There is a lot going on politically and culturally in the U.S. and around the world. When this decade is over in 2030, it is hard to say what the big stories will be.
If there is no nuclear war or major world war, then the story inside the United States might be the decline of the American middle class.
The problem is that this isn’t a story that makes headline news. It isn’t something that just all of a sudden happens like other big events.
Maybe there will be the occasional report on the decline in real wages, but it won’t get much attention after that. Yet, for most people, this is a really big story.
While the people alive today get to enjoy technology as never seen before, living expenses for basic needs have gone higher than in previous generations.
It is a sad state of affairs when you can see that the young generation of today might be worse off than their parents.
Just as economic growth slowly compounds over time and is barely noticed, the slow economic decline is barely noticed at first.
Compounding Declines
Compounding interest is a beautiful thing when you are able to take advantage of it. Unfortunately, compounding can work in the other direction too.
If price inflation is running at 5% and wages are going up at 3%, then you are losing 2% per year. It’s actually a little worse than this because you have to pay taxes on the additional 3% in nominal wages.
When this happens year after year, it starts to add up. The first 2% might not feel like much. It might just mean a little less accumulated in savings. It might mean eating out one fewer time per month.
But then it starts to grind you down. The cuts you made last year aren’t enough to get you through this year. And the harder cuts you have to make this year aren’t going to get you through next year when your real wages decline again.
Even if wages after taxes keep up with price inflation for one year, you are still down from the preceding years when wages didn’t keep up.
Different Worlds
At the risk of sounding like Bernie Sanders, there seem to be two classes of people. There are the rich, and there is everybody else.
Maybe there is a third category of the upper middle class who are doing well but still on the treadmill of life. They are able to afford many luxuries and show no signs of struggling financially, but if they ever experienced a significant decline in income, they would quickly be poor.
I see it in my own life and the people I know. There are some people who are almost careless with money. They will be quick to throw around hundreds of dollars for very minor conveniences. Then I know people who are just barely getting by and having to pinch every penny.
I feel like the disparity has grown in the last few years. I have seen almost no change in the behavior of the people I know who are well off. If anything, they are spending more than ever. The people who are middle class but barely getting by are having a much tougher time today than, say, 4 years ago.
Of course, I don’t blame those who are doing well as long as they are making their money honestly. I don’t think they should be as wasteful or careless with their money as I often see, but it is their choice.
The solutions of the likes of Bernie Sanders consist of more government spending and intervention, which is the opposite of what we need. A major reason for the big disparity right now is exactly that, coupled with a previously loose monetary policy from the Federal Reserve.
A Six-Figure Salary
I saw a recent post by someone in a financial independence (FI) community saying that their family income was about $90,000 per year and they were barely making it. They were able to contribute to a 401k plan, but there wasn’t much to save after that.
Her housing expenses were less than $1,000 per month, so it probably wasn’t a high cost of living area. I don’t know if that included taxes and insurance, or if it was just principal plus interest on the mortgage. Still, it isn’t a big housing payment in today’s world.
The comments in response were interesting. Some people were critical saying that she should be able to save with that kind of income. But I think most of those comments were coming from people who either made more money, already had significant savings, or didn’t have any children at home. (Kids are expensive, no matter what anyone says.)
Many other comments were sympathetic, and many people could relate even if their situation wasn’t quite the same. There was definitely somewhat of a common feeling that prices are going higher and wages are not keeping up.
It is sad to say that making a low six-figure income in today’s world isn’t really that great. It is better than a lot of other people, but it doesn’t put you into any kind of wealthy or rich status. You can certainly become wealthy over time with a low six-figure salary and frugal living, but it will take you a long while.
Most people don’t want to live very frugally though. If you have a family, you want to be able to take a vacation. You want your kids to be able to play sports and go to the fair. You want to be able to eat out at a restaurant once in a while. It’s nice to have a streaming service to enjoy some movies.
A Revolt of the Middle Class
The decline of the American middle class is a result of massive government intrusion in our lives. The decline of the American middle class may also be the only thing that will stop and reverse this intrusion.
It’s easy for Americans to not pay attention to some war overseas. It is easy to take a political position on this or that issue. But when a formerly middle class family is all of a sudden struggling to pay the bills and put food on the table, they may start paying attention.
The $100 billion or so being sent to Ukraine doesn’t sell as easily with the American public when American living standards are in decline.
There is a big recession coming, and there will likely be big changes that come with it. One morning, the American middle class will wake up and realize that they are no longer middle class, and they aren’t living the so-called American dream.
This is when positive change towards liberty becomes possible.