Dismiss the middle class at your peril

By David Rohde
October 27, 2011

For two hundred years, the middle class has enjoyed legendary status in Western economic thought. First the British and then the American middle classes, Weber, Marx and many others said, served as vaunted engines of economic growth and political stability throughout the 19th and 20th centuries.

When large segments of the population moved beyond subsistence living, they invested their excess capital in savings, education and the purchase of increasingly high-quality consumer goods. A focus on thrift, education and hard work produced entrepreneurial small companies that drove economic growth.

For a remarkable forty-year stretch after World War II, that model proved largely accurate in many parts of the world. The American, European and Japanese economies drove global growth. And a middle class the likes of which the world had never seen emerged in the United States. American incomes, educational opportunity and home size seemed destined to grow inexorably generation after generation.

In an astonishingly short period, that economic model has disintegrated. In practice – just ask the American worker whose real wages have declined for decades – and even in theory.

Last month, the British economist Charles Kenny declared the middle class’ importance and purportedly magical role in economic growth a “myth.” A 2010 paper by the Brookings Institution’s Homi Kharas argued that the best hope for the world economy was the emergence of western-like, consumer middle classes in China and India. And my colleague Chrystia Freeland wrote a recent column describing how companies are increasingly trying to sell to the rich at home and the emerging middle class abroad instead of the cash-strapped American middle class.

All of this is seemingly disastrous news for the American middle class, and is instantly exaggerated by the lens of next year’s presidential election. Government regulation and taxes are destroying the American middle class, Republicans rail. Wall Street and boardroom greed have destroyed the American middle class, Democrats rail back.

One problem is that there is no universal definition of the American middle class. The U.S. government has no official classification. Scholars use various parameters. And politicians add to the confusion by constantly trying to pander to a vaguely defined middle class American.

That said, there is an American middle class and there are at least two ways to define it. One is a technical definition: you map the income or wealth of a society along a classic bell curve, choose a symmetrical section in the center and define that as a middle class. In many countries, that “class”’ can be quantified, measured over time, subdivided, compared and contrasted with other classes.

In an earlier column, I defined the American middle class as the 60 percent of American households who earn from roughly $30,000 to $80,000 a year. Those figures are based on census data that breaks the American public into five equal groups of twenty percent.

A second way is to define the middle class as a set of economic expectations. Those expectations vary from society to society. In the United States, most Americans would say being a member of the middle class includes affordable, modern housing; access to quality education and health care; and the very American desire to own an automobile.

For better or worse, the American middle class existence has seized the imaginations of people around the world. The idea of a prosperous middle class is one of the most ill-defined yet powerful concepts of our time.

Today, large parts of the world want what the American middle class had. One one level, this desire is unsustainable consumerism. On another, it is the positive spread of an American-like social compact where the majority, not the few, should prosper.

In countries like Brazil, China, India and Turkey, a global middle class is emerging. Again, no universal definition exists but the economic evidence is increasingly clear. Brookings’ researcher Kharas estimates that by 2020 more than half the world’s middle class will be in Asia and Asian consumers will account for over 40 per cent of global middle class consumption. Americans who dismiss the scope of change in our midst – and the importance of the global middle class market – are sentencing themselves to economic irrelevance.

A central unanswered question is whether the rise of middle classes in other countries means that the American middle class must shrink. Researchers are divided.

Kharas believes that the American and emerging market middle classes can prosper at the same time. American firms can grow by exporting high-quality, high technology goods to emerging market middle classes, particularly in Asia.

“It is possible for both the U.S. middle class and emerging market middle classes to expand together,” Kharas told me in an email. “But then the U.S. needs to make its domestic market more inclusive by expanding the education quality of the middle class and investing in infrastructure.”

Abhijit Banerjee, an MIT professor and development expert, agrees. But he cautions that American firms must compete with Indian and Vietnamese manufacturers also trying to sell to Chinese consumers.

Not enough Americans believe they can compete and win. Our political culture is sowing dissent, not strategies. A dispirited American middle class sees its society as broken.

While the economic importance of the American middle class may be diminishing, the political power of the concept of the “middle class” remains fearsome. More and more Americans feel the majority is not getting what it deserves. Members of the emerging global middle class are determined to get their share as well. Leaders who dismiss the middle class – anywhere – do so at their peril.

PHOTO: Vehicles are stuck in a traffic jam in the central business district of Indonesia’s capital Jakarta September 19, 2011. With its population of 240 million — the world’s fourth-largest — a fast-growing middle class and economic growth, Indonesia is seen as the next frontier for automakers after Brazil, Russia, India and China. REUTERS/Supri

4 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Until recently the “American Market” was a private preserve of relatively well-heeled consumers who, in the main, traded among themselves for the necessities and most of the luxuries of life. It was hated and opposed by the Soviets, China, Cuba and North Korea, none of whom had much of the international economic pie and would have gladly invaded the U.S. to take all that it had if they could have done so successfully.

The U.S. has become a victim of those who followed our example. Only the economic midgets of the above remain “outside looking in”. Russia has huge natural resources needed by many countries. The corruption and repressive nature of it’s government have proven more of a hinderance than that of China, but today each has something to sell that the rest of the world wants instead of merely producing war munitions.

But the “rising tide” does NOT raise all boats. The more people get into the “middle class boat”, the less freeboard (security) is provided each passenger. There is a limit to the number of “above economic average” people that the world economy can support at any given time, and there is constant traffic into and out of the boat due to the sheer determination so some to get on board and the relative inertia and sense of entitlement of some born there.

Those who continue to think and strive will always prevail under Capitalism. Those who want to coast along on the effort(s) of others will always find their hold on the “good life” tenuous, at best.

My advice to my fellow Americans? The rules have changed. Learn the new rules and adapt or you’re out of the boat (and you deserve to be). The world is fast becoming more and more a meritocracy (and that’s good)!

Posted by OneOfTheSheep | Report as abusive

> “Not enough Americans believe they can compete and win.”

Many of them are not wrong. Some of your other readers have been recommending this TED talk, which proves the point:
http://www.ted.com/talks/richard_wilkins on.html

Posted by matthewslyman | Report as abusive

A smart tariff plan is one way to fix the American economy. An education system that focuses on producing people that can create and serve consumer demand versus the current one that is focused on creating more bureaucrats and funding research boondoggles. The US education system also needs to become cheaper and more efficient. A media that actually reports relevant economic news and information is another one of the many important improvements necessary to fix the system.

Posted by M.C.McBride | Report as abusive

When the middle class is disenfranchised and stripped of power, social unrest will occur. I believe we’re already seeing that unrest take place in the Arab Spring and OccupyWallStreet movements, as well as the Greek demonstrations. In the United States, the “1%” can earn their bounty only with the tacit cooperation by the voting electorate, which is predominantly middle class. If the middle class keeps taking it on the chin economically, this class will ultimately demand that the moneyed elite yield some of its power and perks. It would behoove the powerful elite to promote the success of the middle class, at least to some degree, in order to secure their own long-term interests.

Posted by SinoKat | Report as abusive