UNITED STATES: A make-or-break moment for the middle class
THE EIGHT-year-old son of a former Hollywood film producer rides the bus for four hours daily, so he can continue to attend school in his old neighbourhood. The producer and his family hide the fact that they live in a shelter for the homeless on Skid Row in Los Angeles. Half the shelter’s residents have lost houses to foreclosure.
A volunteer at a church food bank in a suburb of Cleveland is stunned to see his former boss arrive, seeking a handout.
Queues of rental lorries form on Kendall Drive, Miami, each weekend, as families who’ve been forced to “short sell” their mortgaged properties for less than they owe line up to store belongings they cannot fit into smaller rental properties.
These examples, taken from recent US media reports, show the impact of the Great Recession and the crash of the housing market, which wiped out $7 trillion in American wealth.
The decline of the American middle class did not start in 2008. According to the US Census Bureau, median household income, adjusted for inflation, declined 7 per cent in the first decade of this century, to $49,445 in 2010. That’s approximately what it was in 1970.
During the Great Prosperity, from 1945 until the late 1970s, more people lived better in the US than at any time in human history.
It was, President Obama says, “an America where hard work paid off, and responsibility was rewarded, and anyone could make it if they tried”. The outsourcing of jobs to developing countries with cheap labour has been one reason for the decline. Technology that replaced secretaries, cashiers and assembly line workers is another. But huge disparities in income, fostered by a government that has consistently favoured the wealthiest Americans, is the biggest factor.
In “The Broken Contract; Inequality and American Decline”, published in Foreign Affairs in December 2011, George Packer explains how the rise of corporate lobbying and the “Reagan Revolution” created the “massive, generation-long transfer of wealth to the richest Americans”.
A now-famous 2005 study commissioned by Citigroup found the top 1 per cent of US households – dubbed the “plutonomy” by analysts – possesses as much wealth as the bottom 90 per cent.
While the rest of America’s income diminished, that of the top 1 per cent rose 250 per cent, to $1.2 million per year, Obama says. Among the top one hundredth of 1 per cent, the average income is $27 million per year. As Obama noted, “the typical CEO who used to earn about 30 times more than his or her worker now earns 110 times more.”
The top income tax rate was 91 per cent in 1960, 70 per cent in 1980, 50 per cent in 1986, 39.6 per cent in 2000 and is now 35 per cent. Many middle-class Americans pay 35 per cent, but the richest Americans – including Republican presidential hopeful Mitt Romney – pay 15 per cent or less, because profits on investments are taxed at lower rates.
Economic inequality “is the defining issue of our time”, says Obama. He portrays the 2012 election as “a make-or-break moment for the middle class, and for those who are fighting to get into the middle class”.
Obama wants to raise taxes on the rich, invest more in education and infrastructure and provide financial incentives to companies that manufacture in the US. (One-third of US manufacturing jobs have disappeared in the last decade.)
Republicans say government efforts to help middle-class homeowners who are struggling with mortgage payments are counterproductive. They claim that reducing taxes and government regulation still further will free up capital for investment, thus creating new jobs.
This was the policy of the 2000-2008 Bush administration, which precipitated the present crisis.
GERMANY: There is ideological disagreement on the health of the middle class
DEREK SCALLY in Berlin
ONCE THE German word “Abstiegsangst” – fear of relegation – was the sole concern of underperforming football teams and their fans. Today it increasingly refers to the fear stalking Germany’s middle class.
Decades of wage restraint and reform have eliminated many certainties of German life: a comfortable, secure job and a welfare safety net in emergencies. Driving the fear is Germany’s brave new welfare world. After one year of unemployment benefit – based on two-thirds of final salary – an immediate downgrade follows to basic dole payments of €374 a month plus benefits.
That has sparked a media feeding frenzy over Abstiegsangst — but the reality is more complicated.
Middle class is as messy a term to define in Germany as elsewhere. Depending on how you measure it, between 60 and 80 per cent of Germans are middle class. Some 58 per cent of Germans “feel” middle class, according to official statistics, while the figure in eastern states is 46 per cent, up 10 percentage points since 1991.
German researchers disagree fundamentally over whether “Abstiegsangst” is more an emotional or real economic phenomenon.
A representative study last month by the Gfk agency – sold on to companies and advertisers – found that 40 per cent of Germans belong to the three “middle” salary classes – with a net monthly income of €1,100 to €2,600.
Those figures have been static for the last four years – despite the recent wave of reforms and economic turbulence.
“The middle classes are quite stable,” said Simone Baecker-Neuchel of Gfk Geomarketing, author of the study. “Our study shows that most Germans don’t have reason to feel threatened.” Another study, “Middle Class Myths”, by the Cologne Institute for Economic Research, came to a similar conclusion.
