The Coming Collapse of the Middle Class

I’m watching this Elizabeth Warren video today: The Coming Collapse of the Middle Class.

Synopsis after the jump.
1. Though household incomes have increased over the last thirty-five years, median incomes for males have actually dropped by $800. (Women make less still.) Household incomes have only increased because both partners are working.
2. Household savings have gone from 11% of take-home pay to -0.8%, while the contemporary family has negative savings: revolving debt has risen from 1.4% of annual incomes to 15%. From saving 11% of annual income to indebtedness of 15% of income!
3. However, contemporary households actually spend less on consumer goods than they once did: 35% less on clothing, 18% less on food (including eating out,) 52% less on appliances, 24% less on automotive expenses per car. This revolving debt is not the result of consumer society, despite what everyone would have you believe.
4. Comparing households from 1970 with households in 2006, Warren adjusts for family size by asking questions about the two parent/two child household.
5. Mortgage payments are up 76%: real estate costs are way up, but it’s not really a matter of size. Median home size has gone 5.8 rooms to 6.1 rooms, basically an extra bathroom. However, new construction is aimed at the top 20% of families.
6. Health insurance and health costs are up 74%.
7. Since more families need two cars, the lower per car cost still leads to 52% increases in automotive costs for the two-income household.
8. Child care is up 100%, but that’s just because the average two couple household had no child care costs thirty-five years ago.
9. The median family is paying 25% more taxes than thirty-five years ago.

So: single income families in the 1970s earned less money but had more disposable income. Today, the two-income family spends 3/4 of its annual income on fixed expenses, and spends the 1/4 left on food, clothing, and entertainment. They can’t pare back their spending when financial hardships arise, and if either income is lost through family illness or job loss, the 2006 family can’t pay its fixed costs!

The contemporary middle class (literally median) household works harder, its individuals make less money, it is more brittle, vulnerable to risk. All this volatility spells the coming collapse of the middle class. Bankruptcies are rising, all due to job loss, family illness, or divorce, but people aren’t admitting it. “A middle class where people are falling out and into poverty is a middle class that has less room to bring people up and out of poverty.” Poverty is intractable because the middle class is shrinking, and I think Warren is right to say that our economy is increasingly becoming a two-class society: those who don’t get sick, lose their job, or get divorced, and those who do.