The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Fate of the Middle Class


Via Mike Konczal, I’ve come across some interesting numbers that offer a useful contrast to the aforementioned report by Leonhardt and Fabrikant. Tom Petruno of the Los Angeles Times flagged a Bank of America Merrill Lynch research brief on “The Myth of the Overlevered Consumer,” which essentially argues that an economic recovery will depend on renewed spending by the affluent. The top 10 percent of earners spend almost as much (42 percent of total consumption) as the next 50 percent of earners (46 percent), yet that next 50 percent — let’s call them the middle class — face a heavy debt burden.

In terms of their debt burdens, neither lower-income families nor the wealthy are constrained the way the middle class is constrained, the report asserts.

It estimates that middle-class families’ debt as a percentage of disposable income was 205% in 2007, a function of the level of trading-up during the housing boom and of the cash people pulled from their houses via home-equity loans.

By contrast, lower-income families’ debt-to-disposable-income ratio was a much less onerous 133%. And for the wealthy the percentage was lower still, at 116%.

Thus, the need to pare debt is most urgent now for middle-income earners.

Petruno highlights the uneven impact of the housing collapse.

What’s more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets — stocks, bonds, etc. — which have mostly bounced back significantly this year.

The crippling effect of negative equity on middle-class families is one reason why a number of conservatives and liberals have been rallying behind Dean Baker’s right-to-rent proposal, which Konczal outlined for Baseline Scenario

 ”The Myth of the Overlevered Consumer” reminded me of Ajay Kapur’s 2005 report on “Plutonomy,” which Robert Frank of the Wall Street Journal summarized as follows:

In a series of research notes over the past year, Kapur and his team explained that Plutonomies have three basic characteristics.

1. They are all created by “disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants…the rule of law and patenting inventions. Often these wealth waves involve great complexity exploited best by the rich and educated of the time.”

2. There is no “average” consumer in Plutonomies. There is only the rich “and everyone else.” The rich account for a disproportionate chunk of the economy, while the non-rich account for “surprisingly small bites of the national pie.” Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

One wonders if the top 10 or 20 percent can drive a sustainable recovery. More importantly, one wonders how middle-class families will respond politically to the painful process of paring down debt. Unfortunately, I think it’s easy to imagine a turn towards punitive soak-the-rich policies that end up undermining America’s long-term growth potential.

This is a good time to point, once again, to Zachary Karabell’s excellent essay in the Journal on why corporate earnings aren’t a good guide to the state of the real economy. As the BofA Merrill report notes, the fortunes of the wealthy are tied to corporate earnings that are buoyed by global growth. Yet as Karabell argues,

As these companies profit from global expansion and greater efficiency, they have little or no reason to rehire fired workers, or to expand their work force in a U.S. that is barely growing. If you are a global company, you want to hire and expand where the most dynamic growth is. Unfortunately for Americans, that’s not the U.S.


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