This morning I walked to the liquor store to buy a bottle of carbonated mineral water. Although Lucky (until recently Albertsons) is conveniently located directly across the street, I prefer supporting the Turkish family at the corner store. I enjoy that they’re making it here in America by selling liquor and cigarettes to hipsters. And I’m drawn into the dramatic Turkish musicals that overflow the 14-inch television.
As I stepped into the store and navigated past the glass-bottle pyramids to the nonalcoholic drink cooler, I overheard a couple (let’s say the Andersons, and we’ll presume they’re married) exigently discussing their lunch budget in the aftermath of a costly medication purchase. For a solid five minutes the Andersons stood mulling their options, staring at the liquor store’s 2-meter food aisle. By the time I’d payed for my seltzer and walked out, eliminations of the microwaveable burrito, marinara sauce, and pancake mix, left the can o’ SpaghettiOs the favorite heading into the finals.
I didn’t catch the resolution (I was pulling for the canned soup) but the Andersons’ dilemma speaks to broader trouble in the American zeitgeist. People are strapped these days, for sure. Maybe not everyone, but the trend is undeniable—we’re working more and we’re deeper in debt than ever before. What gives?
Harvard Law Professor Elizabeth Warren beautifully elucidates the problems afflicting the American middle class, slicing through the dense mythology surrounding the American family’s expenditures. Granted, frugality is a golden rule to which we should all adhere. But her assertions might surprise you: The middle class is suffering not due to reckless spending, as it is commonly perceived, but as a result of massive underlying shifts in American society and economy. The data, she argues, portends America’s transition into a two-class society.
Here’s her full 2007 lecture (57:37) at UC Berkeley. It’s worth watching or listening to in full, but I’ve summarized it as well.
The bottom line is that in 1970, the median family’s income was $32,000, earned by a single worker. In 2003, the median family, now with two wage earners, made $73,000. But Americans save nothing today and bankruptcies are rising. So where is the money going?
When compared to 1970, American families spent less in 2003 on flexible items like clothes, food, appliances, per-car costs, etc. However, necessary expenditures have increased dramatically. In 1970, less than 50% of the family’s income was spent on the “big five” inflexibly necessary items (mortgage, health care, child care, cars, taxes). This rose to 75% of the family’s income in 2003, limiting the financial flexibility of the family and increasing the likelihood of default.
The Rundown:
[Unfactchecked]
—Income for American families (married couples, median earners) rose from 1970 to 2005, when adjusted for inflation. However income for fully employed males in 2005 was about $800 less than in 1970. This means the increase in the family’s income is due to someone else: Women entered the workforce.
—Yale economist Jacob Hacker has shown that the volatility of the American family’s income has increased 95% from 1970 to 2003. Over the same period, the chance that a family will suffer a sudden 20% decrease in income has increased from 4% to 11%.
—Savings for families in 1970 was 11%. In 2005, savings was negative, and had been for years.
—Revolving debt (credit card) for families in 1970 was 4% of income. In 2005, revolving debt was 15% of income ($1 out of every $7 earned). The pictures for consumer debt and mortgage debt are similar.
This means, that families have spent everything that women added to the family income, everything that they use to save, and went into debt another 15% after that. As Warren says, “They spent it all.”
So what did they spend it on? Clothes?
—American familes (married couples, two children, median earners) spent 32% less on clothes in 2003 than they did in 1970, when adjusted for inflation. Think outlet stores.
—Families spent 18% less on food in 2003, including eating out, than they did in 1970. Costco runs.
—Families spent 52% less on appliances in 2003, than they did in 1970.
—Per-car average costs of owning a car was 24% less in 2003 than in 1970. Americans kept a car more than two years longer in 2003.
—Electronics went up, $300.
—Dog food, up. Baby food, down. Dry cleaning, down. Cigarettes, down.
—Liquor, up.
The question remains: Where are American families spending their money? The big five:
—The amount American families (again married couples, two children, median earners) spent on mortgages increased by 76% from 1970 to 2003. Over the same period, the median house size has increased slightly from 5.8 to 6.1 rooms.
—Families spent 74% more on health insurance (employer sponsored) in 2003.
—Families spent 52% more on cars in 2003. Although per-car costs decreased, families with two wage earners require more cars. Thus the over-all cost rose.
—For families in 2003, there’s an entirely new set of costs for child care, preschool, and university, which are now seen as necessary for success. This means that families in 2003 see six more years of educational costs, that they must pay for, than they did in 1970.
—Because the first dollar of the second wage earner is taxed after the last dollar of the first wage earner, taxes increased for families by 25%.
And that’s just a taste.
Tags: economy, elizabeth warren, jacob hacker, middle class, nation, vanishing of the middle class
