Where’s the Middle Class?

Capital Forum’s current series on “Reducing the Wealth Gap” ties in nicely with Edward Luce’s July 30 piece in the Financial Times“The Crisis of Middle Class America,” a sobering reality check, putting real people behind the statistics. Read it when you have a quiet moment.

What exactly is the “middle class” anyway? I grew up in what we called a “middle class” family.   My parents had gone to college and therefore were able to avoid what was then considered the “dreariness” of “manual labor” or working in a “trade.” (I put these words in quotes because I have tremendous respect for people who master trades and crafts.  We need to value tradespeople and crafts more in our society.) My dad had a career in advertising, my mom stayed home to raise my brother and me.  I never had to worry about my next meal or a roof over my head, and I could go to college, although my graduation documents included a packet from the Manufacturer’s Hanover Trust Bank containing my monthly student loan payment stubs.  I paid them diligently for the following ten years, as I recall.

My perception growing up was that the middle class must account for the majority of America. If I had to guess, maybe 10 to 15 percent were the unfortunate “poor”, 5 percent were “rich” and the other 80 to 85 percent were split between working class and middle class – I would have guessed about equally. I was probably “upper middle class” because I brushed up against “rich” people frequently. They drove Mercedes and flew first class to nice vacation spots. Some even had vacation homes. Although we drove Chevies and didn’t take a lot of family vacations, I never felt such a life was a world apart from mine.

No doubt my childhood perceptions were not consistent with reality at the time.  Now a student of the economic system, I’ve seen the ugly wealth gap statistics sliced up in many ways. But reading Edward Luce’s story about real “middle class” families clarified the stark reality of income distribution in America at the beginning of the 21st Century (even before the Great Recession) in a way that the statistics can’t convey.    Nevertheless, here are the facts, per the 2008 census, before the Great Recession, presented by individual rather than by “household” as has become our convention.

47% of Americans earn less than $25,000 a year

75% of Americans earn less than $50,000 a year

94% of Americans earn less than $100,000 a year

I read these numbers and find myself asking,  where exactly is the “middle class” in these numbers? It must be tucked away inside some small slice of the whole.  Increasingly I have come to believe that the “middle class,” which we all intuitively believe is out there somewhere living the “American Dream”, is in fact living a very different reality.  Edward Luce describes an alternative reality of the “American Dream” for the vast majority of the country.  It’s a reality of financial insecurity, with bouts of outright financial violence.  It’s a reality of health insecurity.  And if future uncertainty could be properly factored in, it’s worse than it appears.  Particularly as a result of the recent financial collapse, our society has lost the buffer it once enjoyed against future uncertainty.

Of course there are many complex reasons for the economic reality we are confronting as a nation. Our failing education system, globalization, Wall Street greed and irresponsibility, too much government, too little government, you name it.  The pundits on the left and the right agree on one thing: growth (meaning GDP growth) is the solution. The debate is around how best to achieve growth.  The current austerity versus stimulus debate, and the coming tax policy debate over the Bush tax cuts all reflect mostly honest differences in opinions over what’s best for growth.   But we never ask the fundamental question: is growth the solution to our problems?  We never stop to ask why, despite decades of mostly uninterrupted growth,  our problems have not lessened but intensified.

It’s increasingly clear that the benefits of this growth have accrued mostly to the very wealthy, literally the top 1 percent (not 5 percent) of the country. What’s even clearer is that lack of growth will make the problems for the “bottom 99 percent” much worse, and for the bottom half, disastrous, as we have seen borne out in the recent Great Recession. As a society, we find ourselves running on a treadmill in which winning means sliding slowly rather than swiftly. Karl Marx must be grinning in his grave.

Capital Institute’s focus on “Reducing the Wealth Gap” is therefore really a focus on our entire economic system, and on the entire financial system which is the fuel source driving this economy. Our Wealth Gap work starts with an analysis of the CDFI industry, which was established by the United States Treasury to meet the financing gap for the “underdeveloped and under banked” sectors of our society, represented by people hard at work, but who are unattractive to traditional banks as a customer base. What we must comprehend is that we are in reality talking about at least half of the entire country,  people with incomes of less than $25,000. We are talking about  a series of related deep structural challenges that must be met if we are to improve the well-being of this for-too-long overlooked sector of our population. The current resources of the CDFI industry are woefully inadequate to take on this massive and growing challenge.

Unfortunately, the challenge is about to get much harder. Ecological boundaries will increasingly impose new impediments to our growth paradigm. We will either gather the will to  impose limits on ourselves to protect our long-term viability as a species, or nature will impose even harsher consequences on us.

We have enjoyed decades of seemingly magical development following WW II. This was followed by an increasingly competitive drive for “efficiency” driven by globalization and the financialization of the economy (which means efficiency on capital deployed), during which the productivity gains accrued to the top 1 percent and, in particular, to the top 1/10 of 1 percent, who controlled the deployment of this capital. But that game has run its course.

We are in a transition requiring new economic thinking that transcends the austerity vs. stimulus debate. We must imagine and then transition to a 3rd Millennium Economy.  Capital Institute is proud to be working on this critical initiative, the “Great Work” of our generation.

A civil society needs to create meaningful jobs.

A civil society needs to avoid spoiling its nest.

These are not either/or choices. Our current economic model, focused on GDP growth regardless of the human-well-being-enhancing or ecosystem-supporting quality of that growth, is not achieving either goal. Welcome to the new reality. Time to re-assess with open minds.