The collapsing American middle class

Then you could bring up a family on one income; now you can’t.

That’s a little strong. There are loads of single parents bringing up kids: they can do it. Certainly the comfort level is not what it was.

Can’t get the video to load, but anyway I found Todd Zywicki’s critique of her argument to be interesting. The bottom line:

In fact, for the typical 1970s family, paying 24% of its income in taxes works out to be $9,288. And for the 2000s family, paying 33% of its income is $22,374.

Although income only rose 75%, and expenditures for the mortgage, car and health insurance rose by even less than that, the tax bill increased by $13,086 — a whopping 140% increase. The percentage of family income dedicated to health insurance, mortgage and automobiles actually declined between the two periods.

For those who prefer to text to video, a good article by Warren that covers some of this is this piece in the Boston Review:

http://bostonreview.net/BR30.5/warrentyagi.html

RB, you’re right on a literal reading, but I think what is implied is that bringing up a family on one income and maintaining a middle class position is no longer possible.

7: I am inclined to agree.

On the other hand, this ‘non-discretionary’ income point is pretty important. The percentage of your income that it occupies is a pretty important measure of risk.

Well, I’m a single father of a 15 year old daughter, raising her on $71K a year, minus 9K I have to ship to my ex-wife (don’t even ask about the stupid divorce laws here in Ohio.) I don’t have money to throw around but we certainly live a thoroughly middle-class existence. And as she’s a very academically talented kid I have reasonable expectations of a decent financial aid package that will keep her college debt to a sane level. So, easy, no. Possible, yes. There are plenty of jobs that pay a salary in the same ballpark as the the $62K I net after spousal support- and lot of them don’t require anything like my qualifications.

The middle class is indeed getting shafted, but exaggerations really don’t help in making that case politically.

Of course it is. But it’s still a big exaggeration to say you “can’t” do this any more. My income may be above the average but it certainly isn’t upper-middle-class, and jobs that pay something like it aren’t that rare.

My worry about this actually is that based on this kind of talk, politicians justify buying votes by handing out goodies to people like me, and to even people considerably more affluent than me, when we’re not the ones who urgently need help. (Just look at Charlie Gibson’s tender concern for those pulling down 200k.)

Also the way that these “constant dollars” adjustments work is that you can have no change in the price level (or more precisely, no change in wages when converted to constant dollars) but at the same time a significant change in relative prices. The average doesn’t change but the composition of the average has changed.
And it is definitely true that the price of housing, education and health has gone up in both the absolute and relative terms whereas the price of food, clothes, etc. has gone down in absolute and relative terms.
Since housing, education and health are more “indivisible” than food and clothes, when a bad income shock hits your household back in the day, you could simply cut back temporarily on food and clothes. Now you got to either sell your house or take on debt. Enough of these shocks and the debt grows to a point where it makes sense to declare bankruptcy, if you could.

But Steve L is right too that these kind of stories – with a good bit of truth in them – are often exaggerated to the point (comment 1 is a prime example) where they become ridiculous and the “fixes” that are implemented don’t really address the problem.

Very few people consume private education, and as far as “indirect consumption of better public education via house purchases” – I understand, but we are talking about the average here. Unless this is lake Wobegon, everybody can’t be above the average. The average 1970-style family lives in the average town and doesn’t pay the premium.

Beyond above? Damn I wish 1) we could edit our posts and 2) the live preview was working…

Nah, I’m not buying it. In particular, I’m not buying the idea that real discretionary purchasing power is down — not when all the indicators of discretionary consumption are way, way up compared to the 1970s: restaurant meals, airline travel, $3 cups of coffee, square feet of housing per person, percentage of American kids who’ve never shared a bedroom, etc. And that’s not to mention TVs, recorded music and movies, computers, cell-phones, game consoles, digital cameras, GPS units, and the like.

