Guest Post: Why the Middle Class Is Doomed

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Why the Middle Class Is Doomed

The dwindling middle class, squeezed by higher taxes and costs, is losing its political voice.

The middle class is doomed by some very basic dynamics. Economic historian David Hackett Fischer laid out the fundamental dynamic in his book The Great Wave: Price Revolutions and the Rhythm of History.

By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawned population growth, an expanding number of workers entering the market economy (as opposed to the non-market subsistence economy) and a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

We like to think that modern economies have escaped this cycle, but that is hubris and denial, not reality, for the 20th and early 21st centuries have been characterized by inflation (the U.S. dollar has lost approximately 96% of its value since 1900) and wages have stagnated for the past 40 years: Soaring Poverty Casts Spotlight on ‘Lost Decade’:

According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.


Overall, median household income adjusted for inflation declined by 2.3 percent in 2010 from the previous year, to $49,445. That was 7 percent less than the peak of $53,252 in 1999.

We can see this steady decline in wages in this chart:

The more recent fall-off is depicted in this chart:

Notice that the only age bracket with rising incomes is the 65 and over cohort; everyone younger than 65 has seen their income slashed. And this is assuming "official" inflation is accurate; if it understates real inflation (loss of purchasing power), then the income declines are actually much more severe than charted here.

As I have observed many times before, the middle class filled this gap between rising costs and stagnating wages with debt. This chart reflects this reality:

Household debt has soared far above wages. (Note that this chart is not adjusted to inflation; in real terms, wages have been flat for decades).

Now that the average household is heavily indebted with student loans, vehicle loans, credit card debt and mortgages, its ability to leverage a declining income into more debt is seriously impaired. So filling the gap between rising costs and declining wages with debt is no longer a possibility.

Living within their means and servicing their mountains of debt removes most families from the middle class. As a rough metric, I define middle class as any household with the following attributes:

1. Meaningful healthcare insurance, either provided by an employer or paid by the household

2. Significant equity in a home or other real estate

3. An income and expense sheet that enables the household to save at least 6% of its income

4. Significant retirement funds, either employer-provided or 401Ks, IRAs, income property, etc.

5. The ability to service all debt and expenses over the medium-term if one of the two primary household wage-earners lose their job, i.e. either the household has significant savings or its debts are modest compared to the household income.

Anything less than this basket of attributes is too precarious to qualify as middle class. These basics of financial security were standard-issue for the middle class in the postwar era.

A household could have all of the above attributes on an annual income of $40,000, or they may not have them with an income of $80,000, as "middle class" means some measure of financial security, i.e. owning assets and carrying a debt load that isn't large enough to crush the household balance sheet if income declines.

We can further understand the precariousness of many American households by examining IRS tax data. The top 25% of taxpayers--34 million workers out of a workforce of 160 million and 140 million wage earners--pay almost 90% of all Federal income taxes. Where Do You Rank as a Taxpayer?

An adjusted gross income (AGI) of $66,193 or more puts you in the top 25% of earners. The top-earning 25% of taxpayers reported 65.81% of all AGI and paid 87.30% of total federal income taxes ( $755.9 billion).


How much do you need to make to be in the top 50% of earners? Just $32,396. Fall below that level and you are in the bottom half, along with nearly 70 million of your fellow taxpayers. All told, that group earned just 13% of the income reported on 2009 tax returns. And they coughed up 2.25% of all the income taxes paid.

All these numbers mask the sobering reality that 38 Million Workers Made Less Than $10,000 in 2010-- Equal to California's Population (The Atlantic magazine)

If we dig into the data, we find that the top 25% (34 million workers) is really the top 33%, as only 104 million tax returns actually pay any Federal tax--and as noted above, the bottom 70 million paid a scant 13% of all Federal taxes while the top 34 million paid 87% of all income taxes.

Many Unhappy Returns? (America's aggregate 1040, from IRS tax data).

In 2009, the IRS reported 140.5 Million personal income tax returns were filed. From this starting point, 36.3 Million returns (or, one quarter of the total) are lost to the tax base because of losses, exclusions or deductions. By line 43, taxable income, only 104.2 Million returns survive. In aggregate dollar amounts, total income from all sources falls from $7.7 Trillion to $5.1 Trillion — a decline of more than one-third. This latter amount is what truly constitutes the tax base, since it is the income ultimately subjected to tax.

Of course Social Security taxes are paid by low-income workers, but this amounts to 7.6% of income--not zero, but not too punishing compared to Federal tax rates.

