The Collapse of the American Middle Class

Earlier this year, George Friedman, founder and CEO of the Stratfor global intelligence and analysis firm, wrote an insightful article about the ongoing collapse of the American middle class. Given the attention the middle class is getting these days from President Obama, it's worthwhile looking back at the Stratfor article. For Friedman to write an essay like this suggests that America's socio-economic problems are a potential national security risk of the first order.

As Friedman puts it:

The United States was built on the assumption that a rising tide lifts all ships. That has not been the case for the past generation, and there is no indication that this socio-economic reality will change any time soon. That means that a core assumption is at risk. The problem is that social stability has been built around this assumption -- not on the assumption that everyone is owed a living, but the assumption that on the whole, all benefit from growing productivity and efficiency.
He points out that the United States of the post-World War II era -- from the late 1940s through the 1960s -- no longer exists. The economy has changed, as has the nation's social structure, to the point where the "American Dream" of our parents' (or grandparents') generation has dissipated like a morning mist burned off in the stark light of the midday sun. 

Friedman observes:

In the 1950s and 1960s, the median income allowed you to live with a single earner -- normally the husband, with the wife typically working as homemaker -- and roughly three children. It permitted the purchase of modest tract housing, one late model car and an older one. It allowed a driving vacation somewhere and, with care, some savings as well. I know this because my family was lower-middle class, and this is how we lived, and I know many others in my generation who had the same background. It was not an easy life and many luxuries were denied us, but it wasn't a bad life at all.Someone earning the median income today might just pull this off, but it wouldn't be easy. Assuming that he did not have college loans to pay off but did have two car loans to pay totaling $700 a month, and that he could buy food, clothing and cover his utilities for $1,200 a month, he would have $1,400 a month for mortgage, real estate taxes and insurance, plus some funds for fixing the air conditioner and dishwasher. At a 5 percent mortgage rate, that would allow him to buy a house in the $200,000 range. He would get a refund back on his taxes from deductions but that would go to pay credit card bills he had from Christmas presents and emergencies. It could be done, but not easily and with great difficulty in major metropolitan areas. And if his employer didn't cover health insurance, that $4,000-5,000 for three or four people would severely limit his expenses. And of course, he would have to have $20,000-40,000 for a down payment and closing costs on his home. There would be little else left over for a week at the seashore with the kids.

Of course, this is the case for the median wage-earner. What about those who earn less? Says Friedman:

Those below him -- half of all households -- would be shut out of what is considered middle-class life, with the house, the car and the other associated amenities. Those amenities shift upward on the scale for people with at least $70,000 in income. The basics might be available at the median level, given favorable individual circumstance, but below that life becomes surprisingly meager, even in the range of the middle class and certainly what used to be called the lower-middle class. 

This means the end of upward social mobility for that half of the population that lies below the median. In practice, these citizens become wards of the state. The government gives them what they need to survive, and they opt out of the "American Dream."

Then, Friedman says, there is the crisis of the American corporation, In the old days, people were accustomed to working for companies for an entire career, and retiring with a pension. Increased inefficiencies and other factors have made this impossible, and corporations have been forced to undergo re-engineering, in which many have lost their jobs and probably cannot regain them. Keep in mind that over the past half-decade or so, some 19 million people have dropped out of the work force and are unlikely to return to it.

So where are we now?

What we are facing now is a structural shift, in which the middle class' center, not because of laziness or stupidity, is shifting downward in terms of standard of living. It is a structural shift that is rooted in social change (the breakdown of the conventional family) and economic change (the decline of traditional corporations and the creation of corporate agility that places individual workers at a massive disadvantage).The inherent crisis rests in an increasingly efficient economy and a population that can't consume what is produced because it can't afford the products. This has happened numerous times in history, but the United States, excepting the Great Depression, was the counterexample.

Friedman doesn't offer us a solution to the American crisis, but he has helped elucidate some of the problems. It is now up to our leaders and future leaders to see if they can help America find a way out of this grave dilemma.