How America Broke the Middle Class

From 61% of all households in 1971, the middle-class shrunk to 50% in 2015.

Photo by Matthew LeJune on Unsplash

There is something poignant about the day Trump supporters marched on the US Capitol. Thousands of Americans gathered in Washington, D.C., on January 6th to protest against the transition of power. “We’re not backing down anymore. This is our country”, a man with fresh stitches on his head told The New York Times the day before the protest.

Americans were fed lies that the 2020 election was stolen. But how did the world’s number one economy with an educational infrastructure that remains the envy of the world allowed its citizenry to be brainwashed with lies?

2015 was a watershed moment in US history. After spending more than three decades as the economic engine of the United States, middle-class households barely matched the combined number of upper- and lower-income households in 2015.

From 61% of all households in 1971, middle-class households shrunk to 50% in 2015.

Even as millions of middle-income families slipped into lower-income, the families that retained the middle-class classification saw their buying power significantly erode in the last two decades, piling on their agony. Adjusted for inflation, the median 2019 household income of $68,903 is a full 33% less than the median in 2000.

The anger of the economically unfortunate is now starting to impact the social order.

The threat to the United States is the persistent decline in the middle class’ standard of living, a problem that is reshaping the social order that has been in place since World War II and that, if it continues, poses a threat to American power. What we are facing now is a structural shift, in which the middle class’ center, not because of laziness or stupidity, is shifting downward in terms of standard of living.”

The structural shift is precipitated by two political parties that refuse to look for long-term solutions but content with short-term fixes, performative politics, and diverting attention towards imaginary issues.

The failure of successive US governments in fixing the US tax code, the rising cost of home acquisition, and the debt burden graduates carry all the way to their mid-life are the top three factors that exacerbated the economic hardship of middle America. And yet, Americans believe outsourcing is the major cause of their economic hardship.

Did outsourcing 300,000 jobs annually trigger the economic collapse of more than 200 million adults living in the middle- and lower-income households in the United States. Is that the reason why a middle-class family that lived happily with a single earner in 1970 is now struggling to save with two earning members?

No. It is not.

Americans believe an insignificant issue such as outsourcing is at the root of their economic problems because that is what lazy politicians told them. Blaming outsourcing is a one-minute act, but fixing the US tax code will take years of sleepless slog that may cost some politicians their careers.

The US Tax Code enriches the rich and impoverishes the rest

Source: bundesfinanzministerium.de

On the surface, the US tax code never really looks like a system that robs the poor for the welfare of the rich, but the more you keep drilling into the holes, it reveals the ugly edges.

  • “The top 20% of households got 54% of all income and paid 69% of federal taxes.
  • The top 1% got 16% of the income and paid 25% of federal taxes”.

The rich are paying more than their fair share, and the poor must work harder, isn’t it? — Wrong.

If the rich are paying their fair share, how did the top one percent have their income before taxes triple between 1979 and 2016, when millions of middle-income households slipped into lower income?

Governments around the world, led by the United States, have built an escape door for the rich. When you earn six figures, monthly take-home income is not something that you spend sleepless nights over. Instead, you will pay a lot more attention to the following:

  • Value of your business.
  • Value of your security holdings.
  • Value of the properties you own

How much tax did Jeff Bezos and Elon Musk pay as they took off from a million-dollar holding and landed on a billion-dollar holding?

Most probably — nothing.

Here is a statement from Tesla that will put all your fears to the test

“Elon actually earned $0 in total compensation from Tesla in 2018, and any reporting otherwise is incorrect and misleading. Unlike other CEOs, Elon receives no salary, no cash bonuses, and no equity that simply vests by the passage of time. His only compensation is a completely at-risk performance award that was specifically designed with ambitious milestones, such as doubling Tesla’s current market capitalization from approximately $40 billion to $100 billion. As a result, Elon’s entire compensation is directly tied to the long-term success of Tesla and its shareholders, and none of the equity from his 2018 performance package has vested.”

A billionaire could easily invest half of his wealth in an index fund, never sell a single share, and enjoy full appreciation of value all the way to his death without paying a dime as tax. All he must do is — not sell his shares. And even if he chooses to sell them, he will only pay a top rate of 23.8%, which is a lot less than the income tax rate paid by a middle-class household.

The billionaire will deploy highly trained, highly paid accountants to drag the top rate down, and his effective tax rate will be a lot less than the federally advertised top rate.

The rich in the world is not getting richer because they work harder than the rest of us or because they were willing to risk it all. They are getting richer because the taxation system helps them to do exactly that.

Trickle-down economics is nothing but Suck-it-up economics in disguise. Unless the rich are asked to pay capital gains tax at the same rate paid by a household making the median income, the asset concentration at the top will continue. Unless global tax havens are taken out of existence, money will keep flowing out of the United States and may never make a comeback.

