Disappearing Middle Class in the USA

Categories: Ethics, Politics & Economics

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Michael Snyder’s recent Yahoo! Finance article points out quite a few disturbing trends that signal the disappearance of the middle class in the United States, as the gap between the “haves” and “have-nots” continues to increase:

•    83 percent of all U.S. stocks are in the hands of 1 percent of the people.
•    61 percent of Americans “always or usually” live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.
•    66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.
•    36 percent of Americans say that they don’t contribute anything to retirement savings.
•    A staggering 43 percent of Americans have less than $10,000 saved up for retirement.
•    24 percent of American workers say that they have postponed their planned retirement age in the past year.
•    Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.
•    Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975.
•    For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.
•    In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.
•    As of 2007, the bottom 80 percent of American households held about 7% of the liquid financial assets.
•    The bottom 50 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.
•    Average Wall Street bonuses for 2009 were up 17 percent when compared with 2008.
•    In the United States, the average federal worker now earns 60% MORE than the average worker in the private sector.
•    The top 1 percent of U.S. households own nearly twice as much of America’s corporate wealth as they did just 15 years ago.
•    In America today, the average time needed to find a job has risen to a record 35.2 weeks.
•    More than 40 percent of Americans who actually are employed are now working in service jobs, which are often very low paying.
•    or the first time in U.S. history, more than 40 million Americans are on food stamps, and the U.S. Department of Agriculture projects that number will go up to 43 million Americans in 2011.
•    This is what American workers now must compete against: in China a garment worker makes approximately 86 cents an hour and in Cambodia a garment worker makes approximately 22 cents an hour.
•    Approximately 21 percent of all children in the United States are living below the poverty line in 2010 – the highest rate in 20 years.
•    Despite the financial crisis, the number of millionaires in the United States rose a whopping 16 percent to 7.8 million in 2009.
•    The top 10 percent of Americans now earn around 50 percent of our national income.

Snyder clearly blames increased globalism for these problems, implying that the American public was swindled (by politicians, of course) into believing that “free trade” would be beneficial, while in fact it has hurt the middle class. Though there is some truth in that the American public has been somewhat blindsided by its lack of competitiveness in the global market, I’m not so ready to blame “globalism” for the increasing disappearance of the middle class in the USA. For one, given the way that better technology has “flattened” the earth regardless of free trade agreements, protectionist policies (high tariffs, etc.) limiting international free trade wouldn’t have advantaged the USA, especially since any products we produce would only fall under the same kinds of tariffs in the other direction, only adding to the higher expense of having come from the USA in the first place. Instead, I would be more inclined to blame the well-intentioned but misguided governmental efforts to artificially pump up the US economy and improve the lifestyles of the poor and middle class. After years of trying to serve free lunches, the bills are finally coming due—and with plenty of interest.

One such example is the persistent increases of minimum wage over the last two decades, a trend that, though well-intentioned, has been extraordinarily deleterious to the US economy and to the ability of lower-income workers to make ends meet. (The national minimum wage in 1989 was $3.35; there have been seven increases since then, bringing minimum wage to $7.25 today.) Unfortunately, these minimum wage increases have been short-sighted and based upon a confusion between purchasing power and the number of dollars in one’s pocket. Effectively, the American public has fallen prey to the old swindle often pulled by older children upon those younger than themselves: “Wouldn’t you rather have these three one dollar bills than that one five dollar bill? See, there’s three here and only one there. Why don’t we switch so you can have more?”

But the problem is that more money doesn’t necessarily equal more purchasing power—one dollar is only worth what one dollar will buy. And when the minimum wage is increased, it effectively increases the overhead of every industry with any employees, forcing those industries to increase prices or reduce employment in order to maintain profit margins. When this happens economy-wide, the economy-wide effect of increasing prices has a higher multiplier than the single employee’s pay increase, meaning that each worker—despite nominally making more—actually has less purchasing power than before (that is, when hundreds of products go up by a few cents to counteract the minimum wage increase, that more than offsets the few extra cents the worker brings home). Take a look at a minimum wage chart adjusted for purchasing-power—the $3.35 made in 1981 had equivalent purchasing power to $8.01 in today’s dollars. And that was after the massive inflation of the 1970s. So despite increasing minimum wage, the minimum-wage earner today is poorer today than in 1981 (in contrast, since pay rates increase by percentages, the folks at the high end are making more than before, since the starting minimum is higher—this only helps build an even bigger gap between rich and poor). To make matters even worse, every increase in minimum wage effectively prices some labor (that worth less than the minimum wage) out of the workforce, effectively declaring that they are unemployable. It is no surprise that every increase in minimum wage corresponds to a significant spike in unemployment (just a few months after the increase).

The dirty secret nobody seems to want to mention about our continued unemployment woes is that it is not simply tied to the credit crisis of 2008, but the sharp rise in minimum wage from $5.85 in 2007 to $7.25 in 2009. The economy will take some time to absorb those increases through increased prices and inflation before employment picks up again—and that may be years down the line. The truth is that “globalism” isn’t really responsible for the decreasing middle class; it has rather been the combination of our foolish pump-the-economy-up-with-easy-credit fiscal policies and steadily increasing minimum wages that have progressively priced American workers (and products for purchase in the USA) out of the global market. Then again, the only way out of the unemployment cycle is to inflate the currency enough to get folks back to work again—but that inflation and reduced incremental purchasing power only hurts those at the bottom the most. It’s a vicious cycle. Of course, whenever the high cost of American labor is addressed, it always seems to be framed as though the workers willing to work for less were being “exploited”; Snyder’s article is no different:

The big global corporations have greatly benefited by exploiting third world labor pools over the last several decades, but middle class American workers have increasingly found things to be very tough.

As for the “exploitation” of non-American labor pools (after all, they are paying people $0.50 an hour in sweatshops!), this is a bogeyman often misunderstood. When I assisted a Business Ethics class in the Business School at Florida State University a few years ago, the subject of sweatshops was probably the most eye-opening for the students of all the ethical issues we covered. Nearly all the students came into the class under the assumption that these labor forces were simply exploited, that it was abominable to pay someone so little per hour. But 50 cents buys a whole lot more in the third world than it does in the USA, and when the students realized that medical doctors in those countries only make a few dollars per hour and that increasing the hourly wage to, say, $3.50 per hour, would only lead to physicians and other professionals to quit their practices for higher-paying factory jobs, this impression of “exploitation” was suddenly gone. Yes, working conditions have not always been good, and some companies have exploited their workers in some fashion. But the fact is that these workers aren’t being forced to work; they are taking the highest-paying and best option available to them, an option presumably leading to a higher quality of life. (The bigger ethical issues involved in sweatshops actually tend to be environmental, as developing countries tend to have very lax environmental regulation.)

The problem isn’t that people are making under a dollar per hour for unskilled labor in developing nations. The problem is that in the USA, we have so artificially pumped up our economy and price levels that an American would be paid over seven dollars (plus benefits!) for the same work. Global competition is only exposing the air in the US economy; the problem is not the global economy but our own.


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2 Comments. Leave new

  • OK, so how do you let the air out? The only option I can imagine is rapid inflation of the U.S. Dollar (to cancel out debt) followed by the establishment of a new, properly adjusted currency.

    • Some form of debt cancellation and significant wealth/inheritance taxes for wealth above a certain threshold (along with the elimination of the payroll tax and corporate tax) would be the first substantive possibilities, but each of course comes with costs.

      It may also be worth having a minimum guaranteed income and potentially some form of guaranteed housing (which is where most of the income of the non-wealthy goes), but again, those are massive programs that would require tremendous organization and very high taxes.


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