The Indebted Middle Class

[powayseller]

Neweeks story, Spend Cycle, is an interview with Christian E. Weller, senior economist and author of a recent Center for American Progress (CAP) report, ‘Drowning in Debt,’

Why are Americans so indebted?
“The labor market has been rather weak, employment growth has barely kept pace with population growth, wages have been flat, income has fallen for five years in a row, and at the same time, prices for critical big ticket items-items such as health care, housing, college education—have gone through the roof. In that bind, the only escape valve for middle class families is to borrow more money.”

On the meaning that household debt is 108% of income
“In 1952, the average debt to income (disposable income) ratio was less than 40 percent. Now, it’s 126 percent. Debt has really risen much faster than our income. [And] I don’t want to say that all debt is bad, but the growth we’ve seen in the last few years is unsustainable. And it’s not sustainable because of the reasons for which people borrow. People borrow because they’re caught in this bind of a weak [labor] market and rapidly rising prices. What that means is that eventually, unless income rises or prices slow down, people will have a really hard time making payments. And if they have a hard time making payments, there are two responses: there’s going to be less debt taken out to fuel consumption and a lot more people will default.”

On why it’s so hard to shed debt
“You can hope that your income will grow as your debt grows, or the other option for families is to send in a second earner into the labor market. But most families already have that. So what’s next? Eventually, you’re running into natural limits here. You cannot work 24 hours a day. You cannot send your toddler into work.”
– Newsweek

I posted this to squash any optimism on the forum about the actual number of people with boatloads of cash ready to buy or people making 25-50% pay increases: while they exist, they are in the minority. The vast majority of Americans are either in poverty or in the indebted middle class.

[lamoneyguy]

I don’t agree for one second with this comment:

“The data shows that people are borrowing more money not because of over-consumption, but because they’re caught in a bind,” says Weller, a senior economist at the CAP. “In that bind, the only escape valve for middle class families is to borrow more money.”

Perhaps for some for whom medical expenses caused their debt, or unexpectedly caring for an elderl parent. But most families are trying to live a lifestyle they cannot afford.

~lamoneyguy

[carlislematthew]

Perhaps for some for whom medical expenses caused their debt, or unexpectedly caring for an elderl parent. But most families are trying to live a lifestyle they cannot afford.

I agree. I see far too many flashy new cars around, and I live in Mira Mesa…

I moved to here from England, another wealthy western country, and the rate of consumption in this country (even before the housing boom) was huge. I never saw so many people in restaurants during the week, I never saw so many TVs in people’s houses, and I never saw so many new cars. I mean, it’s not like I’m from Russia or anything, marvelling at these western people with their supermarkets. I’m from a country and an upbringing where we had money and were comfortable. However, they just don’t spend like they do in the states. Why? Not because they’re fabulous, intelligent people. It’s because of the restricted access to credit that we had – you just couldn’t borrow as much.

[rankandfile]

I agree with everything written so far and would just like to add a comment about the medical costs. Medical costs aren’t just for the elderly anymore. Anyone with children, or even without children for that matter, can attest to the high costs for medical insurance. Not that this is the reason for the middle class’s debt woes, but it certainly doesn’t help. The well-to-do can afford insurance payments on a PPO. The poor have Medicare/Medicaid, and the illegal immigrants, well they just get free care. It’s the middle class family that ends up shouldering the lion’s share of high medical costs. Don’t forget about the frivelous lawsuits and malpractice insurance, either.

[lamoneyguy]

Agreed Rankandfile. I didn’t mean to imply that medical costs are restricted to the elderly. I was just trying to come up with another example in which costs may get very high despite genuine efforts to live within your means.

~lamoneyguy

[speedingpullet]

Hello fellow Brit!

I’ve posted on here before, I think, on having the same perception when I moved over here – big, clunky, inefficient, well just about everything!

carlislematthew is right – the UK isn’t a paragon of fabulous, intelligent people, but it is much harder to get caught in the ‘debt trap’ over there, simply because its harder to get a line of credit.

Having said that, its been 6 years since I lived there, so I have don’t know if things have changed.

One thing hasn’t changed, or at least amongst my UK friends – people haven’t grown up with the “spend, spend, spend!” mentality. Huge wasteful consumer durables are ignored as being, well, huge and wasteful.
People are more concerned with energy conservation, smaller cars (if a car at all iin a big city like London), houses in line with family needs (few McMansions in Greater London – there simply isn’t the land for them), and living within your means.

