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  The Perfect Storm: How America’s Middle Class Arrived
  at the Brink of Destruction

Remember the Cleaver clan? They were America’s post World War II standard bearers. Hard working and clean cut, this nuclear family existed on a single income. They owned a modern, suburban house. Their children went to safe, public schools. They looked forward to expanding prosperity and knew their kids could have a future even more prosperous than their own. Though the Cleavers were a fictional family on the 1950s television show “Leave it to Beaver,” they embodied the middle class, American Dream — a dream that seemed possible to an ever-growing majority of Americans. Half a century later, that dream of homeownership, relative security from want, affordable health care, decent pay for a 40-hour workweek and a shot at a comfortable retirement, is on the brink of destruction.

During the past decade, the middle class has stopped expanding. In fact, it is demonstrably dwindling and those who are leaving the middle classes primarily end up as part of the working poor. There are myriad reasons for this phenomenon including: shrinking wages; job losses due to globalization and cheap overseas labor; the lack of reasonably priced health care; the increased cost of education; credit card policies run amok leading to crushing debt; and the potential collapse of the pension and Social Security systems. The convergence of all of these phenomena at one time have created a “perfect storm,” of sorts, in which the dreams of the many are being lost at sea.

Waning Wages

Though mainstream press organizations generally report rosy, government-sponsored statistics regarding wages and jobs, like low unemployment figures and the continued, superlative spending power of American consumers, others numbers belie this story. According to data surveyed by the Financial Times of London:
“Real wages in the US are falling at their fastest rate in 14 years. Inflation rose 3.1 percent in the year [2005] to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent.” Sadly, falling wages are now the norm for college-educated workers as well as for those with scant education. However, for those with a high school diploma or less, who have generally made up the bulk of the middle classes, the situation is direr. In an article titled, “The Middle Class in Economic Decline,” S. R. Shearer says:

[Over a decade ago] Jack Beatty, writing in the Atlantic Monthly, anxiously noted that between 1974 and 1989 workers with less than a high school education had seen their wages fall by 21.7 percent, and high school graduates had seen theirs fall by 14.7 percent.

Economist Lester Thurow reported the same thing five years later. He wrote that:

from 1973 to 1992 average wages for the bottom 60 percent of male workers fell 20 percent. Thurow went on to say that the phenomenon of falling wages was a particularly desperate problem for younger workers aged eighteen to twenty-four where the percentage of those working full time at a poverty level income increased from 29 to 48 percent. (Shearer, online, Keystone Publishing).

The high wages for non-professional work that once fueled growing prosperity for the middle have fallen for several reasons. One is that the labor unions that once guaranteed workers a fair share of the spoils of capitalism have lost their clout during the past several decades. Beginning with president Ronald Reagan’s use of the Taft-Hartley Act to defeat a strike by the Professional Air Traffic Controllers Association in the early 1980s, collective bargaining has been on the decline.

In the annually updated, “The State of Working America,” Lawrence Mishel, Jared Bernstein and Sylvia Allegretto of the Economic Policy Institute document the waning membership in unions from about one-fourth of the workforce in the 1970s to less than one-eighth in 2003. In the report they state:

This falling rate of unionization has lowered wages, not only because some workers no longer receive the higher union wage, but also because there is less pressure on non-union employers to raise wages.

In addition, David Broder, in his Washington Post article, “The Price of Labor’s Decline,” reveals that, “the [wage] gap is large. In 2003 the average blue-collar union job paid $30.76 an hour in wages and benefits, compared with $18.11 for the nonunion job.”

The financial equation has clearly not changed to favor workers. For example, in 1970, the auto company, General Motors was the country’s largest employer. Overwhelmingly unionized, workers there earned $17.50 an hour plus health, pension and vacation benefits. Today, the country’s largest private employer is the retailer, Wal-Mart. Workers there earn, on average, $8.00 per hour, with no defined pension and insufficient health care benefits. To extrapolate further, in the 1970s, GM’s workforce could afford to buy the new automobiles they produced, while today the employees of Wal-Mart are hard-pressed to come up with the money to purchase the cheaply made goods they sell.

