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EScroogeJr (< 20)

middle class is alive and well

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April 07, 2008 – Comments (10)

The rumors about the death of the middle class have been slightly exaggerated. What is the basis for these rumors anyway? Let's go over some favorite pet peeves. Expensive gas? Shrug. Is that such a big expense as some panic-stricken SUV drivers would have us believe? Let's run the numbers. In order to really bite, this higher price should take some meaningful amount out of your pocketbook. Let's say, an extra $1000 a year would be noticeable. The price of gas has increased about $1 per gallon, from 2.40 to 3.40, so in order to lose $1000, you have to spread this additional cost over 1000 gallons. A normal car should run 30,000 miles on this amount of gasoline, which is considerably more than an average driver (and perhaps an average household) should drive in one year, so for the people who buy their cars rationally, price at the pump is a lesser issue than this year's $600 present from Bush. Don't be an idiot, don't drive a gas-guzzling SUV you have no reason to own, and you'll do just fine. What else? Food? Yes, food is a big concern and it could become an important issue in the future. But for now, price increases have been relatively modest. A year ago, a family of 4 would need roughly $10,000 to buy food. This number should be something like $11,500 today (I don't believe the official 4.5%), but it should still be manageable. The median household income was 48,000 in 2006, and despite "income stagnation" complaints it did increase slightly afterwards. In practical terms, the recent deterioration of macroeconomic conditions amounts to roughly $2000 of additional expences for an average family living within its means. This is unpleasant, but it doesn't take you brom the middle class to the lower class. Nor does it have to result in reduced consumption if you counter this challenge by reducing your 401K contribution, which would obviously have negative long-term repercussions, but is perfectly acceptable for a period of 3-5 years while we're grappling with this temporary oil spike. This is where we stand today from the income standpoint. But wealth is less a matter of income than a matter of assets. Considering that house values have doubled as compared to Clinton's era of good feeling, and stock indices, which form the backbone of your 401K plan, also grew very substantially (excepting the 1999-2000 dot-com aberration), it should take middle class a higher than average level of impudence to complain about being squeezed.

10 Comments – Post Your Own

#1) On April 07, 2008 at 10:21 PM, motleyanimal (60.08) wrote:

Agreed that the current middle class is not in bad shape, but I do worry that younger workers may have greater difficulty getting there.

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#2) On April 07, 2008 at 10:35 PM, alstry (36.08) wrote:

First of all, a gallon of gas a few years ago was $1.40, not $2.40, and now it is $3.40.  The typical driver travels about 15,000 miles per.  At 20 miles per gallon blended, that is about 750 gallons of gas.  For a two car family, that is 1500 gallons per year.  The additional cost for that family is $3000 dollars per year.  At a 40% state and federal combined tax bracket, the family must earn an extra $5000 per year simply to cover the increase in gas prices over the past few years.

Food price increases have been modest?  Milk has doubled.  Eggs have doubled.  Bread has doubled.  Many other items have doubled.  Obviously you don't shop for groceries.  Studies show that the average family is spending an additional $3,000 to $4,000 per year on food alone.  Now the above family needs to earn an extra $5-7,000 to cover additional food expenses.

How about property taxes....an extra $2,000-$3,000 per year.

How about health insurance....an extra $3,000 to $8,000 per year.

How about heating and cooling your house....an extra $1,000 per year.

How about homeowners insurance doubling????  We could go on and on and on.......

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#3) On April 07, 2008 at 10:40 PM, Imperial1964 (97.82) wrote:

What I think you're missing is that the middle class as a whole has ratcheted up their living expenses and debt--thereby their debt-servicing costs--to the point where many can't absorb a $2k increase in necessary expenses.

They can't not eat.  They can't not pay their heating & electric bill.  They can't not pay their mortgage.  They can't not pay their car loan.  They can't not pay their taxes.  They can't not pay their insurance bill.  They can't not pay their student loans.

This $2k, if your numbers are correct, at best amounts to a sizeable reduction in discretionary spending and at worst a real reduction in standard of living as people have to downsize their homes, cars, etc. or face foreclosures and reposessions. 

It has probably been a generation since a sizeable number of people have faced an actual reduction in their standard of living.

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#4) On April 07, 2008 at 10:43 PM, Imperial1964 (97.82) wrote:

Good job, Alstry, for doing a thorough job of running more accurate nubers.  I was too lazy to do it myself.

And you guys are forgetting ARM resets adding hundreds to some people's monthly payments. 

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#5) On April 07, 2008 at 11:08 PM, EScroogeJr (< 20) wrote:

motleyanimal,

You're right. The social lifts are now closed. That is the real problem we should be discussing.

alstry,

gas cost 2.30 as far back as 2003. The norm is 30 miles/gallon as far as I'm concerned. If someone feels that a small Japanese car is below his dignity, then I'm happy to let him pay the price for his dumbosity. All the other numbers you cite look more like a personal consumption pattern than like a meaningful piece of statistics.

Imperial,

You're exactly right. The problem is not with incomes per se, but with the sense of entitlement gone completely wrong. I deserve this granite countertop here and now, and if in reality my income does not allow me to splurge on luxuries, then so much the worse for the reality.

 

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#6) On April 08, 2008 at 12:04 AM, alstry (36.08) wrote:

Gas spiked a bit in the summer of 2003 but at the beginning and end of 2003 a gallon of gasoline hovered around the the mid one dollar range.  It spiked  up to the upper one dollar range in 2004.  You must have been living in Canada in 2003 when the looney was a bit weaker than it is now.

Although my Japanese car likes to brag it can get 30 miles to the gallon, a more honest assessment would be in the low 20s factoring a fair blend of city and highway.  I try to be honest with my assessments.

Actually, none of the items listed are personal consumption items save food....by definition is a necessary  personal  consumption item.  Again, it is obvious you don't have kids or  have never done grocery shopping in the past year.

And my estimation on heating and cooling was very low, especially if you live in the North or South.

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#7) On April 08, 2008 at 12:37 AM, EScroogeJr (< 20) wrote:

Oh really?

California was a part of Canada in 2003?  :):):)

You spend an extra 8000 on health insurance? Why? You are unemployed? :)

Your property tax is up by $3000? Did you enjoy a $200,000 appreciation (1.5%*200,000=3000) despite the competing constuction activities of the big bad evil SPF? :)

Your family is spending an extra $4000 on food? You're not writing from Hawaii, are you? :)

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#8) On April 08, 2008 at 2:48 AM, DemonDoug (35.21) wrote:

Escrooge, you just love being the Devil's Advocate don't ya ;).

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#9) On April 08, 2008 at 8:55 AM, EScroogeJr (< 20) wrote:

Demon, I'm just naturally mistrustful of trite cliches that I hear on the radio. If you analyze them, you'll discover a lie behind them, I'd say, 9 times out of 10.

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#10) On April 08, 2008 at 12:54 PM, leohaas (31.35) wrote:

Escrooge, love this post. "dumbosity",  how did you come up with that one? Brilliant!

"...for an average family living within its means..."

Now therein exactly lies the problem. Clearly, the average family in the US does not live within its means. They live paycheck-to-paycheck. In that situation, gas going from $2.40 to $3.40 is a disaster. Especially if you choose to drive a vehicle getting 20 mpg and to live in a McMansion 30 miles away from work...

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