Squeeze on the Middle class

Wherefore Art Thou Middle Class?
By Paul A. Herbig

America’s Middle Class, that bastion of economic solidarity that has been the bulwark of this country for over two centuries, is in danger of extinction. Although the trend has been ongoing for the last thirty years, since the Dot Com crash in March 2000 and 9/11 in 2001 it has accelerated at an alarming rate almost to the point of no return: In early 2004, economic statistics indicated bankruptcies, foreclosures, and credit card default were all at record levels . Many think the worst is yet to come.

The Middle Class can be defined in many ways but the very center of American society, the heart and soul of this country, can be found among those wage-earners making between $30,000 and $80,000 annually. This is the group that is falling further and further behind and in danger of being the first generation ever in the history of America to drop in economic mobility. The extinction of this class that has been the glue of the American social fabric for over two centuries does not bode well for this country

America’ Middle Class has traditionally been composed of higher paying manufacturing (blue Collar) workers, white collar (service) workers, and professionals. Manufacturing is rapidly exiting the Country (note: In the 1950s, 33 percent of the work force was employed in manufacturing and the economy added 1.6 million manufacturing jobs. By the end of the eighties the percentage was down to half, 17 percent, and falling steadily. Peter Drucker predicts within ten years it will drop to less than 12 percent! In 1981, 20.2 million manufacturing jobs; by 1991, down to 18.4 million and currently below 15 million, While the working population increased by 11 percent, mfg dropped by nearly 10 percent), so are service jobs and eventually many professional jobs as well.

Those who have lost their jobs are finding their future downwardly mobile as they find positions paying half or less their previous employment; record bankruptcies and foreclosures tell their story of survival on a day-to-day basis. Those who still have their jobs find unrelenting downward pressures on both wages and benefits. The net result in the not-so-distant future is the disappearance of the American Middle Class.. The effect of globalization and multinationals with no country loyalty (IBM can no longer be considered an American firm but a global one who seeks global advantages no matter what cost to any nation state) is the lowering of global wages to the least common denominator (As India will soon learn to its amazement when ‘higher-paying’ Indian jobs start moving to Filipinos and Indonesians who will work for half to third). As for globalization, beware of what you asked for, you just might get it, and we did

Social mobility in the United States has declined considerably over the past few decades. Data from he Congressional Budget Office indicates between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent. Meanwhile, the income of the top 1 percent rose by 148 percent, the income of the top 0.1 percent rose by 343 percent and the income of the top 0.01 percent rose 599 percent. In 1959, the top 4% earned the same as the bottom 35%; In 1970, the top 4 percent earned as much as the bottom 38%; In 1989, the top 4% earned the same (in wages and salaries) as the bottom 51%; By 2000 this percentage exceeded 60%.

It is clear the Concentration of wealth has worsened over the past few decades: in 1989, richest 0.5 percent of families owned 30.3 percent of all household net worth owned 38% of all corporate stocks and bonds and 56 percent of all U.S. private business assets., the top 1 percent of families earned 14 percent of total income in U.S. and had over 50 percent of net assets of this country. Capital gains reported on 1989 tax returns totaled $150 Billion. 72% of that went to less than 1% of tax filers; the remaining 38.5 went to groups that represented less than 6% of all filers; the other 93 percent had no gains income whatsoever Rich became superrich largely at the expense of the rest of the American workforce who saw their wages cut, benefits shrunk and jobs eliminated.

.A classic 1978 survey found that among adult men whose fathers were in the bottom 25 percent of the population as ranked by social and economic status, 23 percent had made it into the top 25 percent. In other words, during the first thirty years or so after World War II, the American dream of upward mobility was a real experience for many people. Business Week cites a new survey of today's adult men, which finds that this number has dropped to only 10 percent. That is, over the past generation upward mobility has fallen drastically. Very few children of the lower class are making their way to even moderate affluence. This goes along with other studies indicating that rags-to-riches stories have become vanishingly rare, and that the correlation between fathers' and sons' incomes has risen in recent decades.

The Number of Americans living on middle incomes fell from 71 percent of population in 1969 to less than 63 percent in 1991. The only saving grace during that timeframe was the vast wave of women that entered into the workforce. Salaries of individual wage earners declined. Only through addition of second worker was family able to make it: even then the average American family experienced an income loss of 2 percent. Real weekly income fell during the last 3 years. Overall labor incomes have been virtually stagnant for the same time frame. In a normal recovery, total real compensation would be up nearly 3%; instead it is down by nearly that same amount. The middle class has not only failed to stay even these last few years, it has fallen further behind. And since the vast majority of women are already working, no reserve exists save to return to child labor.

