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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GMadScientist's picture

"Up until a couple days ago, the empty grassy area was a cluttered filthy home to as many as 40 people. Caltrans said the biohazard alone was bad enough, but there were other threats to public health there as well.

Caltrans says the encampment is only one of 30 dismantled in Santa Clara County over the past two weeks." 2/12

Benjamin Glutton's picture

we just had a camp burn in our area...


since .gov sided with the banks the only humane thing to do is open the FEMA camps,imo.

slewie the pi-rat's picture

are you a "middle class" clonie? 

or just a meddling clonie ass?

AgShaman's picture

Hahaha....did you party too much in Colombia, pass out, and get your wallet taken by some shiksas?

Now they've got yer identity....aargh!

"A little dash 'll do ya"

CPL's picture

There are hundreds of them in the US.  Have been since 2007.


The citizens of the tent cities in the US are now called The Occupy Movement.

johnu1978's picture

I think they already have, they're called Obamavilles.

There's also a lot of people moving into the National Forests. This is another reason why I recommend for people to learn primitive skills.


Primitive Skills Classes - Edible Plant Tours

Chaos_Theory's picture

Blah blah blah primitive skills class.  If people wanted to live like the Amish, they'd learn Deutch, stop shaving and go be Amish.

My "Live like the Mongol Horde" class is much more fun, and readily accessible for the American nihilistic generation roaming the cities and plains from sea to shining sea.  As soon as they're done flash mobbing stores and state fairs during the "good times" of today, they'll be ready for the advanced 301 and 401 classes that upgrade them from punk to wasteland biker gang. 


DaveyJones's picture

and to think, this is just the beginning

jus_lite_reading's picture

Don't worry. This is "transitory" and gold is an ancient barbarous "relic"...

Cognitive Dissonance's picture

"Fisher found that this cycle ends in transformational political upheaval."

To some degree or another we are all captured by, and thus support, the financial/social/political system. This is why it must all end in tears.

The real question is this. When it does finally collapse will we have the courage to look deeply within and recognize our collective and individual part in the insanity and then discover our true inner sovereign?

Dr. Richard Head's picture

Sovereignty......I just got a woody.  If people understood what a wonderful world this would be if we all asserted our sovereignty.  Alas, as this article points out, Uncle Sam has a lot of titties for the people to suckle.  Crying while sucking a teet is not sexy.

blu's picture

Unless your sovereignty becomes my tyranny.

History is unkind.

Toxicosis's picture

When have humans, unless living in tribal communities ever discovered their inner sovereign?  Whatever that means.  The process into collapse and during collapse means chaos.  After that order as a result of exhaustion and essential survival just might kick in but to make the assumption that emotional maturity might make it to the top of the list and Maslow's hierarchy reign supreme is not likely on a collective scale.

And this time around as in other times around, political upheaval will be a daydream, the nightmare of violent insurrection is far more likely.

KK Tipton's picture

Everything was fine until "The System" was put into place.

Humans lived and died natural deaths. Mostly on their own terms.

The System caused millions of unnatural deaths (see feudalism, socialism/communism/etc., Americanism, corporatism)

The System is not done yet. It will keep on causing millions of unnatural deaths till it's dismantled.

e-recep's picture

Whatever has the advantage, will survive. Hence the system survives. Try living like a hunter-gatherer and see how many days you can keep alive. There's no going back. If you don't like the system, you have to build your own.

Cognitive Dissonance's picture

You most certainly may be correct in your assumption that we will once again begin the same cycle we are now ending. But we can, and do, create our own reality based almost entirely upon our beliefs. So real change can only spring from within.

This is precisely why those in power divide and conquer, subvert and seduce. They fully understand that to allow the human beast to awaken means the end for them. We directly participate in our own enslavement and the powers-that-be enable us to remain in denial of this very fact. Quite symbiotic if you think about it. The pusher and the addict are both dependent upon each other.

Is this "human condition" natural or conditioned. I suspect the latter. The proof (in my view) is that most of our conditioning comes from our own parents and peers. We are trained to comform by those who already conform.

tarsubil's picture

I was raised by wolves and serpents.

