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Why the Middle Class is Irrelevant

Written By Geoffrey Pike

Posted December 16, 2015

middlepoorIn a free market society, there will be disparity, but most everyone will be getting wealthier

I have been harping on the theme of the struggling American middle class. Most politicians just aren’t attuned to the problems facing the middle class. Unfortunately, many of the few who are in touch with this are proposing things that would only make it worse (see Bernie Sanders).

Perhaps I shouldn’t talk too much about the struggling middle class because there isn’t as much of a middle class anymore if we are to believe the latest reports.

As reported recently by the Pew Research Center, we have reached a tipping point where the middle class is now a minority. About 49.9% of the U.S. population is now considered middle income. The very slight majority of those not in the middle class is made up of about 29% lower income and 21% upper income.

Of course, defining middle income gets quite subjective. For this report, middle income was defined as a range of two-thirds of the U.S. median household income up to double the median income.

The Pew Research Center analysis gives the following example. For a family of three, you would be considered middle income earning between about $42,000 and $126,000 per year.

If you go back to 1971, over 60% of households were considered middle income. But it isn’t all bad news because only 14% were considered upper income at that time.

In other words, the middle class has shrunk, while both lower income and upper income households have increased in percentage.

This also comes at a time when optimism is shrinking. In a recent poll, 48% of Millennials (age 18 to 29 in the survey) said that the American dream is dead today.

It is easy to point fingers at the young generation and say they are too lazy or not future-oriented enough to save money. But I think the older generations are trying not to take responsibility for the problems they are handing over.

The Culprits

There is always going to be a disparity of wealth and income in any society. Even in a socialist society where everyone is supposed to be equal, those in power always live much better than the general populace. The large majority of the population is more equal, but they are all poor.

In a free market society, there will be disparity, but most everyone will be getting wealthier. A poor person in the U.S. is typically better off than a middle class person in Cambodia, if there is such a thing as middle class there. Even poor people in the U.S. are often better off than what is considered middle income in parts of Western Europe.

In a free market society, there tends to be something similar to a Pareto distribution (80/20 rule). For example, 80% of the wealth would be owned by approximately 20% of the population.

In the U.S. we have actually slightly strayed from a typical Pareto distribution. 80% of the wealth is owned by less than 20%. 80% of income earned is earned by less than 20% of the population.

But this isn’t capitalism that has caused a greater disparity. If anything, it is big government and central banking. It is corporatism – which is the alliance between big business and big government.

When there were massive bailouts of the financial system in 2008/ 2009, who do you think were the prime beneficiaries of these bailouts? Was it the rich or the poor?

When the central bank creates money out of thin air to buy U.S. government debt or mortgaged-backed securities, who do you think gains and who do you think loses? If the price of milk goes up by 50 cents per gallon, this has almost no impact on high-income households. It is the guy making 10 dollars per hour that feels the pinch.

The Fed’s massive monetary inflation over the last 7 years has helped asset owners. It is stocks and housing that have gone up the most. This is not for the benefit of the lower class, or even the lower-middle class.

The continual burden of taxation and government regulations makes it more difficult for the little guy to get by. It also makes it tougher to start a business and compete with the bigger players. The politicians talk about helping the lower class. They do throw handouts that way, but most of the handouts end up going towards those with the political connections at the top.

The Bernie Sanders plan of taxing the rich more isn’t going to work, leaving aside the immorality of it. The rich are going to find a way to make money and keep as much as they can. When entrepreneurs and businesses are taxed, it is often passed on indirectly to consumers and employees in the form of higher prices and reduced wages. And if businesses can’t pass on the taxes, they just won’t do business, which means fewer choices for consumers and fewer jobs.

Our goal shouldn’t be an equal society, or even anything close to it. Our goal should be a wealthier society where all people have an opportunity to thrive.

Right now, that is not happening. There are still plenty of opportunities out there, but it isn’t as easy as it was in decades past. The American middle class will continue to shrink until the government finally shrinks.