Middle Class Bubble

[Aitrus]

So then, are we defining "Middle Class" by taxes as a proxy for class? And if so, then is Middle Class different depending on where you in terms of geography e.g. rural West Virginia vs Washington State?

I've always thought of "Middle Class" in terms of "Upper Middle", "Middle Middle", and "Lower Middle". I don't think that taxes would be a good measurement because some people can, and do, claim tax breaks that others can't, don't, or don't know about. I think it should be defined as a standard of living, purchasing power given the locale and anticipated retirement comfort.

And yes, I think that Middle Class is different depending on where you live. My Middle Middle class status wouldn't fly for diddly if I had to take the same amount of money and try to live in NYC.

 

[Frixxxx]

Middle class as defined by Investopedia:

Individuals who fall between the working class and the upper class within a societal hierarchy. In Western cultures, persons in the middle class tend to have a higher proportion of college degrees than those in the working class, have more income available for consumption and may own property. Those in the middle class often are employed as professionals, managers and civil servants.

I think what happened, is those below this were targeted to be "brought" into the fold. If you look at most of the foreclosures on homes and people in trouble, they were the first to be introduced to the money by proxy. Take equity and spend it. Making us look more like the diamond:

That being presented, it should not surprise that this was an indirect effect of the progressive tax and tax code. Believe it or not it's the personal/dependent deduction that take the biggest chunk of taxabale income and turn it "untouchable". Case in point, I have a co-worker salary $125K/yr, of which his deduction of himself, wife, and four kids (+child credit), 401K investments, mortgage interest, and all other deductions drop him down to to almost 60,000 AGI.

$65,000 untouched dollars.

Now, ask yourself the question, is he middle class? The original definition describes him to a "T". But definitely, locale will determine levels of course, but as civil servants, we all know the "adjusted" income we receive because of where we live.

So, if we brought "up" all these people who normally wouldn't owned property, inflated values, validating their salary on "future" worth, then yes....Somebody sold them a bill of something that stinks. Hence the bubble was constructed, filled, and then popped by the unscrupulous investors.

The same way the "DOT COM" bubble was created and popped. Venture Capitalists. I remember the SEC doing the audit on my firm that went "public" and realized it was nothing more than "kicking the tires". Government oversight that failed miserably.

Any way, middle class, yeah, we need a better term. Bubble? yep, popped a few years ago....

 

[SkyPilot]

Frixxxx, well done. To summarize, the "Middle Class" was oversold and artificially inflated and subsidized with unwarranted borrowing? Maybe the definition of "bubble" is worth as much reflection as "middle class"... Maybe the Middle Class should be understood to be a result of policy, not the object of it or a state to be created, maintained or expanded. Can we tolerate the concept of failure, or is the Middle Class just such an "institution" that "is too big"?

 

[Birchtree]

I think it may be time for me to apply for a home equity line of credit so I can get the interest deduction and invest the money in the market with larger dividend returns. I have the available resources to pay it back without difficulty so my paid off home is more valuable as collateral. Interest rates are not going to increase for several more years so as a capitalist why shouldn't I exercise this opportunity. I'm willing to assume the risk of a home depreciation because we are now already on the bottom in pricing. It seems like a good idea to me. You know you are middle class when you own a $500K recreational vehicle.

 

[Warrenlm]

I may switch my vote.

 

[Frixxxx]

Frixxxx, well done. To summarize, the "Middle Class" was oversold and artificially inflated and subsidized with unwarranted borrowing? Maybe the definition of "bubble" is worth as much reflection as "middle class"... Maybe the Middle Class should be understood to be a result of policy, not the object of it or a state to be created, maintained or expanded. Can we tolerate the concept of failure, or is the Middle Class just such an "institution" that "is too big"?

Thanks, SP!
I don't think of middle class as an "institution". It is somebody's classification at the time they want to "justify" their numbers. The real question is how do you fairly apply the outgoing monies based on supply and demand. If you have 10 people in a community and they want a school there, then how is it paid for fairly? How are all services paid for fairly? When does anybody become "tax-exempt"? I remember when I joined the military and someone said that I cost the government "x" amount of dollars but my response was I provide a service as dictated by the U.S. government and the Constitution that formed it. I was not a "burden" as the monies invested in me were on my skills and talents I provided them.
I paid taxes (much to the chagrin of my mother who was beside herself when she found out her tax dollars were taxed again) against my income. But when does a service become an entitlement? When is it perfectly acceptable to pay into something without expectation of receiving all or partial repayment? Based on my previous example of classes, I was never middle class until 2007, 20 years after I joined the service. My parents were poor and they said they were upper lower class - yeah right!

Anyway - I will research more numbers this week to determine if I can find the numbers to people to taxes out there and stand from a better place with my understanding.

 

[nasa1974]

Birch, You may have out classed yourself from the middle class.