Other long-term studies claim the opposite. The OECD says Germany is becoming a less fair society, with the top 10 per cent earning eight times more than the bottom 10 per cent – up from six times in the 1990s. The middle class is being squeezed, it claims, a view shared by Dr Markus Grabka of Berlin’s DIW economic institute.
His long-term research suggest Germany’s middle class has lost 4.5 million people since 1999. Unlike other researchers, he examines annual rather than monthly income, which takes into account the recent pruning of former middle-class privileges such as the “13th month” salary at Christmas.
Germany’s relegation debate is highly political, he says, because it goes to the heart of the dominant orthodoxy of wage restraint.
“If I can show the middle classes are doing fine, the pressure to increase distribution of wealth is diminished,” says Dr Grabka of the DIW, traditionally more in favour of easing wage restraint.
German trade unions dispute studies claiming the middle classes remain strong, saying these reports overlook how middle earners have to fill gaps in services the state can no longer afford to provide, from education to private pensions.
The wage restraint camp hits back that complaints about high taxes by the middle class ignore the disproportionate level of tax breaks and other allowances they are granted by governments anxious to win their votes.
There is a fundamental, ideological disagreement on the health of Germany’s middle class. Despite their differing interpretations, both camps agree that the data reveal two trends: a shift from the “middle” of the middle class to the margins, and a sinking mobility through the middle class.Sociologist Dr Berthold Vogel says that, regardless of the data, Abstiegsangst is growing.
BRITAIN: Living standards were faltering before the downturn
MARK HENNESSY in London
RARELY IN crisis, but “squeezed, exposed and overlooked”, Britain’s middle classes are in grumbling mood as austerity bites, pensions look more precarious and long-enjoyed State benefits are threatened by the Conservative/Liberal Democrats coalition.
First described by Labour’s Ed Miliband as “the squeezed middle”, they are a group that can be hard to define. For some, it is those people with incomes starting even in the mid-teens. According to others, the threshold to membership comes with salaries starting in the early thirties.
The scale of income destruction caused by the economic crisis is illustrated by figures from the Office of Budget Responsibility, which indicate that typical wages in 2016 for the group will be no higher than they were in 2001 – and £1,400 below the 2009 pre-recession peak.
Incomes for the group rose, on average from £27,300 in 1996-97 to a peak of £32,000 in 2004-05, before standing still for a number of years until they went into a headlong retreat provoked by the recession, according to the Resolution Foundation think-tank.
“Evidence from recent decades suggests that living standards were faltering for millions of households long before the start of the downturn in 2008,” said the foundation, in a recently-issued report, Squeezed Britain.
Property-owners, in the main, have been helped by low interest rates and the coalition’s contested decision to order local authorities to freeze council taxes, which can cost some middle-income families up to £3,000 a year in after-tax income.
However, those who had not managed to get on the ladder before the credit crunch have been left marooned, facing ever-higher rents and without hope of approval for a realistic mortgage, particularly in the southeast of England.
From April 2013, 680,000 families are due to lose their child benefit under changes ordered by the chancellor of the exchequer, George Osborne, though the changes are demonstrably unfair, since one-income families lose most.
Such families will lose the benefit, worth £1,752 for those with two children, if their income exceeds the 40p tax threshold which currently stands at £42,475 a year. However, a two-income family will be allowed to earn twice that before they lose out.
The plan infuriated Conservative backbenchers, once they understood its implications, leading prime minister David Cameron to signal recently that there will be some concessions in the March budget – though Osborne is reluctant to lose any of the £2.5 billion worth of savings.
Already, working couples have lost part of the state help previously offered for childcare costs, with changes to the working tax credit, and there are fears that this could be further cut in budgets to come.
“Taking cash away from families on low to middle incomes is precisely the wrong thing to be doing – it hits households when they are down,” said Gavin Kelly, chief executive of Resolution Foundation.
Besides facing the loss of long-supplied benefits, the middle classes in England and Wales, if not in Scotland, or Northern Ireland, to the same extent, are also struggling to cope with the arrival of higher third-level fees – which could cost £9,000 a year for some courses.
Car sales, perhaps, are a barometer of the middle classes’ mood, in a land where maintaining them is a Saturday occupation for millions. New registrations fell by 4.4 per cent in 2011 to just under two million, according to official figures, with private registrations down by 14.1 per cent. Unlike in Ireland where the Ford Focus is the most popular model, the favourite in the UK is its smaller sister, the Ford Fiesta, though the Volkswagen Golf – the picture of middle-class dependability – is the best-selling diesel.