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The Federal Reserve reports that the middle class has taken a financial beating. The report made the front page of the New York Times. The Times called it “much anticipated.” (Please stifle that yawn.) The Fed issues its Survey of Consumer Finances every three years; this survey is about consumer finances in 2010, so the report is already 18 months out of date. OK, it isn’t news. You knew it all along — the middle class is going down the drain.
Here are the basics. Most of the wealth of a middle-class family is bound up in its house. In general, a lower-class family doesn’t own a house; it pays rent forever and never gets to own the roof over its head. The upper class not only owns a house, it also has money in the bank and a portfolio of stocks, bonds and government securities. So when housing prices collapsed, it was the middle class whose finances collapsed. Now you don’t have to read the Fed’s report.
But a little background information is helpful and here it is. Sectors of the middle class began their long decline in the 1970s. The descent became general in the 1980s and has continued relentlessly since then. Middle class wages and salaries, when adjusted for inflation, have remained stagnant or declined for at least 30 years. The middle class standard of living didn’t appear to decline because married women streamed into the workforce, giving families a second earner, and when the continuing descent wiped out that, families used their credit cards to maintain their living standard, and when credit cards maxed out, they refinanced their homes which at that time had an inflated value. And when housing prices collapsed – well, you know the rest.
As for the upper class, the top 20 percent of US families also suffered from the collapse and consequent recession – their 401K plans and their brokerage accounts took a dive. Stock prices fell roughly 50 percent from peak to trough from October 2007 to March 2009. But since then equity prices have risen and, while fluctuating, they have essentially made up for what they lost. The upper class — have you noticed? — tends to do well, no matter what.
The Fed’s Survey of Consumer Finances also showed that our middle class is still mired in debt. The number of families able to put some money aside in savings has shrunk while the number not saving so much as a dollar has increased. Furthermore, the median amount owed has remained the same. Most people are not going to be able to retire their debts before they themselves retire
In conclusion, here’s the Good and Bad news. First, the absolutely bad news — the middle class is headed for a cliff. Now, the sort of good news — the looming catastrophe isn’t in the same category as a hurricane or earthquake or tsunami. It’s not an act of nature, an act of God or a force majeure. The 30-year decline of the middle class is largely the result of the US economic system with its peculiar structural defects. It’s a human artifact. It can be changed.
We would have given credit for the graphic illustrating this post, but our search provided neither the artist nor the origin of the graphic.
College students are now more than a trillion dollars in debt. That comes as news to anyone who isn’t a college student or the parent of a college student. The young and old who graduate this year are quite aware of it. Last year’s college grad started working life — if he or she could find a job — with an average debt of $27,000.
That average of $27,000 is the debt owed only by the student. Mark Kantrowitz, a knowledgeable expert in the field of student loans and student debt, estimates that if you add in the loans taken by parents to pay for their kid’s education, you get an average total bill of $34,000. That was last year. The numbers have been getting worse, year after year. (Kantrowitz was quoted in the New York Times last year, saying that student debt goes up and it doesn’t ever go down.) If student debt goes up 5 percent this year, as it did last year, then the burden — well, you can do the depressing math.
The economics of borrowing and debt often inspires comfortable moralists to criticize the profligate borrowers. But there’s been no criticism of students’ or parents’ borrowing. Over the past 30 years the purchasing power of the middle class has remained flat or has declined. Our average worker hasn’t been able to make the necessary strides ahead of the cost of living which permits increased savings or increased purchasing. But in that same period, the price of a college diploma has steadily gone further and further ahead, rising between 4 and 6 percent a year.
As has happened repeatedly over the past three decades, parents — and now their college-bound children — have to borrow. The gradual erosion of the middle class has increased so that now we are witnessing something rather like a collapse. The rich float further and further up, the poor drift further and further down.
But that’s a terrible note to post during the month of college graduations, so we’ve illustrated this with a diploma from the Italian University of Messina in 1672. We think it’s a great diploma with great but serious colors, a truly intricate initial letter and fancy writing. That’s something worth hanging on the wall! Even if it does put us a bit in debt.