If you put that research together with other research that shows a drastic increase in income and wealth inequality, you reach an uncomfortable conclusion: America looks more and more like a two-class society: the upper and the lower with little or no middle.

Haves versus have-nots

Robert Reich’s editorial column on the future of work in America in the Friday, December 26, 2003 Wall Street Journal indicated the economic trends were evolving to a two class system: professionals and “personal service workers.” I would rename with two classes: the Haves and the Have-littles. Conspicuously absent is the Middle Class. Traditionally, the middle class contained higher paying union or skilled blue collar jobs (going to China), professionals (accountants, administrative, information technology—going to India), or small business owners (being squeezed out by Walmart and other retail conglomerates). The events Reich describes (and which indeed are occurring even as I write this) and the economic trends that appear to be in process, predict the end of the American Middle Class as we know it.
The Have-littles, those in the personal services (e.g.,retail, hotel/restaurant, other personal services), earning little more than minimum wage and certainly nowhere near a liveable wage (as more and more fall into this category, the over-supply of workers will reduce wages for all) can not possibly hope to ever escape poverty status; even with two full-time breadwinners, they will still not eek out an acceptable, formerly middle-class living. If this sounds uncomfortably like the economic curve in lesser developed countries (a small upper class with most of the resources, a vast lower class with little of the resources, and a small, almost nonexistent middle class), that is indeed the end result.
As one reader replied, confirming this bleak future is already upon us: “My wife has worked at our local Wal-Mart for a few years and doesn't see much future for those who are working there. The associates who work the floor are paid a tad over minimum wage, have no benefits unless they purchase them, have one paid holiday per year, work an average of 34 to 36 hours per week. Not exactly the kind of job to raise a family on, or supplement one's retirement.” And the future will only have more such workers and families.

Bye Bye Jobs.

A Forrester Research study estimated that over the next 15 years some 3.3 million U.S. service sector jobs would be sent abroad (representing $136 billion in wages) and it also forecasts that 472,000 U.S. technology jobs will move overseas by 2015, up from 27,000 just three years ago. Market researcher Gartner Inc. predicts that by the end of 2004, 1 in 10 jobs within U.S.-based IT vendors and service providers will have moved overseas. Within enterprises that buy information systems, 1 in 5 IT jobs will be handled outside the U.S by the end of 2004 with the torrent becoming a flood afterwards (While just 5% of domestic IT jobs have been offshored by 2003, as much as 25% could be situated overseas by 2010.). Economists at U.C. Berkeley say as many as 14 million programming, accounting, paralegal and other service jobs are at risk of being offshored (11% of the nation’s total jobs are vulnerable). Goldman Sachs & Co. says an estimated 200,000 IT-related service jobs have left the United States in the last three years. One High Technology executive recently made the heart-warming statement that no job is safe. Perot, in 1992, may have been right about the his famous job loss statement, just a decade premature and turning to the right (India, China) instead of straight South to Mexico.
I believe this tremendous growth of offshoring is the result of convergence of several factors:
1) A labor market (high unemployment) that provides companies with upper hand in almost any personnel related activity. How else can you account for the passiveness in which employees knowingly and willingly train Indians as their replacement. If this were 1999 or before, those same employees in this same scenario would have given their employers the Bronx cheer on their way out the door and not humiliated themselves. The ultimate end to all this is wages for developed countries to converge with those from the developing countries: i.e., it will stop when our programmers are paid the same as those from India. A generally considerable lessening of the quality of life will be the inevitable result for all developed countries, but particularly noticeable for the U.S. .
2) Wal-mart’s rise to dominance, its obsession on costs, and its controlling behavior upon is suppliers, is forcing those suppliers to offshore to meet the prices Walmart allows them to charge. The automotive companies are also beginning to exhibit this behavior. A total focus on costs to the exclusion of relationships or any other long term conditions can only brew bad (I never have trusted bean-counters to have long term interests in mind).. Those jobs that the employees at Wal-Mart did and the pay of the employees once provided middle class wages but with Wal-Mart in town the pay of these people drops to near poverty level in wages. And this isn’t just within the Wal-Mart store it also happens in Wal-Mart’s competitors that have to compete with Wal-Mart. We are spiraling towards the lowest common denominator. Wal-Mart, makes no apologies for its role in the spiraling down of employee wages and benefits. Wal-Mart, obviously, has de-emphasized the popular "Made in America" campaign that founder Sam Walton launched in the 1980s (and it was not coincidental that only after Sam’s death that the global corporate philosophy now seen presented itself—Sam would be turning in his grave if he saw what was being done now by the company that bears his name.)
This obsession on costs has spread to other American corporations. Electronic Data Systems Corp., founded by Ross Perot but no longer run by that noisy patriot, now recruits $1.25-an-hour tech workers in India and sheds their $10-an-hour counterparts in EDS's home state of Texas. Wall Street brokerages including Morgan Stanley and J. P. Morgan Chase & Co. are shifting from New York to India the ground-floor stock-research. Both India and China are already well-known to recruiters from Intel Corp. and Microsoft Corp. Carrier Corp. will relocate production to Asia from Syracuse, N.Y. No inducement or threat could now save Syracuse's 1,200 Carrier jobs, a company spokesperson said, "unless they are going to pick up New York State and move it."
3) Global marketplace and trading allows total international competition. Now with the internet, you can compare suppliers from all around the globe instantaneously. Now the Indians and Chinese can be given equal attention and low-cost takes on an international dimension. One major concern here is national security. As we lose our manufacturing to China and technology skills to India, our dependence on these nations become ever more critical. What happens in a time of national crisis or war? Will we still have enough manufacturing capability and professional skills nationally to fall back on? Is it only me or do others see an analogy of our giving India software expertise to that of selling scrap iron to Japan during the 30s?

