United States' middle class is no longer the richest in the world | Baltimore Post-ExaminerBaltimore Post-Examiner

United States’ middle class is no longer the richest in the world

Save-the-Middle-Class1

Pew graph 2My last post dealt with the state of Maryland gradually raising its minimum wage over the next five years. It was met with some partisan acceptance and resistance depending upon what side of the aisle you fall on. Ideology can be entertaining at parties and in bars. However numbers can sometimes show that real policy is needed to fix real problems.

For a long time we’ve felt this American invincibility of what we’ve created since World War II, the epitome of the middle class in a consumer driven economy. But that armor now has now suffered several cracks and the rest of the world is catching up to us.

The U.S. Middle Class is no longer the world’s most affluent

The New York Times asked LIS – a group that compiles government household income data from around the world for comparison purposes – to conduct research so that they could compare the incomes of nearly 20 countries across income distributions. The data went back five decades but it’s the last two that show the most telling tale.

What they found was that the wealthiest Americans are still outpacing their peers around the world. However middle and lower income earners in the U.S. have seen their income advantages shrink or disappear completely.

Let’s start with the middle class. Even though they were pretty far behind fourteen years ago, middle class Canadians now take home a higher disposable income than Americans. The study noted that Britain, the Netherlands and Sweden have made significant strides to close a once sizable gap.

The picture is even bleaker for the working  poor in the United  States. A family earning in the 20th percentile of income in the U.S. makes a lot less than that same group that lives in Canada, Sweden, Norway, Finland or the Netherlands. This was not the case 3 to four decades ago.

The most recent year of data collected for the LIS study was 2010, however other government studies since then have shown that pay in Canada and some other European countries has risen at a faster pace than here in the U.S.

sdt-2012-08-22-Middle-Class-01-02It’s been a long time coming

“The idea that the median American has so much more income than the middle class in all other parts of the world is not true these days… in 1960, we were massively richer than anyone else. In 1980, we were richer. In the 1990s, we were still richer,” said Harvard Economist Lawrence Katz, who also serves on the Panel of Economic Advisers for the Congressional Budget Office.

He went on to say this is no longer true.

Partisan readers can’t specifically blame a party or an Administration; it’s been a trend over time.

So why are we so stagnate while the rest of the world has caught up? The LIS researchers came up with three reasons the income gap is shrinking.

Number one is education. Other developed or “first world” countries have seen a rise in educational attainment in the past three decades according to the Organization for Economic Cooperation and Development’s Education at a Glance 2013 report.

Americans in the age range of 55 and 65 have literacy, numeracy and technology skills that beat out their peers in the rest of the industrialized world. However, Americans between the age of 16 and 24 rank near the bottom of developed countries.

mc-mainbar-art-g5vdsvl5-10904gfx-mcmainbar-graphic-income-growth-epsThis poses a problem for the U.S. keeping its highly skilled jobs.

Number two is how corporations in other countries allocate pay. U.S. top-tier executives make a whole lot more than those in other countries. This is coupled with those countries having a minimum wage and stronger labor unions.

The final point deals with that touchy subject of income distribution. The wealthy in the U.S. pay lower taxes than their peers in other developed countries and do not redistribute as much income to the poor. This results in a greater gulf of disposable income between the rich and the poor than in some other first world countries.

And the ramifications to our economy

This erosion of the middle class speaks to one thing: Income Inequality. Take note that the U.S. is still experiencing growth, but only the small upper tier of wealth is benefiting from the post- Recession gains. Get it out of your head the partisan arguments going on in the halls of the Capital. This reality is creating a lopsided playing field in the business world.

The markets for businesses that cater to the middle class are getting smaller while those who appeal to the more affluent are expanding.

2013-06-28-werenumber27Say what you want about Wall Street but one thing their consultants can let us know is where the money is going and who is becoming more or less profitable. According to PriceWaterhouseCoopers, investors are putting their money into big stores and restaurants targeting the affluent with high-end goods and services. Those same investors are focusing on thrift/dollar stores as they believe more of the middle class are falling into their target market.

The numbers support this trend. Research by economists Steven Fazzari, of Washington University in St. Louis, and Barry Cynamon, of the Federal Reserve Bank of St. Louis show that in 2012 the top 5 percent of earners made up 38 percent of consumption. Since 2009, this same top tier has seen its spending rise 17 percent while the other 95 percent of American has risen just 1 percent.

The researchers wonder can you really have a recovery with such a divide. Trickle-down theory is a figment of the imagination of the 1980s. When the Middle Class can’t spend, the Olive Garden’s, the Red Lobsters, the Sears and J.C. Penny’s of the world will suffer – as they are doing right now.

This is not about hand-outs or entitlements; we are losing the fuel that keeps this economic engine going.


About the author

Jason Jenkins

Jason spent eight years at T. Rowe Price serving in various roles from investment counseling to retirement planning. In 2005, he became Senior Security Analyst at Wells Fargo Corporate Trust in their Residential Mortgage-backed Securities division. He has contributed to several financial newsletters and the Motley Fool website while completing his thesis and Master’s Degree in Government from the Johns Hopkins University Advanced Academic Program. He resides in Baltimore. Contact the author.
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