Washington Lets Shrinking Middle Class Twist in the Wind

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Letting sequestration happen is just the latest burden Washington's politicians have dumped on a struggling and shrinking middle class.

Unless our bickering lawmakers come up with a solution, the Congressional Budget Office estimates that sequestration could knock 0.6% from the nation's gross domestic product and cost up to 750,000 jobs.

And this comes while most middle-class families are still struggling to adjust to the 2% reduction in their paychecks that occurred when Congress allowed the payroll tax break to expire on Jan. 1.

If it seems that Congress doesn't care about the plight of the shrinking middle class, it's probably because they're so far removed from a middle-class lifestyle. They earn $174,500 a year, far above the U.S. median salary of $50,000, and nearly half are millionaires.

Meanwhile, life keeps getting worse for the shrinking middle class – yes, shrinking.

A study last year by the Pew Research Center found that the middle class – defined as those households earning between two-thirds and double the median income – fell from 61% of U.S. families in 1971 to just 51% in 2011.

Thanks to the Great Recession, which the federal government has for the most part failed to reverse, median household income has dropped by 4.2%, or nearly $2,300 (adjusted for inflation).

And the longer-term trend is no better: Median U.S. household income is down more than $4,000 since 2000.

At the same time, inflation keeps creeping higher. The price of many daily necessities such as gasoline (up from $2.75 in 2007 to $3.75 today), food (expected to rise another 3% to 4% in 2013), and health care (premiums are up 97% since 2002).

"Their [middle-class families] economic future isn't very bright," Timothy Smeeding, director of the Institute for Research on Poverty at the University of Wisconsin-Madison, told U.S. News and World Report. "Wages and income are flat. Transportation, childcare costs, and health care costs are going up, and your income isn't."

What's Behind the Shrinking Middle Class

Multiple factors, many related to the Great Recession, are responsible for the shrinking middle class in America.

One of the biggest was the collapse of the housing bubble. A home is the biggest investment most middle-class Americans ever make. Home equity accounts for two-thirds of middle-class assets.

Even with the mild recovery in the housing market, national home prices are still 29% below their 2006 high, according to Case-Shiller data.

That enormous loss of wealth has helped push the median net worth of U.S. households down 47% from 2007-2010, from $107,800 to $57,000 (figures adjusted for inflation). That's the lowest level in more than 40 years.

And that loss of equity also added to the middle-class debt burden. A study by Edward Wolff, an economist at New York University, found that middle-class families had 41cents in debt for every dollar of wealth they possessed; by 2007, that had risen to 61 cents per dollar.

Another factor contributing to the shrinking middle class is what's happened with jobs. It's not just that unemployment rose past 10%, and is still hovering around 8%.

Of all the jobs lost during the Great Recession, about 60% were in middle-wage occupations. But only 22% of the jobs gained during the recovery fall into the mid-wage category.

In addition, the number of people working part-time jobs who would rather be working full-time has spiked from 4.8 million five years ago to 8 million today.

Is Washington Helping the Shrinking Middle Class?

Since the middle class is the engine of U.S. prosperity – consumer spending drives 70% of the economy – you'd think Washington's leaders would be doing more to help the average American.

But it's almost as if they're deaf to the pain of the shrinking middle class, instead bragging about the number of jobs created or how well the stock market is doing.

A recent report by the Economic Policy Institute blamed the government for not doing enough to create jobs.

"We have made very little progress in the past two years towards full recovery, and spending cuts coming down the pike might actually throw the economy into reverse," said EPI Research and Policy Director Josh Bivens.

Spoiled by a cocoon of wealth and outlandish perks, Washington's elite simply don't feel the pain of the shrinking middle class.

"[After the Great Depression], we made major policy changes to ensure we have a strong middle class. We let too much of it wither on the vine," David Madland, director of the American Worker Project at the Center for American Progress, told U.S. News and World Report. "We need something approaching that kind of effort."

If you think Congress is just a collection of fat cats who have let the middle class down, you can click here to vote in our Money Morning poll.

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  1. L.Sanfod | March 7, 2013

    The FRB states household wealth is back.
    This may be true for the wealthy but is not accurate for most home ownerswho still have 30% less equity that 5 years ago. The average hard working person still has less income and less savings than ever. This wealth figure must have been arrived at by averaging the wealth of the hundreds of new billionaires and millionaires with the rest of us. The ever growing gap between the rich and poor is appalling

  2. H. Craig Bradley | March 8, 2013

    MIDDLE CLASS BLUES

    Lets face it, with Federal and State Government and large company employment opportunities reduced from the last up-cycle, about all that's left is small business and contract workers ( 33% of all workers today). Increasingly, fewer individuals have a union-paid, 40 hour a week, 8 hour a day job with 2-3 weeks paid vacation plus 12 Federal Paid Holidays for 35 years AND for the same employer -who then receive a generous defined-benefit pension at retirement that is fully-funded (at least 80% or better funded).

    The world of employment which characterized the WWII generation is about finished. In its place is a lower paying and much less secure workplace. Fewer applicants will enjoy a lifetime of secure employment, be it union or government sector-based. Even fewer will receive a traditional pension with a annual COLA. Instead, you have to save yourself in a private tax deferred pension account such as a IRA and/or 401 (K). It probably won't be near enough unless you make over $100,000/year or work under the table in the "underground" economy. More and more workers are forced to work "off-the-books" as taxes and the cost of living increase while wages stay essentially flat for the majority of the middle class.

  3. H. Craig Bradley | March 8, 2013

    A MATTER OF DEFINITION: TODAY'S "MIDDLE CLASS" IS $75,000/YEAR (+)

    $50,000/year before taxes (gross income) in high cost of living states or cities like California or Seattle, WA is lower-Middle Class, not "Middle Class". This is especially true of families in high cost areas.

  4. 48ozhalfgallons | March 11, 2013

    When the masses contract into a desperate organized group sharing a "nothing to lose" passion, only then will change begin to occur. The outcome of this change will not come from democratic processes. The outcome will evolve from a process of machtergreifung. Those who have something to lose will lose everything including what was once America. When a country sheds its middle class it sheds its own existence.

  5. dourdan | March 11, 2013

    Does anyone know or care who is running this busline?

  6. Andy Schuck | March 11, 2013

    BOO HOO, the 2% tax cut that expired is now the SAME amount that I paid in SS taxes my working life. It should have never gone into effect in the first place and now we should not be calling it a tax hike, for god's sake.
    That money is going to their future SS benefits, so buck up mateys

  7. Dwight Chestnut | August 21, 2013

    For some reason, everyone looks to the government for answers. The government is not the answer. Nor, can we look to large multinational corporations to become good corporate citizens again and restrain their outsourcing tendencies in the interest of the general welfare of the U.S public. Real solutions can only come from ground up.

    Think OCCUPY WALL STREET, but instead of holding up picket signs, marching in the streets and complaining about the 1%, grassroots individuals need to collaborate over the internet and grow new wealth building resources from ground-up. It's like social networking, but with a business and income production twist. It's formally called Social Production.

    According to the Institute of the Future, social production is “production that draws on contributions from large networks of people, enabled by social technologies, to create new kinds of wealth. In other words, what we need is a well crafted, grassroots lead social production campaign to address the shrinking middle class issue.

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