Published On: Mon, Jan 20th, 2014

The way the middle class has managed declining incomes is no longer working. What next?

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In 2013 Robert Reich, the former Labour Secretary under President Clinton and currently a professor at University of California Berkeley, released a documentary called “Inequality for All” during which he highlighted the decline of the middle class income relative to expenses in America since the 1970s.

Just who are the “middle class”? Reich defines them as households as those that earn 50% above or below the median US income of $50,000 per annum. So if you earn between $25,000 and $75,000 per annum you will fit into the “middle class”.

He observes that the middle class have used three main coping mechanisms to help make the decline less painful and noticeable.

First, women went into the workforce in larger numbers.  Initially this was advertised as a good thing. Women were becoming more “equal” with men and could strive for a great career, just like men.  The reality was far more prosaic. Most jobs are boring and not particularly well paid.  Women went out to work because they needed the income to help compensate for the fact that their husbands were not making as much money as they had earlier.  For a number of years this strategy worked and pushed up household income during the 1970s and 1980s.

Second, both men and women started to work longer hours.  The number of hours they worked increased every year.  Many started to work an additional job in the evening. This helped to keep households above water and worked reasonably well in the 1990s.

Finally, as house prices went up, fuelled by low cost loans – mainly thanks to free trade with developing countries like China- the middle class started to use their houses as cash machines.  By refinancing their houses they could release cash to buy things that they would have been unable to buy otherwise. This helped to keep the middle class feel good about themselves in the 2000s.

This worked until 2008 when everything started to unravel.

The problem with these three coping mechanisms is that there is a limit to how sustainable they are long term.

Getting more than two adults to work in a household is not that easy.  In most households there are only two working age adults – typically the mother and the father.

This could change.  If Westerners reverted back to the historic norm of three generations living under the same roof then this could result in an increase in the amount of household income and a reduction in household expenditure as only one mortgage would need to be paid, grandparents could step in to provide childcare, food could be cooked in bulk and so forth.

For those that could not stand the thought of living with their parents there are a few other options.  Polygamy is not widely practiced, deemed socially unacceptable (and illegal in most Western countries) but could make economic sense.  More wives would be available to work inside and outside the home.

Another option is for two families to share the same house.  This might be possible with siblings and cousins, for example.  But given the number of households that end up in divorce the added complexity of having another entire family living with you would be significant.  But, like with polygamy, more adults could be available to work inside and outside the home.

Working longer hours is not really possible in many cases.  There are only a certain number of hours in a week.  People do need to sleep, eat and spend with their families.  For many households they have already reached the maximum that is really possible before you reach the point of asking – what is life worth living for?

As to more household debt?  House prices in some parts of the developed world are rising again, enabling the “house-as-a-cash-machine” dynamic to last a little longer.  But house price inflation, creating an asset bubble, is not a great long term solution to the problem.  Eventually the bubble will burst.

But all of these coping mechanisms are literally just that: coping mechanisms.

Unfortunately, the coping mechanisms are no longer working and are not keeping up with the general economic malaise that has gradually creeped up on the West since the mid 1970s.



History Future Now, ebook edition, is now available from the Apple iBookstore!  So if you have a iPad or iPhone click on this link to download it.  It is currently on at a special offer of 99c.   The Kindle version has been submitted to Amazon and should be available shortly.

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