What is Middle Class?

People define middle class in different ways.  As with many things, it is all relative.  Most would rather be a poor person in the United States than middle class in Ethiopia, if there even is such a thing as middle class in Ethiopia.

Many will define middle class in terms of income or wealth.  Personally, I like the definition of defining classes by their time perspective.  The more future oriented someone is, the more towards the upper class he is.

But for today, let’s discuss the middle class in terms of living a relatively comfortable lifestyle in the United States.  Someone in the middle class should be able to have a decent place to live, a car, and other basic needs.  But we also expect certain luxuries such as televisions and smartphones.

These luxuries, which are now considered common, should be expected.  As a society advances and technology gets better, we should expect greater wealth and more choices.

The problem in today’s world is that while we enjoy these extra luxuries – some of which didn’t even exist just a few years ago – many Americans are struggling with their day-to-day expenses.  It is hard to pay the expenses for basic needs with anything close to the median family income, which is a little over $50,000 per year.

I know some will say that people should give up their cable tv and their cell phones if they are having trouble paying their electric bill and rent (or mortgage).  But I really don’t accept that because we should be able to have these extra luxuries without struggling.

I believe there is a silent majority out there who are struggling, but don’t speak openly about it.  This is part of the reason that some of the unexpected presidential candidates – particularly, Donald Trump and Bernie Sanders – are doing unexpectedly well in the polls.  They may have the wrong solutions, but at least they are recognizing there is a problem.

The problem is burdensome government and Federal Reserve policy.  The massive deficits hurt our standard of living.  While everyone talks about the next generation being burdened with debt, they should be looking at right now.  The massive spending coming out of Washington DC is misallocating and wasting resources on a massive scale.

Charles Hugh Smith recently wrote an article on the shrinking middle class.  He lists ten requirements on what it takes to be middle class.  I don’t necessarily agree with the list, but his overall point is well taken.  Really, his list is a reflection of future orientation, which I mentioned above.

He estimates that to have a chance at a middle class lifestyle, a family would have to earn about $100,000, or $130,000 for those who are self-employed.  He acknowledges that there is a wide range of living expenses across the country.  Obviously $100,000 isn’t going to get you very far in San Francisco or New York City.

I think he is on track with this.  A family earning $100,000 is not really all that well off any more.  A family earning this much will barely get by even in a less expensive city when you factor in a mortgage payment, a couple of cars, health insurance, food, and the other basic necessities.  It gets even more expensive if you factor in daycare or private school.

Of course, the biggest expense any family faces is taxes.  You pay your payroll taxes, your income taxes, your property taxes, your sales taxes (which really add up), excise taxes that are typically hidden, and various other hidden taxes.  This also includes corporate taxes that can make things more expensive.  It also includes the inflation tax, where your money loses its value.

I think the biggest setback for most families over the last few years is health insurance and medical costs.  Not only have premiums skyrocketed, but the plans themselves cover far less.  You can fork out thousands and thousands of dollars in premiums for a policy that doesn’t even cover anything for the first several thousand dollars.  This is not weighted high enough in the CPI numbers, something that Smith alludes to in his article as well.

Basically, if you are a family of four making less than six figures, you are probably struggling. I don’t mean that you can’t put food on the table or a roof over your head.  But if you have your kids in activities and you have your basic luxuries of cable tv and cell phones, then you are going to have trouble taking a nice vacation once a year and still saving some money for a rainy day.

When you get to a family of four making around the median income, it is on the verge of poverty, at least in relative terms in the U.S.  Good luck saving anything at all.

I believe this is generally unsustainable.  Either Americans are going to have to cut back significantly or the government is going to have to be cut back significantly.  That is why there is likely to be a severe correction.

Hopefully a “correction” will be exactly that.  It should downsize the government and make some prices look affordable again.  If the government and Fed respond to a correction with even more spending and inflation, then it will just make things worse.  Something is going to change.

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