Changing economics of the middle class

Harvard Law professor Elizabeth Warren was a pleasure to watch in the film Maxed Out, a documentary about predatory practices in the credit industry. Not at all your standard media-savvy academic, her onscreen persona is quirky and a bit awkward but ultimately engaging, and her explanations are crystal clear.

I’ve just watched a video of Prof. Warren giving the 2007 Jefferson Memorial Lecture at UC Berkeley, entitled “The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net.” The lecture is far from an alarmist polemic, but rather a careful examination of economic statistics showing how life for a family of four was radically more difficult in 2003 than it was one generation earlier in 1970. I didn’t expect to watch more than a few minutes of this video, but ended up watching the entire hour, even taking notes.

Prof. Warren’s most striking statistics concern the spending shifts in different categories between the 1970 one-income family and the 2003 two-income family. The latter family had 50% more income than the former family. Here is how the spending changed in nine categories. First, the decreases:

  • clothing: 32% less in 2003
  • food: 18% less
  • appliances: 52% less
  • car-related expenses (per car): 24% less

And then the increases:

  • mortgage: 76% more in 2003
  • employer-sponsored health insurance: 74% more
  • car-related expenses (per family): 55% more
  • taxes: 25% more
  • child care: infinitely more (i.e. new expense)

Warren points out that the first group of categories is somewhat flexible, i.e. open to cost-cutting when times are tight,  while the second group represents more or less fixed expenses. Given this, she says that the 1970 family spent 50% of their income on fixed expenses, while the 2003 family spent 75% on them, and the 1970 family had more absolute dollars left over after fixed expenses than the 2003 family.

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6 thoughts on “Changing economics of the middle class

  1. Professor Warren is right on with this line of thinking. I have seen it in the fundamental difference of what my folks were able to do on 1970 something dollars compared to what you can do with 2000 something dollars. And the general trend toward 2 workers outside of the home since that time versus usually only 1 and perhaps with a farm none have really taken a toll on things with new expenses that were not there in 1970 something – not to mention the lack of family time. Though I am still trying to figure out one stat you list above. Single car expense has gone down 24% since 1970? I am wondering if that is truly correct or of the is mistake. Car prices have gone up and certainly the expense to own and operate one given current oil prices have compounded that even giving the rate of dollar increase.

  2. Single car expense has gone down 24% since 1970? I am wondering if that is truly correct …

    Ray,

    Prof. Warren attributes the drop in single car expense to two things: in 2003 people were holding onto cars longer than they did in 1970; and maintenance costs dropped dramatically from 1970 to 2003.

  3. Rick – thanks for the clarification. I wouldn’t have thought maintenance had dropped that much, compared to the amount the price of a basic car has gone up over that same 33 years. Especially when adding in the increased of fuel, but I suppose that was just really starting to hit in 2003. And for me, maintenance is generally and always has been low as I do most of it myself – and of course I didn’t have my first car until 1986 so I can’t really say how the need for maintenance compared then to now.

  4. I have found Prof. Warrens research interesting. It certainly is about what I’ve seen in my own families histories. My father was a low level supervisor at Mountain Bell telephone in Arizona, during the 60’s and 70’s. We were at that time in the middle of nowhere basically, yet he could afford a nice, if modest new house, 3 kids, and a stay at home wife, and two decent automobiles. But I felt something was changing, when ATT was broke up. My father was offered double his retirement, if he left. So he did. At least at that time, he still had his pension. Many people in the last few years lost theirs. I do have one dispute though, with her on the idea that car repair bills are so much cheaper these days. What everyone often forgets, is that in those days you could fix most things on your cars, yourselves. A tuneup in 1970, might be needed every ten thousand miles, and cost 50 bucks. And you could usually do it yourself. Now a car can go thirty thousand miles between tuneups, but it costs $900 and a technician to do it. I know some mechanics who simply refuse to take a modern engine apart. It’s so complicated, that it take hours just to put it back together, and get it to run. It just ain’t the same. It’s like comparing repairs between an old DC 3, and a modern airliner. Yeh, the new one has lots more comfort, and looks cool. And is often safer. But the old one could be fixed with a set of sockets, and a pair of pliers, and screwdrivers. The new ones require enough technology to impress NASA, just to get off the ground. They are also more expensive too.

  5. I finally got around to watching the the video and found that I am living in the 1970s. My wife stays home. Our mortgage, employee sponsored health insurance, taxes and car expenses (no child care expenses) make up just about half of the $40K I make, not three quarters. We have nearly half my annual salary in the bank for a rainy day and have no debit but our mortgage. So we fit the profile.
    But I am now seeing what drove one generation from the 1970s profile to the current treacherous two income middle class. The current economic downturn has caused us may times to reflect “at least we have a potential second wage earner in case we get in trouble”. Our wage-labor economy provides many more opportunities for Mom to take advantage of her potential as an economic safeguard than she had before the industrial revolution. But when Mom does earn an income as a safeguard, suddenly a family is faced with extra income that becomes a temptation to indulge in consumerism. We weak humans quickly and easily get carried away by consumerism and suddenly Mom’s extra income is needed to pay an oversized mortgage because we used her income to pay for a color TV rather than save for a house. This is how the trap was built and now most of our country is stuck in it.
    I now understand why I feel more at ease about our economic position than do most of our friends and acquaintances who make two or three times what we make. I wish I could make more people see that a little savings and a change in attitude about consumerism could open a door to the American Dream circa 1970..1950…

  6. Rick,

    I’ve long suspected what this video proves. Inflation is an invisible tax eating the wealth of our country. This is especially apparent in the fact that, adjusted for inflation, male head of households haven’t gotten a raise in over 30 years, even though my income is 4x what it was in the ’70’s! Meanwhile, our money (so called) becomes progressively worth less and less, even as advertisers encourage more and more spending.

    Jdubb,

    It’s going to take more then adjusting attitudes about consumerism to revisit the ‘American dream’, whatever that is. We’ll have to repent of all forms of covetousness and greed, especially usury, first.

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