Vanishing US Upper Middle Class

[dcarrigg]

Interesting charts from Bloomberg this morning focusing on the upper end of the middle class.



This is a weird way to break it out, but it's kind of a trip.

In the last 30 years:
Share of total US wealth owned by the upper 1% has increased 13%.
Share of total US wealth owned by the next 9% has increased 4%.
Share of total US wealth owned by the 50th-90th percentile decreased 17%.
Share of total US wealth owned by the bottom 50% decreased 68%!

Ouch.

But in nominal, not relative, terms, the Upper Middle Class lost the most money.

Meanwhile, the upper middle class has almost totally lost all business equity of all kinds from shares in mutual funds to non-corporate small business equity:



This one shocked me. Every person in the 50th-90th percentiles added together only own about an eighth of total US business equity. The other 7/8ths all belongs to the top 10% now. I would have figured 401(k)s with standard set-ups alone would have put a bit better number on that, even though I know 401(k)s have been a huge policy failure. The 50th-90th percentile's share of total US business equity in the last 30 years has decreased by 45%!

Worse still? Beyond equity, in the last 10 years, the debt composition of the upper middle class has changed pretty sharply:




Much more debt is held in auto and student loans. We all knew that already. And much less debt is held in mortgages. We knew that too. Young people have lots of student loans and are the least likely Americans to be able to own their own homes in a hundred years. But figures like this tell me even more. The share of mortgage debt owed by the upper middle class (defined as 50th-90th percentile) has decreased 17% in the past 10 years. Meanwhile the share of student loan debt has increased 102%, and the share of auto loan debt has increased 91%. In just 10 years! The auto debt is shocking. I knew we had big big growth in subprime auto loans. I did not realize the extent to which those in the top half of the middle class leveraged themselves for cars. I mean, it just exploded.

Lots of stories on student loans. Not so many on auto. Pretty sure the consensus around here is that the smart amount of a car to finance is 0%. Mortgages are a bit different in my mind. You gotta live somewhere. So the trade-off's different. So is the equity picture. Keep up with a home, and it's not going to be a great earner, but it will be worth something. Most cars rapidly depreciate to 0.




It's not mentioned often, but property taxes are also increasing significantly faster than top-line inflation--like everything else that can't be outsourced to low-wage countries. So this is another thing putting the squeeze on both mortgages and rents.

Meanwhile, wage growth for the 50th-90th percent does not beat inflation. It's 2%-3%, just like inflation. Completely flatlined since the great recession.




And the icing on the cake? Interest rates are up. Investors have found a way to seek better return off the upper middle class, even if wages have flatlined. 1. Shift the credit profile of the upper middle class toward higher interest loan types, and 2. charge them higher interest rates for existing loan types. So an increasing share of wages goes to rents, property tax, healthcare, and debt service than ever before. And beyond that, credit card interest rates are now as high as the late 1970s, only with inflation much, much lower, the real costs of credit card debt have never been higher:



The professional class is getting totally wrecked.

[Mega]

Re: Vanishing US Upper Middle Class

Hmmmm..............If only "They" allow the credit cycle + interest rates

[Mega]

Re: Vanishing US Upper Middle Class

[jk]

Re: Vanishing US Upper Middle Class

those pie charts are interesting. the biggest [relative] losers were the lower 50%, who lost 2/3 of the little share of wealth they'd had. and virtually all the losses from the bottom 50% and the 51st to 89th went, of course, to the top 1%.

if there is no significant redirection of the economy and social contract, presumably the "upper middle" will continue to be drained. i wonder at what point the top 1% will go after the 90th to 98th, and how they'll do it.

[DSpencer]

Re: Vanishing US Upper Middle Class

those pie charts are interesting. the biggest [relative] losers were the lower 50%, who lost 2/3 of the little share of wealth they'd had. and virtually all the losses from the bottom 50% and the 51st to 89th went, of course, to the top 1%.

if there is no significant redirection of the economy and social contract, presumably the "upper middle" will continue to be drained. i wonder at what point the top 1% will go after the 90th to 98th, and how they'll do it.

You're assuming the top 1% (and .1%) isn't already growing its share. I think the term "drained" is misleading though. If the pie is growing then it's possible for everyone to have more while certain groups are declining on a relative basis. I think that the real question, the one that is more likely to alter the social contract, is whether groups are truly stagnant or declining in absolute rather than relative terms. The average person probably cares little about whether Jeff Bezos has $100 billion or $300 billion, but they don't want a lower standard of living. This is not to say that relative measures are meaningless, but I think they are less important.

[thriftyandboringinohio]

Re: Vanishing US Upper Middle Class

..If the pie is growing then it's possible for everyone to have more while certain groups are declining on a relative basis....

Here at iTulip we've seen hundreds of charts showing inflation adjusted wage trends, median income trends, income disparity, wealth disparity, labor's share of GDP, and they all point to the same conclusion. If the pie really is getting any bigger it's not by very much, perhaps 2% per year, and the top 1% and the big corps are taking all of the new pie slices plus more.

While the "growing pie theorem" is logically plausible and mathematically possible, the evidence is clear that it has not actually happened since Ronald Reagan was president in 1989. That was thirty years ago, the entire working lifetime of every American under fifty years old.

