{"id":62461,"date":"2025-03-31T18:12:09","date_gmt":"2025-03-31T07:12:09","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=62461"},"modified":"2025-04-03T13:03:00","modified_gmt":"2025-04-03T02:03:00","slug":"the-hollowing-out-of-the-middle-class-in-the-us-and-beyond","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=62461","title":{"rendered":"The hollowing out of the middle class in the US and beyond"},"content":{"rendered":"

The Post WW2 period was marked by the mass consumption boom and the rise of the ‘middle class’, which is a sociological designation that is intended to say that the working class had segments that had experienced better conditions and outcomes than the labouring cohorts. The fact that Capital (as a class) deigned to concede to the rise of this cohort was due to the threat that the Soviet Union and the increasing interest in Marxism in Western nations during the mid-C20th posed to the on-going hegemony of capital. The solution was to share a bit of the booty out with workers, improve pay and working conditions, and provide the basis for a ‘divide and conquer’ strategy, which would effectively segment the working class into ‘individual’ elements that could be played off against each other. And to maintain the profits, sales had to expand and what better way than to encourage the ‘middle class’ households to consume like crazy and fill their ever increasing size homes with stuff. That strategy worked for some decades until the middle class and the trade unions started to get too vocal and demand more at which point something had to give. And in the early 1970s, give it did, and with Monetarism running rife in the academy and industrialists plotting to capture the legislatures (think Powell Manifesto), the conditions for neoliberalism were laid. And the next several decades have seen that ideology become dominant and establish a dynamic that is now likely to implode.
\nToday, I report on dimensions of that implosion.
\n<\/p>\n

I read a report a few weeks ago that motivated a bit of research to see what it was all about.<\/p>\n

The news report (February 25, 2025) – The Wealthiest 10% of US Households Now Represent Nearly 50% of Consumer Spending<\/a> – was reporting on a research report released by Moody’s Analytics and the title says it all.<\/p>\n

In the US, the:<\/p>\n

\n… the richest 10% of U.S. households \u2014 defined as making about $250,000 or greater \u2014 represented 49.7% of all consumer spending. That\u2019s the highest figure on record since data collection surrounding this metric was first measured by Moody\u2019s … also pointed out that consumer spending is responsible for driving approximately 70% of United States GDP\n<\/p><\/blockquote>\n

In the 12 months to September 2024, these highest income recipients increased consumption spending by a staggering 12 per cent.<\/p>\n

At the other end of the income distribution:<\/p>\n

\nIn contrast, spending by both lower-income and middle-income American households declined during that same period.\n<\/p><\/blockquote>\n

Commentators have wondered why the US economy did not slow appreciably as the Federal Reserve Bank hiked interest rates.<\/p>\n

The answer is, as I have discussed in many earlier blog posts, that the impact of interest rate hikes is not as straightforward as mainstream economics would like us to believe.<\/p>\n

At the heart of the impact is a distributional mechanism.<\/p>\n

Borrowers are negatively impacted as their income must service higher interest payments.<\/p>\n

But creditors are positively impacted as their interest income increases.<\/p>\n

Further, those who hold wealth in the form of financial assets benefit.<\/p>\n

Low-income households spend more of each dollar they earn whereas high-income households save more of each dollar (because they have so many of them).<\/p>\n

But the difference in spending propensity between these different income cohorts just tells us at the margin – what proportion of the extra<\/strong> dollar will be spent by each cohort.<\/p>\n

However, in absolute terms, the high income earners may end up spending more overall when they enjoy income shifts because those shifts tend to be larger than any incremental income gains or losses for low income earners.<\/p>\n

It is simply a scale issue.<\/p>\n

That is why the new article quotes the author of the Moody’s study who wrote<\/p>\n

\nWealthier households are financially more secure and thus more able and willing to spend their income … That is, they save less than they would otherwise. This is consistent with our estimates of consumer spending by income group, which shows the well-to-do in the top quintile of the income distribution powering the recent growth in spending.\n<\/p><\/blockquote>\n

There are two additional facts.<\/p>\n

1. Mortgages tend to be mostly fixed-rate in the US, which means that the rising interest rates did not really affect the existing mortgage holders, only new mortgages.<\/p>\n

2. The rise in public debt during the pandemic support means that there has been an increase in financial assets in the US economy and so income flows to the bond holders increased substantially during the period that interest rates rose.<\/p>\n

So the Federal Reserve was actually acting to stimulate a fiscal expansion via the increase in government interest payments.<\/p>\n

Which is why the high-income recipients, who overwhelmingly hold such assets, experienced a big fiscal boost and were able to increase their consumption spending so much.<\/p>\n