CPL's picture

You are American then?

Toxicosis's picture

Sorry we do NOT create our own reality.  And believing in something does not make it true.  In fact if you have to believe in something there is a great possibility it isn't true. Schizophrenics may believe they are a savior, an alien or an omniscient being, but that does not make it true.  It makes it delusional.  Pretending is for children, and we foster magical thinking and even magical friends in children as part of the growth and imagination processes.  To remain in a childish state and pretend that things are or are not happening is the hallmark of emotional immaturity.

Perception is not reality, it can certainly be delusion, but is not reality.  If we see things and perceive things unprejudiced and unbiased for what they, instead of what we desire or want them to be, than that's reality   We may attempt to generate circumstances that favor a specific or certain outcome, but we must live within the dictates of nature, which creates reality.  CD there seems to be a great deal of post-modernistic thinking in much of what you write.  Reality and existence are already there irrespective of our perception of it.  A grown-up recognizes the need for maturity and dealing with reality whether they like it or not.

  And the more emotionally mature the less is an individual is swayed by programming and control tactics because they are aware.  Our society is chock full of narcissists, thus selfish, oblivious and vastly unaware mortals.  What you're prescribing is that individuals who have exercised and been taught self-serving and selfish behaviors are all of the sudden going to see the light and grow up.  Sorry, reality beckons, and it's not by a long shot buying it.

Dagny Taggart's picture

Perhaps in order to be emotionally mature and see the control system for what it is, we must create our own reality. Nothing changes when we mentally exist within the one the Matrix tells us is real.

Toxicosis's picture

Emotional maturity requires personal sacrifice and responsibility, not creating an alternate reality.  It's standing up, being straightforward, and even dealing with tyranny or control head on.  An alternate reality is an escape, and is exactly what most have succumbed to via the media and compulsive consumerism.  Pretending does not equate with dealing with reality and certainly not the thinking that is involved in attaining or maintaining human and humane cohesiveness necessary for a fulfilling or peaceful reality driven life.

DanDaley's picture

"Emotional maturity requires personal sacrifice and responsibility, not creating an alternate reality."

"When I was a child, I spoke as a child, I understood as a child, I thought as a child; but when I became a man I put away childish things."  1 Corinthians 13:11 KJV 2000

This means giving up golf and games for guns and gold -not something that a lot of people want to do.

Raymond K Hessel's picture

It's the difference between Liberty and Freedom.  It's a thesis I'm working on lately.  

Liberty is innate to humanity and Freedom is permission from an authority to act without suffering negative consequences.

Sockeye's picture

"True liberty cannot exist apart from the full rights of property, for property is the only crystallized form of free faculties...The whole meaning of socialism is a systematic glorification of force... No literary phrases about social organisms are potent enough to evaporate the individual, who is the prime, indispensable, irreducible element." - Auberon Herbert

sschu's picture

It is no longer a question of some sort of social/economic/political/all upheaval, this is a given.  The impetus or spark for the upheaval or crash and the nature of the crash are not entirely, but somewhat inconsequential.   

The important question becomes, what will the people do in response to the crash and how will this be manifest in the aftermath of the crash?  The 4th Turning talks about the vulnerabilities felt by the masses and how these feelings of vulnerability can coalesce around perceived solutions to their pain and system chaos.  There is no guarantee that the right “path” will be chosen by the masses, and in fact historically often the chosen path has been wrong, Hitler, Russian communism, Napoleon, and others are clear examples of huge errors.  The US has been fortunate in that during our history, the masses have usually made good choices.  Perhaps this is a product of our Christian heritage, certainly the quality of leadership during troubled times has been good.

But each situation is unique, and the present social dynamic and nature of the problems are different from the past.  Greed, centralization, secularization, “self-centeredness”, propaganda, progressivism and lack of social cohesiveness are challenges to people making the right decisions as a group.  Some of these are unique to our time and place, therefore predictions of what will happen are risky.  

I have to say I am not optimistic.  But then I cannot imagine my grandfathers were optimistic in 1930 while facing a deflationary depression and complete change in their world view.


