a broke, poor, bitter, broken down old man," then so be it.

Income equality would be nice in many ways, but if the inequality is a reflection of the underlying values of the culture, maybe we should quit trying to fight the culture.

enjo• 14 years ago

It's really steady cracks in the underpinning ideas in the efficient market hypothesis. We've made a LOT of assumptions in our economic and tax policy around ideas that haven't necessarily proven to be true.

AznHisoka• 14 years ago

"workers made enough money to be able to buy Ford's cars, and this made Ford more successful."

So, I assume today's middle class have to afford MORE than a 50 inch TV, a Macbook, an iPhone, an overpriced house, a wedding ring, and a iPad?

bunderbunder2• 14 years ago

Today's middle class hasn't been affording stuff like that. They've been paying for them by cutting into their savings or going into debt.

It's easy to say (and true) that they should quit spending beyond their means. However, that's problematic. If they quit buying that stuff, then it's going to harm American businesses, and the economy is going to go into a slump.

(I realize my choice of tense is a little bit silly. Pretend that last sentence was written in 2007 and not 2012.)

heretohelp• 14 years ago

That's a nice straw man, but that's not the median for the US.

Not even for bay area white collars is that reasonably the median, given how expensive houses are here. Most rent unless they're past 30-40 or won the startup lottery.

twoodfin• 14 years ago

Huh? The median sufficiently-aged U.S. resident absolutely owns a home (home ownership rates are 65%+), and it's indisputable that the median home size has been growing at a good clip:

http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf

goggles992• 14 years ago

"Over the past 30 years, a larger and larger portion of America's income growth has gone to those in the top 10% of incomes, and especially those in the top 1%. This is a major change from the prior 60 years, in which the top 10% and the bottom 90% shared in the income gains."

one word can largely sum up why... China

WiseWeasel3• 14 years ago

And yet the overriding goal when planning a start-up, at least for web start-ups, is to eliminate paid human labor at any cost, in the name of scalability. Federal minimum wage is largely irrelevant when talking about the middle class, since it's so distant from an income that might include you in it. I don't see how our community is equipped to address such an issue in any meaningful way.

Perhaps ubiquitous availability of sophisticated robots might allow people to have their needs met with fewer relative resources at their disposal, though it will also exacerbate the problem as productive jobs become more scarce. People can now be entertained more cheaply than ever, with free access to content made by their peers. People can virtually travel the world without leaving their homes. Can we at least ease the pain of not being in the top 1%?

tankenmate3• 14 years ago

Unfortunately human nature being what it is, everyone will have to agree together that income (not necessarily wealth) will need to be re-distributed. So in order to do this the high earners (1%, highly profitable companies) will have forgo some income to re-distribute to the lower income earners; this doesn't necessarily mean that some people will make more without working. This means not only do some people need to be employed that are currently unemployed, but also some people (middle class?) need to be paid more for what they do.

From what I can see there are two ways to do this; both of which effectively force _all_ high income people (both natural and legal) to employ and pay more. Both of these methods are generally denigrated in the US media, and I suspect by a largish number of the people who would benefit most by these methods.

Taxes and unions. Both of these lead to higher pay and employment, one is forced and paid for by the government, the other is forced by employees and paid for by employers.

Can anyone think of any other options that would force all high income people to re-distribute their income largely together?

EDIT: I should have said distributed by government and distributed by employers, not paid.

cobrausn• 14 years ago

Can anyone think of any other options that would force all high income people to re-distribute their income largely together?

A failing economy or, failing that, an economic meltdown?

The problem I see with taxes as a solution is that it generally doesn't redistribute wealth to the middle class (if that is your goal) as much as it does redistribute wealth to those with political connections, and the rhetoric tends to catch the upper-middle class in the crosshairs - which, if I'm reading this correctly, would make the problem worse.

philwelch• 14 years ago

There are few things left that only humans can do--art, entertainment, interpersonal services, engineering. As technology makes everything else cheaper, these things will stay expensive and provide income for more people. Just like when agriculture went from needing 90% of the population to less than 10%.

