The Death of The Middle Class (Part I)

On last Sunday’s Meet the Press, Senator Christopher Dodd of Connecticut observed, "We've lost almost $11 trillion of household wealth in the last 17 or 18 months." Basically, that means one of two things; neither of them is any good. Probably a majority of that amount came out of the equity held in single family homes or 401-K retirement accounts. Today, U-6 unemployment, the most accurate measurement, stands close to 17%, a depression era number. The “good” jobs for Americans of average ability with a high school diploma have been sent to China, India, or some other low wage country. The costs of key components of our economy including education and health care have skyrocketed at rates far in excess of the rate of inflation. Finally, total tax burden on the middle class has increased to unprecedented levels. It will continue to increase. I could say more but I make a serious effort, perhaps not always successful, to keep my personal political opinions out of this blog.

First of all, where did all that wealth go? If I remember correctly, I bought my house for $98,000 in 1987. A couple of years ago it was “worth” more than $450,000. Then, in a matter of months, the value of my home, real wealth, dropped to $300,000. The house was still there. I was still living it, but $150,000 of my wealth, money planned for use in my retirement, had just vanished. The destruction of this kind of wealth had more to do with unreasonable expectations than any kind of a sinister plot. Housing prices go up forever, right? Banks, real estate flippers, and the average American all believed that single family homes would continue to increase in value. We were wrong.

There is another kind of wealth that was destroyed in this debacle, wealth that was never wealth at all. I recently read an article about an economics professor and lawyer who is considered an expert on white collar crime. He explained some of the investment vehicles devised by the likes of Goldman Sachs as nothing more than teaser bets, like the over under, sold by sports books in casinos. The over under is a bet on a football game. It has no direction connection to the outcome of that game, only the combined number of points scored by the two teams. The casino is unconcerned with the outcome of the bet as the casino is content to take its cut of the winner’s share.

As I understand it, a synthetic collateralized debt obligation is a naked bet on whether a particular pool of mortgages goes up or down in a specific time frame. If it is going up, its value increases and if it is going down its value decreases. Over time, if the pool of mortgages continues to perform the synthetic CDO receives some payment from the underlying credit default swaps. If the pool of mortgages fails, the owner of the synthetic CDO can be left with a very large debt, far larger than the initial investment. The brokerage house makes its money on the day of the sale. In the movie Scarface, the old drug dealer tells Tony the “rules” of a successful business. One of those rules is, “Don’t get high on your own supply.” The banks became involved with their own money in CDOs, credit default swaps, and truly esoteric naked gambles like synthetic CDOs. The problem is these are institutions insured by the Federal Deposit Insurance Corporation and similar government entities. Ultimately, the American middle class taxpayer will foot the bill for the follies of these criminals.

Market Watch observes that, “According to the report by economist David Autor of the Massachusetts Institute of Technology that was presented at a Washington conference about the future of American Jobs. The four middle-skill occupations -- sales, office and administrative workers, production workers and operators -- accounted for 57.3% employment in 1979. That portion fell to 48.6% in 2007, and declined to 45.7% in 2009.” Our high paying, wealth creating, stable factory jobs have been sent to China. The front office work from those abandoned factories has been sent to India. Now companies like IBM, are sending high skill jobs like computer programming to those same countries. Today, an X-Ray of your body may be read by a doctor in India earning far less than an American radiologist performing the same task. To add insult to injury, I once read that New York City parking tickets are being processed by Indian office workers.

These are the jobs that have contributed the most to the American standard of living. When my father was 40 years old, an American man with a high school diploma, willing to work 40 or 50 hours a week could reasonably expect to buy a house, a car, and support a wife and a couple of kids. That is no longer true. The American man has lost jobs at an even faster pace than the American woman. If he is fortunate enough to find any job at all in this horrid environment, it is likely to be a low paying service sector job. Our high paying, wealth producing, industrial jobs are likely gone forever.

David Autor continues, "Perhaps most alarmingly, males as a group have adapted comparatively poorly to the changing labor market," Autor wrote. "For males without a four-year college degree, wages have stagnated or fallen over three decades. And as these males have moved out of middle-skill blue-collar jobs, they have generally moved downward in the occupational skill and earnings distribution."

An article published by “The Street” entitled GDP Report: An Anti-Middle Class Recovery states that, “This recovery is decidedly anti-middle class. Wages will not keep up with rising prices, health care premiums and taxes. A good deal of the gains, so far, are going to Wall Street and the medical and intellectual property industries.” The new health care proposals will greatly increase the total cost of medical services. The cost of new services given to the poor will be passed on to hospitals, pharmaceutical houses, and insurance companies. They in turn will pass the cost onto state governments, local governments, and most of all the Federal government. A certain amount of this expense will be passed on by the provider to the existing customer base, the American middle class. The rest will be paid for by increases in taxes. Remember, while the government can prevent a insurance company from increasing rates, they can not force an insurance company to sell coverage at that price. This is happening in Massachusetts, a state that implemented a form of socialized medicine some years ago. The insurance companies were not allowed to increase their rates, so the companies quit selling new policies in Massachusetts and have threatened to leave the state.

The bills for health care and other government programs will be paid by the middle class. Today, close to ½ of all Americans do not pay any Income Tax at all. Some of these people actually receive money from the Government. The rich, with access to accountants and tax attorneys will always be able to limit the damage to their pocketbooks better than the middle class. Besides that, there are really not enough rich people. Even if the tax man took 80% of everything they owned there would not be enough to cover the bills. Once again, that leaves the middle class holding the bag and there are fewer of us every year.

On April 30, 2010 the U.S. Bureau of Economic Analysis announced that the gross domestic product increased for a third straight quarter and that in the first quarter of 2010 consumer spending rose at the fastest pace in three years. By definition three consecutive quarters of growth tells us the Great Recession of 2008-2010 is over. These trifling increases have not begun to erase the trillions of dollars lost in the last two years. Even as the Gross Domestic Product is increasing we continue to lose jobs. Since June of 2009 we have lost over 900,000 jobs. Depending on whose numbers you wish to believe, our country needs an increase of about 120,000 new jobs a month just to keep up with the increase in population. U-3, the official measure of unemployment continues to hover around 9.7%. U-6 which includes involuntary part time work hovers just below 17%. Neither of these numbers covers workers who have just given up and are no longer even looking for work. The number of workers unemployed for 27 weeks or longer climbed from 6.5 million in March from 6.1 million in February. That means 44.1% of all the unemployed have been out of work for more than six months. These numbers come from Jim Jubak’s column entitled “The Recession is Over? Yeah, Right.”

I sorry to say it, but the unemployed former members of the American middle class are just holding on by hook or crook. They are not creating wealth, paying taxes, buying cars, giving to charities, or increasing the investments in their 401-K accounts, but I will have more to say about that subject on another day.

Jeremiah 8:20 (NIV)

The harvest is past, the summer has ended, and we are not saved."