Middle-Class Americans Suffer In Silence, For Now

Sept. 20 (Bloomberg) — President Barack Obama’s proposed tax on millionaires has restored the issue of “class warfare” to the forefront of politics.

The new tax plan follows a week of intense campaigning by the president for his jobs bill, and of considerable attention devoted to a Census Bureau finding that poverty rose to a 17-year high.

Asking the wealthiest among us to pay more, and taking new steps to help the least well-off — the jobless and the poor — are good policy. But politically, and perhaps even economically, the president can’t lose focus on a group often left on the sidelines of the political conflict over rich and poor: the long-suffering middle class.

Recent developments have driven home how urgently middle-class families need to be put front and center in Washington.

First, there was bad news for middle-class households in the Census Bureau’s study of poverty for 2010. The news reports focused on the finding that the average annual income of households at the bottom — those in 10th and 20th percentiles – – had fallen by $1,000 and $1,500 a year, respectively, since 1998. At the opposite end of the spectrum, households in the top 10 percent of the income distribution saw their annual income rise by $3,600, and those in the top 5 percent had a $4,200 increase, over the same period. (All these figures are adjusted to be constant for inflation.)

Rich Get Richer

But ignored in this story of the poor getting poorer and the rich getting richer was the less publicized — but equally important — finding of what happened to the household income of those in the middle of the economic distribution, the 50th percentile of national income. In actual dollars, these middle- class families suffered an even bigger drop in annual income than the poor did over the past 12 years: a decline of more than $2,500.

Put another way, American households in the middle of the income spread, those making about $50,000 a year, have lost more than $200 in monthly income since 1998.

The dwindling of middle-class incomes represents a sharp reversal of our tradition. The earnings of families in the 50th percentile rose more than $5,000 over the 12-year period from 1967 to 1979; it then edged up only slightly, by $650, during the tough 1979-to-1992 period; then saw another jump of $5,000 from 1992 to 1998. Thus, looking over the 31-year period from 1967 to 1998, the middle class had periods of strong increases in annual income, and some periods of lesser increases, but the trend moved in one direction: upward. One might even say the fundamental characteristic of middle-class life in America was steadily increasing income.

Decline in Savings

All that changed over these past 12 years, as the incomes of those in the middle fell. Moreover, this loss of annual income is compounded because these families have suffered — more than those above them or below them — a steep decline in savings due to the collapse of housing prices.

While the richest households have their wealth in diverse holdings (including stocks, which recovered after 2008), and the poor have no savings at all, middle-class families have their net worth concentrated in a single asset: accumulated equity in their homes.

Many of these families saw this “nest egg,” which they planned to tap to pay for a child’s college or their own retirement, wiped out when housing prices plummeted in 2008.

Second Blow

If the news on incomes wasn’t bad enough, the middle class was dealt a second blow last week when a report by the Washington research organization Third Way showed that schools serving this segment of the population have vastly under-delivered for their students. (Disclosure: I am a member of the board of trustees of Third Way, though I didn’t participate in preparing the report.)

No one should be surprised by Third Way’s finding that, compared with schools in the wealthiest districts, those serving middle-class families spend about $1,600 less per student, have three more students per teacher, and pay teachers $6,000 less per year.

Sadly, we have come to accept that wealthier districts get better public schools than middle-class areas. What was surprising in the Third Way report, however, was that, compared with middle-class districts, schools that serve the poorest students also spend more per pupil (about $1,400 more), also have fewer students per teacher (about one fewer), and also pay teachers more (about $1,600 a year more).

Behind the Wealthy

The bottom line: On all three of these critical metrics, middle-class school districts are behind both the wealthiest school districts (which use their bigger tax bases to fund their programs) and the poorest school districts (which benefit from more state and federal aid programs).

Is it any wonder, then, that these middle-class schools — which educate more children than the wealthiest and poorest districts combined, and serve a majority of our white, black and Hispanic children — are producing results below our national expectations? Indeed, Third Way found that only about one out of four graduates of high schools in these middle-class districts will finish college before they turn 26.

Falling incomes and floundering schools, that is what our great middle class faces today.

Workers of Tomorrow

Economically, addressing the prosperity of this vast majority of our citizens is essential, because it is impossible to build a prosperous America without a strong middle class. They are the workforce of today and their children are our workers of tomorrow; they are the consumers who power demand; they are the small-business people who create jobs and innovations. They make the cars, build the homes and grow the food that make up a huge share of our national output. They also buy the cars, the homes and the groceries that make up a huge share of our national consumption.

No economic recovery plan can work unless it lifts up the middle class.

Politically, middle-class voters perennially believe that Democrats care too much about the poor, and Republicans care too much about the rich, leaving their hearts and minds up for grabs. As we approach the 2012 election, these voters are alienated from both parties, seeing little benefit for themselves in policies such as the bank bailout; state and local fiscal relief; and extended unemployment insurance; all of which have consumed so much of Washington’s time and money.

Policy Doubts

Over the past few years, these Americans have developed doubts about whether Obama-administration initiatives such as the Patient Protection and Affordable Care Act really help them, or mostly help the disadvantaged. At the same time, they are deeply skeptical about Republican economic policies. Those misgivings are certain to be reinforced as Republicans race to protect the wealthiest Americans from paying the same share of their income in taxes as the middle class pays.

The president should continue to press for his new “Buffett Rule” to raise taxes on the wealthy, and his jobs bill to help the unemployed. But he also needs to speak directly to the millions of middle-class families that have jobs, but are reeling under the unprecedented income squeeze of the past decade, and are worried that their children may be part of the first generation of Americans that didn’t do better than the preceding one.

Demanding that the wealthiest shoulder the same tax burden as the middle class is only fair, but by itself, doesn’t address middle-class anxieties; likewise, pressing policies that provide jobs and health care to those who lack them is the right thing to do, but may not lift incomes and reduce costs for those who are employed and who have health coverage.

Best Opportunities

Education initiatives need to focus not only on fixing the most broken schools and drawing the best teachers to the most troubled districts, but also on lifting up middle-class schools, so that those students can compete for the very best opportunities in the years ahead.

It is often said that U.S. elections are “won in the middle,” a statement about ideology that reflects the centrist leanings of swing voters. But in 2012, that is more likely to be a true description of the economic profile of the voters who are up for grabs.

The party that can best address the needs and concerns of middle-class voters who have jobs, but are enduring flat incomes, underperforming schools, and shrunken savings, is the one most likely to win next year.

(Ron Klain, a former chief of staff to Vice President Joe Biden and a senior adviser to President Barack Obama on the Recovery Act, is a Bloomberg View columnist. He is a senior executive with a private investment firm. The opinions expressed are his own.)


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