What all this reveals is that the middle class has lost its political power. Roughly 40% of all households receive a check or equivalent from the Federal government, while at the top Power Elite crony capitalists skim capital gains and pay an average of 17% of all income.

The 100 million dependents on the Federal government (Central State) vote to support their share of the largesse, regardless of the consequences to future generations, and the Power Elite crony capitalists buy political protection for their cartels and financialization scams. The dwindling middle class ends up paying most of the taxes even as their percentage of the population falls to the point that their political voice is drowned out by more numerous dependents and Elites that both favor the Status Quo.

The Federal government is supporting its dependents and its crony-capitalist Elites with borrowed money: $1.5 trillion every year, fully 40% of the Federal budget. It is in effect filling the gap between exploding costs and declining income, just like the middle class did until they ran out of collateral to leverage.

The dwindling middle class, now at best perhaps 25% of the workforce, has been reduced to tax donkeys supporting those above and below who are dependent on Federal largesse.

Fisher found that this cycle ends in transformational political upheaval. No wonder; even as the class paying most of the taxes shrinks and is pressured by higher costs, the class of dependents expands as the economy deteriorates and the super-wealthy Power Elites continue to control the levers of Central State power.

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MFL8240's picture

Why the Middle Class Is Doomed- Whithout personel change in the White House.

brewing's picture

not just the white house.  this country needs a total reboot...

MFL8240's picture

Couldnt agree more but, needs to start at the top first.

t_kAyk's picture

Look in the mirror. 


It begins and ends with us. 

brewing's picture

exactly.  there will be no reboot without revolution from the bottom...

AldousHuxley's picture

investor class have union called corporate lobbists and executives doing the dirty work.

middle class has been brainwashed into bashing each other's unions until there aren't any.

poor class just keeps getting poorer and they don't even know it.


when you add healthcare costs and education costs which are largely privatized versus provided from taxes like in most other countries, middle class tax has increased significantly.


college loans and healthcare preimums are TAX which corporations don't want to pay for.


privatization of services necessary to work is TAX on labor.


elites have abandoned middle class long time ago.


"Our skilled wages are higher than anywhere in the world. If we open up a significant window for skilled workers, that would suppress the skilled-wage level and end the concentration of income." - Greenspan who was also wrong on housing bubble proposed to kill middle class to join the poor while super elite rich class benefits.

LetThemEatRand's picture

The MSM has convinced the large majority of the middle class and ever increasing former-middle class that it is their fault they are losing ground.   After all, those green shoots have turned into flowers and everything is good again, right?   The "job creators" are using generational low tax rates (large U.S. corporations once contributed 40% to our tax base while also paying good benefits to employees, today they contribute less than 10%), to hire more people and give them good benefits, right?  Until people start to realize that the system is completely stacked against the little guy and in favor of concentrating more and more wealth in fewer and fewer hands, the oligarchs will continue doing what they do. 

The Big Ching-aso's picture



If the Middle Class is doomed then the only solution is 2 become rich. That's why I've decided to serve my country & go into politics.

Clowns on Acid's picture

Love the not so hidden syllogism !

Raymond K Hessel's picture

How are members of the middle class all in a union?

Calling healthcare and education expenses a middle class tax is wrong.  Everyone pays for these in taxes: sales tax, income tax, this tax, and that tax.  Suggesting that the middle class pay extra is ridiculous.  Many within the middle class don't want healthcare or education provided by the state on the state's terms.  That's why they pay extra for it.  In Italy and Canada, there's socialized medicine for everyone....if you can wait for it, or want to take the chance you'll be approved.  The middle class in those countries do what the middle class in the US do: they pay extra and cut the line.

Education and healthcare are not taxes.  They are services rendered by highly educated and dedicated people who have had their souls crushed by socialist fuck sticks, like you.

Privatisation of services making work necessary is not a tax on's called the grown-up world, Peter Pan.

Elites and middle class were never on the same team....ever.


But I do agree with your sentiment that Greenspan is a neo-zoom max dweebie, for sure.

LetThemEatRand's picture

"Calling healthcare and education expenses a middle class tax is wrong."

