Middle class

Memo To The FED And Its Media Tool Hilsenrath: We’re Not Here To Enrich Your Corporate Cronies

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healthcareCharles Hugh Smith – The Federal Reserve is appalled that we’re not spending enough to further inflate the value of its corporate and banking cronies. In the Fed’s eyes, your reason for being is to channel whatever income you have to the Fed’s private-sector cronies–banks and corporations.

If you’re being “stingy” and actually conserving some of your income for savings and investment, you are Public Enemy #1 to the Fed. Your financial security is nothing compared to the need of banks and corporations to earn even more obscene profits. According to the Fed, all our problems stem from not funneling enough money to the Fed’s private-sector cronies.

Fed media tool Jon Hilsenrath recently gave voice to the Fed’s obsessive concern for its cronies’ profits, and received a rebuke from the middle class he chastised as “stingy.” Hilsenrath Confused Midde-Class “Responded Strongly” To “Offensive” Question Why It Isn’t Spending.

Memo to the Fed and its media tool Hilsenrath: we’re not here to further enrich your already obscenely rich banker and corporate cronies by buying overpriced goods and services we don’t need. Our job is not to spend every cent we earn on interest to banks and mostly-garbage corporate goods and services. Our job is to limit the amount we squander on interest and needless spending. Our job is to build the financial security of our families by saving capital and prudently investing it in assets we control (as opposed to letting Wall Street control our assets parked in equity and bond funds). Continue reading →

The Self-Employed Middle Class Hardly Exists Anymore

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incomeCharles Hugh Smith – Many people rightly aspire to improve their household’s state of resilience through actions such as storing emergency supplies, starting a vegetable garden, and learning basic readiness/maintenance skills, etc. In general, resilience boils down to self-reliance. But like it or not, in our largely urbanized society, true long-term self-reliance needs to include some measure of financial independence.

By ‘financial independence’ I don’t mean so much wealth that you no longer have to earn a living. Rather, in this discussion, financial independence means owning income streams that you control lock, stock and barrel.

Some of this income may be passive (for example, royalties earned off a patent you own) but for most people, ‘independent’ income is actively earned via their own labor (i.e. self-employment).

Of course, the easiest path to financial independence is beg born into a wealthy, well-connected family.

But since few of us win that born-rich lottery, this article addresses the important question: How do “the rest of us” carve out financial independence?

How Many Make a Middle Class Income from Self-Employment?

Let’s start by defining ‘self-employment’ as an enterprise without employees that has more than one client. If a consultant’s entire annual income is from one client year after year, for example, the Department of Defense (DoD), the consultant is more of a proxy employee of the DoD than a sole proprietor. In an era where Corporate America and the government attempt to shed employment costs by hiring independent contractors rather than employees, we need to differentiate between quasi-employees who work for one client and the truly self-employed. Unfortunately, the officially-reported employment data does not distinguish between the two.

But of greater use is a recent article published in The State of US Small Businesses that included a chart by Docstoc.com regarding self-employment in the U.S. According to Docstoc.com’s research, there are about 22.5 million businesses with no employees in the U.S. that report at least $1,000 in annual receipts. Of these, 3 million are partnerships or S corporations (typically licensed professionals such as attorneys, engineers, architects, etc.) and 19.4 million are sole proprietors. Continue reading →

Neofeudalism 101: Strip-Mining the Upper Middle Class

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Charles Hugh Smith – I have often examined the Neofeudalist structure of the U.S. economic hierarchy, and the many social and financial fault lines running through this creaking structure. For example:

America’s Nine Classes: The New Class Hierarchytaxes (April 29, 2014)

Are You an Elitist? Class Warfare and the New Nobility (April 26, 2014)

Protecting Elites and the Clerisy Class That Serves Them (September 26, 2014)

Bifurcation Nation (June 24, 2013)

The Three-and-a-Half Class Society (October 22, 2012)

Tyranny of the Majority, Corporate Welfare and Complicity (April 9, 2010)

Today I’d like to examine the neofeudal strip-mining of the class that pays most of the taxes. These taxes support the bottom 50% who pay the 7.65% payroll taxes and receive substantial income tax credits, and enables the super-wealthy to pay lower tax rates on their vast unearned income.