Given those irrefutable facts, the word "drained" seems spot-on.

[dcarrigg]

Re: Vanishing US Upper Middle Class

You're assuming the top 1% (and .1%) isn't already growing its share. I think the term "drained" is misleading though. If the pie is growing then it's possible for everyone to have more while certain groups are declining on a relative basis. I think that the real question, the one that is more likely to alter the social contract, is whether groups are truly stagnant or declining in absolute rather than relative terms. The average person probably cares little about whether Jeff Bezos has $100 billion or $300 billion, but they don't want a lower standard of living. This is not to say that relative measures are meaningless, but I think they are less important.

The problem I always have with the absolute approach, & the whole Rawls ideal in general, is that we do not live in a vacuum. Even if it's largely a positive sum game, some things are zero sum. They're not making more land. They're not making more power. Wealth concentration has serious consequences, political, social, psychological, & economic.

So for economic consequences, take for instance real estate. Maybe they don't care if Bezos has $100bn or $300bn. But if it's the difference between him holding 1 million or 5 million acres of land for himself, now the market in general is bid up for everyone else. Even if some bottom or middle wealth band you're looking at has a slight increase in absolute terms, if they're losing in relative terms, they lose market purchasing power in real estate by definition. A similar thing happens with suppliers when mergers and acquisitions in one field or another get close to oligopoly or monopoly, or otherwise find a choke point where they can muscle competition out.

Then there are the political consequences. We've trod that turf all too well. But concentrated economic power has a very clear vector into political power, especially since the Citizens United and McCutcheon decisions took the caps off spending. I thought a key moment in the 2016 Republican Primary especially was seeing everybody except Trump line up to kiss Sheldon Adelson's ring. There's obviously real political & policy effects of this stuff. And it's easy to imagine how relative inequality could become self-reinforcing through these means.

Then there are the social consequences. Not just the general trend I've noticed that civil unrest starts popping up a lot more over about 0.55 gini. But general despair, malaise, declining social mobility, and an entrenched inherited elite who may or may not actually have any skill or merit, and who therefore may or may not make good decisions. Widening gulfs in health and other social outcomes result. I think the life expectancy drop is a canary in the coal mine, and I suspect this is related, but that's a point reasonable people might argue about.

All this has psychological effects on those born into differing social strata, and as the relative gulf widens, one would imagine the psychological effects must increase in magnitude. Maybe not at a direct 1:1 rate. But almost certainly somebody growing up in a $20k per year household and somebody growing up in a $20,000,000k per year household are going to be more different than somebody growing up in a $200k per year household and somebody growing up in a $2,000k per year household.

Then there are the capital/labor effects. Obviously the relative shift means more of the pie goes to capital and less goes to labor. At some point, it seems reasonable to me that there can be a glut of capital and insufficient demand for consumption based on a relative labor/capital imbalance. Labor's share was constant in the United States for a very long time, as was the correlation between productivity and wages, until 30 years ago. Now they have diverged. And we're running a live experiment the outcome of which nobody can say for certain, in which workers are no longer paid for increased productivity, and labor is losing total income share to capital. One might predict this would result in, 1) slower overall productivity gains, since there's no incentive for workers to be more productive if they're not getting paid for it, 2) a chronic lack of demand for consumables and depreciating goods, and 3) a run up in asset prices that hold value reasonably well. I think evidence bears all 3 of these out. And I suspect the problems we're facing generated by these results will only be exacerbated as inequality accelerates.

Always worth remembering the only thing preventing the other 300 million from taking Bezos' $300 billion is buy-in to the system. Faith. You lose that, and all bets are off. How far do you think you can drive the relative inequality until it all falls apart? Even if you don't personally care, it must be obvious to you that lots of people do. At some point the wealthy shift in the majority's mind from aspirational successes to illegitimate oppressors. Nobody likes the guy who takes 6 slices of pizza out the box, no matter how big the pizza is.

[dcarrigg]

Re: Vanishing US Upper Middle Class

As an addendum to this, think of how Bezos is able to not only buy up the press, but strong arm state and local government into handing over billions. Meanwhile Amazon paid $0 in corporate taxes. He's not alone. Many others do this. But I imagine this will only be exacerbated as inequality increases. It's another vector by which inequality self perpetuates.

[jk]

Re: Vanishing US Upper Middle Class

i'm still thinking about how the upper 0.1% will go after the assets of the 91st-99.8th percentiles. kiting the stock market further would increase the disparity some more. hedge funds are passe - the original unexploited niche of the hedge fund industry was leverage combined with short selling to create a market neutral portfolio. alfred jones figured that out when he created the first "hedgeD fund" in 1949.

now that niche and other niches that benefit from leveraging publicly traded assets have been fully mined. private equity, otoh, is a big growth industry, as is the practice of keeping businesses private. i expect this niche to accelerate its already rapid growth

meanwhile, when the next recession appears on the horizon publicly traded equities will take a bath. the down-rating of the 50% of the "investment grade" corporate bond market which is already at the lowest investment grade - BBB - will force mutual funds and pension funds to disgorge them all simultaneously, since most such funds are barred from holding non-investment grade paper. this will kill the pubicly traded corporate bond market. the simultaneous equity and corporate bond selloff will decimate all those individual brokerage accounts, as well as all the already underfunded private and public pension plans.