The recession and the jobless recovery since 2000 has seen 3 million manufacturing jobs lost. Never mind that many jobs that were lost were high-wage jobs with benefits, and the replacement jobs are mostly minimum wage jobs with no benefits whatsoever. Americans who have seen their jobs either outsourced abroad or lost to foreign replacement workers will either be forced to dramatically alter their life styles or resort to increased levels of personal indebtedness to maintain that which they have grown accustomed to. .Those who have trained for what were once thought of as the securest of the secure positions in the modern workforce, now find themselves with a set of obsolete job skills. The remaining positions available for them are positions at decreased salary levels or the unwelcome alternative of low-paying retail sector jobs out of economic necessity. The excess labor pool available of these displaced workers will result in downward pressure on wages in all fields in general

The United States as a result of this Walmartization of America, is rapidly moving towards the ‘hollow corporation’ where the manufacturing has been outsourced overseas (China), the white collar (IT, support, accounting, marketing, engineering) subcontracted abroad to the cheapest source (India), and what’s left is top management. This has the audiacious beginnings of the double hump income curve often seen in lesser development countries: a huge under class, a tiny upper class with most of the income, and a small middle class. America’s middle class has traditionally come from well paying manufacturing jobs (soon to be gone), the white collar (going quickly) or the professionals (your time will come). What will be left will be plenty of minimum wage retail, fast food, and other service positions but not sufficient to provide the same quality of life as we once had.

What jobs are likely to remain in the US? Those positions that require direct contact. Primary medical physicians (doctors, dentists, optometrists, etc.), surgeons, nurses (however, radiologists whose job are to read X-rays are already being outsourced to India so too will similar back-office positions). Judges and lawyers (although those in the law profession not required face to face could well find themselves outsourced as well!). Bankers and Brokers and financial advisers who have required face-time with their clients. And on the other extreme, plumbers, carpenters, painters, electricians, gardeners and other craftsman. Perhaps we should be telling our kids to go for broke (doctors) or not go to college at all and take up a craft. Yet, as more and more professionals get downsized or offshored and decide not to retrain for yet more sophisticated positions, many will move towards competing at similar personal service positions. We are already seeing the forefront of this trend with a huge influx of realtors just over the past year; the end result in real estate as will be the case inevitably in all other personal service occupations will be a downward pressure on wages and new multitudes try their hands at the profession or craft.

The Wal-Mart economy knows the price of everything and the value of nothing - certainly not of a well cared-for workforce, or of a full-employment economy, or of competitive marketplaces that have not yet succumbed to the predations of a single omnipotent enterprise. And who's to blame for that? The consumer: you and I. At Wal-Mart, the customer is king, everyone else be damned: competitors, employers and even the domestic manufacturing base..





