Great polarisation: middle class edition

"Destruction" of the middle class sounds malevolent; is it? Or is there some systemic bias that seems to seep in?

I

How America's middle class got hollowed out was a recent, rather evocative, post in Vox, with the central argument being that the middle class purchasing power has decreased for those in the middle of the income distribution and that sucks.

Let's assume the path to prosperity is an equation made up of upbringing + education + luck + job + network. There's plenty of interaction amongst the variables but the individual components still matter by themselves too.

The average pay naturally is highly skewed by the types of industries which are not distributed randomly. They're highly concentrated in some geographic areas. Those areas also see exceptionally high costs for housing, education and cost of living. Healthcare is expensive everywhere. And then we see the situation today - cost disease run rampant.

If being middle class requires you to have a certain purchasing power, which comes from some types of jobs, which comes when the distributions of costs remain the same, then the number of those who are middle class declines.

You get education because you wanna do well. To repay and get the right job you move to a high cost area. Then the wage you get becomes not enough since the costs increase faster than the wages. While those who aren't in the cost rat race don't even show up in the arena.

Was this different before? Yes in some ways. For one, there were a lot more jobs that could've qualified as middle class. For another the costs weren't nearly as astronomical.

There are three things that the article doesn't seem to talk about. Some of this is unfair of course, since articles can't talk about everything, but these have a direct impact on the case at hand.

For one thing, the idea that the debt to income ratio is much higher today than in the 1980s is true, but it needs some contextualising.

We’ve been normalizing low savings rates at the same time that we’ve become more and more comfortable taking on consumer debt — a symptom, as financial analyst Karen Petrou put it, of “deep economic malaise.” In the early ’80s, the income-to-debt ratio hovered between 0.55 and 0.65, which meant that a household’s overall debt level amounted to between 55 percent and 65 percent of their income after taxes.

The ratio first hit 1.0 in 2003, and rose all the way to 1.24 before the 2007 crash. Now it’s stabilized at just under 1, so a middle-class family making $80,000 has somewhere around $80,000 in debt. Until relatively recently, the majority of that debt would have been mortgage debt. Over the past decade, the proportion has begun to shift toward student loans, auto loans, credit card debt, and medical debt: so-called “bad” debt.

This isn't because we've become more profligate with our random spending. It's also because we're at rock bottom interest rates and saving money is a mug's game.

See if you can spot anything interesting about the 1980s, and why people might have wanted to save!

You don't save, because you don't want to save, but you need to spend more for basic goods, so you spend more in consumption, so you're in debt, and move to high cost places to get jobs which are scarce anyway, and fall into the devil trap from which there isn't much of an escape.

Pre-pandemic, middle-class Americans modeled the belief that everything was fine. Unemployment was low; consumer confidence was high; the housing market had “recovered.” In 2019, 95 percent of people in households making over $100,000 a year reported they were “doing okay” financially, a 13 percent increase from 2013. But those positive economic indicators obscured a larger reality.

Did they? I'm not so sure. Wasn't there an incredible populist wave of anger that elected a reality TV star to the highest office in the land?

When we think about the days before the pandemic, or the days before Trump for that matter, as the "good times", I think we're squinting our eyes and looking past the very real problems people had even during those times. Example 1. Example 2.

II

In any case, the normal positions to argue for why the non-ultra-rich are all so screwed boil down to:

  1. The death of unions, and as a consequence the ability for collective bargaining

  2. The decline in good, high-paying, jobs for some reason

  3. There's just way too much debt and that's got us all addicted to a hedonic treadmill

  4. Purchasing power has fallen off a cliff and nobody knows why

They all play a part for sure, but they're not all the same.

For example, if the death of unions was a primary reason for the decline of the middle class, it surely shouldn't cross international boundaries with widely varying levels of unionisation. Or if you prefer it straight from the horse's mouth.

Clearly there's a reason the Swedish are so uppity and happy all the time. The chart says why - they've been screwed far less than everyone else! And it's for the same reason that the Italians hate everyone with a passion.