Jason T's picture

peak oil and china speak volumes to this data.

in 2000, china had 3.5% of global auto production market share and the US had 22%.  In 2011, China had 23% market share and the US had only 10.8% market share.


peak oil .. US consumed 22 mb/d in 2007, now consuming a little over only 18 mb/d.  China is gobbling up our oil too.  Bitchez!

grimey's picture

"Gentlemen, I have merely sketched the power of one of the seven groups that constitute the brain of the Plutocracy.* Your twenty- four billions of wealth does not give you twenty-five cents' worth of governmental power. It is an empty shell, and soon even the empty shell will be taken away from you. The Plutocracy has all power in its hands to-day. It to-day makes the laws, for it owns the Senate, Congress, the courts, and the state legislatures. And not only that. Behind law must be force to execute the law. To- day the Plutocracy makes the law, and to enforce the law it has at its beck and call the, police, the army, the navy, and, lastly, the militia, which is you, and me, and all of us."

Chupacabra-322's picture

It gets worse.  For those of you who haven't noticed.

Blackhawks Circle Low Through Chicago Skies as Secret Service Releases Security Details

Chicago - Blackhawks and A/MH-6 Little Bird helicopters used by special forces circling low through downtown Chicago skies made for a scary scene along the Chicago River, as they rattled windows flying among the city's skyscrapers.

The training exercise comes as the city found out some of the details of what the Secret Service wants for security at next month's summit at McCormick Place.

Chupacabra-322's picture

@ Everbodys All...  Wake the Fuck Up.  The G8/NATO meeting is scheduled to be there.  The Global Elite want to tie up loose ends for the coming collapse. 

CPL's picture

You make it sound like they get to keep it all?


Nobody wins in this situation.  Nobody.   Not the 1% or the 99%.  I'm not sure if people are clear on that yet.

blu's picture

The 1% will lose less than the rest of us, and remain on top of anything that emerges from the ashes.

In a race to the bottom, the winner arrives last.

kralizec's picture

City of disarmed citizens.

(Nobody but crooks and politicians are allowed to be armed in that shithole!)

Whoa Dammit's picture

Stalinism. The paramilitary police will soon be the only middle class.

CPL's picture

Army, Air Force, nor municipal law enforcement can afford the gas to fuel them now.  In a month, LOL.  Whatever.  


Why sweat it?  I want them to run flight training six times a day.  Or twenty times a day.  The day's of summer wine are over for ALL helicopter pilots. Let them burn the last of the oil.


Let them have their last hurrah before they kiss their careers goodbye this summer.



nyquil762's picture

Why this summer? 


Raymond K Hessel's picture

That was pretty fucking ominous.

squib's picture

You said that last summer.

LawsofPhysics's picture


Why is the middle class doomed?  Aside from the vast majority being morons, compensation and the real fucking value of one's labor have been separated.  Fuck the paper-pushers, crash the system, and let's find out precisely what the value of everyone's labor really is.

The socialization of losses by a relative few who benefitted.  Blowback is indeed a bitch.  So long as the fraud continues, so does the downward trend.

dogbreath's picture

Aside from the vast majority being morons, compensation and the real fucking value of one's labor have been separated.    <<<<<<<<  the conditions you identified certainly doesn't help and I'll add a few more.   

demographics   see the chart, only the oldsters are seeing increases in income

population growth is driven by immigration and so is real estate demand

social de-engeneering of the family resulting in wasted capital allocation

education system sucks, but I don't know if moronity is genetic or learned


engineertheeconomy's picture



LFMayor's picture

I'd say the biggest factors will be:

internal combution engine

These things make history happen faster.

Diogenes's picture

Maybe they weren't radioactive but they used large amounts of lead. Airborne lead from Roman era Spanish lead mines have been found as far away as Swedish lakes.

Dr. Richard Head's picture

This article pretty well sums up why I file this form for my taxes on Anal Rape Day -

If Uncle Sam can pretend and extend, so can I!

yabyum's picture

We have met the enemy and he is us!