as such a situation evolves we can expect QEn [for all n] and/or explicit mmt spending/helicopter money, dropping the value of cash and treasury paper.

so this hypothesis is that everything that is publicly traded will sell off, while privately held corporations and real estate, which remain capable of generating cash flows, will hold or even increase in value. this maneuver would effectively drain everyone but the holders of such private assets.

anyway, that's the one such scenario i've been able to imagine. i'd appreciate any feedback on whether it seems plausible, and also any other ideas of how the 0.1 or 0.01% manage to get an even bigger share of the pie.

[dcarrigg]

Re: Vanishing US Upper Middle Class

i'm still thinking about how the upper 0.1% will go after the assets of the 91st-99.8th percentiles. kiting the stock market further would increase the disparity some more. hedge funds are passe - the original unexploited niche of the hedge fund industry was leverage combined with short selling to create a market neutral portfolio. alfred jones figured that out when he created the first "hedgeD fund" in 1949.

now that niche and other niches that benefit from leveraging publicly traded assets have been fully mined. private equity, otoh, is a big growth industry, as is the practice of keeping businesses private. i expect this niche to accelerate its already rapid growth

meanwhile, when the next recession appears on the horizon publicly traded equities will take a bath. the down-rating of the 50% of the "investment grade" corporate bond market which is already at the lowest investment grade - BBB - will force mutual funds and pension funds to disgorge them all simultaneously, since most such funds are barred from holding non-investment grade paper. this will kill the pubicly traded corporate bond market. the simultaneous equity and corporate bond selloff will decimate all those individual brokerage accounts, as well as all the already underfunded private and public pension plans.

as such a situation evolves we can expect QEn [for all n] and/or explicit mmt spending/helicopter money, dropping the value of cash and treasury paper.

so this hypothesis is that everything that is publicly traded will sell off, while privately held corporations and real estate, which remain capable of generating cash flows, will hold or even increase in value. this maneuver would effectively drain everyone but the holders of such private assets.

anyway, that's the one such scenario i've been able to imagine. i'd appreciate any feedback on whether it seems plausible, and also any other ideas of how the 0.1 or 0.01% manage to get an even bigger share of the pie.

I've mentioned it before a couple times, and folks don't seem so alarmed by it as I am, but it's worth considering:
US never had a President or cabinet member wealthier than George Washington until 2013 with Penny Pritzker.
Same year the 'nuclear option' upends the rules in the Senate.

Now US has a president and several high-up executive branch appointees wealthier than George Washington at the same time.
And several more 'nuclear options' have been used since 2016.
First thing they push for is weird tax law that benefits the 0.1%, but hits salaried people with $$$ homes in NYC and SF etc.
And then they stack the courts.

Seems to me the opening salvo of the attack you're thinking of already happened.
Problem is the top 10% can and knows how to fight back in the political arena.
Once the filibuster is dead, all bets are off.

50 becomes the new 60. Simple majorities can do anything they want without limit.
And it already died for Supreme Court nominees and everything jammed through under 'budget reconciliation' like the tax bill.
Regular order in the Senate has died in the past 7 years.

Senate rules are continuing, unlike the House; they're old and they endure and this time it's different.
Might seem boring, but it's why John McCain did that thumbs down stuff before he died.
Forget all the other hand-wringing about norms; it's what happens to legal & legislative procedure that matters.

And to be honest, were I the upper 0.1%, I wouldn't give a shit about the administrative state or regulations.
Easy enough to write a check to a lobby firm to handle that OMB / Federal Register stuff.
I'd want to blow up Senate rule XIX, abandon blue slips, get hand-picked robes on the bench.

The BBB stuff's interesting food for thought, and I don't doubt there's a game afoot there.
But there's also this game that seems to be happening in a very obvious way, out in the open, in plain sight.
Somebody just handed them a trillion out of the US Treasury on his way out the door.
And look where that somebody is now.

[dcarrigg]

Re: Vanishing US Upper Middle Class

There's a new OECD report about the problem of the middle class getting shellacked worldwide and the potential systemic risks it creates.

...over the past 30 years, middle-income households have experienced dismal income growth or even stagnation in some countries. This has fueled perceptions that the current socio-economic system is unfair and that the middle class has not benefited from economic growth in proportion to its contribution. Furthermore, cost of living has become increasingly expensive for the middle class, as the cost of core services and goods such as housing have risen faster than income. Traditional middle-class opportunities for social mobility have also withered as labor market prospects become increasingly uncertain...Uncertain of their own prospects, the middle class are also concerned about those of their children; the current generation is the most educated, and yet has lower chances of achieving the same standard of living as their parents. This report documents these trends in detail. It shows that every generation since the baby boom has seen the middle income group shrink and its economic influence weaken. Three decades ago, the aggregate income from all middle income households was four times larger than the aggregate income of upper income households; today the ratio is less than three.