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Sunday, February 9, 2014

The Death Of The U.S. Middle Class: No Longer A Greatly Exaggerated Rumor: 40% of all U.S. workers are now making less than what a full-time minimum-wage worker made back in 1968, after accounting for inflation.

The Death Of The U.S. Middle Class: No Longer A Greatly Exaggerated Rumor
The companies Dollar Tree and Michael Kors don’t have much in common. Although they’re both retailers, they cater to a very different customer base.
Dollar Tree is a discount retailer that offers merchandise at the fixed price of $1.00. It caters to the low-income class. Michael Kors, on the other hand, is a luxury retailer that sells high-end clothing and accessories, such as handbags.

But they do have one thing in common: they’re both thriving in the current economic environment.
Dollar Tree has added 323 stores just in the last 12 months. Sales have grown at a compounded annual growth rate of about 12% over the last five years. And the stock has jumped 550% since 2008.
Since going public in 2009, Michael Kors’ sales have jumped more than 650%. This past week alone, the stock rallied 20%, after the company wowed Wall Street with a blowout third quarter.

While discount and luxury retailers are doing well, companies that cater to the middle class are in trouble. Perhaps JC Penney is the best example. Last month, the company announced the closing of 33 stores and 2,000 layoffs. The stock has lost more than 90% of its value since 2007, and many analysts believe the company is heading to bankruptcy.
This performance discrepancy is now rippling through the retail industry. Companies that sell goods to the 1%, such as Tiffany, Coach and Nordstrom, are booming. Discount retailers, such as Dollar Tree and Dollar General, are also experiencing tremendous growth.

But those selling goods to the middle class, such as Sears and JC Penney, are struggling.
And the reason is simple: The American middle class is continuing to disappear.

A Disturbing Economic Trend

A thriving middle class has always been one of the pillars of the American empire. That’s why the decline of the U.S. middle class has become one of the most disturbing economic trends of this past decade.
In order to achieve the so called “American dream,” the middle class needs to have steady jobs with rising income. But that’s not happening. According to the latest data from the Census Bureau, median household income fell for the fifth straight year in 2012 to $51,017, the lowest inflation-adjusted income since 1995. As you can see in the chart above , that’s 9% below its record high of $56,080 set in 1999.
Meanwhile, the rich keep getting richer. The Wall Street Journal recently reported that the average income for the top 1% has jumped 11% over the last decade. That explains why luxury retailers are doing so well.

A 2012 study from the Institute for New Economic Thinking shows that the top 5% of earners already accounts for 38% of domestic consumption. In comparison, they were responsible for 28% of total consumption in 1995. With the middle class in decline, the rich is now playing a bigger role in the economy.

The bottom line is that the middle class is getting squeezed. So why is this happening?

The economy is very complex, so there are several factors involved. Things like excessive regulation and policies that favor special interests have contributed to this trend. But the Fed’s monetary policy has also played a key role in recent years. Its bond purchase program known as Quantitative Easing (“QE”) has boosted the price of financial assets, such as stocks and real estate…assets that mostly the rich hold.

Meanwhile, paychecks are simply not keeping up with inflation. In fact, 40% of all U.S. workers are now making less than what a full-time minimum-wage worker made back in 1968, after accounting for inflation. 

With its bond purchase program, the Fed wanted to push up financial asset values in order to stimulate demand through the so-called “wealth effect.” But that’s just a myth. There are several research papers that show the wealth effect is negligible.

So, this isn’t really helping to stimulate the economy. It’s just enriching those who own financial assets at the expense of the middle class. The result is a growing gap between the rich and the rest. It’s possibly one of the most dangerous and unintended consequences of current monetary policy.
This is a big deal because our economy is largely based on consumption. So, it’s hard to see how we will be able to maintain strong economic growth without a thriving middle class.

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