Alexandria Ocasio-Cortez's suggestion to tax the top earners by 70% is as bad as the Republican plan to drop the corporate tax rate to 21% while leaving all the loopholes intact.

What we need is a solution that equitably charges all Americans. It is not as hard as it looks. The time for a minimum rate to replace the effective tax rate is already here. It only needs a handful of politicians ready to do the heavy lifting while keeping the radicals in both parties at bay. And it will always be the responsibility of the electorate to send such politicians to Washington, D.C.

We only get the politicians we asked for.

As the US tax code continues to uphold the welfare of the rich, rising housing cost continuously erodes the standard of living for the rest.

Sources: Fred, Bloomberg, Researchgate

In a recent survey, 71% of Americans said that they find the home buying process overwhelming. At 65.8%, the rate of U.S homeownership in 2020 is as low as it was in 1995.

Americans are willing to rent instead of buying a new home. They are content with paying a double-digit portion of their income every year into the ‘Get a Landlord Rich Fund.’

The millennials do not hate homeownership, but they honestly believe they do not have the capacity to save the money required for the down payment and deem the entire process as too risky due to the frequency of recessions in the United States.

When two-fifth of the country does not have $400 to pay for an emergency, buying a home will be the last thing they will be worried about. The conservative ideology that ‘free market’ is the solution for all our worries is the root cause of this problem.

Median home prices more than doubled between 2000 and 2020, while inflation ate into the middle-class buying power by nearly a third. As housing prices skyrocketed beyond the reach of many Americans, the rich started buying houses and renting them out, further driving the price upward.

Now, what will be the impact of the free-market-anti-regulation policies? First, it will signal the rich to compete with each other, increasing the cost of homes. Second, as housing prices increase, some first-time buyers will exit the home buyers market and enter the renters market, attracting even more rich into the buy and rent market.

As the rich get richer, the not-so-rich will be forced to part with a major portion of their disposable income as rent instead of building their wealth through mortgage payments.

“The basic way that middle American households build wealth is through their homes.” — Richard Fry, a senior researcher at Pew Research Center.

The US government needs creative solutions to drive the median housing price back to the earth. Unfair tax breaks for first-time home buyers and fair tax breaks for affordable home builders would be a great place to start. Unfortunately, the federally backed Fannie Mae and Freddie Mac are not the solution; they are part of the problem. We don’t need cheaper and accessible loans.

We must free up disposable income by forcing the home acquisition cost to grow slower than real wages by relentlessly attacking the supply side of the housing market.

The U.S government has no choice but to intervene because a free market that places economic interests ahead of social interests will only accelerate the housing crisis and increase the debt load of millions of middle and lower-income families.

January 6th is the first time scores of American citizens marched against their own government to nullify the election result that they did not like. And if we want to make that the last march — we have to act, and we have to act now.

The Future is Trapped under a pile of Student Debt.

Sources: Vox, MotherJones, and Statista

The last but also the factor that significantly influences the future of the American middle class is student loans. The left is right about the burden student loans impose on the current generation. The rising cost of education has saddled many with oversized debt they struggle to come out for decades.

Student loans play an outsized impact in reducing disposable income, shrinks the standard of living, and strangles upward mobility. Moreover, it kills entrepreneurial spirits, which does not bode well for the country’s future.

The liberals are correct in their assessment that the student debt problem has to be handled immediately. But what will a waiver do? Should a person graduating in 2030 with an outsized student loan wait for the next Elizabeth Warren to help them get a waiver?

The United States needs a long-term solution that creatively reduces the aggregate loan held by students.

However, unlike the housing market, expanding the number of schools and colleges will not solve the student loan crisis. Instead, it will require a wide range of effort. Cheaper loans, more schools, or maybe a month of action to funnel corporate donations to reduce student debt every year.

We have to innovate our way out of this fast-growing hole that offers the best potential to sink generations.

Can we get out of the hole we have dug ourselves in?

When they pitched trickle-down economics, the conservatives sowed the seeds of this crisis and convinced Americans that the government is the problem and not the solution. The liberals have now identified the issue and have their hearts in the right place, but the solutions they offer are either band-aids that kick the problem to the next generation or ineffective.

The dance of democracy happens only when the left pulls the right forward, and the right pulls the left backward.

The 2008 sub-prime fiasco broke our backs, and even before we could recover from the after-effects of the great recession, we were hit by a pandemic that upended our lives beyond recognition. We need to act, and we need to act fast.

Some politicians may even ask us to skip a meal to fund their campaign. Some will say minimum wage is a no-brainer before their election and lecture us on bi-partisanship after they get elected.

As voters, it will be our responsibility to send the best candidates to Washington, D.C. But, if we insist on electing performative politicians, then we all deserve the future they will grant us.

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