What Killed The Middle Class?
Everyone knows the middle class is fading fast. I've covered this issue in depth for years, for example: Honey, I Shrunk the Middle Class: Perhaps 1/3 of Households Qualify (December 28, 2015) and What Does It Take To Be Middle Class? (December 5, 2013)
This raises an obvious question: what killed the middle class? While many commentators try to identify one killer cause (for example, the U.S. going off the gold standard in 1971), the die-off of the middle class is more akin to the die-off in honey bees, which is the result of the interaction of multiple causes (factors that increase the toxic load dumped on bees and other pollinators by modern agriculture).
Longtime collaborator Gordon T. Long and I discuss the decline of the middle class and other key topics in a new 29-minute video How did that work out for you?
So where do we begin this detective story? With the engine of all real prosperity, productivity. This chart reveals that wages stopped rising with productivity around 1980.
Here's another look at the same phenomenon:
Productivity has been slipping since around 2003: Alan Greenspan:"Productivity is Dead”
Cause #1: declining productivity, which means the pie of real wealth is no longer expanding.
Exhibit #2: middle class wage earners have not received any of the gains.Wages as a percentage of GDP have been falling for decades, with occasional blips up in tech/housing bubbles:
Inflation-adjusted household income has dropped back to levels first reached in the 1980s:
More recently, wages have actually declined, regardless of educational attainment:
Income gains have all flowed to the top 10%, with most of the gains being concentrated in the top 5% and top 1%:
If the middle class didn't receive any of the gains, who did? Corporate profits have soared to unprecedented levels:
Cause #2: all the gains in the economy have flowed to corporations and the top 10% of financiers, managers and technocrats.
But wait a minute--hasn't the rising stock market enriched the middle class? Short answer: no. Middle class household wealth has absolutely cratered since the top of the housing bubble in 2007, and hasn't recovered.
Why? Middle class wealth is based not in stocks but in the family home. The middle class does not own enough financial assets to have participated in the latest stock market bubble, while the majority did not recover the wealth lost in the housing bubble bust. This is the cost of allowing the financial sector to financialize housing and mortgages in the 2000s.
Cause #3: the middle class doesn't own the "right" assets to benefit from systemic financialization and financial speculation.
How about rising costs? The federal agencies tasked with measuring inflation assure us inflation is near-zero. But these measures underweight big-ticket costs like healthcare and higher education, where costs have exploded higher, greatly increasing the burden on the middle class:
Cause #4: soaring costs of big-ticket expenses such as higher education and healthcare. Saving $10 on cheap jeans imported from Asia does not make up for 135% jumps in tuition and college fees, and $100 decline in the cost of a laptop computer does not make up for healthcare insurance and out-of-pocket expenses in the tens of thousands of dollars per household.
Correspondent Kevin K. submitted this article and accompanying note: Colleges with the biggest tuition hikes (my alma mater University of Hawaii-Manoa clocked in with an increase of 137% since 2004.)
"It looks like the article linked above didn't do much research since:
University of California Davis
2004 in-state tuition $5,684
2015 in state tuition $13,951
Percentage increase 145.44 percent"
There is no way middle class households with declining real incomes can pay soaring costs imposed by state-enforced cartels and gain ground financially. If the four structural trends highlighted above don't reverse, the middle class is heading for extinction, the victim of financialization, the glorification of financial speculation via central bank-central state policies, the decline of productivity and rising costs imposed by state-enforced cartels.
Disclosure: None.
Indeed central bank policies have been a big cause of distorted and largely hidden inflation such as healthcare, education, etc. but so has perverse government intervention. Although a 100% national healthcare system squeezes out costs and generates savings, what we have done has merely increased costs by subsidizing a system with government funds that has no controls. Likewise, education costs have increased, but that is mainly due to the government loans through Sallie Mae which massively increased the amount that could be paid for education without any controls and a total disregard for the ability to pay. Thus you had parasitic firms like Trump University trying to get in on the free fall.
It got so bad the government passed a law preventing people from declaring bankruptcy to get out of their student loans. That itself should have been a sign that this system is going off the rails.
Much like the housing bubble financed with Fannie Mae and Freddie Mac dextroyed our economy. These will result in similar catastrophies after destroying the economy. We haven't solved Fannie and Freddie's problems and the Federal Reserve is insistent on reduplicating its efforts in the stock market. The issue is, like the housing market, when the banks and financial institutions the Federal Reserve supports ends up owning too much of an asset it is bad. That means they can no longer unload their over inflated paper gains on the unsuspecting public. We have seen trading increasingly be concentrated on big financial companies and banks. Who then can they unload onto unless they make it so tremendous they make the government pay for it much like the housing market bubble before.
What is killing the middle class is distortions from true capitalism. As long as there remains a way for people to make money without adding goods and services like QE and zirp, capitalism will continue to flail not because capitalism doesn't work, but because it is being replaced by corruption and socialist ideals that undermine capoitalism.
Growth is dead. The reason is obvious as we sit at zirp and the Federal Reserve asks to tax people with negative rates. No one can deny the central banks anti-capitalistic coruuption anymore.
I agree, except that crony capitalism is not socialism. As Roubini said, the profits are privatized and the losses are socialized.