The Squeeze is On?

As recently as last summer(03), Greenspan and other economists were worrying about the ramifications of deflation. Well, the middle class is not just worrying, they are experiencing it, all the bad effects. The only deflation they have seen over the last four years has been in their incomes, their wages have increased very little (if at all) and for many they have taken major cuts in pay either to keep their existing job or to find a new one. In the meantime:
Health care premiums are skyrocketing (for those lucky enough to have coverage)
Health care deductibles and copayments are shooting through the roof
Medicine copayments are doing likewise
College tuition is increasing at double digit rates
Insurance (auto, home) premiums are rapidly moving upwards
OPEC’s tight reign on quotas keeps auto gas prices near $2+ gallon
Natural gas price rises have tripled home heating bills
State and local property taxes are increasing due to local government deficits

The squeeze is on. With incomes flat or falling and expenses rising, what is the average middle class family to do? If two parents are available, both are probably already working full time jobs so adding another person to the work force is not possible. Working an additional part-time job may be an option but jobs are difficult to find, pay little, and after-taxes would hardly pay for child care and other items that result. Cut back on living? They were not living a king’s life to begin with. Where to cut back? You still have to eat, have a roof over one’s head, heat the house etc.. What many families are doing now are cutting to the bone and dipping into savings. Many must make a choice: pay health care premiums or pay utilities bills.

The middle class is quickly and decisively moving downwards. This Downward mobility will be the death of the middle class and have considerable negative social impacts in this nation..

The Ivory Tower solution

A recent Wall Street journal article had an economist writing deploring the federal budget deficits and the continuing immense trade deficits and their eventual long term impact on the US. His solution was two-fold: buy more American-made goods and save more.

Buy American?
Many would like to take the oath of American made only goods and services. Part of the problem is determining country of origin. When you make a service call or phone a call center how do you know where it is located? A federal law mandating country of origin would assist in this endeavor. Even if this were to be accomplished, the offshoring of American industry over the last 25 years has been enormous. Today you may well have a difficult if not impossible time finding any goods of certain categories that are Made in America. So how can you buy if you a) don’t know and b) can’t find any? It is only going to get worse unless government and consumers take steps now.

Save?
The mantra save more sounds great but how can you save more when you are already living on the edge and actually dipping into savings to do so?

Retrain. Educate. Upscale.
The supporters of offshoring indicate we are only offshoring simple tasks and the solution is to move up the value ladder. Their solution to the programmer, to the laid off manufacturing worker is to retrain and get additional education that would enable them to work at another level, another occupation. Slight problems with this theory. 1) Most of these middle class workers are of the harried living on the edge variety (see above). They have little if any savings or are actually using it to live on. Education and training requires time and money. Either of which they have little of. If laid off from one job, they must immediately find another just to make ends meet. They do not have the luxury of several years to be retrained. With dependents to feed and support, house payments to be made, they must find a job, even if worse paying, just to survive; 2) many of the jobs deemed to be jobs of the future that will be offshore-free are in the personal services sector, including most health care positions. These are minimum wage or slightly above minimum wage positions and even at $10/hour equate to 20,000 gross a year, insufficient to support one’s self let alone a family.; 3) The higher value added jobs usually require superior mental ability and advanced degrees (next big industry that will supplant the IT sector is bio-tech, the typical high-paid research job would take 4-6 years of university-level education. Even a job taking care of the retiring baby boomers (nurse, phys. assistant) takes months or years of training, and would not replace the former salary). Not everyone is capable of managing these positions. What are we to do about the eight out of ten unable to master the next level? Discard them? How are we to assist the lucky two with the time and money necessary to pursue the additional education to reach the next level? And finally the zinger: who is to guarantee those lucky two that after four more years of their lives and a large capital investment, the Indians have not also raised the ante and achieved the next level and take over that job as well?

The end run?

Steve Ballmer and others indicate the only problem with programmers and their salaries is that they are too high. If only they would work for peanuts (40K or less without health, benefits, and pensions) comparative to Indian workers, they could have as many jobs as available. Only problem: at the wages indicated, how many of our top students would want to study and prepare for a career in that field? Fewer would enter into that discipline and the masters of industry would then say : We have to (hire from abroad) (offshore) because we do not have sufficient trained workers in that field. A subtle but deadly catch 22 they are already aware of and planning to occur.

