There Really Is no Middle Class any Longer
There was a time when a large portion of Americans belonged to the It meant you could afford a decent living standard, such as owning a house and a car and had savings in the bank. Whenreminisce about the they are referring to when being middle-class was normal.
However, the American middle class has continued to contract over the past five decades. According to Pew Research, the share of adults who live in middle-class households fell from 61% in 1971 to 50% in 2021.
The Census Bureau clearly shows the problem in thethrough 2021.
Median DPI: Top-20 Vs Bottom-80-Pct
That dotted black line is the most important. As with the PEW Research data looking at incomes alone obfuscates the most important part of income analysis. The question is how much income it takes to maintain a lifestyle. Or rather, what does it take to buy a house and a car and feed two kids?
Most importantly, and what is often not included in the analysis, is the standard of living gets on an ” basis. When we include taxation, it becomes clear that roughly 80% of America is failing to support thelifestyle.
After Tax Income By 5ths
As we discussed recently Harvard Business Review noted::
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Again, it is a true statement that household net worth has increased since the Covid lockdown lows. However, household net worth is predominately held by the top 10% of income earners, leaving the bottom 90% fighting over the remaining 30% of the wealth.
Household Net Wroth By Bracket
Debt is not a choice for most Americans.
More Debt Isn’t A Choice
I recently discussed that is plaguing more individuals, according to a BankRate.com survey. To wit:
Age Groups Unprepared For Recession
With the Federal Reserve focused on combatting inflation by tightening monetary policy, the financial pressures on households will continue to increase. Given the already high levels of “unpreparedness” for a recession, such leaves a majority of families dependent on additional debt to make ends meet.
Consumer Credit Balances
With the pandemic-driven savings now spent, 60% of Americans say they are living paycheck-to-paycheck. While consumers can supplement their disposable incomes with debt to offset rising inflationary pressures, it is not a long-term solution. The chart below, which requires a brief explanation, shows the problem clearly.
Between 1959 and 1990, individuals could sustain their inflation-adjusted standard of living with only incomes and savings. There was roughly a $4700 surplus yearly as households had very low debt levels. However, beginning in 1990 and accelerating following the Financial Crisis in 2008, it requires an increasing level of debt to between what income and savings can afford and the cost of the current living standard. You will notice a brief spike in 2020-2021 as hit household bank accounts. However, that surplus has reversed to the deepest deficit on record.
Consumer Spending Gap
As the continues to widen between those in the top 10% of income earners and everyone else, the ability to maintain a lifestyle becomes more challenging.
The Road To Serfdom
In a recent U.S. News article, many forces shape an individual’s economic class and their views of where they rank.
However, statistics suggest that if 89% of surveyed individuals identify as middle to upper-class, that only leaves 11% of the population at the other end. However, income, debt, and net worth statistics clearly show such is not the case.
The reality is that middle-class America continues to shrink as the rich-get-richer and the poor-get-poorer. The rich can invest, save and use very little debt to sustain their living standard, while the poor rely on debt, making long-term prosperity an impossible goal.
Furthermore, as the peasants demand “ from the Government, such requires more debt and higher taxes. Those demands then divert more capital away from productive investment leading to slower economic growth. As growth slows, businesses shift to the lowest labor costs, or automation, to lower income growth for domestic workers. Such leads to more demands from “free stuff” from the Government, and the cycle intensifies, pushing more of the middle class downward.
The share of annual incomes between the bottom 80% and the top 5% is evidence of that wealth transfer from the middle class.
Share Of Income Bottom 80 vs Top-20
The road to serfdom is paved with good intentions. After decades of piling on increasing debt levels to generate economic growth, the damage to economic growth is becoming more visible. As shown, economic growth trends are already falling short of both previous long-term growth trends.
Real GDP-New Normal Trend
The end game of too much debt, combined with an aging demographic, is the apparent in Japan’s economy.
Of course, Japan doesn’t have a middle class any longer, either.
