A financially devastated middle class is holding back economic growth, and that will not be fixed anytime soon, according to Rex Nutting’s MarketWatch article (“How the bubble destroyed the middle class”) and Scott Patterson’s USA Today article (“Recovery has largely left out the have-nots”). The biggest single cause of middle class devastation is the loss of $7.38 trillion from the bursting of the housing bubble, on average, a 55% loss of the value of American homes, according to Mr. Nutting.
In addition, middle class earnings have fallen since the 1960s, when they had 17.5% of the total earnings, down to 14.6% of the total earnings today. At the same time, the top 5% earners’ share rose from 17% in the late 1960s to 22% today.
During the 2003-2007 expansion, American homeowners liquidated $2.3 trillion in home equity and spent $1.3 trillion, resulting in an average annual growth rate of 2.7% and significant job creation, according to Mr. Nutting, who adds that without that bubble-financed spending, the rate is 2.0%, amounting to stagnation.
After the bubble burst, homeowners have reversed course, paying down mortgages and credit card loans by $1.3 trillion, and spending less.
Consumer confidence is low among households that earn less than $50,000 per year, according to Mr. Patterson, citing Consumer Reports. Lack of jobs reduces income, spending and consider confidence, which results in less economic activity and fewer jobs, and so on.
“We have a backlog of Americans who’ve been out of work for two years, Ed Farrell, director of Consumer Reports national Research Center, was quoted as saying, adding: “It’s going to take a strong surge in the economy to pull these people back in.”
But with a shrinking middle class, where is that strong economic surge going to come from?
The three pillars of middle class prosperity in the three decades following World War II were, according to former Secretary of Labor Robert Reich: (1) strong unions, (2) government spending on education and infrastructure, and (3) a progressive tax system. All three have been eroded in the last thirty years, along with a strong middle class, and the American economy.