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America's Middle Class in Crisis

Politics / US Politics Aug 09, 2010 - 01:13 AM GMT

By: PhilStockWorld

Politics

Diamond Rated - Best Financial Markets Analysis ArticleVery nice reading in the Financial Times this week.
One of my favorite topics since I themed the year with our 2010 Outlook "A Tale of Two Economies" and in the years before that I’ve been bitching about the topic of wealth disparity in America to the point where even arch-Conservatives Alan Greenspan and David Stockman are now forced to agree with me.  So that’s two down, 99,999,998 to go!  That’s right, just 1/3 of our fellow countrymen now identify themselves as Republicans or Republican’ts, as they are affectionately known on Capitol Hill - where they block every possible effort to change the status quo that’s been eating away at our nation and destroying the middle class for an entire decade now.


How bad are things for the Middle Class?  Well, the FT points out that, since Nixon took us off the gold standard in 1973 and began the long, slow death-march of America from Creditor to Debtor nation, the real (inflation-adjusted) incomes of the bottom 90% of American families have risen just 10% - TOTAL.  Over the same period of time (37 years) the real average income of the top 1% has TRIPLED with the top 0.1%, gaining a full factor of 10 - exemplified by the average CEO’s salary rising from 26 times the median income to over 300 times today.

How did 300,000 of our fellow Americans get to be worth as much as 30M (1/4) US workers?  It was bad enough when 140M workers would have to contribute 2% of the profits of their labor to support top management but now it seems the top 1% are skimming 20% off the top - that’s just nasty!  Even worse, the pie isn’t growing as real wages are up just 10% overall - it’s just the top 0.1% are taking a much larger slice of it than ever before, leaving the bottom 99.9% to fight over the remaining crumbs.

"Nowadays in America," says the Times, "you have a smaller chance of swapping your lower income bracket for a higher one than in almost any other developed economy – even Britain on some measures. To invert the classic Horatio Alger stories, in today’s America if you are born in rags, you are likelier to stay in rags than in almost any corner of old Europe.  Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning crisis of American capitalism. It is one thing to suffer grinding income stagnation. It is another to realize that you have a diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse."

Notice in the above chart that women have been forced to work (as there is no possible way that men could have earned enough to survive the inflation) yet they are earning half as much as the men so they become another low-paid labor for US corporations by maintaining that status quo!  And what is the status quo?  Skyrocketing Health Insurance Costs and Child Services and Home Prices - in short, all the things the Democrats want to remedy to give the Middle Class a chance to catch their breath.  Notice also that the massive increase in costs of those necessities (and taxes are up because wages are up so don’t be silly thinking that matters) forces the middle class to spend LESS money on Food, Autos, Clothing and Appliances - in other words, the things that AMERICAN WORKERS used to produce, which created AMERICAN jobs, have been sacrificed as we allow these other expenses to get out of control.

Of course those bottom 90%’ers who were foolish enough to chase the American dream by purchasing a home with their life savings have been pretty much wiped out by the housing crisis while their children were being sold expensive degrees by for-profit education services like Goldman Sachs’ (38% ownership) Art Institute of Fort Lauderdale, where graduates work to pay off $70,000 student loans by stripping for broker employees, who take their clients to lunch at the clubs and stuff bail-out money $20s into the G-strings of the women they’ve impoverished.  Ah, aint that America?

The chart above EXCLUDES capital gains, which are over 90% of the top 0.01%’s incomes so it grossly understates the situation but it does give you a clearer idea of what was going on in the lower brackets leading up to the crisis.  Go ahead, do the math - add up the total wages of the bottom 90% against the total wages of the top 10% and then let me know what a fair and just system we’re participating in.

For the past 30 years, the top 10% (Bankers and the investing class) have lent the bottom 90% money for cars, boats, homes, vacations, hot tubs, big-screen TVs - all the stuff their companies make and that has driven US Household Debt up 120% while dropping the saving rate by 90%, US household debt is now approaching $20Tn, 130% of GDP while personal savings have dropped from $20Tn to $8Tn and falling fast as home-buyers struggle to dig themselves out of leveraged home loans.  What is the upshot of this $20Tn transfer of wealth to the top 1%?  It’s a life of indentured servitude for the Middle Class, who will work their entire lives and be lucky to escape the debt burden they have fallen under.

