When will the recession end? Part 3 The coming collapse of the American Middle Class into an Underclass

Why will this recession / depression be longer and deeper then most of the downturns in the last 100 years?

In each of the post war downturns, it was the consumer, namely the middle class that spent its way out of a recession, using either savings or bank credit.

Today the  consumer is maxed out and the middle class in the US is shrinking, turning into an underclass-- bad news for any business who relies on this cohort of consumers for increasing business sales.

Elizabeth Warren a Harvard  Law professor, and author of the Two Income Trap, has been studying the middle class  over an entire generation. She’s been comparing spending patterns of a typical family with two kids today (data from 2005-2006) and a generation ago ie in the 1970’s. and is warning of the coming collapse of the Middle Class. Her presentation at UC in 2007  summarizes her research that shows that over a  generation, a typical family is

• A) more in debt  ie. 1.47% revolving  credit and 14% savings in 1970 vs over 15% of income in revolving credit and negative savings of 0.8% in 2005-2006) and
• B) now spending less of their family income on clothing (down 32%), food (down 18%), per car ownership costs (down 24%) and appliances (down 52%), but is spending far more on Child Care (up 100%), Mortgage Payments (up 76%), Health Insurance (up 74%) ,the second or third car (up 52%) and all sorts of taxes (up 25%)

She makes the insightful point that all of the expenses in the first category that dropped over a generation are all flexible. You have the choice not to buy fashionable clothes or eat at restaurants but shop at discount malls or eat more at home.

All the expenses in the second category are fixed, so that the loss of one or two income earners due to layoffs can quickly drive a family into bankruptcy and foreclosure.

 

So a family with  a single income earner in 1970 averaging $32K, who  spent half of their income on fixed expenses had more money left over then a two income family earning on average $72 K in 2003 with 3/4 of their income going to fixed expenses.

 

THE BOTTOM LINE: Families are now far less resilient to financial shocks, despite having two income earners then they were in previous recessions with only one income earner.

 

See video from March 8, 2007 lecture  of Coming Collapse of the Middle Class Increased Risks, Lower Rewards and Shrinking Safety Net

 

Related Posts

When will this recession end?

When will this recession end ? Part 2 Do you listen to the Optimists or the Pessimists in 2009?

When will the recession end? Part 4 The double dip housing crash in the USA

When will the recession end? Part 5 Stop Auto Industry Bailouts, start buying Electric

When will this recession end? Part 6 The USA Paradox; Cheer vs Fear vs Transformation

82 Signposts to the current Recession Depression Summary from 2008

© 2005-2009

Walter Derzko -"Changing the world, one idea at a time"©

Author of the soon-to-be-released book: Hard Times Golden Opportunities.. about opportunity recognition in a recession/ depression featuring 45 opportunity scenarios.

Expert, Consultant and Keynote Speaker on Emerging Smart Technologies, Innovation, Strategic Foresight, Business Development, Lateral Creative Thinking and author of an upcoming book on the Smart Economy "

The Smart Technology Blog: The Smart Economy -- Read, enjoy, explore, speculate, comment !!

To arrange for an in house presentation or briefing on smart technology see here

To explore the opportunities and threats of any new smart technology in your industry - Contact Me or explore how we can work together

• ".....Strategy without action is a day-dream; action without strategy is a nightmare"-old Japanese proverb
• ".......Ours is the age that is proud of machines that think and suspicious of men who try to." -- H. Mumford Jones
• ".......Without changing our patterns of thought, we will not be able to solve the problems we created with our current pattern of thought."  --A. Einstein
• ".......Change is difficult, but complacency and stagnation are surefire showstoppers..." --Walter Derzko

• ".......Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it's the only thing that ever has."  -- Margaret Mead

• ".......Small minds discuss people; Average minds discuss events; Great minds discuss ideas; --Anon

P. S. if this is your first visit to my blog, please go to our Welcome page

Comments

[finian cunningham]

A pretty grim, but accurate analysis of how bad this depression is. I reckon it is the end of capitalism as we have known it. But I don’t think that is necessarily a bad thing. I’m hopeful that the dire straits will invigorate new thinking on what the economy is supposed to achieve. I hope it may lead to an enlightened socialism to harness technologies and production in order to meet real human needs in a much more democratic, equitable and sustainable way. As opposed to merely enriching a small minority and forcing the majority into deeper and deeper poverty, ill health, ill education and ultimately barbarity. That is the logical conclusion of the kind of economy we have had up to now. We have got to now break the cycle and create a new paradigm.