You missed his whole point.  Healthcare for the middle class is a hidden tax because it is mostly privatized, e.g., not offered as a social benefit paid for with taxes.  Most middle class people do not qualify for Medicaid and only those over 65 qualify for Medicare.   If they need to see a doctor, they rely on private insurance if they can afford it or if it is offered by their employer (a shrinking benefit offered less and less), or they pay out of pocket.   Since you called out "socialist fuck sticks," perhaps you can explain why our predominently for-profit health care system is the most expensive in the world.  In case you don't have time to research Rush on this issue, I have the answer.  It is because that is really how the free market works in such instances.   Doctors and insurance companies and hospitals have as a group emassed enormous wealth providing a service we literally cannot live without.   If you are wealthy our for-profit system is awesome.  You have access to some of the best care in the world (though places like Germany which have entirely socialized medicine kick our ass in some areas).   If you are among the growing ranks of those who are not offered insurance through their employment and who cannot afford to pay for private insurance, our great health care system may as well be a unicorn because it is unaffordable.  But fuck the middle class, right?  It's their fault for not being rich.  Everyone should be able to pay hundreds of thousands of dollars for life-saving treatment as needed and thus take personal responsibility and not be a socialist fuckstick, or should just die a proud free- market-always-works-even-when-it-doesn't cheerleader.

TBT or not TBT's picture

explain why our predominently for-profit health care system is the most expensive in the world.

Because of government(state AND federal) interference, such as mandates on providers and insurance companies that raise their costs and prevent them offering market driven insurance and health care.   And then there is the corrupting effect of "insurance" which is so bastardized by mandates as to no longer be insurance by any classical measure hiding the cost of the provided health care from the consumer.   Health care costs will plunge if and when government exits regulation of the insurance and providers.    Take a look at plastic surgery, which is mostly elective.   The price/performance in that field improved historically, BECAUSE the cost is paid by the consumer, not hidden by government designed cockamamie.   

Consumers exposed to the cost of health care pay a lot closer attention, and shop around.   Providers who have customers that shop around are obliged to be more cost effective, and can be if they don't have to keep on board an army of paper pushers and worry over byzantine procedure.    For God's sake to get a wart frozen off by a dermatologist, old school, is a five minute interaction he could charge 20$ for, if not for the fucking paperwork etc.   Same deal with so many medical transactions.   But the insurance on both sides makes it cost a fortune to get this simple quick thing done.

Slartibartfast's picture

Speaking purely from the Canadian standpoint, you're wrong. Been through a number of procedures over the years, some very serious (bone marrow transplant) and others more pedestrian (hernia) and I've never had to wait longer than was reasonable (hey, medicine isn't a MacDonald's drive-thru) and never had to pay anything more than a few bucks for supplemental services. Yeah, I hear people bitching from time to time, but not many. Contrast that with a US couple who recently told friends that their newborn got ill and they wound up losing their savings, their house, their child and finally their desire to remain US citizens. There are no death panels in Canada, no seniors set out on an ice floe when they're too old to be productive, and no rationing of care. If the case is serious enough you go straight to the head of the line, which may piss off some of the less serious cases, but again, no healthcare system is like a fast food joint, and even private care can make serious mistakes. If healthcare in Canada was as bad as yanks make it out to be, it would have been jettisoned long ago with nary a tear shed.

TBT or not TBT's picture

uh huh, and getting an MRI scheduled for your pet takes how long, vs how long for a human?    In the US, it is TODAY for an MRI for a human, in Canada, good luck...unless you are a dog with an owner paying cash, or you have the good sense to take your health south for a day.

Raymond K Hessel's picture

Such propaganda... you should be ashamed of yourself.  

My relatives up near the capital and Toronto have had nothing but horrible to things to say about Canadian health care.  From simple tests that take months to get results for and for the little things like seeing a doctor.  

You're last sentence is juvenile.  Socialists don't give a shit about your tears or your opinions.  They will not jettison socialized medicine.  I give you British socialized medicine as exhibit A.



BlackholeDivestment's picture

Brewing, the natural reboot you have described for America, that is just one country. Think global reboot, and then add fire.

rotagen's picture

Please clarify the cliche "it begins with us" comment. If you are trying to say "be a nice guy and share your wealth" or some other "christian" BS I gotta call bullsh*t.  You can't fight crooks with guns by being a docile idiot.  Look in the mirror , yeah that might change something if you're a Rotschild, but those psycopaths are beyond repair.  Look in the gun store.

Vince Clortho's picture

Right on.  Start at the top (CBs).  We can deal with the politicos later.  In fact, our "elected officials" will start crapping their collective panties when the mainstreet mass starts to wake up to who the politicians have been working for all these years.

AldousHuxley's picture

50 and older also have political and executive powers. looks like they are not affected yet so they don't feel the pain.


We need to make oldies at the top feel the pain. They think Americans are just lazy and having it easy while their own children couldn't hack it into their own alma mater or profession these days due to super competition.

WillyGroper's picture

If 50 & older had any political & executive powers, we'd never have gotten into this mess. They don't feel the pain? 