To further complicate things, those cheap goods found at Wal-Mart and other retailers are increasingly being manufactured overseas by labor that makes a fraction of what Americans earn. Wal-Mart is the largest importer of inexpensive or sweatshop produced Chinese-made goods in the United States. In fact, 10 percent of all Chinese goods made for export are purchased by Wal-Mart. Due to their ability to demand the lowest prices from vendors, Wal-Mart has, in many cases, driven American manufacturers — those where workers receive higher wages — out of business.

But Wal-Mart is only one of many American corporations that have discovered the fiscal joys of having their goods produced by underpaid laborers in other countries. Increasingly, a variety of companies have adopted the business practice of outsourcing, or sending jobs to the lowest overseas bidder. This practice has displaced American workers at all levels. Some of those recently supplanted held positions in the typically non-union service and technology sectors that were once thought to possess an inherent warranty against downsizing. The New York Times asserts:

Overseas facilities are now handling all aspects of employee compensation, benefits, finance and even accounting—in short, any functions that are not unique to [a] company and are not part of its essential business.” (qtd. in “Disposable Workers: Today's Reserve Army of Labor,” Monthly Review, April 2004).

Even when actual outsourcing does not happen, the risk of evaporating jobs can be enough to keep wages down and workers compliant. The practice of outsourcing is now so common and the threat so real, that many workers who would, under other circumstances demand raises and benefits, quietly acquiesce to corporate bosses. For example, Fred and Harry Magdoff writing in the Monthly Review state:

It is hard to organize unions in an environment where there is always surplus labor that can not only replace militant leaders but also an entire labor force, if necessary to break a strike. Workers in many businesses are well aware that if they get too bold and demand wage increases or resist concessions the response from owners will be to move the plant to Mexico or China. Thus, in addition to a mostly hostile government and media attitude toward labor for the last few decades, the fear of job loss has had a profoundly quieting effect on militancy.

Whether due to union-busting, outsourcing or corporate demands for higher profits, according to Paul Krugman in The Nation: between 1973 and 2000 "the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent" And as recently as February 2005, the Economic Policy Institute found that:

Among nearly all groups of workers, wages fell, relative to inflation. By 2003, the persistently weak job market began to take its toll on wage growth, and last year the hourly wages of most workers either remained flat or dropped relative to inflation.

Health Care Hurricane

However, it is not only shrinking incomes that have placed the middle class in jeopardy. The second component of the perfect storm of economic catastrophes is the lack of affordable health care. Unlike many other industrialized nations, the United States has never adopted a national health care plan. This type of plan, like the ones Canadians and most Western Europeans enjoy, guarantees medical care to all its citizens. The U.S., instead, has a private health care system in which employers provide, tax-exempt, health insurance benefits for their workers. For those not employed, the government has a variety of national and state-run alternatives, all of which provide universally inadequate and diminishing care to about one quarter of the nation’s citizens.

America’s employer-sponsored health insurance system is troubled in a variety of ways, though the primary problem is exorbitant costs. During the last decade the price of medical insurance increased exponentially. According to a September 2004 story in News Batch:

Health care costs are now approaching 15% of our national economy and the economic repercussions have been felt by most American families as employers are increasingly unwilling to absorb the bulk of this increase. Health insurance costs have had double digit increases in the last several years and are escalating at a rate even greater than the cost of health care.

As the cost of health care has risen, many employers have become unwilling to spend the increasing amounts of capital needed to ensure this employee benefit. As a result, employees must pay a bigger percentage of their own insurance premiums; or they must accept plans that cover fewer illnesses and treatments; or, in many instances, they must do both. In some cases, full-time workers must forgo medical insurance entirely, when employers opt out of providing benefits, and they cannot afford to insure themselves or their families.

A study by the Robert Wood Johnson Foundation estimates that 20 million working Americans are uninsured; "in Texas, which has the worst record, more than 30 percent of the adults under 65 have no insurance." (Krugman. “A Private Obsession.”)