The Report notes that around 3 decades ago;<\/p>\n

\n… the wealthiest 10% of American households were responsible for about 36% of U.S. consumer spending.\n<\/p><\/blockquote>\n

Other data shows that the luxury goods market has boomed in the last year or so:<\/p>\n

\nFrom designer bags to first-class airline tickets to cruise trips, the top 5% of households spent 10% more on luxury splurges compared to last year … They\u2019re going to Paris and loading up their suitcases with luxury bags and shoes and clothes.\n<\/p><\/blockquote>\n

I guess Trump will have to impose some tariff or another to stop those imports \ud83d\ude42 \ud83d\ude42<\/p>\n

The most recent US Bureau of Labor Statistics data – Consumer Expenditure – 2023<\/a> (published September 25, 2024) – shows that:<\/p>\n

Annual growth in consumption expenditure by quintile – 2022-23<\/strong><\/p>\n\n\n\n\n\n\n\n\n
Income quintile<\/td>\nAnnual growth (%)<\/td>\n<\/tr>\n
Lowest quintile<\/td>\n3.6<\/td>\n<\/tr>\n
Second quintile<\/td>\n2.7<\/td>\n<\/tr>\n
Third quintile<\/td>\n5.7<\/td>\n<\/tr>\n
Fourth quintile<\/td>\n7.3<\/td>\n<\/tr>\n
Highest quintile<\/td>\n6.7<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The higher-income quintiles thus increased their nominal spending in real terms (faster than the inflation rate) while the lower-income cohorts experienced real cuts in their overall spending.<\/p>\n

Those trends changed further in the following year (no exact data yet) and the growth was much higher for the higher-income cohorts and flat to negative at the bottom.<\/p>\n

The data shows that:<\/p>\n

\nThe bottom 80% of earners spent 25% more than they had four years prior, barely edging out price hikes of 21% over the same period of time. On the other hand, the top 10% of earners spent 58% more.\n<\/p><\/blockquote>\n

What does that imply?<\/p>\n

The Post WW2 reliance on the ‘middle class’ to drive consumption growth and profit realisation is being eroded by the very system that created that reliance.<\/p>\n

Growth and profit reliance in recent years has increasingly required profligate consumption excesses by the wealthy high-income group. The sort of consumption goods and services they purchase are biased towards a narrow range of luxury products.<\/p>\n

Any financial market disturbance will also impact on overall spending substantially.<\/p>\n

Neoliberalism has steadily been hollowing out the ‘middle class’.<\/p>\n

The analysis by the Pew Research Center in the US provides evidence of this for the US – The State of the American Middle Class<\/a> (published May 31, 2024).<\/p>\n

It showed that:<\/p>\n

\nThe share of Americans who are in the middle class is smaller than it used to be. In 1971, 61% of Americans lived in middle-class households. By 2023, the share had fallen to 51% …<\/p>\n

As a result, Americans are more apart than before financially. From 1971 to 2023, the share of Americans who live in lower-income households increased from 27% to 30%, and the share in upper-income households increased from 11% to 19%.\n<\/p><\/blockquote>\n

Thus, 6 out of 10 Americans were classified as middle-class in the early 1970s just before the neoliberal assault.<\/p>\n

Now only 5 out of 10.<\/p>\n

Two major aspects of this shift are notable:<\/p>\n

1. “the growth in income for the middle class since 1970 has not kept pace with the growth in income for the upper-income tier.”<\/p>\n

2. “the share of total U.S. household income held by the middle class has plunged.”<\/p>\n

The growing inequality is also highly concentrated across ethnic groups and geographic locations.<\/p>\n

So the rise of ethnically-biased urban ghettos is increasing.<\/p>\n

The conclusion is that the top-end-of-town have become so obsessed with grabbing the booty for themselves – through their influence on government policy and their roles as employers etc – that they have forgotten why the ‘mass consumption’ boom was motivated in the first place.<\/p>\n

If an increasing proportion of the population become impoverished and the middle class continues to be hollowed out then the ‘stability safeguards’ that protect capitalism was falling to mass uprisings of the sort seen in the C19th and beyond, will be undermined and social instability will increase.<\/p>\n

The US and other advanced nations will be heading towards a situation like we see in nations like South Africa, where the fastest growing employment sector is the security industry protecting the property of the rich from the hungry hordes.<\/p>\n

The hollowing out of the ‘middle class’ has been an unfolding story over the last several (neoliberal) decades and the pace of the retrenchment has varied in different nations.<\/p>\n

