SSTI Commentary: Reflections on renewing the middle class

Scarcity and systems issues on a biosphere level (ocean warming, acidification, deforestation, CO2 levels, etc.) aren’t the only reasons some people are beginning to have their doubts on whether capitalism is up to the challenges the world is facing. Some are wondering if the very success of our dominant economic model isn’t reaching limits of propriety of its own making.  A growing number of this community, including some among the well-to-do, are beginning to wonder aloud what’s next? What comes after capitalism?

The latest example of the uncomfortable irony of this discussion among elites playing out in real time could be found during the two-day community development research conference convened last week by one of the most conservative bastions of the American economic structure: the Federal Reserve System.

A biennial event bringing together researchers from the Federal Reserve and academia with policy makers and practitioners in community, workforce and economic development to discuss findings around a particular theme, this year’s conference focused on “Renewing the Promise of the Middle Class.”   

Finding a common definition of middle class amid the opulent setting of a swanky business hotel in the heart of Washington, D.C., pushed my mind to the first of many reflections during the meeting on the recent, SSTI-recommended title by Anand Giridharada, Winners Take All: The Elite Charade of Changing the World.

Regardless of the boundaries of the middle class, one of the success stories of capitalism has been the very creation of a body of people within a society residing comfortably between the wealthy and poor because of our chosen economic system.  Consumption by the middle class, in turn, fuels more economic growth. However, that fundamental middle class argument for capitalism is beginning to crumble. Despite this long period of sustained economic growth and low unemployment rates (capitalism working well) since the recession, the ability of an increasing share of Americans to live a comfortable “middle class” existence continues to fade.

The Federal Reserve conference was full of data to back up that concern and cause to look for solutions. A keynote address by Federal Reserve Governor Lael Brainard, who used households between the 40^th and 70^th percentiles of income for her middle class definition ($40,000 to $85,000), provides an ample sampling of the crisis. Excerpts from the written copy of her speech are illuminating (sources are available on the address link):

• The wealth of middle-income households increased an average of about 1 percent per year, adjusted for inflation, over the past 30 years.  The average wealth of the households in the top decile of the income distribution has increased three times faster per year, on average, than the wealth of middle-income households, more than doubling over the period as a whole.
• Looking only at the “even more sobering” past decade, middle-income families still have not fully recovered the wealth they lost in the Great Recession. The wealth of the top 10 percent of households is 19 percent higher than before the recession, even after factoring in the decline in stock prices at the end of last year.
• At the end of 2018, the average middle-income household had wealth of about $340,000, while the average households in the top 10 percent of the income distribution had wealth of about $4.5 million. The average wealth of the top income decile is now 13 times higher than that of the middle-income group, while it was 7 times higher in 1989.
• Among households at the middle of the income distribution, the average wealth in 2016 of white households ($277,200) was roughly one and a half times that of black households ($179,700) and nearly three times that of Hispanic households ($95,400).
• The average wealth of black households in which the head had a bachelor's degree ($271,200) was 26 percent less than that of white households in which the head did not attend college ($367,800).
• The 30 percent of households in the middle category now hold only 13 percent of all wealth, down from 19 percent in 1989.  The top 10 percent hold more wealth than the remaining 90 percent combined.
• Regarding liquidity, only about one-fourth of middle-income households have enough liquid savings to cover six months of expenses — the amount often recommended by financial advisers — and only 4 in 10 could cover three months of expenses.
• According to the forthcoming results from the 2018 Survey of Household Economics and Decision-making, one-third of middle-income adults said that they would borrow money, sell something, or not be able to pay an unexpected $400 expense. Parsing out that one-third: 6 percent of middle-income adults said they would not be able to pay the expense using any means, 27 percent would borrow or sell something to pay the expense.
• Nearly 3 in 10 middle-income adults carry a balance on their credit card most or all of the time, and the same households are five times as likely to borrow if faced with a $400 expense as those who never carry a balance.
• Only 35 percent of middle-income adults, who are not retired, say that their retirement saving is on track, and 16 percent of middle-income adults do not have any money saved for retirement.
• Two-thirds of middle-income adults who hold self-directed accounts, including defined contribution plans and individual retirement accounts, say that they have little or no comfort in managing the investments.
• In 2018, 2 in 10 middle-income adults with education debt were behind on their payments, and those who did not complete a degree were nearly twice as likely to be behind. Repayment status also differs by the type of institution attended. Among middle-income adults with education debt, 30 percent who attended for-profit institutions were behind on student loan payments, compared with 17 percent of those who attended public institutions and 12 percent who attended not-for-profit private institutions.
• One study found that individuals with student loan debt are less likely to start a business, and those who do are more likely to fall behind on their loan payments. Another study found that growth in student loan debt resulted in a 14 percent reduction in small business formation in counties over a 10-year period.
• Stock market participation fell for middle-income families after the Great Recession, so they have not benefited as much from the subsequent rise in stock prices. By 2018, the 30 percent of households in the middle of the income distribution held only 6 percent of aggregate business assets, while the top 10 percent of households held over three‑fourths.

Albert Einstein, while not in attendance during Renewing the Promise of the Middle Class, was on my mind during the limited discussion on potential solutions. I found myself reflecting on an unsourced quote attributed to him: “Problems cannot be solved with the same mindset that created them.” 

There is need for innovation in how we grow our companies, distribute the wealth from their successes, and finance our educations to correct many of those trends presented by Brainard and others.  The readership of this newsletter represents most of the state, university and regional organizations committed to encouraging innovation in their communities.  Are we up to the challenge to innovate new paths for growing a middle class — or part of the same mindset destroying it?