America’s Long-Term Challenge #4: Erosion of The Middle Class

The comments below are an edited and abridged synopsis of an article by Simon Black

Being middle class means you’re neither rich nor poor. You earn enough to pay the bills, enjoy modern conveniences and recreation, and still have some funds left over for savings and investment. Maintaining it depends on the rate of inflation.

If wages rise faster than prices, the middle class thrives. If prices rise faster than wages, the middle class perishes. And that’s what’s been happening in the west. Housing, rent and medical care are all great examples.

In an ideal world, inflation would be 0%: prices would be stable. But that’s rarely the case. Inflation has averaged 2.4% per year for the past decade, and 4.8% per year since 1980.

One would hope that, as consumer prices increased, wages would keep up. But inflation has exceeded wage growth for 33 out of the past 38 years, averaging a loss of 1.35% per year.

This is crucial. One or two years of losing 1.35% of your income’s purchasing power would be no big deal. But decades of this sustained erosion can take a toll on the middle class.

In aggregate, inflation has outpaced wage increases by 66% since 1980. So the average American salary buys 66% less than it used to four decades ago. People have made up for it by going into debt.

In 1980, the average amount of debt per worker in the US was 1.96 times his/her monthly salary. Today the average American worker’s debt is 5X his/her monthly salary.

This isn’t the path to prosperity. There are zero examples from history of a major power achieving long-term economic success by slowly degrading its middle class.

Just like the gargantuan size of the national debt, the major funding crisis plaguing US pension funds and the steady debasement of the currency, this slow erosion of the middle class will take years to play out.