Meanwhile, our Government has run up $10Tn of debt during the same time period, mainly to pay for the "War on Terror" as well as $4Tn of tax breaks given to the top 10% as the Bush Tax Cuts shattered the "lock box" surplus that was run under Clinton - and that’s a debt that now moves down to our children’s generation and perhaps their children as well as it doesn’t look likely we’re going to be fixing it anytime soon under the current political system…

Of course we just can’t blame the Republicans for turning our daughters into prostitutes.  Over in Michigan, the Great Lakes Gold Rush store (one of those charitable operations that buys your gold and silver jewelry for steep discounts) is training teenage girls to shake it (pom-poms made of cash, of course) on the streets in skimpy outfits (the girls, not the cash).  The owners want the government, who are trying to enforce an ordinance against pedestrian promotions, to get off their back.  Hopefully the local Tea Party will come down and rally for them - I’m sure Sarah Palin is writing a speech on her hand as we speak…

Score one win for the Nanny state as the Portland Health Department’s Inspectors put a stop to illegal signage that described lemonade as "yummy" and threatened the proprietor of a street fair stand with $500 fines, which made her cry - as it was far more than her allowance would cover (the girl was 7 - that’s her in the picture, in happier times, before her entrepreneurial dreams were shattered).  "When you go to a public event and set up shop, you’re suddenly engaging in commerce," the government inspector said. "The fact that you’re small-scale I don’t think is relevant."

We definitely need to do more to encourage small business in this country. (Cameron Herold makes a great case here for teaching our children to be entrepreneurs, but avoids the hot-button debate on lemonade stands)  99.7% of the businesses in the US are "small," with less than 500 workers yet, surprisingly, small business makes up 97% of the US’s export volume.  Last year there were 672,200 new businesses started in the US but, unfortunately, 595,600 closed down and 43,546 additional ones went bankrupt - this "birth/death" ratio for small businesses is a far bigger impact on the US job market than anything that’s happening in Big Business.  We need government stimulus to get small business back in gear - the best way to make America strong is to make sure we have a diversified base of small business, who are nimble enough to pick up the slack in the economy in troubled times. Unfortunately, with the banks refusing to lend, what usually turns us around in a recession is dead in the water and our Government refuses to help as every bill aimed at aiding small businesses for the past 3 years has been filibustered to death.

One of the hardest things to his small business last year was the shut-down of Advanta in March, as Advanta was focused exclusively on small business credit cards and the shutdown left one million small businesses with no access to credit - essentially without warning.  No one has stepped in to fill that hole and that has ground hiring and, of course, spending to a halt as small businesses join consumers in trying to work their way out of debts - even when their cash-flow is good.

Laurie Santos did a very interesting study on chimps which goes a long way towards explaining why Conservative Capitalists act irrationally and would rather go down in flames, protecting their shrinking pile of wealth, taking a chance that the economy will not collapse without any aid from them (taxes), risking losing it all - rather than sensibly contributing to the greater good in order to raise the standard of living for the whole society and vastly improving their own chance of success in the long run.  Very interesting…

Also interesting is Money.cnn.com’s map of the Fortune 500, especially the top industries by growth (Pipelines) and Profits (Networking) - until the government does start doing something to help the smaller businesspeople (and the citizens) of this country, Big Business continues to be the horse we’re going to be betting on:

By Phil

www.philstockworld.com

Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a real estate title insurance software solution, and is also the President of the Delphi Consulting Corp., an M&A consulting firm that helps large and small companies obtain funding and close deals. He was also the founder of Accu-Search, a property data corporation that was sold to DataTrace in 2004 and Personality Plus, a precursor to eHarmony.com. Phil was a former editor of a UMass/Amherst humor magazine and it shows in his writing -- which is filled with colorful commentary along with very specific ideas on stock option purchases (Phil rarely holds actual stocks). Visit: Phil's Stock World (www.philstockworld.com)

© 2010 Copyright  PhilStockWorld - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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