Vol.4 No.2, 11 February 2004

Global Demise of the Middle Class

Margaret Legum

Everyone now accepts that poverty – whether actual destitution or state-aided underclass misery – is a growing global phenomenon. The figures, though astonishing, have become a cliché. Three million people live and die on less than $2 a day, and 1.2 million on less than $1. Even rich countries suffer homeless beggars and street kids and queues for soup kitchens.

Less well known is the fact that globally the middle class is struggling and declining. Capital accumulation used to be a normal middle class pattern – pensions and insurance, setting up the kids on the home-owning ladder, a nest-egg against unforeseen misfortune. Today, dis-saving is closer to the norm – cashing in inherited savings, taking out loans in excess of income, selling the family silver. Parents are baling out and/or literally accommodating their adult offspring, who in the past might have contributed to family pensions.

This thinning of middle class assets accompanies another new trend. Two incomes are needed to pay the bills. Not to upgrade the home, buy a new car or take a fancy holiday, but to pay the bond, the groceries, medical bills, school fees, transport – the essentials. Middle class incomes no longer allow even very small children the luxury of full-time care by one parent.

This trend has happened over the thirty years when the world’s capacity to produce wealth expanded by a factor of eight, thanks to the digital revolution. The world is immensely richer.

We all observe these trends, but we tend to put them down to feminist insistence on income-earning, or simply to ‘the youth of today’. In fact, the growing poverty from the middle class down is a function of the exponential systemic increase in inequality. Again the figures are well-known. The top three people own more than the bottom 600 million. The richest fifth in the world earns over 85% of world income. The pattern is worst in the US, where I% owned more than the bottom 95% in 2000 – up from 90% a year earlier. Where the US leads the rest of the world follows, because that is the economic system it sets for the world.

Thus the astonishing upward gush of resources – from poor to rich – is depleting the middle classes. In the US, middle class households have lost net worth since 1970. Average weekly wages and salaries were 12% lower in 1998 than in 1973, while labour productivity rose by 33%. In the decade 1990-2000 the pay of Chief Executives rose by 570%: it is now some 600 times that of the average worker. All of the increase in productivity – and more – now goes to the top.

The systemic nature of this concentration of wealth means that it cannot be corrected without systemic change. It cannot be tackled by expanding growth. The more productivity rises the greater proportion the rich take away. It will never trickle down - not because the rich are mean bastards, but because they do not spend more than a small part of their wealth.

In the past the rich spent or invested most of their money, and other people were employed in the process. Today a large proportion is effectively hoarded. Over 95% of the world’s savings – much of it deriving from top incomes – is ‘grown’ by speculative trading through the financial sector. It is not invested in productive enterprise. It is used to buy and sell money and shares – and sometimes property - none of which puts one brick on another or employs any but the speculators.

What has happened is that there are now effectively only two ‘classes’. One owns capital; the other does not. Senator Edwards, a Democrat Presidential hopeful says: ‘There are two Americas. One that does the work and one that reaps the rewards…Middle-class America whose needs Washington has long forgotten; and another America – narrow interest America – whose every wish is Washington’s command.’

Capital owning people – Edwards’ ‘narrow interest people’ - are able to demand and get historically high proportions of the product of all countries – for the simple reason that they are allowed to move their capital from country to country. Rates of return between 30% and 40% are not unusual – indeed anything less than 20% and you change your broker or switch your operation. Only thirty years ago 10% was considered very good.

It was also described as ‘unearned income’, and attracted more tax than income you went to the workplace and worked for. Today it may be entirely untaxed. That is because capital owners, having the power to move out – also profoundly influence government policy. Low taxes on capital are only one example. Low regulation, ‘flexible’ labour laws and privatisation are among the others. This middle class generation must save and ensure for health and education because owners of capital frown upon government expenditure on any but the most rudimentary education and health care.

Capital rules Ok when it can move around.

All that is very unfair to people who don’t own capital. Even worse is the danger it poses to economic and social systems globally. Extreme daily fear of starvation is the fate of poor people everywhere. But everywhere also middle class people are getting into terrifying debt; having their homes re-possessed, falling behind on medical insurance and pension payments, and leading a life of constant insecurity, worry, stress and family conflict. Divorce, family violence, mental illness and middle-class drug-abuse and delinquency follow. So does a disrespect for the laws of society and a profound cynicism about politics and politicians.

The middle class is traditionally thought of as the stable backbone of society. It holds traditional ethics about decency and good behaviour. It is generally well-educated and values education. It is about moderation and stability and abiding by the law. And it is often charitable. It can be mocked for all that; and it often does the mocking. It is lost at our peril.

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