And one of the biggest reasons that women’s workforce participation hasn’t improved family finances as much as you might expect? Taxes (that second income is taxed at a higher rate than the first one):

http://online.wsj.com/article/SB118705537958296783.html?mod=opinion_main_commentaries

Lastly, I remember when those on the left thought it was a good thing for women to enter the workforce and wouldn’t have been caught dead idealizing the sole-provider-dad and the stay-at-home-mom. What happened?

“real discretionary purchasing power is down—not when all the indicators of discretionary consumption are way, way up”

The difference is called “debt” or more precisely “that part of debt due to difference between discretionary purchasing power and discretionary consumption”. Warren actually wants to argue that the high levels of debt observed in the present day US ARE NOT due to this difference but the gap in the non-discretionary component.

But yeah, what exactly is “discretionary purchasing power”? The portion of my income that I DECIDE to use with DISCRETION. So the other portion of my income is the part which I DECIDE to use without DISCRETION.

You could maybe make it better by defining it as portion of your income that’s left over after you pay off the interest on your debts and other obligations you’ve pre-committed too.

this “constant dollar” thing is simply meaningless.

Even ignoring the fact that the CPI numbers are being gamed by the government in various ways, comparing the purchasing power of a dollar across 3 decades of rapid technological and social change is an absurd, hopeless abstraction only economists can take seriously.

For once I kind of agree with you, Slocum, but I think the point here is not how desirable it was for women to stay home but that fewer person-hours per week were required to earn the equivalent of a comfortable household income where you could still have savings, holidays, etc.

Yeah, I know that’s the claim, but I’ve seen this argument often enough and it seems to verge on nostalgia for a lost golden-era of traditional, single-income families.

And for anyone who lived through the 70’s, remembering it as any kind of golden age of middle-class prosperity is just bizarre. The OPEC oil embargo, gas lines, WIN buttons, the misery index, stagflation — those are things I remember (along with crappy cars, ghastly clothing styles, and hideous interior decor — leisure suits and orange shag carpet, anyone?).

The modern-day equivalent might be both people working fewer hours.

Or, more commonly, spending fewer years in the labor force on both ends — which has been happening (fewer teens hold jobs, people stay in school longer, and tend to retire earlier).

I’m sure if you were able to maintain your household working fewer hours, you’d appreciate it as much as your wife would.

No, we really don’t fit the hurried, overspent profile. I have no commute at all, and my wife’s is very short, so time isn’t a big problem — take an hour of commuting every day out of the equation, and you’ve got the equivalent of six extra weeks of vacation a year.

(BTW — whatever happened to the message preview? Or is it still working for others?)

Sortition 26, I’m not sure it’s true. This woman did the work, she researched what people consume, how much they spend on things, how much they need. The next step could be, for example, to take a hypothetical 1970 average family and place it in the same situation in 2005 – same kind of house, same kind of food, same level of medical care, the amount of education necessary to give their children the same average social position, same level of financial comfort – being as far from bankruptcy they were in 1970 (IOW: what they need to be saving to get the equivalent of 1970 safety net), etc. Sure, there are all these electronic gadgets and airplane travels now, so it’ll be subjective and controversial, I understand. Nevertheless.

And then she could calculate her own value of the “constant dollar”. Then she would come out and say: in 2005 the average worker earns (for example) only 70% of the average 1970 wage, by my definition/calculation of the “constant dollars”. Average family with two earners has (for example) 110% income of one-earner 1970 family.

That’s all, all we need to know, end of the lecture.

I think javi’s comment illustrates something here. The impact of these changes (since the 70s) has not been uniform. In particular it is FAMILIES that are being hit, especially because of education and housing costs. Relative prices (and also employment prospects) have moved to the disadvantage of families. My experience was similar to quo vadis – but the key was my father paid for the education to honors batchelor degree level of 5 children, no debt. (In Australia in the 80s mostly). What to do about it, is another issue (housing affordability being the tricky bit). We need to take externalities of the built environment a lot more seriously than we do – and this is not exactly the area of expertise of most economists.

abb1, I suspect there are two large difficulties when assessing travel and gadgets. The first is of course the valuation of products that were not available at an earlier time.

