Disappearing Middle Class

Our satellite TV service includes a bunch of educational channels, including one from the University of California at Berkeley. A faculty member there named Harry Kreisler hosts an interview program called "Conversations with History" which I record, and often watch. I very much enjoyed one a few weeks back with Cosmologist James Peebles from Princeton. Another good one was with philosopher Hubert Dreyfus. A complete list of Kreisler's interviews are available via the link above.

The interview this week was with Elizabeth Warren, a professor of Law at Harvard. She has done extensive research and writing on the topic of personal bankruptcy in the US, and has been an advisor to some public officials on this topic.

Professor Warren said she went into this area of research with the assumption that most people who declared bankruptcy were undisciplined consumers who spent well beyond their means and used bankruptcy as an easy way to dump their debts. What she found was that the skyrocketing backruptcy rates were being driven by two elements: a) the dependence of families on two incomes because of the rising costs of goods, especially housing and education; and, b) the relaxation of consumer protection laws relative to credit which have been enacted as a result of extensive lobbying by the financial services industry. The consequence is that families are using more and more credit to fund middle class lifestyles, and when any burp in income happens (layoff, sickness, etc), the credit terms are so oppressive so as to drive people quickly to bankruptcy.

By the way, she tells an interesting story of an encounter with Hillary Clinton. When she was the First Lady, Mrs. Clinton invited Professor Warren for a brief chat about some of her research. The professor quickly made her point about the potential damaging impact of the new consumer financing bill working its way through Congress. Mrs. Clinton understood, and presumably expressed that concern to the President. When the bill made it's way to President Clinton's desk, it was vetoed. However, later as Senator Clinton, she voted for the same bill. As the professor said, it was dispairing to see that the power of lobbyists and the campaign contributions they direct, could cause this kind of behavior in a US Senator (trust me, this isn't a Hillary bashing -- this happens in politics all over our country).

She made a connection I hadn't thought of: people are spending a lot of money on housing because the price of the home you buy often reflects the quality of the school system. In other words, if you want your kids to go to a good school, the price of admission is an expensive home. This dynamic is widening the gulf between the haves and the have-nots in the society. While there is a growing number of families who can afford upscale housing in nice school systems, and still be able to build wealth and send their kids to college, an exploding number of families are barely able to afford their suburban homes, are building little wealth, and must send their kids off to college with student loans. Many of today's children will start their adult life already tens of thousands of dollars in debt, and their parents will be of little help because they are also strapped.

Professor Warren makes the case that the future of America depends on having a well-educated workforce, meaning through college, and that these dynamics are threatening that. I'm not so sure this is exactly true, although I believe we must have a competitive workforce in terms of skills and labor rates.

But I completely agree with her on one thing -- the middle class of our country is in danger of disappearing, and it is the middle class which currently funds just about everything in our society. As the economies of the world begin to normalize, the equalibrium point is only a little higher for most countries, but way below the standards Americans have enjoyed for the past 50 years.