FYI – Elizabeth Warren, Harvard law professor gave this lecture as part of the Jefferson Memorial Lectures at the University of California, Berkeley Graduate Council entitled,
“The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards and a Shrinking Safety Net.”
She gave this lecture in March, 2007. This date is prescient because at that time few people were forecasting the current downturn / recession / depression (call it whatever you want.) In March, 2007 we saw the collapse of two obscure Bear Stern’s hedge funds which in itself was not surprising because hedge funds had collapsed before so it barely made the news. It is only in hindsight that we see the significance; they collapsed because they publicly exposed for the first time the toxic nature of modern derivatives, the sum total of which is 10 to 20 times global GDP. Bear Sterns withdrew their offer to sell, voluntarily collapsed the funds and paid investors out of Bear Stern’s own accounts. However, the damage had been done; the true nature of derivatives as practically worthless reverberated throughout the financial world and set the stage for the financial and economic collapse that followed.
Her lecture is one hour long and is insightful, prescient and simple to understand. Although she speaks of the American middle class, her prediction of the collapse of the American middle class is particularly poignant to Canadians. America is being transformed from three classes; the rich, the middle class and the poor to two classes; the rich and the poor. She saw this BEFORE the current collapse.
Canada’s largest customer will eventually lose its largest “consumer” class and the largest market for our resources. Even if (and it becomes a bigger IF every day) we eventually come out of this downturn / recession / depression (call it whatever you want), Canada’s standard of living will be permanently reduced. Canada is not large enough to be economically self-sustaining and our largest export customer is going broke. Geographically we are farther away from emerging markets like China and India than are resource exporters like Australia and Russia. Why would China buy our logs if they could import them cheaper from Siberia next door? In other words, things will never again be the way they once were; not in our lifetime or our children’s.
The only good news is that the trillions of dollars being printed out of thin air to stimulate the economies are buying us time by slowing the collapse but not preventing it. This gives us more time to get our house in order.
If you don’t have an hour, I’ve summarized her lecture below the following link:
One of the most significant changes in the last half century and certainly since 1970 is the number of mothers that have poured into the workforce. Elizabeth says she could not have predicted how many people moved to the suburbs with their longer commutes to work. With two paychecks, she would have guessed that families would be wealthier, have more savings, no debt and more vacations. It didn’t turn out that way.
From 1970 to 2005, family incomes rose because many families now had two breadwinners. However, fully employed male incomes either flat-lined or fell slightly. By the way, all her statistics are adjusted for inflation. By the way, all her statistics are government statistics. [Gerold note: by the way, all government statistics are manufactured bullshit; the reality is far worse.]
Savings did not increase; they plunged. In 1970 savings were 11% of household income. In 2006 they were below zero. At the same time revolving debt (such as credit cards) increased from 1.4% in 1970 to 15% in 2005. Other changes in expenses as a percentage of income from 1970 to 2005 are as follows:
– Clothing -32% (made in China, few people pay retail anymore, most buy discount)
– Food -18% (mostly big box stores)
– Appliances -52%
– Car maintenance -24% (they’re driven longer and require fewer repairs)
Other expenses increased dramatically:
– Housing + 76% (median house size grew less than most people think, from 5.8 rooms to 6.1)
– Health insurance +74%
– Cars +52% (2 car families, living in suburbs and more moms work)
– Taxes +25% (two incomes)
Note: the expenses that decreased are flexible i.e. you can reduce restaurant meals, delay buying appliances or clothes. The expenses that increased are fixed. You need that 2nd car if Mom works, you can’t avoid paying more tax with two incomes, etc. In 1970 families paid 50% of their income on fixed expenses. Now, it’s 75%. Today, after spending on fixed expenses, a two-income family has less disposable income than a one-income family in 1970. In other words, modern families now have twice the risk of not meeting fixed expenses i.e. mortgage payments.
On top of this, if either wage earner loses their job, the family is in trouble. In 1970, if Dad lost his job, Mom could go to work. Although her earnings may have been less, they had a greater safety cushion (50% fixed expenses VS 75% today.) Added to this is the risk of losing jobs is greater today than in 1970.
U.S. healthcare expenses have changed. In 1970, after having a baby, healthcare covered Mom for 5 days in the hospital. Today, it’s 24 hours, The healthcare industry today calls it “Send them home quicker and sicker.” The family is expected to provide more healthcare but both Mom and Dad work therefore there’s a greater risk that ill health will impact income. As well, U.S. healthcare coverage has decreased i.e. Utah covers everyone except they don’t cover hospital, specialists, drugs, etc. etc.
Today, a single American income earner with kids has no chance. Single income increase in volatility by family type, 1970 VS 2003:
Single income with children 35%
Single income without children 30%
Married without children 70%
Married with children 95%
Also, today, parents “buy schools.” House prices for the childless increased 50% but with kids they increased 100% because parents buy houses closer to good schools. There are many other factors at play:
– more people have lost health insurance
– pension plans have shifted from defined benefit to defined contribution
– in 1970 a high school diploma could get you into the middle class (12 years of education)
– in 2002 twice as many people thought the moon landings were staged as believed a high school diploma = middle class
– a high school diploma was paid for by the taxpayer, college is not, neither is day-care so families now pay 1/3 of education
The following are bankruptcy statistics per 1,000 people
– married couple, no kids 7.4
– unmarried, no kids 6.3
– unmarried woman, no kids 7.2
– couples with kids 15.3
– single women with kids 23
The three main reasons for 90% of bankruptcies 1) job loss, 2) medical, 3) marital breakup. Today, there are more kids in homes facing bankruptcy than divorce. It tends to be invisible because bankruptcy is easier to hide than marital breakup.
What about the poor? The middle class has fewer resources and less appetite to help the poor than in the past. Also, there’s less opportunity for the poor to climb into the middle class. The “intractability of poverty” is truer as time goes on.
Elizabeth Warren, as a professor of commercial law who has studied the middle class believes that America is moving from a 3 class society to a 2 class society. The middle class is disappearing.
November 14, 2009
Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific advice you should consult your own investment professional.
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