But I think the more important effect is the status consumption effect. Every time people mention LCD TVs as an example how modern gadgets are so much better for the same money, I can’t help thinking that a 1970 family was probably exactly as a happy with their mid-range TV then as a modern family is with their mid-range TV now. No matter that a mid-range TV is better nowadays.
Same of course for driving/flying holidays.

It’s easy to dismiss this as trivial, but to a very deep level people do not have middle-class incomes to buy middle class stuff, but they buy middle-class stuff to show ( mostly to themselves) , that they have middle class incomes. Of course this applies to every other class too.

I think the ‘status envy’ issue cannot be ignored, because going on a 1970s holiday just isn’t the same now as it used to be.

But stronger, I think ‘envy’ and other derogatory terms are not justified. Every society confers some status on their people, and ours ( American, European, perhaps ‘modern’ in general) puts a lot of weight on income.

For all its weaknesses, it is probably fairer than status based on your parents, or your warrior skills, or your Party rank, and it is definitely more productive.

Look how much of the ‘middle class basics’ in this debate are about children: it is about families, about education, but also in general about an income security that is especially important to parents.

I think it is quite reasonable to say that what people are (rightly) fearing is not so much inequality, but stratified inequality, where the income and status of parents will determine that of their children.

So, if someone could go on a certain holiday in 1970, and their children can afford the same holiday now except for lower status attached to it, than they have lost something real, perhaps just as real as the holiday itself.

Sortition: Whether considering two incomes with shorter hours or a single 8-hours-a-day-job income, this has nothing to do with “traditional” family roles (i.e., the single earner being the male). The way it “seems” so to you, may reflect your own biases.

But none of the various discussions I’ve seen about how we’re allegedly worse off than in the 1970’s mentions ‘two incomes with shorter hours’ but rather just compares modern living with the supposedly superior situation in the 70’s where the typical family had one (male) breadwinner. That it could be about ‘two incomes with shorter hours’ suggestion has come up here only in response to my complaint.

abb1: So, despite all the technical advances, it shouldn’t be too difficult to figure out what a 1970 family needs to spend to get roughly the equivalent of entertainment and travel in 2005, right?

To get the 2005 equivalent in entertainment and travel would have cost the 1970 family a fortune. Airline travel was rare and expensive, but 2005-style home entertainment was out of this world. If you wanted to watch a Hollywood movie at home, you had to be a millionaire with your own Hollywood-mogul style screening room. By the end of the 70’s, you could buy a VCR, but the players cost hundreds (of 1970s dollars) and the movies were mostly $50 or more (again, in 1970s dollars).

Great Zamfir: But I think the more important effect is the status consumption effect. Every time people mention LCD TVs as an example how modern gadgets are so much better for the same money, I can’t help thinking that a 1970 family was probably exactly as a happy with their mid-range TV then as a modern family is with their mid-range TV now.

Another question — when did lefties decide that what really matters in life is status? I don’t know about you, but my life is richer and more interesting now that I can run down to the video store and borrow almost any film for the 1970s equivalent of 50 cents. There’s no status bump from owning a DVD player and a Blockbuster membership–that’s not what it’s about. Contrast this with the 1970s. In 1975 NBC paid millions (of 1970s dollars) to show ‘Gone With The Wind’ on TV for the first time. They showed it over two nights, and it was a HUGE event. The two nights were the highest rated programs in history at that point. It’s hard now to remember such a time existed, but until the late 1970s, most movies tended to disappear from public view after their initial distribution (unless you were lucky enough to live near a revivial house).

In the same way, the Internet similarly makes life richer and more interesting without any status effects. If it’ll help, think in terms of a public library. There’s no status effect from having a library card — it’s about the books (I think even lefties would agree that public libraries are not about status, right?)

There are also no status benefits from having a GPS in your car, but you don’t get lost. There are no status effects from having a cell-phone, but you can reach your friends and family members. No status effects from owning a digital camera, but you have the pictures.

