What Happened to the Middle Class?


It's a bad time for millions of Americans. No surprise, then, that a survey by the Pew Research Center last week showed that 85% of self-described "middle-class" Americans say it's harder to maintain a middle-class lifestyle today than it was a decade ago. Only 9% said it was less difficult.

But here's what is surprising -- or, at least, telling. Pew asked respondents "How much do you blame (each) for the difficulties the middle class has faced in the past 10 years?" They answered:

Source: Pew Research Center. Graphic recreated.

They blamed everyone -- except themselves. How fair is this?

Step back for a second. Why middle-class finances have deteriorated is one of the most complicated subjects out there. Whenever someone points the blame at one reason or one person, stop listening. They've got it wrong. There could be thousands of reasons, most of which we don't understand. Part of the problem owes to globalization. Some of the blame lies with health care costs, changes in family structures, educational attainment... the list goes on and on.

But one factor that doesn't get enough attention is the role perceptions alone have played in the decline of the middle class.

A group of Fools and I met a business executive named Andy last year. We asked him what concerned him about America. He responded:

What concerns me most is the perception that people share that it is so terrible right now. I think life in America has been tough since the time of the Colonists all through World War 2 and all the way through today. The middle class has gotten it all twisted. Maybe it's because of the credit cards and the candy bars that people are being fed, but the reality is, I think we have the same amount of discretionary income, and the ability to guide our own future. But our values have radically shifted.

Now, discretionary incomes for millions of Americans have declined in recent years. But he makes a valid point when the dates are stretched out further.

Take measures of subjective well-being, e.g., surveys that ask, "How happy are you with life?" Most show that the percentage of Americans very satisfied with life peaked around the 1950s. Median household income back then was $31,500, adjusted for inflation. Today it's a hair over $50,000 per household. So we're richer. An average American household in 1950 spent 30% of its budget on food. Today, that's down to 13%. The shares going toward shelter and apparel have dropped sharply in the last half-century, too. So we have more disposable income. The average new American home in 1975 was 1,500 square feet. Today, it's 2,169 square feet. So we're also living in bigger, nicer homes. And all of this has happened decades after reported happiness peaked.

You don't have to take this back quite so far: In 1990, the average American family spent 5% of its budget on entertainment, while in 2010, 5.2% of spending was devoted to having fun. Or, if you want to take this back a century or so, consider this quote from Matt Ridley's book The Rational Optimist: "Today, of Americans officially designated as 'poor,' 99 per cent have electricity, running water, flush toilets, and a refrigerator; 95 per cent have a television, 88 per cent a telephone, 71 per cent a car and 70 per cent air conditioning. Cornelius Vanderbilt had none of these."

So why do so many middle-class Americans feel cheated? It's not so much that they've gotten poorer, but that a few have gotten so much richer.

According to author Tim Noah, "From 1980 to 2005, 80% of the total increase in Americans' net income went to the top 1%." Nobel-winning economist Joseph Stiglitz points out another mindblower:

The upper 1 percent of Americans are now taking in nearly a quarter of the nation's income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent.

If you're a member of the middle class watching this happen, you feel worse off. It doesn't matter that you're better off in absolute terms. When you go from a minivan to a minivan with an extra cupholder, while the corporate exec goes from a Lincoln Town Car to a fleet of Bentleys and a private jet, you feel like you've slipped behind. We don't feel richer, because the goal posts of what counts as "rich" have moved dramatically.

There's actually a theory that says this explains the consumer debt boom over the last few decades. It's the "keeping up with the Jonses" effect, where the aspirations of the middle class are inflated by the legitimate wealth of the rich. "Trickle-down economics may be a chimera, but trickle-down behaviorism is very real," writes Stiglitz.

Here's a good example of how powerful this is. Last week, Nike (NYS: NKE) said the new LeBron James shoe could retail for a whopping $315. Many were shocked at the price, but others went further. Marc H. Morial, CEO of National Urban League, called on Nike to drop the shoe altogether. "To release such an outrageously overpriced product while the nation is struggling to overcome an unemployment crisis is insensitive at best," he said. "It represents twisted priorities and confused values."

There's an easy solution for those who can't afford $315 sneakers: Don't buy them. But Morial's call implies that many consumers won't be able to fight the urge.

Here's why that's important: We know that the consumer debt used to feed those urges has played a big role in the deterioration of middle-class finances in recent years. Brookings economist Karen Dynan has shown that the households that levered up with the most debt last decade have had to cut their spending by the most today. A Federal Reserve study showed that the regions that accumulated the most debt last decade saw some of the largest declines in employment over the past few years. Congress, CEOs, or the Bush administration didn't force those consumers into debt. They chose it.

To the extent that shifting values have spawned the rise in debt, which has in turn contributed to the deterioration of middle-class finances, there's no one to blame but yourself.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

The article What Happened to the Middle Class? originally appeared on Fool.com.

Fool contributorMorgan Houseldoesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel.Motley Fool newsletter serviceshave recommended buying shares of NIKE. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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