Tuesday, December 8, 2009

The Coming Collapse of the Middle Class

The video lecture The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net by Elizabeth Warren (wikipedia) came to me by way of The Big Picture.

First Aired: 6/11/2007, 57 minutes
Distinguished law scholar Elizabeth Warren teaches contract law, bankruptcy, and commercial law at Harvard Law School. She is an outspoken critic of America's credit economy, which she has linked to the continuing rise in bankruptcy among the middle-class.

The huge economic shift that brought the median family in America from being a 1 income household in 1970 to a 2 income household in 2005, a single generation. Income for fully employed males has been flat to slightly negative over this period. Savings went from 11% of disposable income to nothing. Revolving debt as a percentage of annual income went from 1.4% to 15%.

Surprisingly, typical 2-kid family spending has dropped on several staple items. Clothes have gone down by 32%. Food has dropped by 18%. Appliances down 52%. Per-car cost has dropped 24% because people keep cars longer and spend less on repairs. Imports are cheap. Retail works on thin margins.

But spending on mortgages has popped up by 76%. This is magnified for houses in decent school districts. Health insurance is up 74%. Most people have 2 cars. Childcare is a new expense not present in 1970. The tax rate has gone up by about 25% for this family.

The income of this typical family has gone from 32k to 73k, but after the big-ticket fixed expenses, the two-income family has less money than their one-income parents. The two-income family is much more precarious because they have less slack (no spare worker), income is more volatile, health care expenses have gone up.

While volatility has increased, the safety net has eroded. Risk on healthcare has increased, we've shifted from defined benefit retirement to defined contribution. The educational bar is higher and college is paid for by the family rather than government. (As is preschool.)

Families with children filed for bankrupcy at a rate of 15 per thousand in the early 2000's often due to illness, job loss, or divorce. People hide bankrupcy. We're moving from a three class society to a two class society. The solid american middle class drives our economy and gives us a stable democracy. She paints a picture a weakened insecure middle class, where, if you don't get sick, divorced, or fired you do OK, but any of those events will push you over the edge of a cliff into the underclass.

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