Let’s take a quick glance at payroll and income taxes for context. Individual income taxes and Social Security/payroll taxes total $2.4 trillion.Corporate and other taxes add $600 billion, for a total of $3 trillion in Federal tax receipts.

2 out of 3 taxpayers pay more in payroll taxes than income taxes: Continue reading →

The Solution To The Declining Middle Class: Destroy Fixed Costs And Debt

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OfTwoMinds May 11 2014

The solution to the erosion of the middle class lifestyle is to destroy debt and other fixed costs and eliminate self-sabotaging discretionary consumption.

CharlesHughSmithLast week I covered the structural dynamics causing the decline of the middle class. In general, the costs of untradable services (healthcare, higher education, government) and the rot of financialization have increased while wages have stagnated. The Federal Reserve’s “solution” was to make everyone who owned a house a speculator who could only keep even with rising costs by riding the asset bubbles higher and then extracting the “free money” generated by these bubbles before they popped.

Let’s take two representative households to understand the decline of the middle class and the solution. Let’s say both households earn $81,000 annually, virtually all from wages and salaries. This puts the family at around the 70% mark of U.S. households, just within the top 30%. (For context, the 2011 median household income was $50,054.)

This income is solidly middle class: not low enough to qualify for much in the way of government subsidies but not high enough to avoid prioritizing and trade-offs.

Household A has a big mortgage on a house they bought near the top of the market with a minimal down payment, student loans, two auto loans and credit card balances. After making the loan payments and paying for utilities, transportation, groceries, employees’ share of healthcare costs, eating out, mobile phone/broadband/TV service plans, there is little money left to save for emergencies, travel, college for the kids, home maintenance, etc.

How do we describe this family: middle class or debt-serfs? Actually, they’re both:measured by what they superficially own (home, two vehicles, communication and entertainment devices, college degrees, etc.), this household is solidly middle class. But measured by how much income is spent servicing debt, how much is left to accumulate or invest, the family’s net worth (their assets’ market value minus debt) and generational wealth, this household is mired in debt-serfdom: their debts will never be paid off.

The mortgage will never be paid off, and by the time the parents’ student loan debt is reduced, the next generation’s student loans are piling up. The auto loans may eventually be paid off, but it will look cheaper to buy a new vehicle with a modest monthly payment than to pay costly auto maintenance with scarce cash. Continue reading →

How The Middle Class Lifestyle Became Unaffordable

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OfTwoMinds  May 7 2014

CharlesHughSmithThere are four structural drivers behind the soaring costs of the middle class lifestyle.

Why have the costs of a middle class lifestyle soared while income has stagnated?Though it is tempting to finger one ideologically convenient cause or another, there are four structural causes to this long-term trend:

1. Baumol’s Cost Disease
2. Systemic headwinds to the current version of capitalism
3. Dominance of global corporate capital
4. Financialization

The key take-away here is that the first two causes are structural and cannot be changed by passing a law or funding another state bureaucracy. Though many believe they can tax global corporate capital to eliminate wealth inequality, capital is mobile and will move to where it can expand. The dominance of money in politics also means that the political machinery is for sale to the highest bidder, which just so happens to be global capital.

Since financialization rewards both capital and the central state that depends on tax revenue, reversing financialization politically is a non-starter.

No wonder the middle class is evaporating. These trends are far more powerful than the proposed solutions.

Let’s start with Baumol’s cost disease, named after economist William J. Baumol, whose work with William G. Bowen I described in Productivity, Baumol’s Disease and the Cliff Just Ahead (December 8, 2010).

Baumol examined the relationship between productivity and cost, and found that productivity in labor-intensive services (for example, nursing and teaching) had intrinsically lower rates of productivity increases than goods-producing industries. Continue reading →