WiseWeasel3• 14 years ago

People are increasingly doing all those things for free, driven by the desire for social recognition and the pursuit of intellectual interests.

bencpeters3• 14 years ago

This strikes me as somewhat misguided. As a modern, wealthy society, we shouldn't have to content ourselves by just easing the pain of not being in the 1%. Furthermore, while it's certainly true that the tech revolution has brought about some changes that get rid of human labor, there's a lot more going on to this growth of inequality than that. If it was just about unique skills or education, you'd expect to see the top ~20% dramatically pulling away from the bottom 80% of the distribution, not the 99/1% that you see in reality (we can quibble about the numbers there a bit, but the point is that the inequality we're seeing isn't just a skills/education/technology revolution structural thing).

I don't pretend to have a great answer for "how our community is equipped to address such an issue in any meaningful way," except perhaps to suggest that we try to find more tech solutions to "bigger" problems (energy, grid infrastructure, etc.) instead of inventing more social widgets. That, and trying to hold politicians more accountable to interests besides those of the super wealthy.

tankenmate3• 14 years ago

I think you are completely missing the point the top 20% _are_ dramatically pulling away; in the last ten years _all_ the gains in income have gone to the top 20%!

feverishaaron• 14 years ago

I found it interesting that the hosts of that show were suggesting that the system would be self-correcting. I think that may have been the case before a global economy, but now if your home nation can't consume, a corporation can either relocate operations or refocus on growth markets.

The final, and most extreme self correcting option they offered – revolution, would probably come too late and have little effect on corporate and financial executives who have by then fled the country.

bencpeters3• 14 years ago

Another important argument against self-correction is the extent to which institutions of government (and by extension regulation) have been captured by the lobbies and proxies for the wealthy. Add to that the fact that one of the only voices for the middle/working class that actually had some political clout - unions - have been on the decline for a generation, and it really starts to look like a rigged system where all politicians profess to support working class values but really are beholden to the rich. Although I certainly wouldn't say that both parties are equally bad in this realm, it definitely is a systemic problem, and one that makes a correction less and less likely as it becomes more entrenched.

vannevar3• 14 years ago

I found it interesting that the hosts of that show were suggesting that the system would be self-correcting.

And so it may be, but nature often has a way of self-correcting that is not very hospitable to human life. Tectonic plates shift suddenly, causing earthquakes. Revolutions break out, leading to the deaths of millions. It might be prudent to use our powers of reason to consider how to make a soft transition rather than blindly letting nature take its course.

Shivetya• 14 years ago

I am not broke. I am unfortunately of the realization that the idiots in Washington aren't bothered to fix it. I love how this article completely ignores the real problem, instead it blames "corporations" who are also stuck because of government.

Look, I have relatives with their own businesses. What is the primary reason for job loss, government. How about new rules like vehicles of a certain weight are suddenly subject to a host of new regulations which result in having to sell said vehicles at a loss or pay many times the fees just to keep it. How about inspectors showing up at a friends hair care business checking every single brush for a hair, which is a two hundred dollar fine. How about not knowing what your tax rate will be next year because people in Washington won't make the tax rates permanent.

How do they exist people or business to operate in an environment run completely on the whim of a bunch of politicians. it is politicians who are the one percent. Yeah the rich have lots of money and money buys influence but its the politicians who decide what it costs to do business. They just have been damn good at recasting it as a rich versus poor thing and too many people fall for it.

sorry for the rant, but having family also in politics makes me realize where the real scum are.

douglasisshiny5• 14 years ago

Businesses (via surveys) have always complained about regulations, taxes, etc. While some regulations may be burdensome or unrealistic (and lets keep in mind that the federal government isn't responsible for all of them), the fact is a lot of them are sensible.

The one thing that has changed dramatically in surveys from businesses: a lack of demand. when private consumption is down, historically it has been observed that public consumption should pick up to end the cycle.

Even under Regen, states and municipalities received a lot of aid, and the public sector helped to pull up the economy. That's one aspect of a robust economic rebound, which includes an increase in public debt (which, adjusted for inflation, is negative -- i.e., a 10-year Treasury Bill for $1,000 will be worth less in 10 years -- people are paying us to hold onto their money because U.S. is so secure).

The point here is that one party is gone off so far to the right that Congress isn't able to effectively deal with this issue. We have Republicans warning of the dire consequences of sequestration (large cuts) and blaming Democrats for wanting to slightly increase revenue, when all along all the GOP wanted was large cuts...

I could ramble for awhile longer, but I think it's more nuanced than Washington can't fix anything. One party has been taken over by extreme ideologues.

anonymoushn3• 14 years ago

What sort of level of public consumption would be appropriate? Currently the deficit is 10% of GDP. Do you believe it should be 20%?