A couple of things, I think, help explain this:

A) the cost of gas in the UK, and many other European countries, has been very high for a very long time – gas in the UK has been over $3 a gallon since the mid-1980’s. Consequently, most people need to find the smallest, cheapest transport, have energy-efficient household goods and cheap-to-run houses because otherwise they would simply not be able to survive.

B) historically, Europe is a generation behind the US in its ‘hard times’.

The US had the Great Depression in the 20’s and 30’s, and now most of the people who lived through it have passed, taking with them thier stories and tips on living frugally. There are few alive today to share what its like when things get really tough.

Over in Europe, the ‘hard times’ were the WWII years – so anyone born just before or just after 1939 – 1945 has first-hand knowledge of living frugally. As many parents and grandparents were born at this time, there’s still enough people living today to remember what it was like to live at rock-bottom.

Bear in mind too that in the UK, rationing was still in effect for some things until 1957! Well within the lifetime of many people in the UK.
While Europe was busy picking up the pieces after WWII, the US saw its biggest boom in consumerism and expansion – a direct contrast.

Anyway, my tuppenceworth 😉

[PD]

In addition to gas prices, there is another reason why Europeans drive smaller cars – many of the roads are hundreds of years old and aren’t big enough for a huge SUV. It is simply more practical to have a smaller car.

[bob007]

my two cents …

i have no sympathy for the indebted middle class. they have the power to contain medical, education and housing costs.

they make a lot of poor choices as individuals and collectively in the realm of public policy.

people insist on living in the high priced coastal areas.
a lot of companies in midwest and texas have a hard time finding qualified professionals.

[carlislematthew]

Hi speedingpullet! I’ve been in the states for about the same length of time as you! It’s always nice to have company from the “old country”, even in an anonymous forum such as this.

Bear in mind too that in the UK, rationing was still in effect for some things until 1957!

I’ve always used that exact reasoning for my explanation of why my mother’s cooking is quite bland. No seasoning, no salt! She grew up in a time when they just didn’t have access to these “luxuries”.

Reminds me a certain Monty Python sketch. 🙂

“Luxury!”

[rankandfile]

NP, Lamoneguy. The main point I was trying to express is that the middle class is getting squeezed from more than one direction, and not just from housing. I believe that, next to housing, healthcare would probably be the next biggest ongoing expenditure for many middle class families.

I am of the belief that the middle class is the most important class in determining the health of an economy. Yes, the wealthy invest in more profit-making ventures and create jobs, and the poor provide much needed services and spend most of their earnings on consumable goods (I’m over-generalizing here). However, the middle class resemblances both the upper and lower classes at times. They often earn enough to save and/or invest it, yet they also are great consumers.

What I worry about most is that the middle class will no longer able to consume at current levels and help keep this economy afloat. I also think we are staying afloat on borrowed time as it is, since much of the consumption over the past 5 years or so can be directly or indirectly attributed to unsubstantiated run-ups in home prices and cheap, easy money in the form of loans.

[bob007]

right now the middle class consumption is fuelling imports from China and Asia. I am generalizing here.

Cutting back on consumption will force the reduction of the trade imbalances.

[bubba99]

Clearly the big banks saw the upcoming squeeze of the middle class. The changes in the bankruptcy laws protect the banks against the middle class walking away from debt.

Under the old rules (chapter 7) if an individual got into serious debt, he or she could file bankruptcy and the debt would be completely discharged – giving the debtor a fresh start. Under the new rules, if the debtor has any money ($130/month)left over after basic living expenses, he or she must pay off a sliding scale of the debt over the next few years.

So our indebt middle class homeowner who has maxed out credit cards to pay growing variable mortgage payments will not get a fresh start. He or she will be repaying the banks for years to come. Although the mortgage debt does not follow the borrower, the credit card, automobile, and some HELOC’s do. Although the debtor can protect $125k homestead exemption, this debt service could keep the previous homeowner out of the home market for some time to come. The homestead exemption could be meaningless if the bubble takes the home equity out of the equation.

[VCJIM]

Is that why English food is so bad? I always wondered…

[equalizer]

In CA, mortgages are non-recourse, meaning that banks cant come after you if you leave the keys and walk away. Other states, maybe Texas, dont provide that protection so you owe the balance from loan and the repo resale.

[VCJIM]

As we’ve discussed in the past, I believe you can end up with a substantial tax liability if you just walk away…

[Author]

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