Essentially, by having to pay more for medical insurance, or saving their own money in medical savings accounts or, when necessary, using credit cards to pay for health care, middle class workers are feeling a measurable drain on their incomes. For many, the rising cost of private, employer-sponsored health care, has resulted in a literal pay cut.

Endangered Education

Wages are down and health care costs are up. However, despite this economic stagflation, one thing that keeps the American Dream-boat afloat on these stormy seas is the belief that a good education will allow middle class families to rise within the social ranks, earn more money and eventually live more comfortable lives. “A bachelor's degree, not a year or two of courses, tends to determine a person's place in today's globalized, computerized economy. College graduates have received steady pay increases over the past two decades, while the pay of everyone else has risen little more than the rate of inflation. “ says David Leonhardt in the New York Times. (May 2005) However, while a college education may have been a reasonable aspiration fifty, or even twenty years ago, when state colleges were affordable, for many, it is now financially out of reach.

Writing in The American Prospect, Elizabeth Warren says “as the cost of educating children before they enter public schools has risen, so has the cost of educating children after they graduate high school. Once again, the change over the past three decades is stunning.” Additionally, according to the latest College Board report, titled “Trends in College Pricing,” the tuition for a four-year, public college education has risen from $1,992 in 1977 to $5,132 in 2005. That is an increase of 257 percent. In just the last year tuitions at these schools have risen nine percent.

With wages down an average of 20 percent for many middle class Americans during the same period when a college education has increased in price by 257 percent, today’s Ward Cleavers will find it difficult, if not impossible, to pay for Beaver’s bachelor’s degree. As a result, researchers say that “moving from one income group to another over the course of a lifetime has stopped rising... Some recent studies suggest that [upward mobility] has declined over the last generation.” (Leonhardt).

Credit Card Craziness

If the current downward mobility of the middle class has gone somewhat unnoticed, it is due to one ubiquitous component of the economy: credit cards. A brief look at the history of the credit card will show how this single economic factor has masked a litany of financial ills. Before 1980, credit cards were issued by local banks and carried low rates of interest. Though used by many to make purchases for which they could not have received credit from other lenders, credit card spending was a manageable aspect of middle class debt — and with low interest rates, a loss-leader for lenders. That changed in 1980 when the state of South Dakota made a deal with Citibank to begin issuing nation-wide credit cards that carried much higher rates of interest than were previously allowed under individual states’ usury laws — laws originally put in place to keep banks from resembling loan sharks. The next year, the state of Delaware followed suit and the era of deregulated, 18%-and-higher interest rates had come to stay.

Not only were interest rates higher, acquiring the cards became easier — often as simple as filling out a form which arrived unbidden, in one’s mailbox. In “The Ascendancy of the Credit Card Industry," Robin Stein says:

Between 1980 and 1990, the number of credit cards more than doubled, credit card spending increased more than five-fold and the average household credit card balance rose from $518 to nearly $2,700.” By the end of 2004, the Federal Reserve reported that outstanding credit card debt was $796 billion, over three times higher than in 1993.

During the past two decades the middle classes could largely ignore their declining earning power because conversely, their spending power had magically increased. In fact, consumer spending accounts for about two-thirds of the Gross Domestic Product, and much of that is financed with borrowed money. However, while the first fifteen-years-or-so of this wave of credit spending often went to the purchase of discretionary items like vacations and new electronics, according to PBS’s Frontline:

Demos' [an online action network] public policy expert Tamara Draut says credit card usage in the U.S. has dramatically changed in the last several years. ‘Today, credit cards have become a Band-Aid to hold the family budget [together], a socially acceptable solution for maintaining living standards during periods of income loss or stagnation."’ (Telvick, “Charge It!”).

Or, as Elizabeth Warren and Amelia Warren-Tyagi put it in their 2003 book The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke:

No advertisements trumpet, "When your husband leaves you, there's MasterCard." Nor do we hear: "American Express: Don't lose your job without it." But those slogans would be closer to the truth about how credit is used today. When corporate layoffs loom, workers apply for as many credit cards as possible to see them through until they can find a new job. When health insurance lapses, the family hands a MasterCard to the doctor and prays for the best. And when Dad walks out, that "E-Z check" stuffed in with the latest credit card bill looks like just the thing to tide Mom over until the child support checks arrive” (131).

