The Continuing Collapse of the Middle Class

Back in 2007 law Professor Elizabeth Warren gave a talk on “The Coming Collapse of the Middle Class”.

Last November Warren was elected to the US senate and now quite predictably some of her academic work has come under the microscope. Whenever anyone mentions the word “class” the risk is that the analysis gets lost in the emotion around that debate. But it does give us a way to talk about groups of people and relative movement in economic terms.

Senator Warren is on a major banking committee and she is a politician to watch especially if she can bring some of her research into the policy making process.

This talk is pertinent to New Zealanders today who are struggling with many of the same issues. What happens in the U.S happens here sooner of later but perhaps we can learn from the US experience.

Back in 2004 Warren wrote a book called “The Two-Income Trap: Why Middle-Class Parents are Going Broke” which formed the core research for this talk.

As Warren explains the paradox is that even though median incomes have been going up our savings have been going down and our debt levels have been going up. The research then focuses on where the money has gone – perhaps we are just spending more on living costs?

She works through data to compare a family from 1970 to one from 2003. She picked a Mum, Dad and 2 kids as the family unit so that they could “run the data”. The first comparison was on clothing costs (32% less), then food costs (18% less), appliances (52% less), owning a car (24% less). Some costs did go up in budget terms.

What she found out was that Americans were spending 76% more on their housing mortgage costs ( ave 3 bedroom house increased in size from 5.8 rooms to 6.1 rooms) The next big cost increase was also 76% on health insurance costs. Cars also cost more because families have more cars (even though each car costs less than it would have.)

Childcare is also a new expense compared with families from 1970. Taxes are also up. There are some differences with New Zealand today but the net result is the same. We have the same home price increases in bigger cities which are close to the best schools.

I suspect the differences between schools are not as great in NZ but home costs inside certain school zones can be hugely different depending on which side of the street you are on. In Auckland or Sydney ( and many other big cities) there are whole suburbs where the median house price is well above $1m. Sure – you don’t have to live in those suburbs but those prices raise the emdian costs for all types of accommodation across the city.

The costs that have come down in relative terms are variable costs and discretionary to some extent. Our fixed costs as a share of family income is much greater. Families with children have more financial stress that others and then if that family has only one parent then the stress is much greater.

Keep in mind that Waren’s talk was given in 2007 before the GFC and so if anything the current economic status for families is more precarious than it was.

In the NZHerald yesterday had an article 44pc of Kiwis living pay day to pay day

“A survey into our banking habits showed younger people at the beginning of their careers, women and those from Waikato and Otago were more likely to be unable to put money away for a rainy day. Forty-four per cent of Kiwis hang out for pay day every week, with women the highest at 48 per cent”.

( Start at about 5mins to miss the intro)

What is striking to me about all of this economic history is that politicians and policy makers seem to be so clueless when they could look around and share some of the learnings from what works ( or not) in other countries.

Instead we continue to get ideology arguments often driven by those who have benefitted the most from a system that is perpetuating inequality and decreasing social equity. We can see the trends – lets learn from them.