The Great Stagnation - the crisis of middle class America

JP45

The slow economic strangulation of the Freemans and millions of other middle-class Americans started long before the Great Recession, which merely exacerbated the “personal recession” that ordinary Americans had been suffering for years. Dubbed "median wage stagnation" by economists, the annual incomes of the bottom 90 per cent of US families have been essentially flat since 1973 – having risen by only 10 per cent in real terms over the past 37 years. That means most Americans have been treading water for more than a generation. Over the same period the incomes of the top 1 per cent have tripled. In 1973, chief executives were on average paid 26 times the median income. Now the ­multiple is above 300.

The trend has only been getting stronger. Most economists see the Great Stagnation as a structural problem – meaning it is immune to the business cycle. In the last expansion, which started in January 2002 and ended in December 2007, the median US household income dropped by $2,000 – the first ever instance where most Americans were worse off at the end of a cycle than at the start. Worse is that the long era of stagnating incomes has been accompanied by something profoundly un-American: declining income mobility.

Alexis de Tocqueville, the great French chronicler of early America, was once misquoted as having said: “America is the best country in the world to be poor.” That is no longer the case. Nowadays in America, you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.

Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning ­crisis of American capitalism. It is one thing to suffer ­grinding income stagnation. It is another to realise that you have a ­diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the ­American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.

Statistics only capture one slice of the problem. But it is the renowned Harvard economist, Larry Katz, who offers the most compelling analogy. “Think of the American economy as a large apartment block,” says the softly spoken professor. “A century ago – even 30 years ago – it was the object of envy. But in the last generation its character has changed. The penthouses at the top keep getting larger and larger. The apartments in the middle are feeling more and more squeezed and the basement has flooded. To round it off, the elevator is no longer working. That broken elevator is what gets people down the most.”

Fascinating account in today's FT (well worth reading in full) of the decline in living standards of middle class Americans.

Can't help wondering if this is what lies in store for us in the UK.

http://www.ft.com/cms/s/2/1a8a5cb2-9ab2-11df-87e6-00144feab49a.html

teddy_ruckspin

“We work day and night and try to save for our retirement. But we are never more than a pay check or two from the streets.”

..I guess much like the majority of the UK then.

I'm probably 3 montly pay checks away from the streets, at the moment. Intend to remedy this ASAP!

neverdespairgirl

Not quite. We have more protection here with rent / mortgage help. And you can be sacked in the USA for any reason, effective almost immediately.

LydiaJ

The bit that got to me was this:

People in Europe and Canada are subjected to the same forces of globalisation and technology. But they belong to unions in larger numbers and their healthcare is publicly funded. More than half of household bankruptcies in the US are caused by a serious illness or accident.

JP45

neverdespairgirl wrote: »

Not quite. We have more protection here with rent / mortgage help. And you can be sacked in the USA for any reason, effective almost immediately.

I agree, there's clearly more in the way of safety nets in this country to cushion those who fall on hard times. We're also protected, as LydiaJ noted, from the burden of crippling medical bills (thank God).

But I suspect we may well end up following the trend in the US in terms of stagnating incomes (for the vast majority) and a growing disparity in wealth between those at the very top of society and the rest of us.

As in the US, the impact on people's standard of living has been masked over recent years by the easy availability of credit:

For years, the problem was cushioned and partially hidden by the availability of cheap debt. Middle-class Americans were actively encouraged to withdraw equity from their homes, or leach from their retirement funds, in the confidence that ­property prices and stock markets would permanently defy gravity (a view, among others, promoted by half the world’s Nobel economics prize winners, Spence not included). That cushion is now gone. Easy money has turned into heavy debt. Baby boomers have postponed retirements. College graduates are moving back in with their parents.

kabayiri

It's very interesting, thanks OP.

Some have suggested we are heading towards a society which is more feudal, and echoes the old barons and serfs model, most evident in pre-revolution Russia.

Maybe globalisation made this an inevitability. If you have true wealth you can operate outside national boundaries and focus your capital on wherever gives you the greatest return. Park yourself in a tax haven and you needn't worry about pesky taxed eroding your wealth.

The US seems to lack direction as a society, but are we that much better?

MiserlyMartin

Disagree with that article. In the US they have no welfare state like ours. Therefore people in poverty have two choices. Continue to be poor or make something of their lives and get a bloody job or education to get one.

In the UK, people comfortably stay on benefits and are pretty well off all their lives and see their children fo the same. Need a house? Do what Mum did and pop out a few more kids to top up the benefits.

I wish we were more like the US. No safety net for the !!!!less and lazy, that the working have to pay for. Then people would be encouraged to change their lives for the better.

datostar

MiserlyMartin wrote: »

I wish we were more like the US. No safety net for the !!!!less and lazy, that the working have to pay for. Then people would be encouraged to change their lives for the better.

Wouldn't you prefer the pre-revolutionary Russia scenario? Boyar knouting the serfs?

marklv

JP45 wrote: »

Fascinating account in today's FT (well worth reading in full) of the decline in living standards of middle class Americans.

Can't help wondering if this is what lies in store for us in the UK.

http://www.ft.com/cms/s/2/1a8a5cb2-9ab2-11df-87e6-00144feab49a.html

Very interesting. I guess the peak for middle class prosperity in the UK came sometime in the late 80s, and has been declining slowly and steadily ever since. I predict the decline will accelerate more and more over the next few decades. Even the prospect of inheritance is now becoming more of a pipe dream as millions of elderly people struggle on well into their 90s and are forced to sell their homes to fund nursing home care. Millions of people on final salary pensions have seen them become ever more diluted or stopped altogether, and those investing in the stockmarket have seen scant growth in their investments - and will not ever see genuine growth again. In the meantime, inflation will increase steadily, and erode the standard of living of the whole nation. What a prospect!!

America is, and always has been, a plutocracy. The rich dominate totally. To do well you need a top class education and a lucrative profession (e.g. law or medicine) or have a very strong business, otherwise you will always be at risk of falling through the cracks. The principle is: 'up or out' - there is no alternative. If you want to muddle through in some middle-of-the-road job you will always be at risk of poverty, because when you get made redundant you will be left entirely helpless.

marklv

MiserlyMartin wrote: »

Disagree with that article. In the US they have no welfare state like ours. Therefore people in poverty have two choices. Continue to be poor or make something of their lives and get a bloody job or education to get one.

In the UK, people comfortably stay on benefits and are pretty well off all their lives and see their children fo the same. Need a house? Do what Mum did and pop out a few more kids to top up the benefits.

I wish we were more like the US. No safety net for the !!!!less and lazy, that the working have to pay for. Then people would be encouraged to change their lives for the better.

How can you comfortably stay on £65 a week of income support, idiot? If you are single and with no children to support, that is all you get. Engage your brain before opening mouth.

marklv

neverdespairgirl wrote: »

Not quite. We have more protection here with rent / mortgage help. And you can be sacked in the USA for any reason, effective almost immediately.

You can be sacked in the UK for any reason, almost immediately. The minimum notice in the UK is only one week - that meets my definition of 'almost immediately'. You can only claim for unfair dismissal after you have been employed by your employer for at least one year.