 

[alevin]

Frixxxx, well done. To summarize, the "Middle Class" was oversold and artificially inflated and subsidized with unwarranted borrowing? Maybe the definition of "bubble" is worth as much reflection as "middle class"... Maybe the Middle Class should be understood to be a result of policy, not the object of it or a state to be created, maintained or expanded. Can we tolerate the concept of failure, or is the Middle Class just such an "institution" that "is too big"?

SP, Frixxxx's diamond describes what I was talking about earlier. The "faux" middle class would be the ones in the lower half of the diamond that were encouraged to dream bigger than they could truly afford, encouraged to live on the lifestyle margin and whose margins got called but they couldn't cover-$300K houses on a maid's paycheck-near immediate defaults at the least little hint of a cold or sneeze in their financial circumstances.

 

[PessOptimist]

Middle class as defined by Investopedia:
Individuals who fall between the working class and the upper class within a societal hierarchy. In Western cultures, persons in the middle class tend to have a higher proportion of college degrees than those in the working class, have more income available for consumption and may own property. Those in the middle class often are employed as professionals, managers and civil servants.

Based on this using the two out of three rule, I am not middle class. I may be deluding myself but do not consider myself a civil servant. Based on the USC chapter I work under. Yeah, I will look it up and quote it if necessary. I am working class.

I think what happened, is those below this were targeted to be "brought" into the fold. If you look at most of the foreclosures on homes and people in trouble, they were the first to be introduced to the money by proxy. Take equity and spend it. Making us look more like the diamond:

Yeah, many people have cycled through the neighborhood. Some got in and out before the bubble burst. Some didn't leave in time. Many foreclosure sale signs. Most didn't want to introduce themselves. Just a starter home, leaving soon. Most moved themselves in and out with rental trucks. Interesting.

Oh yeah, most had very nice new luxury cars or bigger/newer pickups than I.

Any way, middle class, yeah, we need a better term. Bubble? yep, popped a few years ago....

SP, Frixxxx's diamond describes what I was talking about earlier. The "faux" middle class would be the ones in the lower half of the diamond that were encouraged to dream bigger than they could truly afford, encouraged to live on the lifestyle margin and whose margins got called but they couldn't cover-$300K houses on a maid's paycheck-near immediate defaults at the least little hint of a cold or sneeze in their financial circumstances.

alevin jumped in before I could get this posted. Yeah what alevin said too.

alevin, don't dis the maids. Many of these people claimed to be IT engineers. As in they passed the Cisco course.

I gotta say, birchtree if you are serious about that HELOC, I hope the other family members beat you badly.

 

[alevin]

alevin, don't dis the maids. Many of these people claimed to be IT engineers. As in they passed the Cisco course.

I gotta say, birchtree if you are serious about that HELOC, I hope the other family members beat you badly.

PO, no dis for the maids, or waitresses here. I did my time as waitress, part-time switchboard operator (back when they had switchboards), even applied for a maid job but circumstances resulted in non-followthrough on that one. during those times, I shared apartments or slept old friends couches or rented a bedroom in an elderly couple's home. never ever thought of being a homeowner during those years. I had a paid off car and a college education-my only assets. plus a little work experience.

People at that income level were led up the rosy path, didn't have the financial comprehension to understand pitfalls what they were encouraged to take on.

 

[Birchtree]

NINAs (no income no assets) were encouraged by democrats to seek the dream. Now Barry wants four more years to restore the dream - please don't let it happen.

 

[Aitrus]

Extrapolating between the two...an income range of $50,000 - $70,000 annually per household (based on family of 4).

Well, by this definition I'm almost smack dab in the middle, family of 4 included.

 

[SkyPilot]

If we aggregate our various understandings or perceptions of Middle Class, it seems that we are largely in agreement that there is a "bubble" and it is at least "deflating" if not popping... If Middle Class is dependent upon a manufacturing base to exist, then are we seeing the end of such a "class" at least as we have known it heretofore?

 

[Aitrus]

Interesting...but other G-20 countries that have had simolar reductions in their manufacturing base still have a larger, more well defined middle class than in the US.

SO I would just add that while the decimation of manufacturing in the US has significantly hurt the middle class, it is likley a flase assumption that a country needs manufacturing to have a large, well defined middle class (although it would greatly help). A progressive tax code (not a flat one) helps keep the middle class afloat with more purchasing power.

History has taught that a healthy middle class coincides with an overall higher standard of living...even for much of the upper classes.
The deciimation of the middle class makes a country's people resemble the "Serfdom" of the Dark Ages.

Huh? The G-20s have large middle classes that compare to the US? Mexico, South Africa, Brazil, Argentina, China, South Korea, India, Indonesia, Saudi Arabia, Russia, Turkey all have middle classes that compare in quality and purchasing power with the US?

The others, namely Australia, Italy, Germany, France, UK and Japan are all highly socialist. Their middle classes are funded through lack of freedoms and high tax burdens, and their quality of life still sucks compared to the US. Healthcare and dental that sucks, expensive and cramped living arrangements, money problems just as bad as ours, etc. The only G-20 nation that has a middle class that comes close to the American version is Canada, whose middle class is supported by everything from fishing and lumber to tourism, high tax burdens, and a small population compared to GDP.