One of the reasons that I am not a lefty is the pervasive and unattractive idea that all the fruits of human ingenuity make us no better off because we’re left in the same position in the ‘great chain of status’ and that’s what matters the most. Bleech.

Slocum, there is something I don’t understand about people on the right who claim that status doesn’t matter.
They are usually (but perhaps not in your case) the same people who argue that society is close to meritocratic, that the rich deserve their money because their income shows they are better, more productive members of society.

How is that different from giving people status based their income?

Note that I am not arguing in favor of or against income-based hierarchy. I think it is an observable fact that many people do care about status, that status is highly (but far from fully) related to income, and that as a result people value an income that buys them certain things, even if they would not put much value on those things intrinsically.

I also do not believe status is entirely a zero-sum game. More specifically, I fear that strong income inequality leads to a situation of stratification, where people from lower ranking groups get less chances in life.

About “discretionary income”, and the apparent paradoxes in Warren’s account of it:

Roughly speaking, Warren divides household expenses into two categories: the ones that the household can easily reduce when they’re going through a rough patch (appliances, entertainment, toys of all varieties, even food — in the first world, at least, going to cheaper cuts of meat, and so forth) and the ones that they can’t easily reduce (house payments, gas for the car, health insurance premiums, etc.). The former category is what’s going by “discretionary” here.

What resolves the apparent paradox is two trends that have been happening at the same time. On the one hand, the mix of household expenditures has shifted. Using Warren’s figures, the 1970 family spent roughly half of its income on expenses that it couldn’t easily reduce, but now, it’s more like 75%. On the other hand, the price of toys has gone down, so that 25% of family income buys a lot more toys.

The upshot: the 2005 family can afford gadgets that the 1970 family couldn’t dream of. But what they can’t afford is a 35% drop in income. For the 1970 family, that’s an inconvenience. For the 2005 family, it’s a calamity — they’re materially better off, so long as the income keeps coming in, but they’re far less secure.

(That’s a hopefully accurate paraphrase of about five minutes of Warren’s talk; there’s somewhat more at my original blog post.)

SLocum, it sounds as if we actually agree a lot. I am not American, nor a native English speaker, and I suppose my choice of words and examples may give a slightly misleading impression of what I am trying to say.

I did not wish to imply some one-dimensional,ladder-like status concept. Perhaps social standing is a better term for what I had in mind. In this context, income is surely not the single main driver of, by lack of better terms, status. But I do think it is to a very large extent an ‘enabler’, in the sense that every social group has some rough minimum income that is needed to be comfortable.

Second, my point is not mainly about conspicuous consumption as meant to impress others. The main audience is not a peer group or something, but the buyer self. And here the important point is perhaps not so much having the object, as the being able to to have it. And this effect works much stronger the other way round: if someone is no longer able to afford the luxuries of a certain social standing, it hurts harder than just the loss of the luxuries themselves.

In your example, it is clear that having a truck is not something standard in the social class of academics, call it the class of highly specialized skilled workers. Not having a truck doesn’t hurt. On the other hand, being able to travel to exotic locations, to buy any book you want to read, and especially being able to take a lower-paying but interesting job while still not having to worry about cash are important. Sure, they are pleasant, but they are also social markers.

And note that this group is relatively strong in decoupling income and success. For plumbers, or managers, or shopkeepers, having a high income is a good measure of success.

Funny, I didn’t mean plumbers as independent businessmen at all. We rent an apartment including service contracts, so for plumbing I call a rather large company, enter my postal code in the phone, get redirected to the local branch and they usually send someone the same day.

The reason I think this status issue is important is already in the title of the OP: it says ‘collapsing middle class’. The story suggests, to me, that what is changing is not so much the (real or nominal ) income of middle class people, but that the the income required to consider yourself middle class is rising faster than that of the people.

So some people are in the same income percentile as their parents, and they are richer than their parents were at their age, in the sense that they have better machines and more luxurious holidays. But they are somehow no longer in the same social position as their parents.

I don’t know if that is what is really happening, as I am looking from a distance. But whatever IS happening, there are signs that it is starting in Europe too.