Credit cards have been both a temporary boon to, and ultimately aided in, the deterioration of today’s American middle class. While having more credit has enabled people to keep their standard of living at the level to which they have been accustomed, it has also created a precarious situation in which many families owe thousands of dollars and are one minimum payment away from utter disaster. Perhaps this is to be expected in a county where the nation’s leader refers to its citizens as “consumers.”

However, this same leader has recently closed the one escape hatch previously open to debtors who found themselves in need of a fresh start. Earlier this year, President Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 into law. With personal bankruptcies at an all-time high, this new law has a number of provisions that will dramatically limit the rights of many individuals to file for this protection and will, in most cases, require families with credit card debt to repay the money they have borrowed — regardless of their own perceived inability to pay.

Pensions in Peril

If navigating the rocky shoals of lower wages, astronomical healthcare costs, increasingly out-of-financial-reach education and mounting credit card debt has somehow not been enough to propel the average middle class person out of their leaky life raft, then facing old age without a pension or guaranteed Social Security payments may finally do the trick. During the days when Ward Cleaver was a breadwinner, employers of the middle classes routinely offered retirement pensions as part of their compensation packages. In addition to that, American workers could depend on a guaranteed, monthly Social Security stipend after the age of 65.

Today, every aspect of retirement income for the middle class is under siege.
Until the 1980s, many Americans stayed for decades at the same jobs with companies, like General Motors, that promised hundreds of thousands of workers some six percent of their annual income when they retired. This type of "defined benefit pension" was guaranteed for life.

Since then, three major things have changed. The first, as discussed earlier, is that cheaper, overseas —or even local — laborers who will work without the incentive of costly benefits are replacing higher-paid American workers. Therefore, those workers who would like to stay with employers for the long haul, largely no longer have the opportunity. The second is that pensions themselves have, all but, been eliminated due to corporate cutbacks, mismanagement or outright defaults. Companies have, in many cases, been using the money that should have been set aside for pensions to finance the bottom line or invested it in risky stock schemes. According to Paul Solomon writing for the PBS News Hour website (“Pension Gamble,” September 25, 2003):

GM, like pretty much everyone else in the system, took a chance on its pension fund by investing in stocks, instead of safer U.S. government bonds. And for years, the chance seemed to pay off. Stocks performed so well, in fact, GM built up more than enough to cover its retirees. Its pensions were over funded. Having apparently made money on its investments, GM reported it as profit. Then came the recent stock market swoon. GM's pension fund went down so much, it became under funded, with too little money to cover the defined benefit obligation.

The bad news is, that now when retirees reach the age when they need to draw upon this money, it no longer exists, and their promised benefits are reduced or cut entirely. The good news is, that pensions at 33,000 U.S. firms are insured by a government agency: the Pension Benefit Guarantee Corporation (PBGC). The PBGC charges companies insurance premiums in return for pension guarantees of up to $45,000 a year per worker. However, because the number of company pension plans in financial trouble has exploded, the agency is being deluged by a tsunami of corporate obligations.

According to Jack Rasmus, “By 2004 the PBGC fund's deficit was more than $10 billion and rising at a rate of more than $1.5 billion each month.” If the money drain does not reverse itself soon, the PBGC will have to shift this corporate debt onto the taxpayers and reduce payouts. And if the May 2005 decision by United Airlines to terminate its employees' pension plans, considered the largest corporate-pension default in American history, is any indication, a positive reversal of fortunes is unlikely in the short term.

The third change in retirement benefits since the 1980s is that most corporations switched from guaranteed pensions to 401(k) plans. In a 401(k), employees save their own money. The benefits they receive under this system are generally, but not always: that employers will match a small percentage of what the employee contributes and that they will administrate the plan as long at the employee works for the company. This money, initially untaxed, is meant to provide for workers when they retire. However, since most of this money is “saved” in volatile stock investments, often the company’s own stocks, most employees have no guaranteed benefit amount on which to rely.

