PART 2: The US Economy and the Decline of the US Middle Class

PART 2: THE US ECONOMY AND THE DECLINE OF THE US MIDDLE CLASS

During the 1980’s the US economy was growing between 9-12%. For 2013 it is expected to be 2% or better, first quarter 13 GDP came in at 2.4% according to the Commerce Department BEA.

Figure 1 US GDP Growth Rate 1980-2012 (http://www.tradingeconomics.com/united-states/gdp-growth)

The impact of the two 21^st Century recessions, first the “dot.com bust” followed by the global meltdown, have had a devastating impact on the US middle class causing massive loss of assets and income which causing further declines in the US economy.  

According to many economists the US economy has taken the shape of an “hour-glass” characterized by a proliferation of jobs at the top and the bottom of the wage distribution for those with high and low educations, but few jobs in the middle for those with modest educational attainments. This characteristic continues to become more pronounced until changes are made to bring the US Middle Class back to its former self.  This shape can be easily seen when applied to food purchases segregated by income categories (see figure 2 below). 

Figure 2 Growth in US Food at Home Spend by Household Income (2007-2010) http://www.progressivegrocer.com/top-stories/expert-columns/industry-intelligence/id37016/battling-to-win-in-an-hourglass-economy/

 In 1981 the US debt was at a manageable $1 trillion, nearly 30 years later it is at a totally unmanageable $16 trillion mostly due to the US government economic and fiscal policies adopted during the first decade of the 21^st Century. 

Unfortunately, much of the US government economic and fiscal policies were formed on false assumptions. It has not helped that the US fought two very costly wars in Afghanistan and Iraq neither of which were financed, taxes raised and/or spending cuts made to maintain a balanced budget.

Second, the deregulation in 1998 of the financial industry, i.e. removing firewalls from banks allowing risky investments such as derivatives.    This generated an enormous amount of cheap cash, where homes could be purchased cheaply, many without the necessary documentation and due diligence to insure repayment. While banks and mortgage companies relied on adequate appraisals, many of these were bogus.  Investment banks packaged these high risk mortgages into securities and sold them as “A+” rated, meaning they were nearly guaranteed. Once sold more cash was generated.

Easy money allowed massive increases in use of credit cards giving fuel to purchase more and meeting consumer perceived needs. That and a combination of US dependency on overseas oil to fuel and lubricate the US economy and the high prices that oil could command added to the US trade deficit.

Within ten years what was the safest banking system in the world fell into a catastrophic financial meltdown.  In turn, it spread throughout the western world causing massive economic declines, and worldwide unemployment and continuing high unemployment rates in the US.  

While a huge influx of cash was required in 2008 to reverse the catastrophe and stimulate the economy may have prevented further economic devastation to the middle class, the recovery has been extremely slow. Loss of jobs means loss of revenues to off-set the current huge deficit now at nearly 100% of GDP. 

Financing this deficit requires over $400 billion each year on interest alone. Consequently, this expenditure makes it nearly impossible to finance more important needs such as necessary maintenance of US infrastructure, financing public services such as education, public safety or the social safety net all of which means jobs.  Entitlements such as social security and Medicare or unemployment insurance are also at risk. Additionally agencies financed by the federal government that care for those in poverty, the elderly and educating pre-school children such as Head Start are in jeopardy. 

Meanwhile our elections are about the collision of two opposite economic philosophies. One is to leverage the government’s ability through its fiscal and economic policies to place more cash into the economy through stimulus programs creating more jobs, or balancing expenses with income by cutting programs and entitlements while eliminating regulations thus allowing the free market to create the jobs.  Which one will win, or will it be neither? 

Please go to the website Center for Community Futures to obtain a downloadable PDF file that provides technical details and trends on the decline of the US Middle Class as it relates to the US economy.

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