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Portfolio > Economy & Markets > Economic Trends

What a Non-Middle Class Economy Looks Like

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Barack Obama’s economic record looks great. The economy he inherited was in the worst shape since the Depression, with the financial system on the ropes and the labor market in shambles. America’s excesses were blamed for spreading the crisis around the world, so its economic leadership was suddenly in question.

But over the past six years the ship was righted and, amidst bleak economic news elsewhere, the United States once more stands as a paragon of economic strength. All three major stock market indices are at all-time peaks, corporate profits are at a record and the jobless rate is back to its pre-crisis lows. Consumer confidence and consumer spending are rising along with an uptick in wages.

Growing Gap

But there is a paradox at the core of Obama’s legacy. No other president has spoken more about the need to help the middle class, and yet on his watch the middle class suffered an unprecedented deterioration of its economic position, both in relative and absolute terms. Various statistics, including the tri-annual survey of consumer incomes and net worth by the Federal Reserve, show that the recovery has been shared unevenly, with the lion’s share of gains accruing to the highest income brackets.

Much has been made about the enormous enrichment of the top 1% of households, or the richest 0.5%, who now own as much wealth as the bottom 90%. But the scary part of the story occurred in the middle third of the income brackets. According to the Fed, between 2010 and 2013, the years of economic recovery, the top third of American households saw an increase in their net worth measuring 7.3%, to over $600,000 in constant dollars. The bottom third suffered an 11.4% decline, to less than $10,000. The middle third was stagnant, at $96,500.

What actually happened within this middle-income third is the stratification of the middle class. Some households saw their assets increase even as others experienced a decline. The resultant impact was a wash.

Parallel Lives

Adding to this problem are different rates of inflation faced by those who have money and those who don’t. Luxuries and even quality products have been rising in price much faster than basic goods and services included in the standard consumer basket. Incidentally, their ability to raise prices accounts for the fact that companies in the luxuries sectors have been consistently strong performers in the stock market—with healthy results maintained during economic cycles.

In the auto industry, while producers of family cars have been on a rollercoaster ride, BMW and Daimler have been consistently profitable. Volkswagen is vying for global leadership among volume car makers largely thanks to strong profits at its Audi and Porsche brands.

Divergent economic positions have led to social divisions. America is still a land of opportunity, and college education remains the surest path to success. But tuition at private school averages $40,000 a year, more than twice the $15,000 at public schools. Student now graduate with $30,000 in debt—even though most attend state schools.

While Bloomberg publishes articles headlined “The Value of a College Degree is More Obvious Than Ever”—and a recent study puts the average lifetime difference in earnings between college and high school graduates at $1 million—Mike Bloomberg (ranked 14th on the Forbes billionaire list) advised American high schoolers to become plumbers.

Higher paid jobs are concentrated along the coasts and in metropolitan areas in the heartland. Real estate values in cities have been rising—along with inequality. The National Association of Realtors found that in 90 of the 100 urban areas it surveyed, homeownership rates have declined, leading to a rise in the Gini coefficient, the common measure of differences in income.

Bureau of Economic Analysis data show that in coastal states consumers spend 50–70% more on health care, food and shelter. Even though both average and minimum wages are also higher there, many low earners are moving to lower-cost regions.

Egalitarianism’s End

These divisions solidified under the Obama presidency, and we’re seeing the “haves” making use of their money to create distinctly separate—and more comfortable—lifestyles. Equal access to places and services will be limited and placed on a pay-to-play basis.

When Bloomberg was New York City’s mayor, he came up with a congestion pricing scheme, proposing to charge tolls for access to Manhattan and offering fewer traffic jams to those who could pay. The proposal was defeated, but it is an idea whose time has come.

Highways and airways have been this country’s most important egalitarian institutions built up in the post-World War II era, the golden age of the middle class. They linked the continent-size country and are the secret behind the famed mobility of America’s labor force.

This may be changing. In Miami—a city that, like New York, is booming thanks to the influx of rich foreigners buying overpriced real estate—you can now drive in a toll lane to reduce commuting time. Tolls in prosperous metropolitan areas are already steep: New York City bridges and tunnels will set you back $15 for a round trip, which is two hours’ worth of work for those who get the minimum wage.

Steep tolls are coming to interstate highways, too. Funding the nation’s highways has been an annual struggle in Congress. The White House has just drafted a six-year, $478 billion bill. Raising tolls is the only way to raise funding without raising taxes, and people with means will be glad to pay them since they will get good, uncongested roads in return. In many parts of Europe, toll roads are a costly luxury and the average motorist takes free local roads.

Airlines are also coming up with an array of for-pay services. Business class is getting more and more luxurious and out of reach: A round trip between New York and Amsterdam costs as much as $10,000. Airports are becoming like bus terminals from the 1970s: crowded and dirty. Congestion has increased on the runway, too. Business class-only airlines that are popping up will eventually figure out a way to offer passengers priority takeoffs and premium berths after landing—at a price.

The Last Bastion

With the weakening of the middle class, the tax burden falls squarely on those who have money. Mitt Romney’s remark about the 47% of Americans depending on the government may have cost him the 2012 election, but it is also an apt way to describe what is happening in society at large.

While the “haves” keep paying taxes, they increasingly buy their way out of government services—which tend to be subpar, at best, as more and more people depend on them and money to provide them dries up. People in the high income brackets pay for their own medical care, send their kids to private schools, provide for their own pensions, and live in gated communities that minimize dependence on the local police force.

Opposition to taxation without representation is an American political tradition and thus it makes clear political sense that we’re witnessing a tax revolt. The actual taxpayers neither want to pay taxes nor for government to provide most of its services, which they don’t use anyway.

The Tea Party, unlike the original Boston incarnation, doesn’t riot in the streets but uses market mechanisms to achieve its goals. For instance, the Koch brothers are allocating $889 million to fund their preferred candidates in the 2016 presidential election. The nascent campaign will handily beat the previous overall record, $6.3 billion, set in 2012. Last year’s midterm election cost $3.7 billion, also a record.

What this money buys is low turnout. It was lower in 2012 than in 2008, and last year’s congressional elections saw the lowest participation rate in seven decades, as only about a third of eligible voters bothered to show up. It is a counterintuitive result but obviously what the donors want, since money continues to pour into elections in rising numbers. The effective result is the hollowing out of the ultimate democratic institution: the right to vote.


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