American Middle Class - Shrinking?

I decided to look into this issue and publish a post as result of an eye-opening article just written by Michael Snyder in "The Business Insider" in which he concluded that the "middle class is being systematically wiped out of existence in America!" I'm quite aware that the bulk of the commonly called "middle class" is being greatly challenged to survive and prosper these days. However, I'm skeptical of his claim about its imminent extinction, and assume Snyder was probably exaggerating to better gain our attention.

I've learned that President Obama also has significant concerns about this subject and, as a result, as presidents often do, established a Middle Class Task Force under the leadership of Vice President Joe Biden, soliciting ideas from his domestic policy advisors and other people around the country on how his administration should deal with this. Among unspecific initiatives they have in mind so far to promote are creation of a great many new green jobs, supporting high tech manufacturing, and making college more affordable for middle class families.

Who are members of the "middle class"? To effectively analyze this issue and come up with meaningful conclusions, it's helpful to have some definition. We all know "middle class" refers to people who economically speaking are in a broad group in the middle of the population strata, generally considered neither rich nor poor. Some would call the "middle class" just average Americans. Can we be more precise? Yes, although there doesn't seem to be a single definition broadly accepted by sociologists, politicians, and other academics.

Some sociologists think in terms of three classes: "lower income and poor Americans", middle class, and the "rich". Others like to divide middle class into lower and upper. Although the dollar amounts vary over time and also where in the country one lives, lower income and poor Americans tend to have household income, assuming they're employed, up to between $35,000 and $40,000 annually. Generally the employed are blue-collar workers with education up through high school, but usually not more.

The lower middle class tends to have household incomes between $40,000 and something like $80,000, and upper middle class between roughly $80,000 and up to around $200,000. The great majority of these middle class people have high school diplomas and at least two years of college. Many have college degrees. Of the so-called upper middle class, the majority probably have college degrees and often also a graduate degree.

Middle class Americans tend to be managers, supervisors, or professionals, including small business owners, doctors, lawyers, accountants, computer programmers, architects, and politicians, among many others. Financial writer Liz Pulliam Weston has offered another definition of middle class as being those "having the resources to cover all your needs and some of your wants, plus the ability to save for the future." I have no disagreement with that generalization. We can add that while middle class members can have some of their wants, they can't have everything they want!

The rich usually have inherited a lot of money, or have, or have had, incomes well above $200,000 annually, often many millions. Usually they have substantial personal assets in the form of expensive residences, stocks in large companies, and other financial assets. Virtually very brokerage, financial management and private banking firm seeks business relationships with the rich, due especially to their substantial financial assets.

Each firm has their own minimum standards for investable funds and standards to achieve their "preferred", "premium" or "Gold Star" client status, which often gets them waivers for most transaction fees and much more personal service from an experienced adviser. The absolute minimum is usually a portfolio valued at between $100,000 and $500,000. To achieve the higher preferred status, minimum required investable funds tend to vary between $1 million and $10 million. The rich tend to be successful business owners, current or former very senior executives in big companies, real estate investors, or elite professional athletes, authors, actors, and other major popular artists. Occasionally they may also include some successful professional gamblers and major lottery winners!

I haven't seen a current official breakdown of households in these three classes, but, after reviewing some dated surveys on the subject, my guess is that the poor and lower income class now comprises between 30% and 35% of American households, the middle class between 55% and 60%, and the rich between 5% and 10%. This rough breakdown takes into account income, personal assets, and probable standards of living.

Having covered this background, what's going on with the large and important middle class, which Vice President Biden has called the "backbone of this country," in large part, presumably, because of their relatively dominant roles in the job market, consumer spending, political activity, and in voting?

There is no question the middle class is generally being severely challenged by the results of our big national financial crisis. This is evidenced, of course, by the large number of job layoffs, continuing high 9.5% unemployment rate, cuts in pay and benefits, mortgage defaults, home foreclosures, and significant declines in home values and their overall personal financial positions. Moreover, the middle class, and our economy as a whole, is being adversely affected by a disturbing, but understandable, significant level of caution in hiring new employees and making of new investments by our business community.

I have not seen any reliable statistics documenting a specific shrinking of the middle class. However, it is very likely that a sizeable number of Americans in the last 2-3 years have moved from the upper middle class to lower middle class, and from middle class to the lower income and poor class. My guess is that these shifts have involved perhaps 15-20% of Americans. Others, though, have no doubt moved lower within their existing classes. So there has most probably been some shrinking. But, as noted at the outset, I do not believe that there is any realistic chance that what we call middle class is "systematically being wiped out."

Our economy will most likely largely come back within the next 3-4 years through renewed corporate hiring and investments, supported by government policies, including tax reform and other actions to contribute to economic growth, but it will be slow and painful, and dependent on sustainable economic recovery in our trading partners, especially in Europe and the Far East.

It obviously isn't advisable for the anxious in the middle class to wait for the economic recovery or government assistance. The majority of middle class Americans will, however, be helped by the anticipated economic recovery, but perhaps more so by their own prudent immediate actions, including continued caution in spending, increasing savings to the extent feasible, and making their future employment opportunities more positive through additional education, more focused job research and effective training. Those who are wise will also focus more on diet and physical fitness to contain healthcare costs and better prepare themselves for working longer hours and longer working careers, considering also what's going to happen with Medicare, Medicaid and Social Security reforms within the next two years.

What government policies and actions can we expect, regardless of the outcome in the upcoming mid-term elections and who wins the presidential election in 2012, although they will obviously vary somewhat in substance and priority, depending on whether the Republicans or Democrats come out on top? A very key focus has to be on policies and actions that will induce small and larger private sector businesses to begin to hire a lot of new employees to relatively well paying jobs and to convert part-time and hourly workers to full-time employment. This will lead to more consumer spending, more business investments, a rising stock market, more government tax revenue, and take some pressure off government to subsidize the unemployed and underemployed.

However, in order for this to have good prospects for happening, corporate tax rates should be lowered to help make businesses more competitive with major foreign firms and give them more cash flow to support growth, and market conditions need to be made more stable and predictable. The latter may have to entail temporarily easing requirements for limiting harmful emissions and some other environmental regulations. Comprehensive tax reform as recommended in an earlier post is also very desirable, including extending the lower income tax rates for small business owners and other middle class households and individuals that are currently scheduled to expire at year-end. Controversial and difficult as it may be, we also need to see a substantial cut in our defense expenditures, including those for the large number of less critical military bases we still maintain abroad, allowing us to move initially toward lower budget deficits, and ultimately a fully balanced budget, as well as a reduced national debt.

Since globalization is with us to stay, we also need to continue close cooperation with our G-20 partners to remove trade barriers wherever possible, promote economic growth, incent our large businesses to build factories and employ people here rather than abroad, and find ways to make U. S. exports of goods and services more attractive to foreign customers. Finally, I agree with President Obama that moving steadily toward substantial energy independence within the next 10-15 years is highly prudent for national security and financial reasons. Equally important, it will help the middle class by leading to the creation of a substantial number of new well paying green and high technology jobs, in addition to helping us environmentally over time with improved air and water quality, benefiting us all.