The capture of government by the elites which has marked the shift from the ‘welfare state’ Capitalism of the immediate Post WW2 period up to the 1970s (about) to the austerity-biases in economic policy and the cut backs in public infrastructure provision (including transport, telecommunications, health and education) and social welfare safety nets have been instrumental in that retrenchment.<\/p>\n

The attacks on the Welfare State have had varied impacts across nations and where the social support is more pervasive and generous (say in the Scandinavian countries) the retrenchment has been less devastating than it has been in nations like the US, which started with a pretty threadbare social welfare system.<\/p>\n

There have also been sequential tax cuts for high income earners and companies that have contributed to the income shifts to the top.<\/p>\n

Lower-income women are now less likely to marry their high-income boss and this has contributed to the reduction in social mobility across the income classes which reduced income inequality during the Welfare State era.<\/p>\n

And the shifting industrial composition and the related employment changes – from high-paid manufacturing to precarious, low-paid service sector employment has contributed.<\/p>\n

As have the attacks in various countries by governments on the capacity of trade unions to defend the wage interests of their memberships.<\/p>\n

In America, the curious way that it runs its healthcare system, which is biased against low-income families is a particular contributor in that country.<\/p>\n

The Al Jazeera article (March 27, 2025) – The American Dream is officially over: All because the rich must always steal from the poor<\/a> – notes that:<\/p>\n

\nThe War on Poverty\/Great Society programmes President Lyndon B Johnson pushed through in 1965 were the final straw for the burgeoning neoconservative movement … <\/p>\n

Neoconservatives saw Johnson\u2019s vision of ending poverty and shifting more public tax dollars to truly lift all Americans into prosperity as communist and dangerous. By the time of President Ronald Reagan\u2019s conservative revolution in the 1980s, both the remnants of the Great Society and War on Poverty programmes and even the social welfare system Franklin D Roosevelt built through the New Deal in the 1930s faced attacks and austerity.\n<\/p><\/blockquote>\n

We can overlook the slip that “public tax dollars” were shifted into spending, and accept that the hollowing out of the US middle class was not a random event.<\/p>\n

It was part of a coordinated and well-funded effort.<\/p>\n

I wrote about that, in part, in this blog post – The right-wing counter attack \u2013 1971<\/a> (March 24, 2016).<\/p>\n

The article from Inequality.org (December 2, 2022) – Tax the Rich? We Did That Once<\/a> – notes that:<\/p>\n

\nBack at the tail-end of that era, in the early 1960s, America\u2019s richest faced a 91 percent tax rate on income in the top tax bracket. That top rate had been hovering around 90 percent for the previous two decades …<\/p>\n

In the 1980s, Ronald Reagan and his friends on Capitol Hill would shove that rate down even further, first to 50 and then to 28 percent …<\/p>\n

The current top-bracket rate: 37 percent.\n<\/p><\/blockquote>\n

In 1987, the company tax rate was 42.5 per cent for income between $US1 million and $US1.405 million.<\/p>\n

And, since 2018, the company tax for all income is now down at 21 per cent.<\/p>\n

One should not infer that this reduced the US government’s capacity to support what social welfare system it had in place.<\/p>\n

But the tax cuts have transferred massive amounts of disposable income to the top-end of the distribution, which has not only given that cohort increased spending power overall, but more capacity to fund lobbying that advance their own interests.<\/p>\n

The US Department of Labor (while it still exists) publishes extensive minimum wage data going back to 1968 for the federal and state jurisdictions – Changes in Basic Minimum Wages in Non-Farm Employment Under State Law: Selected Years 1968 to 2024<\/a>.<\/p>\n

The minimum wage in the US, which conditions wage movements at the lower end of the distribution has, at the federal level, been unchanged in nominal terms since 2010 at the hourly rate of $US7.25.<\/p>\n

What does that mean in real (purchasing power) terms?<\/p>\n

The following graph tells the story.<\/p>\n

It is indexed at 100 in 1968 and tracks the real equivalent of the federal minimum wage.<\/p>\n

By 2024, the index value was 50.27 points, which means that the real value of the wage has halved since 1968.<\/p>\n

Since the last nominal adjustment in 2010, it has fallen by 30.4 per cent in real terms.<\/p>\n

\"\"<\/a><\/p>\n

<\/div>\n

Conclusion<\/h2>\n

So the top end income has boomed in real terms while the bottom end has collapsed.<\/p>\n

That is the story of the US after several neoliberal decades.<\/p>\n

And it is the story of most advanced nations to varying degrees.<\/p>\n

I will write more about the implications of that hollowing out in weeks to come as I do more work on the topic.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2025 William Mitchell. All Rights Reserved.<\/p>\n","protected":false},"excerpt":{"rendered":"

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