But what about the happy Dutch? Them too? There truly is no escape!

And when you try to look at the individual factors that seem to be affecting the disposable income trend, it's not one thing. It's all the things.

So the question shifts slightly. It also needs to answer why everything seems to have flatlined in the last decade, which seems a different trend than the general decline that's been going on for the past few decades.

But even with that, the fact that everything costs more due to general organisational inertia, Baomol's cost disease and bureaucratic bounties, means that the purchasing power keeps dropping.

Nothing much seems to have gone the way of the middle class in the past few decades, that's the takeaway. Aggregate demand hasn't changed much. Neither has the labour or capital factors. Demographics are relatively stable, and taxes and transfer haven't changed either. Put everything together and the disposable income has barely changed.

And with the disposable income barely changed, what else could be affecting the seeming decline in middle class wages?

Let's see, it's the fact that things you can't do without like education, healthcare and housing, have all increased in price rather dramatically that seems to be causing the hollowing out of the middle class.

It's easy then. All we need to do to find middle class job holders who aren't disgruntled is to find those who haven't had need for healthcare, education or housing. Shouldn't be too hard.

III

So the question is why the middle class's ability to have a good life has dropped like a stone. And while part of the answer is that their income has stagnated, part of the answer is also that things cost a hell of a lot more than they used to.

It's why the key expenses in anyone's life is all of a sudden completely unaffordable. It's why the jobs that seemed oh so secure a few decades ago seem like nooses today.

Recently there was a burst of interest in the fact that Amazon has been on an insane hiring spree. They added 427k employees in the first three quarters of 2020, bringing the number above 1.2 million. And the spree isn't ending anytime soon either.

But simultaneously there's the fact that Amazon logistics jobs are no picnic. They are a far cry from the well paid blue collar jobs of the past, where you were building something up to something better down the line. Here you're very clearly a replaceable cog in a giant machine reminiscent of the Borg.

It's not just that employees are tracked to make sure they're not unionising, but also that the job is made efficient to the nearest pee break.

Clearly not a great place to work by all accounts, though perhaps it's the only place to work for many. While it does seem odd that these people are fighting their way through food stamps to stay alive, the fact is that simultaneously Bezos has added enough wealth that he could give every single employee $6.5k just during the same 3 quarters.

But isn't this simply supply and demand?

Well yes. Clearly if the workers unionised they could argue for higher wages. Or if there were additional jobs available they could make another argument for higher wages.

But do we sincerely believe that even doubling the wages of these lowest level workers is all that's needed to turn these per-second-optimised, panopticon enabled jobs, where you're essentially a slightly more capable robot with lesser capex value, into something that our parents' generation will recognise as "worthy"?

Doubtful.

It's not that these jobs are somehow trying to make people act like robots for nothing. Or that there's a decent career growth potential with one supervisor to number-so-large-that-it's-crazy individual packers and shippers.

The meta layer learning is that it's hard to make a job seem appealing and likeable when it simply isn't. In a lot of jobs, especially white collar ones, we take it for granted that along with our salary and perks, we will also be paid in things like career advancement, job training, skill development, and a whole bunch of other intangibles. Along with making our LinkedIn profiles so mind-numbingly boring to read it's what makes us more interested in doing certain jobs.

My former employer, McKinsey, has made a multi-billion dollar business out of arbitraging smart kids' need for a stellar CV that speaks to those intangibles against the need to pay them very little, and all parties come away from this transaction relatively happy.

This doesn't happen that much anymore, especially not in the lower level jobs like those in Amazon warehouses. And until we change our idea of a job to no longer resemble a mechanised and commoditised input to maximise company output, this will keep on happening.

In the absence of pressures to make true sea-change discoveries, which can fundamentally alter the course of a science or a field or an industry, we'll be stuck eking out ounces of growth and optimising ourselves to no end, and the exponential will become logarithmic will become asymptotically linear. That's just how the math works.