A confirming letter:
I believe that Mr Bush's most recent proposal to allow Mexicans to come to work in The U.S.is truly intended to further the demise of the middle class.I believe employers will waste little time lowering wages all accross America (where ever possible)to drive us out to then claim we don't want the jobs.I suspect it will also be used as a new union busting tactic.Union workers strike and they bus in the Mexicans as permanate replacement workers at a much lower wage.I don't believe manufacturing will dissapear all togeather.When you don't want to take all the jobs to Mexico,you bring the Mexicans to the job. Keep up the great work!See ya at Walmart. Best Regards,Dave


Recommendations

One suggested solution to the Walmartization of America dilemma is wage insurance as a possible prescription for those displaced by globalization. This takes care of providing a living wage but it does nothing to provide jobs or the self-respect that goes with them. Andy Grove, the corporate conscience and former CEO of Intel, has taken up the cause, warning that something drastic must be done to prevent the bulk of new information technology jobs from being shipped overseas. But Grove's remedies, including bigger university R&D budgets, tax cuts and tort reform, would do nothing to curb domestic job loss, only strengthen the balance sheet of domestic enterprises still in the hunt for expedient cost-saving devices.

My own solution is more to the point towards saving jobs.
1) All governmental entities (local, state, federal) to require any business doing business with them to provide made in American goods, to certify the goods and services were produced in America by workers eligible to work in the U.S. This should require enough work to counter some of the effects as well as provide the cushion for national security the next time it is needed. .Reasons to do so include: National security, privacy, and the need to have a solid manufacturing base.
2) I would think a company would use "Made in America" as a marketing strategy and be strong enough to make it work. Walmart before Sam’s death did that and prospered. Why wouldn’t another company or many such corporations? If consumers were to purchase because of that factor, others would follow.
3) .Not a consumer boycott of foreign made goods but more positively, a consumer procott movement that buys only American made goods or encourages the purchase of such goods, perhaps even as far as having the vendors of each product specify what percentage was American produced. This could result in a boycott of retailers that do not sell American-made goods. "Says Steve Dobbins, president of thread maker Carolina Mills: "We want clean air, clear water, good living conditions, the best health care in the world--yet we aren't willing to pay for anything manufactured under those restrictions.""
4) Everything Wal-Mart does - particularly its low prices - is done in the name of slavish devotion to consumer demand. And every day, millions of Americans ratify Wal-Mart's strategy by shopping there. As long as the consumer does not care, the end result is obvious. Only when the consumer rebels and decides that a strong country, a strong economy, jobs for himself and his neighbors, and a positive future is more important than saving a buck, will the trend turn-around. Until then, the consumers have bought into a devil’s bargain for low prices. Until the consumer is willing to put aside his short term fetish with pennies of cost savings and address the long term implications, nothing will change.
5) Establish a “Made in America” Political Party. The Democrats are missing a sure opportunity this year by not addressing this issue. Only John Kerry has raised it. By making this issue the fundamental difference between himself and the other Democrats, let alone Bush and the Republicans, a national debate on the issue could be established.
6) Negative income tax. A safety net.
7) It is bad enough that American companies will offshore American jobs to another country without a second thought; it is even worse when they are given incentives to do so. Removal of all tax breaks and loopholes provided to offshoring would make them think twice. Providing additional warning, mandating longer periods (6-12 months or more) of pay with benefits after termination, providing monies for retraining for terminated employees would ease the offshored employees and begin to minimize the differences in wages between American and offshored workers.


If the job losses now and the predicted ones are not bad enough, future industries and innovations are being shipped overseas even before they are born: Silicon Valley investors are pressuring entrepreneurs to shrink personnel costs by as much as 60 percent by sending jobs overseas. Within the past year, startups have taken the outsourcing trend to extreme lengths, migrating entire development teams to India, China, and Russia and leaving only skeletal crews in Silicon Valley and tech hubs such as Boston and Seattle. How then can we have the new technologies and industries to replace those being lost if they are not even being developed here?





One of my favorite people of all times

If the Middle Class is downsized to a lower class, a permanent level of unemployment above that acceptable to the American working class, pay scales are reduced to levels barely at or below liveable wages, and paths of migration upward economically seen non-existent, civil unrest will become the norm and class warfare the reality. It is in the country’s best interests to save the working class. Time is running out.








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