The unreliability of payouts from investments was brought home to many a few years ago by the revelations of widespread corporate malfeasance in some of the nation’s most seemingly profitable companies. In only one notorious case, the Houston, Texas energy giant, Enron, which was falsely inflating its stated profits, encouraged employees to continue to invest in the company’s stocks at a time when Enron officers knew they were on the verge declaring bankruptcy. Enron soon failed and that cost its employees more than $1 billion in retirement money. It also cost thousand of other retirees across the nation billions of additional dollars And when a company goes under there is essentially no redress for investors because pension benefit protections under the federal Employee Retirement Income and Security Act do not apply to 401(k) retirement investment plans.

If pensions are disappearing and 401(k)s are unstable, at least today’s Cleavers still have one guaranteed benefit: Social Security. Or do they?

The Social Security Act was signed into law in 1935 by President Franklin Delano Roosevelt to provide benefits to workers and their families upon retirement, disability, or death. According to Greg Anrig, Jr. and Bernard Wasow of The Century Foundation:

Although the average monthly payment to those individuals is a modest $895, Social Security constitutes more than half of the incomes of nearly two-thirds of retired Americans. For one in five, it is their only income. Like past generations of Americans, today's workers of all ages will need Social Security to protect them against forces beyond their control — economic ups and downs, inflation, fluctuating investment markets, and possible disability or premature death of a family member. (“Twelve Reasons Why Privatizing Social Security is a Bad Idea,” December 14, 2004).

To the dismay of many, Social Security is as beleaguered as are corporate pensions. President, George Bush, has made it a centerpiece of his administration to overhaul Social Security. Working under the premise that the program will go bankrupt in about 40 years, it is his intention to change the terms of the Act to allow workers to divert a portion of the payroll taxes they now pay towards Social Security into private accounts. In this way, he believes, retirees will have the opportunity to invest their own money and reap potentially greater rewards.

Those who oppose privatization point out that the corporate scandals of the past decade, and the related beating taken by the stock market and its investors, should be a warning against forcing retirees to gamble with their only guaranteed income. Furthermore groups like the American Association of Retired People (AARP) argue that taking money out of Social Security will effectively bankrupt the system much sooner than may have happened otherwise. "Siphoning money from Social Security will not strengthen it," says David Certner, AARP's director of federal affairs. "It will just make the problem much worse." (qtd. in Westerberg. “Myths and Truths About Social Security”). If the current administration has their way, Social Security will become a relic of the past, like dinosaurs, free television or the secure nuclear families of the 1950s.

Dashed Dreams

The American Dream was once a reality for many in the U.S. The idea: that almost anyone could work hard to earn a decent wage, purchase medical care when needed, send their children to college, pay off their debts and retire with a modicum of comfort, has been the backbone of the American ethos for over fifty years.

However, much of what middle class Americans relied upon to fuel their abundance is in a progressed stage of ruin, or has already vanished. Wages for both educated and non-educated workers are not keeping up with the price of inflation. Jobs, once thought secure, are being eliminated or given to cheaper, overseas laborers. Formerly affordable health care is now too expensive for many who are forced to do with less or to do without. A college education, still the best ticket to prosperity, is now financially out-of-reach for much of the middle class. Even the illusion of prosperity, bought with credit cards is reaching its expiration date. Add to that, the lack of guaranteed retirement benefits, and it becomes inescapably clear that the great American Middle Class is on death row with no reprieve from the government in sight.

Years from now, when the sunny prospects of yore have been blocked out by the dark clouds of the impending financial storms, the middle class progeny of the Cleaver family will wonder how their safe havens disappeared. Looking back it will become clear that each, individual portion of this catastrophe had been registering on economic radar screens across the county for decades. Still, it is only now that all these elements have converged into this perfect storm; a storm poised to plunge the middle class into financial depths from which they may never recover.

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