KK Tipton's picture

Yes, the central bank "system" has to be unplugged and dismantled.

Weaponized Inflation is a tool just as dangerous as any gun or bomb.
It's the literal prime mover of cash direct to the elite.

Reign inflation in and see the middle class spring back into action.

Second plan:
Stop the influence of lobbyists/corporations on government.
The laws/uneeded regulations they help enact are the second weapon aimed at the mainstream populace.

Help your fellow man in any way you can. It's going to be literal life or death for Americans in the next few years.
The aggressors are the people that want "something for nothing". By this I mean the elites.
They do not want to work....they want YOU to work FOR them.

Hence, "the system" as it stands in 2012 America.


AgShaman's picture

Middle Class needs to re-learn a couple things...

Like how to build a functional gallows and guillotine

Trailer them into D.C. on parade floats....let the traitors know what the future has in store for them

dark_matter's picture

Don't forget the body armour and gas masks.

CH1's picture

Middle Class needs to re-learn a couple things...

Yes, but #1 - by a mile - is to act on their own will.

No waiting for permission. No waiting for a "movement." Just DO what you think is right.

Nukular Freedum's picture

The genius of the tax system consists of its appearance of taxing the rich progressively whilst appearing to favour the middle class. In reality the exact opposite is the case of course, which is why the MC is dwindling at an alarming rate.
What is needed therefore is an elimination of the 10 million word tax avoidance code combined with a taxation on capital gains which is identical to that of income. This implies a one page flat or fair tax or combination of the two. A final requisite safeguard against the depredations of the super rich is the elimination of all exemptions, even for oh so charitable institutions like trust funds.
This might just about do it for reviving the middle classes (along with a couple other things). Of course the corrupt, socially irresponsible elites will not institute such a system because there is no subterfuge there, it simply reveals the tax burden for what it actually is, no smoke or mirrors.
Oh and regarding those other things absolutely required for a middle class revival look here:

Nukular Freedum's picture

Apologies in advance, double post, etc.

Btw, great post Charles, love your stuff. :)

Diogenes's picture

Capital gains are largely an illusion. The dollar has lost half its value in 10 years. If someone has owned an asset for ten years, and seen its value double, they have just kept even with inflation. They have gained nothing. But if they sold the asset they would pay tax on the phantom "gain".

So, a capital gains tax is actually a tax on capital. It would prevent an ordinary honest person from ever accumulating capital and getting out of the subservient class.

It would not prevent those who already have large capital from cheating and stealing as they do right now.

marathonman's picture

How about nationalizing the TBTF banks and letting their "profits/currency debasement" pay the income taxes? 

sessinpo's picture

marathonman                             2351750

How about nationalizing the TBTF banks and letting their "profits/currency debasement" pay the income taxes?



Disagree on this one. By being TBTF, they are essentially nationalized in a corrupt way already. In fact, as with many corporations, they are globalized with their dirty fingers every where.

Investment banking needs to be separated from the traditional commercial lending side as before. Commercial lending banks should be regionalized or become much more like credit unions whereas the depositors are members/owners of the institution. Regionalizing them prevents them from becoming to big that they take down entire sectors of the country like housing.


As for the investment banking sector. They should be allowed to fail immediately through bankruptcy for their failed investments - period. In fact, that is the way it should be for all businesses.

rwe2late's picture

 This might just about do it for reviving the middle classes (along with a couple other things).

I'm not sure what "couple other things" you have in mind.

But I think a "couple other things" have been much more critical in the recent massive upward shift of wealth and power than the ostensible tax structure.

A meaningfully amended "flat" tax structure, including the regressive SocSec, Medicare, state, and local taxes which you failed to mention, will not be legislated by TPTB, and even if legislated would be evaded,  and even if not evaded would make no significant inroad into the inequitable distribution of wealth and power.

Some more critical "things":

The trillion dollar profiteering budgets of military contractors are in a "locked black box".

Trillion dollar handouts to financial racketeers are in a "locked black box".

Money laundering for the underworld drug & weapon trades are in a "locked black box".

Monopoly premiums to big Pharma and Insurance grifters are in a "locked black box".

Military and petrodollar extortion of foreign nations are in a "locked black box".

Subsidies to global oil and global agribusiness are in a "locked black box".

Accounts of global corporations are in a "locked black box".

Aristocratic indulgences for a political elite are discreetly provided behind closed doors, and behind those closed doors are set policies to open markets, conquer resources, control finances, and police the world.

