Debt leaves middle class vulnerable


EVEN WITH the "new economy," it's the same old story for middle-class Americans.

As the end of the decade nears, the U.S. economy remains strong: We have a robust real estate market, the greatest-ever bull market for stocks and a near-record run of continuous growth.

Unfortunately, this makes for a bitter backdrop for those in the middle, who yet again appear to have lost ground to time, inflation -- and to the millionaire next door.

For instance:

Between 1973 and last year, a span of 25 years, the inflation-adjusted wages of the middle-class American dropped 12 percent.

In 1997, thanks partly to stock market profits and dividends, Americans with taxable incomes of more than $200,000 accounted for nearly 20 percent of all household income -- yet constituted only 0.1 percent of the population.

The middle 20 percent of U.S. households saw their average net worth drop from $57,900 in 1989 to $56,200 in 1997.

These nettlesome numbers don't tell the whole tale, says John Schmitt, an author and economist with the Economic Policy Institute in Washington.

"I think the biggest untold story of the 1990s is really the rise of household debt for people in the middle class," Schmitt says. The case of the middle class is interesting, since that group has been slowly pushed into a tenuous financial position, despite an economy in which the Internet is creating instant millionaires.

Schmitt says the delicate finances of the middle class -- the middle 20 percent of all households, with a median income of $45,000 annually -- leave them vulnerable to a shift in the economy.

Schmitt is one of three authors of "The State of Working America: 1998-99," which the Economic Policy Institute publishes every other year. The latest edition analyzes family incomes, taxes, wages, jobs, unemployment, wealth and poverty.

Released in January, the edition is thorough, though one shortcoming is that the projections are based on Federal Reserve data several years old. The book's estimates stop at 1997, meaning the economic picture it paints could well have changed. But it's still a good foundation for analyzing the problems troubling the middle class.

First, consider stocks. In 1997, according to the book, middle-class households held an average of $7,900 in stocks, directly or through mutual funds. That $7,900 figure is more than double the $3,700 of 1989, but has probably grown in light of the strong market since 1997.

Despite bulkier portfolios, the middle class is dwarfed by America's financial elite. In 1997, the top 1 percent of U.S. households owned an average of $2.5 million in stock, while the next 9 percent of families averaged $275,000.

In terms of stock-market wealth, Schmitt says, "There's a huge gulf between the middle and the top 10 percent" of all consumers.

The gulf has likely widened since 1997, though nearly half of all U.S. households own stocks, directly or through mutual funds and retirement plans, according to a study by two financial-services trade groups. That's up from nearly 41 percent in 1995, 36.3 percent in 1992 and 32.5 percent in 1989.

Unfortunately, the bull market for stocks has fueled a stronger rise in middle-class debt: mortgages, home-equity loans, credit cards and car-and-truck loans.

Higher stock prices made consumers feel richer, inducing them to spend more than usual.

By extrapolating from all these disparate figures, Schmitt draws a rather unpleasant picture of the problem facing the middle group of U.S. society. Between 1989 and 1997, middle-income households' stock portfolios increased by an average of $4,200, while other assets rose an average of $2,300. Together, the stocks and other assets of middle-class consumers grew in value by an average of $7,500.

Total household debt in middle America rose from an average of $33,500 in 1989 to $41,700 in 1997.

It's bad enough that household debt was growing faster than assets; it's worse that consumers aren't making up for it through bigger raises: Middle-income households saw their inflation-adjusted incomes, on average, go from $44,283 in 1989 to $44,568 in 1997 -- a paltry increase of $285 over eight years.

Despite higher wages driven by a tight labor market, higher stock prices and mortgage refinancings that have freed up cash, other studies hint that today's middle-class consumers have spent their way deeper into the red.

For members of the middle-class spitting into the abyss, it wouldn't take much of a shake up to sour their fortunes. Some possible catalysts: higher interest rates, which would boost the monthly payments on adjustable-rate mortgages; loans or credit card debts; a drop in stock prices; a slowdown that forces companies to cut workers; or a slump in a hot real estate market.

Because consumers have higher debt loads, any of those situations could well cause the gap between the wealthy and the middle class to widen more.

"While it's not quite a house of cards, it is very fragile," says Schmitt. "If something like this happens, it sure would be hard to be a cheerleader for the 'New Economy.' "

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