The last one on the list is the European Union, which really isn't a country unto itself but a conglomeration of other nations that don't really take part in G-20 activities.

 

[SkyPilot]

I may be "Middle Class" at this point, but will likely sink further and further down the classification ladder as I leave Federal Service and move through my retirement years....

 

[SkyPilot]

Amen!

 

[Scout333]

How The Poor, The Middle Class, And The Rich Spend Their Money How The Poor, The Middle Class And The Rich Spend Their Money : Planet Money : NPR

 

[Aitrus]

Interesting graphic link.

Probably a big reason why trickle down taxation (tax cuts for the rich) doesn't work.

The poor and middle class will spend most of their money pretty quickly in the economy.

The wealthy will stash more of their cash. A smart thing for themselves as individuals no doubt...but not an economically stimulating one for the nation as a whole.

The ultra wealthy (ahem) will stash any extra $$ outside of the US...in the Caymans, Bahama's and in Switzerland.
Not sure how tax breaks for them helps the Middle Class?

Simple. If there aren't any rich, then nobody will have any money to risk on innovation and ideas.

Perfect example of how rich people make everybody's lives a little better: those little curving bends at the top and bottom of every can of soda and beer made in the last couple of decades. They used to be like oil cans - straight 90-degree angles at the top and bottom. Somebody came up with the idea to make a machine to press those curves into the cans, and in the process save a small amount of raw material in each can while at the same time keeping the same amount of liquid in the container. This would allow the company to save on manufacturing cost in raw materials, and lower the end consumer cost of each can by a few cents. The company would still make money because the savings passed on to the customer is made up by savings on raw material. Our intrepid inventor didn't have enough money to manufacture the machinery himself, so he went to a rich guy. Rich guy looks at the proposal, thinks it's an idea worth trying, and funds the research and creation of the means to put the idea into action.

Basically, the rich guy took a risk on an inventor's well-proposed idea. The end result is that a product is just as good, a little cheaper, and conserves raw materials. That's one example of how trickle-down is supposed to work. And that's exactly why, worldwide, the Middle and Lower Classes have a higher standard of living now than they ever did before - hardworking innovators supported by the free market and rich investors looking to make current products better or take a risk on new, profitable ideas.

If the rich are over-taxed and over-regulated, then they spend all their time worrying about lobbying to keep their money and lawyering to keep out of jail instead of investing in ideas. If you make it too costly and burdensome to run a business in America, then a smart business owner will take their business overseas. Taxation and regulation drive business away, not the opposite. If there's no compensation for the risk takers, where's their incentive? If the innovators don't get rewarded and recognized, then what's the point?

And history has proven, time and again, that governments are horrible at guiding innovation and invention because government bureacuracy always gets in the way. Always.

 

[Aitrus]

How The Poor, The Middle Class, And The Rich Spend Their Money How The Poor, The Middle Class And The Rich Spend Their Money : Planet Money : NPR

Interesting graphic. Misleading, but interesting. Misleading because much of the money in the 15k-19k column isn't theirs - it's been "distributed" to them by the government. It completely misses two entire categories of earners (20k - 50k, and 70k-149k). It doesn't address something fundamental: individual choices. How many poor pay for cigs and beer instead of some other need (like retirement)? Take a look at the food numbers: a total of 14.9% for poor, 13.1% for middle, 10.8% for upper. I would think the wine snobs would be paying more than the beer-n-hot dogs crowd. Same thing for utilities: no way a singlewide uses that much more power and water than a 3-story mansion.

It's cherry-picked information. Very typical of NPR, and most all of the media for that matter.

 

[PessOptimist]

I was including state taxes (but not ODSI - yuk yuk, Medicare and Social Security) in the mix. My state grabs 8% at my state marginal tax bracket. Your 28% bracket lands you squarely in the upper middle class. Welcome to the Bourgeoisie. Yuk, yuk. There are only two brackets above yours!!!

And, having your debt paid is very middle class. The rich never pay their debts because they are 'managing' their money till the estate is sold off, the poor never pay off their debts because they get stuck in a credit hole (the same type many of the rich get stuck in).

I love being in the middle with little debt. Yummy.

That might actually be a pretty good definition of middle class. Someone who has access to credit and is expected to pay it off. The rich are not means tested for credit and many never pay it off - thus leaving nothing for their children. The poor might attain credit but are gamed by the issuers to the point that paying it off is hopeless. What a mess.

I had to go back and check the percentage out as I was using an off the cuff percentage from my withholding. All told it comes to about 20% including fed, and two states. Guess I'm not as middle class as I thought. This is using the standard deduction for MFJ.

It's still 1/5 my income.

Basically, we still have not decided what exactly defines the middle class. We all agree the bubble is at least deflating.

Aitrus and FWM, keep it up, I love the discussion.

SkyPilot, you are right, our standard of living is likely to decrease, especially after we retire.

I heard something on the radio this morning about trade schools enrollment being up. Hmmmm?

PO