A privileged few and their political servants claim indisputable authority, however they see fit, to trample and negate rights formerly held by once equal citizens. 

centipede's picture

I think you are wrong. Capital gain is not the enemy of the MC. As written above CG is eroded over years by inflation and corporate taxes. To tax it more will make it just another option lost for the MC to invest their savings in. The real enemy is the aliance of privileged political and corporate elite. The real money which is made from CG of productive companies is tiny in comparison with the taxes expropriated by the government and siphoned off by crony corporations in form of bailouts and subsidies plus enormous debt burden created again by them and left again for taxpayers to pay for.

Metalredneck's picture

It's not just your country.  It looks similar here in Kanuckistan.

Raymond K Hessel's picture

We're all spinning down the same toilet bowl swirl into fascism.

johnu1978's picture

The only way the middle class will survive is if they start learning primitive and sustainable skills. Here's a school in the Northwest which teaches those types of skills:

Check the link it out when you have a chance, it'll be worth your time.

Take care,

LowProfile's picture

Troll your shit much?

You really are becoming tiresome.

I also doubt you can teach anyone anything they couldn't damn well learn themselves.

LFMayor's picture

Does your holistics class teach how to field dress and smoke people?  I hate to piss on the campfire, but there just aren't going to be enough twigs and figs to go around and I doubt if the hordes will leave you and your little family group alone on your 10 acres long enough to harvest even a seasons worth of crops.

First we're going to play Mad Max.  And when the fuel is well and truly used up we're going to play the Hunger Games, which won't look much like the recent popular movie, it will look like people utilizing the readiest, most available source of nutrients at hand.

Wendigo Meats, LLC.

Lednbrass's picture

People in food producing areas are armed to the teeth and quite competent with what they own.  They also tend to know and rely on each other to a degree entirely unheard of in cities.

If there is a total societal breakdown then the urban zombie hordes with pitiful weapon skills and generally mediocre weapons get out into those areas they arent going to be picking off individual farmers, theyre going to encounter groups of very heavily armed people who know the local land and can kill at distances where the hordes wont be able to even see them before many are lying dead or dying.


10mm's picture

Correct LednBrass,they will drop like flys.

francis_sawyer's picture

Half of their fat, lazy asses won't be able to walk 5 miles out of the city... The other half will die of thirst before they get to 50 miles... The half dozen that make it through the first two will BEG you to take them in & they'll be your bitch...

Conor's picture

You are exactly correct.

Stupid southerners such as myself, and virtually everyone I know, has more firearms than people in the house. They know how to grow food, build structures, adapt to weather, etc.  We are resourceful and fiercely independent.

And there will be so much chaos in the big urban areas, nobody will pay much attention to us.  And we will do just fine.

Raymond K Hessel's picture

I sincerely doubt the Mad Max eventually.  

More likely, there will be more forced labor, police actions, etc.  Federal and State govts pay farmers to destroy tons of grain and milk each year.  The resources are there.  

I don't think it'll go Mad Max.  I think the US will go full fascist long before it gets to urban zombies roaming the countryside.

SilverRhino's picture

Maybe so but I am absolutely NOT buying this statistic

According to the Census figures, the median annual income for a male full-time, year-round worker in 2010 — $47,715 — was virtually unchanged, in 2010 dollars, from its level in 1973, when it was $49,065.

No WAY people were making 49K as median levels of income in 1973. 

Goldust's picture

" 2010 dollars..."



SilverRhino's picture

FUCK ... this is what happens when you fail reading comprehension because you're in a rush.   Damn.

banksterhater's picture

As if our problems didn't start with REAGAN! You think Warmonger Romney is the answer? Obama gave me unemployment benefits and a HARP refi @ 4% (based on our savings/equity/loan sold to Freddie) both only happen once in a lifetime, imo, so even though he's not lived up to his promises, he's helped lots get thru this mess mostly dumped in his lap.

Goldust's picture

member for 2+ years and that's your comment?  WOW.  You are either hopelessly ignorant or a paid shill for Democrat talking points.

Sentences beginning with "Obama gave me" (substitute other politician if you like) are the mark of a fool.  "Obama", and government, give nothing that isn't taken from someone else in one form or another.

"Our problems" as commonly agreed to on ZH, started long before Reagan, though I doubt from your post that you will understand what this means.

Raymond K Hessel's picture


Cass Sunstein!!!  Is that you?  

Is that you again, you dirty motherfucker!!

Lednbrass's picture

If you think our problems began with Reagan you are either very young, very naive, or very dumb. Whichever it is you should look into it more.

Some of the dragons teeth now sprouting were sown before anyone here was even born.

Spitzer's picture


When are the shanty towns gonna spring up ?