A Storied History of the American Middle Class- Part 3
“The middle-class is the heart and backbone of this country”: an idea that has been a central position for many a presidential candidate, and for a long time it was a true statement. The middle class became the bedrock that sustained the country in times of volatility, ensuring continued success with better-paying jobs and a steady-stream of happy consumers. This strong declaration of the importance of the middle-class was even used during the 2016 election, although the upper-class had taken over an almost 50% share of the United States’ aggregate income as of 2014.
The middle class has been slowly changing for years. There was a steady decline beginning from 1971 to 2015, where the middle-class began at a 61% share and ended at a 50% share. The changing middle class could simply reflect the change in times, including changes in economic and demographic trends that might change the composition of the middle-income population.
Background and Introduction:
The stock market crash in 1929 caused the Great Depression, and thereafter the United States experienced the longest and most severe economic downturn the Western World had seen since industrialization. By 1935, the unemployment rate was at a staggering 20%. Franklin D. Roosevelt created the Works Progress Administration (WPA) by executive order on May 6, 1935 as part of his New Deal to get the country out of trouble. The WPA developed public works infrastructure projects to build hospitals, sewer lines, highways and more, employing 3.3 million Americans by 1938. The Great Depression ended in 1939, just as events were beginning to point a more complicated future internationally.
Part III: The American Middle-Class- 2019 and beyond, What now?
Today’s definition of “middle-income,” according to the Pew Research Center, is single family households earning between $24,000 and $73,000 and families of three earning between $42,000 and $126,000. Consider that this definition could vary by location. For instance, the middle-income population in Midland, Texas accounts for 43% of its population, while the upper-income household bracket accounts for an astounding 37% (https://www.npr.org/2016/07/07/484941939/a-portrait-of-americas-middle-class-by-the-numbers).
Overall public perception of the middle-class is still skewed toward the mid-20th Century ideal, where close to 68% of Americans believe they belong to the middle-class bracket, although the reality is closer to 50%. The United States in general has a middle-income population share of 51%.
The middle class no longer claims the commanding majority of the population it once had. The share of aggregate income held by middle-income family households has gone drastically down over the years. The US is going through another structural change, wherein the wealth of the middle class in aggregate is decreasing while being re-disbursed to upper-income brackets. Those in the upper-income hold 49% of US aggregate income as of 2014, a stark switch from the 29% that was reported in 1970. But what started all of this?
While the mass redistribution of the American wealth is a result of many things, the sub-prime mortgage disaster was a key indication of the beginning of the end of the middle class. The ruin of the real estate market sent shock waves across financial sector not only domestically, but globally. This, and the Great Recession eventually demonstrated that a single-family home could no longer be sustained by a one-income household. The rise of the double-income household has become the physical manifestation that reflects the reality of the decline of the American middle class.
If one was to compare themselves to an individual from the 1950’s or 1960’s, they would immediately see the harsh, sad truth of how American middle-class economics is unfolding. In mid-century America, with a middle-income household, a single earner would be able to support about three children and a spouse, as well as purchase a modest tract house and not one, but two cars. Can you imagine a middle-income single earner today being able to do the same successfully? At the very least, the logistics of it would not be half as easy.
There are many factors that have made it more difficult for the middle class to grow in the current era. College costs have sky-rocketed with less help from the Federal government in financial aid, as well as student loans that remain postmortem. This, in addition to plateaued wage growth in an environment with volatile prices, has left little room for the middle-class to grow. And it is extremely important to allow all sects of society to develop and grow. This point is predicated on the assumption that the US was built on the belief that all citizens benefit from improved productivity and efficiency. If people feel unproductive or inefficient, they will feel outside of the system and soon parts essential to the functioning of the system will risk failure. There is truth to the statement “the middle-class is the heart of America.” Without the middle class, the half the population of the United States loses its purchasing power.
The United States might not remain the global hegemon as the world has recognized it for the last Century. The political narrative is rapidly changing to accommodate the changing “heart of America,” as it is no longer in the majority and is losing its status as the buttress of a stable United States economy. The population that could once rely on a modest education and a steady manufacturing job to provide a comfortable life for themselves and their families is losing ground, slowly becoming a relic of the past.
Knowing all this, how can we ensure the fitness of our personal finance in this kind of environment? For Millennials in particular, polling done by the Hart Research Associates found that reaching the middle-income bracket feels harder than it has for preceding generations. And other age segments throughout the population have the same view of the financial future, agreeing that mobility in America today is not what it used to be (http://www.twowestcompanies.com/the-heart-of-america-what-middle-class-really-means/).
In order to get past the difficult hurdles, the key to financial health is to be patient and look toward the longevity of the market. There is volatility in the short-term, but in the long-term there is solace in the fact that the aggregate is a positive gain. Keep saving in relatively aggressive money market accounts if you are young and do your best to find other good sources of passive income. If you are unfamiliar with passive income, it is money that you earn without actively working for an employer or being required to perform daily tasks for nominal reward. Now in the technological era, more than ever, there are any number of options to choose from when thinking of ways to develop passive income.