Middle class On the edge

Experts tell Congress that middle class is struggling with stagnant wages, rising debts and increased expenses.
By Tami Luhby, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) — America’s middle class is increasingly squeezed by sagging incomes and soaring expenses, experts told Congress on Wednesday.

Adjusted for inflation, median household income dropped by $1,175 between 2000 and 2007, said Elizabeth Warren, professor at Harvard Law School, in written testimony before the Joint Economic Committee.

At the same time, the average family is spending $4,655 more on basic expenses, such as gas, housing, food and health insurance. Gas alone costs $2,195 more for a family making the same commute in May 2008 as it did eight years earlier.

Families with children saw their child care costs soar. Those with children under age 5 spent an additional $1,508 a month, while after-school costs for older children rose $622.

To cover these soaring expenses, many people have had to turn to credit cards. Nearly 10% of total disposable income in the United States goes to paying off such debt, Warren said.

“There have never been since the Depression so many families standing right on the edge,” Warren said. “Families have tightened their belts. They have cut down in every discretionary spending area they possibly can.”

“These costs are tearing a hole in the family they simply can’t make up,” she added. “You can’t cut out enough lattes to pay for health insurance in America.”

Gains go to the wealthy
Sen. Charles Schumer, D-N.Y., who chairs the committee, convened the hearing to examine the impact of rising costs and stagnant wages on the economy.

“There is a silent cry going out as middle class families gather around their dinner tables each night to talk about how to pay their ballooning bills,” he said. “Middle class families are the engine of our economy, but their earning power and economic security has actually declined in the last seven years.”

Lawmakers focused their questions on comparing the great strides made in productivity with stagnation of wages.

Increasing economic inequality is to blame, testified Jared Bernstein, senior economist with the liberal-leaning Economic Policy Institute. While the middle class is contributing to productivity, the rewards are increasingly going to the wealthy.

But David Kreutzer, senior policy analyst for the more conservative Heritage Foundation, said it’s more accurate to follow the wages of actual workers over time, not to compare the median wage figure. A Treasury Department study released last year, which followed nearly 170,000 taxpayers, found median income of those workers rose 24% between 1996 and 2005.

To help those struggling, Congress should pass a second stimulus package, Bernstein said. But this effort should funnel funds to the states, particularly for infrastructure projects. This could serve as an important source for much-needed jobs.

“Smartly crafted, it has the potential to help generate more economic growth until the imbalances and necessary corrections in key markets play themselves out,” Bernstein said. “Infrastructure investment serves a dual role of deepening investments in public capital while creating good jobs for workers that might otherwise be un- or underemployed.”

Warren and Bernstein also called for more regulation and oversight of the financial markets, particularly the credit industry, to avoid abuses that lead to bubbles. The last two or three economic downturns were caused by such runups.

These bubbles are “a major contributor to the middle class squeeze,” Bernstein said.