The Breakdown | Explaining Southern California's economy

Is the American middle class being crushed — or redefined?

As the economic downturn grinds on, with really pitiful GDP growth and really high unemployment — it's 12.4 percent in L.A. county — a debate about whether the vaunted American middle class is being obliterated has gained momentum. Elizabeth Warren, now running for Senate in Massachusetts, has been hammering on this for years. So have many other left-leaning and progressive economists. Others are asking questions. Stephen Rose points out that the problem with the middle class is that there's a structural shift in the work that's available to less-educated men.

KPCC's Patt Morrison Show recently took a look at the situation, indirectly, with a segment on the "New Normal" in the economy and so-called "two tier" wage structures that have been adopted in unionized industries, most prominently the car business. UCLA's David Lewin said that the two-tier gambit, in which new workers are hired at lower wages or with less lavish benefits that older workers, can be used to establish the lower tier as the only tier, as older workers are phased out.

I've heard this story before and have been looking at the question of the declining middle class, as well. There are several things happening at the same time, and they all tend to get mashed together, which is why this trend is hard to understand. For example, here's Paul Harris in the Guardian, talking about the vanishing U.S. middle class and two-tier hiring:

Perhaps that system can be justified as an emergency measure to keep Detroit's auto-industry alive and help it survive the current tough times. But…it actually looks far more like the permanent shape of things to come. American society is bifurcating, squeezing the middle class out of existence. The ranks of the poor and low-income earners are growing and the rich are doing just fine – and no one is talking about it, much less doing anything about it.

It's easy to conflate income inequality in America with declining middle-class economic performance. The gap between rich and poor is widening, the middle-class has seen its economic achievement stagnate, forcing families to commit to a two-earner strategy and go heavily into debt to keep pace. At the extreme, you have the argument that a "rentier" class is rising while everyone else is consigned to neo-serfdom. This perspective has been amplified by the housing downturn, which decimated the main repository of middle-class asset wealth, the home.

Income inequality is an important issue, but also a marginal one. Economic policy over the past 30 years has enabled the rich to gather in a disproportionate share of national gains in wealth. This is one of the reasons why Warren Buffett has set himself up as something of a traitor to his class: he wants the rich to pay more income tax and to see their real wealth, capital gains, taxed at a higher level. He figures the rich should pay their fair share to ensure future prosperity, rather than risk future social unrest.

But in terms of American society, the rich or super-rich only make up something like 6 to 16 percent of the population, depending on whose definitions you accept. The middle class makes up 40-50 percent. What's happening to them is that the jobs created in the past 30 years haven't packed as much bang for the buck as the jobs that were created from roughly 1950-1980. A free public high-school education "bought" you a unionized manufacturing job that guaranteed high wages and a funded retirement. Globalization has seen many of those jobs go to China and other emerging economies that support low-cost labor.

This is a bummer, but also just reality. You can still enter the middle class without a lot of education, but you're likely to get mired at the lower reaches. To experience class mobility, you need to invest in learning. And the cost of education has massively outpaced inflation over the past few decades.

So it isn't that the middle class is vanishing so much as being downshifted. Somebody who could formerly have been making $30 an hour is now making $15. This has many implications, but I like to look at it not in terms of the usual middle-class markers of income or access to "lifestyle" milestones — such as a car, two cars, a house — but access to finance. 

Simply put, if you're in the middle class, you have access to the kind of finance that the wealthy have, although your access isn't nearly as extensive (you don't have deep capital reserves or abundant multi-generational assets if you're middle class because your status is largely derived from earnings). This is why things look so bad for the middle class right now in the U.S.: the financial crisis has been just that — a disaster for everyday access to abundant, low-cost borrowing. There are extremely complex reasons why this happened, but the bottom line is inevitable: the American middle class isn't going away, but it has lost its power. And it's going to be hard to get it back.