Edit: (Increase in outstanding public debt)/(GDP) was actually only 8.1% in 2011. Lots of people prefer to define the deficit as "the budget deficit," but this is beyond silly.

icebraining• 14 years ago

Many of those regulations were lobbied for by the industries themselves, though. Regulations are a great way to keep competitors from entering the market. Not that this excuses the lawmakers, but it's a bit more complicated than us vs them.

Planet Money has a piece on it recently: https://www.npr.org/blogs/money/2012/06/22/155596305/episode...

gph12• 14 years ago

None of the issues you are describing in this comment address stagnant middle class income/consumption, which is a demand side problem not a supply side issue. Certainly there is need for more efficient regulatory and tax schemes for businesses, but really it has little to do with what's currently responsible for our economic situation.

goggles992• 14 years ago

It is very true that our government has contributed to the problem. Mostly in manufacturing. Environmental regulations have gotten so stringent that companies could not compete with imports. Thus came a major shift. Manufacturing used to make up a huge portion of jobs and middle class income. It also cost business owners more than they currently spend importing goods from China.

So there you have it - less money and jobs for middle class and more money for the wealthy importer. Thanks US Government for not only allowing this to happen, but for encouraging it with your environmental restrictions, high cost of employees (far beyond their wage) and wide open trade with China who devalues their currency so no-one can compete :(

jblz• 14 years ago

I don't buy the contention that's being bandied about that "the middle class has shrunk in size." If you look at the Pew report, the relative size of the middle class is only established as a function of responses to a survey question asking people to self-identify into economic class.

Comparing the results of this sort of survey over time isn't scientifically supportive of that claim because there is not a universally accepted academic model for class -- even the experts disagree.

tomjen33• 14 years ago

Reading the comments here it is painfully clear just how much Hacker news has changed (and definately not for the better).

Once PG wrote an essay on exactly this topic (http://paulgraham.com/wealth.html) in which he argues convincingly that wealth inequality isn't really relevant because while we can expect that technology will act as a lever to make the absolute differences bigger than they are now, at the same time everybodies relative wealth will get closer and closer together.

And that is true. I know a guy who has a higher networth than I is likely to ever earn. He has a Masaretti, a plane, a nice house, etc.

But while the absolute differences between the two of us are great, the relative differences between us are small, compared to what they would have been historically -- after all we eat mostly the same food and while he can fly first class that is not going to get him to the destination much faster than me in coach.

200 years ago, he would have been the owner of a corporation, making a ton of money and living in a that would look like the set of Downton Abbey. I would have been living in some shack somewhere with no running water and and outhouse that was likely to be frozen in the winter.

So yeah, I don't give much of a crap about income difference and I don't buy that the middle class is bankcroupt due to the very rich (1% isn't very rich, btw). I believe the middle class wealth has grown slightly less than it used to because it hasn't produced as much as it used to.

Remember wealth is not a static quantity, it can be created and it can be destroyed. It is created only when people produce and as far as I can see, the middle class has not produced very much at all.

Of course the wars in Iraq and Afghanistan have a great deal to do with the destruction of wealth too, as have the bloated government system.

ender7• 14 years ago

That is not the point of the article. You're talking about quality-of-life, while the study is talking about the health of the national economy:

"The reason the decline of the middle class is important is not just about fairness. It's about the health of the economy as a whole."

So, even a hypothetical world where even the poorest person in the country has a stellar quality of life would be bad if there was no middle class, specifically because the economy would suffer. Corporate revenue would be hobbled, and so would R&D. You'd get a country of happy people that didn't do anything. A few decades of this and it would be quickly left behind by the rest of the developed world. Those few citizens who are motivated to actually do things (like found companies) will move to countries with economies that can actually support commerce.

douglasisshiny5• 14 years ago

I don't agree on some points here. I don't think anyone reasonable is claiming that the 1% is bankrupting the middle class. The observation is that middle class earnings have been stagnant and even deteriorating over the last decades. That's just an observation.

You claim that the middle class hasn't produced. What exactly do you mean by that? If you mean that workers for large (and small) corporations haven't produced as well as they have historically, then why are corporations making record profits? Certainly a small number of executives can't be making the difference.

