Middle Class Eroded, Facing Uphill Climb: Will Policy Reforms Help?

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3 December 2009 :: J.E. Robertson

The most essential underpinning of a stable, just American democratic system, a strong middle class, is under threat. Overarching global economic trends, built up over decades, have undermined the economic influence of American workers, families and individual consumers. The quality of life of the average household is no longer the measure of economic progress favored by the most powerful forces in an increasingly global economy. The Great Recession of 2008-2009 is revealing long-running trends that leave families and communities exposed to the corrosion of basic resources and economic value.

Elizabeth Warren wrote in today’s Huffington Post that:

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can’t make the minimum paymenton their credit cards. One in eight mortgages is indefault or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.

At a time when one in eight people worldwide goes to bed hungry every night, one in eight Americans is securing food assistance from the government, meaning they are otherwise unable to afford to put food on the table. The wealthiest nation in the world, it turns out, after decades of economic reforms, widespread privatization and the dismantling of union influence, now provides food to its people as well as the world average. Despite being the single most productive source of food in the history of the world.

There are sweeping imbalances that have been fed into the heart of American consumer culture, by a hamfisted process of globalization that has used the bottom-line interest of multinational businesses as the measure of progress, instead of the shared prosperity of the people of affected nations. Globalization itself is a process that emerges naturally from increasing democratization and the laudable opening of borders; it can be a driving force in reducing conflict, as competing nations also become interdependent and share in mutual economic benefits.

But, globalization as it has played out, or been engineered by corporate interests and government policy-makers, over the last three decades, has been a race to the bottom, with firms seeking one after another way to slash average wage-payment burden and put off requirements to adhere to stricter standards of economic and employment responsibility. That race to the bottom has undercut wages across the United States and undermined the wage-base on which banks depend for their management of the cash and credit that feed the consumer economy.

Warren notes that “In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family.” Other analyses of wages show that household wages overall fell by $2,000 per couple per year between 2000 and 2008. This means the boom period created a specific economic deficit that was bound to lead to an economic collapse, shifting so many trillions of dollars in wealth away from middle class consumers that the engine of economic growth in the US would eventually grind to a halt.

Without adequate wealth to continue pushing the expansion of the consumer markets, which comprise 70% of US GDP, the routine expansion of economic wealth could not continue. Instead, a downward spiral effect took hold, in which negative feedback between lower wages, mounting credit failures, foreclosures and bankruptcies, undermined the banking system, freezing credit and crippling the capacity of consumers to spend in order to drive economic growth in a way that creates jobs.

Warren puts the blame squarely at the feet of the banks, saying that despite this sustained trend of eroding the influence and stability of individuals, families and communities, working Americans had not asked for massive government handouts to fix the problem:

The contrast with the big banks could not be sharper. While the middle class has been caught in an economic vise, the financial industry that was supposed to serve them has prospered at their expense. Consumer banking — selling debt to middle class families – has been a gold mine. Boring banking has given way to creative banking, and the industry has generated tens of billions of dollars annually in fees made possible by deceptive and dangerous terms buried in the fine print of opaque, incomprehensible, and largely unregulated contracts.

And when various forms of this creative banking triggered economic crisis, the banks went to Washington for a handout. All the while, top executives kept their jobs and retained their bonuses. Even though the tax dollars that supported the bailout came largely from middle class families — from people already working hard to make ends meet — the beneficiaries of those tax dollars are now lobbying Congress to preserve the rules that had let those huge banks feast off the middle class.

She also argues that the need for Pres. Obama’s proposed Consumer Financial Protection Agency, to guard against predatory lending and unethical banking and trading practices, is now well understood. Recent polling shows strong majorities of American voters in favor of such a financial services reform, with strong consumer protections. The middle class is being seriously eroded, and a fundamental shift in economic priorities needs to occur in order to first shore up what remains of the vast American middle class, then stimulate its sustained expansion.

At present, the depth of the banking crisis means funding for businesses and new jobs is scarce, households continue to be under severe pressure from rising costs and decreasing revenues. Bankruptcies continue to mount, and the resources for funding the rapidly escalating costs of education and healthcare are increasingly hard to come by. Failure to adequately provide for healthcare costs and education means a future population that is sicker and less educated, with the very real risks such a situation poses for competing in a dynamic, 21st-century global economy.

The strength of the middle class is a basic underpinning of the American democracy, and its capitalist system, because the middle class is a source of positive feedback, creating ever-increasing opportunities for higher education, job and wage-growth, consumer market dynamism and the corresponding innovations in technology and infrastructure, both of which feed the next cycle of increased prosperity and innovation. That virtuous feedback, based on a strong middle class, is the state of affairs toward which economic policy reforms should be directed.