Greatest Fallacy Ever: The Middle Class

We as human beings like balance. When there are differences, we tend to want to compromise for a resolution. When there are polarizing views, we tend to want to take a middle view as we all find something to agree with or disagree with no matter what side we're standing on. We generally believe that absolution is mere idealism because out of every one person that conforms, there's another that's serving as a renegade.

So it's no surprise that we developed the concept of the middle class here in the United States, really taking shape in the postwar years of the 1950s and 1960s as many Americans, many for the first time, were able to participate in the economy in ways that they were never able to before, exercising their power of choice in a favorable economic climate -- even if poverty levels were at 20% (and dropping by 1959) and a lot of the economic boom was only enjoyed by whites. The American middle class became sacred ground -- those that believe they are middle class live by it, adore and resent the rich, pity and resent the poor, and in the midst of it developed an "it should be about us" attitude.

The reality is that the middle class is the biggest fallacy to ever be devised out of mythical Americana.

There's only two socioeconomic classes -- those that can weather the economic storm with little scathing and those that can weather the economic storm with massive consequences, largely debt. Observe the following three things:

• According to a graph produced by CNN Money with data from IRS and analysis from Thomas Piketty and Emmanuel Saez of the University of California, Berkeley, the average American income had only gradually increased in the years between 1917 and 2008, with it being largely stagnated since 1988. However, the top 1% in income earners have see their incomes rise 33% in the years between 1988 and 2008. Cost of living inflation has the greatest adverse effect on those making average incomes, and to mitigate cost of living increases against incomes that are not really going anywhere, people generally had to turn to increased borrowing (i.e. credit cards). (Source CNN Money)
• That same article cited three main factors -- outsourcing, American economic transition, and the decline of unions -- that contributed to incomes largely being stagnant for the wide majority of Americans. Give credit to technological advances as well, even though it was not nearly as credited as the first three things I mentioned. Wealthier Americans have more to gain from a company having a solid economy of scale (when the average cost to produce something falls against increasing input, which pretty much forms the basic motivation for outsourcing) generally because of capital gains. (Source CNN Money)
• American household debt is standing at 114% (through the first quarter of 2011), down from the peak of 130% in 2007. While debt is a weight that affects everybody, you have to take something into consideration -- the lower your income, the less liquid your assets are, because most likely you have liabilities tied to those said assets (i.e. auto home, home loan, or massive credit card debt). I will note that considering home loans and auto loans are harder to come by now because banks realize that granting easy credit is a stupid fucking practice and people in general cutting back on expenses (thus inhibiting consumerism), the debt to income ratio will go down, but I expect it to remain over 100% for a while. (source: Wall Street Journal).

There's two further viewpoints that can be made. I'm going to express each along with the flaw in both:

The first thing that can be said, at least for those that can weather an economic storm, is that these said people are smart with their money. They don't live outside their means. Their consumerism is in harmonic balance with their individual buying power, as they will not make economic choices that they cannot pay for either immediately or within due time with confidence. A further argument beyond that is that these people that have money and are financially happy are "driven". They're "go-getters". They "realize" that capitalism is an economic system that "rewards" and not "gives".

The issue with that view is that that's not the absolute reason why these said people are in good financial health, especially the extremely wealthy. Higher incomes provide additional insulation against any major changes in the economy that could pose an adverse direct effect. The majority of Americans went into poor to bad financial health because their increased dependence on borrowed money -- i.e., increasing costs to finance a car, to buy a home, to finance college tuition, and to finance day to day expense either necessities or luxuries.

The second is that the wealthy are hording the money, the wealthy have eroded the middle class, and all government does is either cater to the very rich or very poor. The middle class has been victimized. The illegal aliens are ruining the American middle class. It's the whole American economic system versus the middle class.

It's not really the sole reason why the so called "middle class" is being "attacked". As the CNN Money article noted, because of the outsourcing of manufacturing jobs (as companies increasingly found it lucrative to hire in places with a lower cost of living with favorable exchange rates as it is indeed cheaper), the United States economy is shifting from hard skilled, blue collar economy to a soft skilled, white collar economy which gives even increased value to collegiate education. In essence, because of the outsourcing of work that has provided increased competition for job seekers amongst each other, it causes a downward force on wages (hell, Adam Smith said it himself). Ironically (and I say this because Adam Smith is seen as the preeminent champion of free market, lassiez-faire economics), Karl Marx actually wrote about what happens when companies becomes motivated by profit at the expense of the worker, which loosely concurs Smith's argument, and illustrates what is happening today.

The truth is the middle class never really existed. When adjusting for inflation, as evidenced in the graph, average incomes have largely remained stagnant for the past 70 years, except for the gradual increase in the post-World War II years. We could get into a further argument about the role of inflation, but it only confirms that you either can make it in the economy or you can't. Even if the money supply was backed by specie, it wouldn't change the fact that economic cycles still exist, wages wouldn't change for most, and inflation would still exist. In fact, you can look here to see how violent inflation rates were during the years under the gold standard, and especially during the years of the Bretton Woods system (1944 - 1971). In truth, wages are generally nominal -- that's the reality of a fiat currency -- and the real value of your wages is only as good as how much you can exercise your power of choice freely. You may make $60,000 a year but if your total yearly financial obligations average out to say $70,000, then that $60,000 doesn't look as alluring.