How have the wars in Iraq and Afghanistan destroyed wealth? On the contrary, U.S. defense contractors (some very large employers) have made quite a bit of money as the defense budget has swelled. Hence the outcry over sequestration.

tomjen33• 14 years ago

I will address the last paragraph first, because it is such a common and extreemly dangerous misunderstanding.

Every tank made represent a cost, indeed quite a high cost, as does every other piece of military technology. The money that has been spent on a tank cannot be spent e.g bridge repair in Minesota or even a nice vecation for you.

Yes the defence contractors have been hansomely paid for their services, and yes they have properly hired somebody who would not have had such a good job.

But have they made wealth? No. On the contrary. An engineer who works for a defence contractor cannot at the some time make a more fuel efficent car engine or a cheaper high speed train/monorail. The cost of the wars is not just the money and lives that goes in to it, but also what is not created. What could have been.

As for haven't produced I should perhaps be clearer -- if you expect that your standard of living should increase then what you can buy with your income needs to increase too (either things have to become cheaper or you have to make more money). That has not happened, and while I am not an economist it would appear likely that it is because most of the jobs the middle class have today is make work jobs (too many manager jobs, too many useless compliant jobs, too many lawyers, etc) jobs that, like our defences contractors above don't actually produce value.

Add to that the housing bubble and the higher cost of colleges (both fueled by the idea that no price is too dear for either and cheap credit) and a lot of people can appear to be productive for a long time before the mirage is revealed.

As for the record profits, that I suspect are mostly lagging indicators (e.g. RND being brought to the market, with nothing new in the pipeline) and a lot cheaper tech.

vannevar3• 14 years ago

The flaw in this argument lies in this sentence: ...after all we eat mostly the same food and while he can fly first class that is not going to get him to the destination much faster than me in coach.

What makes you think that someone who is unemployed or making minimum wage, can afford to fly coach? Contrary to your implication, there are in fact people in the US living in shacks without running water, and their number is growing.

Wealth is created and destroyed, but it is a fact that the upper incomes have been growing faster than overall economic growth for many years now, while the middle and lower income levels have stagnated or regressed. We can argue why that is so, but it's clear that the top 1% are consuming a greater and greater share of an economic pie that is not keeping pace with their accumulation of wealth.

tomjen33• 14 years ago

And those people are not in the middle class, and are therefore not relevant for an article about the middle class.

kitsune_• 14 years ago

The middle class is virtually bankrupt.

This "relative wealth" you speak on is an illusion, because it is based on debt. Debt enslaves you.

The true wealth of the top 1% is their freedom.

One miss-step, disease, misfortune, and you will cherish the power of money. You are standing on a thin, melting ice sheet and below is the abyss.

When you are below the poverty line, you will realize that this relative difference in wealth is not relative but absolute.

programminggeek• 14 years ago

I'm not sure how this is news. America was living above its means with a negative savings rate and then we had a massive recession when people ran out of money to borrow. Now a few years later people are working to get back to zero. When you're saddled with a pile of debt and not a lot of buyers, it takes a while to get everyone back to a sensible place.

Now, if companies paid higher wages, it might accelerate the recovery certainly, but at the same time, people would likely just raise their standard of living, not necessarily pay off debt.

What our society needs to fix the long term economy is for the average citizen to be in a strong enough financial position to pay their bills and have enough left over to save some money and spend a bit extra on entertainment, vacations, toys, etc.

It's not about everyone being rich, if we are in a consumer based economy, we need people to be able to afford to buy things without causing financial ruin. It's not about bigger houses, more cars, etc. It's simply about being able to afford to buy things without going in to debt to do so.

gph12• 14 years ago

What's surprising is that mainstream/orthodox economists have not really veered from the neoclassical position that private debt levels are essentially irrelevant from a macro perspective, on the basis that someone's debt is another person's asset and therefore any accumulation of debt is offset by an equal accumulation of savings supplying that debt.

But it's entirely obvious that the household debt overhang from the financial crisis is entirely what is holding demand/consumption back. We have had a historic buildup in HHold leverage for the last 30 years as consumers used debt as a substitute for stagnant wages, and after the housing crisis all this debt is no longer underpinned by adequate collateral.

Head in the sand.

dwd• 14 years ago

Very true. The Keen-Minsky model is the only notable attempt to look at effects of private debt in an economy. http://www.debtdeflation.com/blogs/

Pew Study: The Economy is lagging because the middle class is broke

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