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Forget The Squeeze: The Middle Class Is In A Choke Hold

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The news is a muddle. The economy is showing signs of improvement -- the unemployment rate decreased last month -- or it is stagnant -- retail sales fell. The housing market is perking up -- housing starts for single family homes increased in July -- but 13 million homes are likely to default in the next five years. Health care reform's public option is at once indispensable and a meaningless litmus test for the left.

There are no certainties in the current economic and political climate. Except one: that the current downturn is hurting middle-class Americans more than the wealthiest households.

Two new analyses of the American consumer, one by Bank of America and one by Zero Hedge, paint grim pictures. As is well known by now, in recent years American households accumulated much more debt than was healthy for the economy. They took out large mortgages, home equity loans, and racked up credit card debt. They did this, in great measure, to finance a middle-class living, as higher education prices increased, health care costs skyrocketed, and wages stagnated.

Unfortunately, the quantity -- and type -- of debt that middle-class consumers accumulated over this period left them particularly vulnerable. Zero Hedge notes that the "debt-to-income ratio for the middle class is on average more than 200%, almost double that of the highest decile, 'Upper Class'." Furthermore, low- and middle-class consumers hold a disproportionate share of their assets in residential housing, the market hit hardest by the recent downturn, while the "upper class" holds most of its assets in stocks and other financial instruments, which have performed better recently. Along with wages that have dropped this year, this means that:

[I]t is once again the top decile, or the 'Upper' Class [that] benefited consistently over the past 15 years, to the detriment of both the low-income and the middle-classes, which represent 90% of the population...The double whammy joke of holding a greater proportion of new wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.

Zero Hedge and Bank of America both argue that the superior position of the "upper class" at this point in the downturn means that the federal government must cultivate the consumption power of wealthy consumers and, most importantly, not raise their taxes, which could stifle recovery. This suggests a rather cheerless view of economic recovery: a return to GDP growth absent government intervention.

Yet, the federal government should be paying more attention to ensuring a broader recovery in which Americans no longer have to use debt to finance a middle-class standard of living, a state of affairs far from inconsistent with economic recovery.

Currently, the federal government has done little to address the housing crisis. Foreclosures continue to set records each month and millions more are on their way. One in ten homeowners is underwater. The Bush and Obama administrations have both failed to take broad steps to stabilize housing prices and keep homeowners in their homes. Allowing bankruptcy courts to modify mortgages, including principal write downs, would cost the government nothing while keeping millions of Americans in their homes. Allowing foreclosed homeowners to remain in their residences as renters would provide households an option for stable housing while incentivizing mortgage modifications.

Both policies would stabilize housing prices without subsidizing homeownership. And both would help reduce the debt burden on middle-class households, which would free up resources for consumption elsewhere. Health care reform that took significant steps to cut costs would similarly shift middle-class households' consumption patterns away from expensive care to other, more productive uses. Pro-union policies, as well, could help boost the income of middle-class households.

The story of the squeezed middle class is not over. In fact, it has gotten worse. Using this continued crunch to argue only against "anti-wealthy" taxes instead of for policies that can strengthen the middle-class both now and for the future is perverse.