The lower middle class isn't middle-class anymore

Time to stop the twin flywheels of inequality

I attended a fascinating symposium at the Urban Institute yesterday. Urban is a non-profit research organization and think tank in Washington, DC focusing on issues of economics and social policy. Yesterday’s session was about the “forgotten middle”, a term that refers to the lower half of the middle class in the United States. New data (published here) presented by Jack Chapel from the University of Southern California (USC) showed that this group’s health, wealth, and life expectancy have stagnated or even declined since the 1990s.

The suburb: icon of middle-class life. Photo by Michael Tuszynski on Unsplash.

How the middle class is doing is a vital question for any democracy. The middle class represents a large group of citizens (by Jack’s math: about 60% of the population) who are thought to enjoy good and stable quality of life. They often own some assets like a home or a business, which makes them likely to care about policy changes and turn out to vote. A flourishing middle class, therefore, provides both a good standard of living and a buffer against adventurers and chaos-seekers in politics. No wonder political scientists, economists and the like care so much about trends like the rise of the global middle class in the past century.

According to The Economist, “an essential characteristic [of the middle class] is the possession of a reasonable amount of discretionary income. Middle-class people do not live from hand to mouth, job to job, season to season, as the poor do.” (Source; emphasis mine.) In other words, middle-class families have enough money to meet their basic needs AND invest in a better home or better schooling for their children. This is key, because it provides a starting point for compound interest. Better schooling for their children means a higher wage for those children, who can then afford even better houses and schooling for their kids, and so on. By this logic, middle-class citizens should see a consistent rise in health, wealth, and life expectancy, until some natural plateau is reached.

Because of discretionary income, being in the middle class is like sitting on a giant flywheel, like one of those heavy wheels on a spin bike. If you’ve ever been on a spin bike (middle-class readers probably have), you know that it takes a lot of energy to get the wheel going, but once it does it’s almost impossible to stop. The same is true for middle-class income. Once you earn enough to secure your basic needs, you can invest the rest of your money in ways to ensure that you (or your kids) are even more likely to secure those basic needs in the future. You can afford really good dental or car insurance, for instance, which shields you from unexpected expenses, making it even easier to plan your finances. Another example is that earning a little extra allows you to invest in your health by buying good food or a gym membership, which makes you more able to be reliably productive in the future. Sitting on the positive flywheel of the middle class insulates you from risk and helps you along when you need it most.

Spin bikes: one application of flywheel technology. Photo by Marlon Silva on Unsplash

The new USC study marks a turning point in this traditional narrative. The researchers show that the positive story of asset-building and rising standards of living is only true for a lucky slice of the middle class: the upper middle class.

The researchers used data from the Health and Retirement Study (HRS), a nationally representative, longitudinal survey of U.S. households with an adult aged fifty-one or older. They defined middle class as between the 15th and 75th percentile of the financial resource distribution in this dataset, counting income as well as annuitized wealth. These cut-offs follow traditionally used standards for defining the middle class. They then split this group in two: a lower middle class from the 15th to the 45th percentile of the resource distribution, and an upper middle class from the 45th to the 75th percentile. The researchers compared cohorts of people approaching retirement (aged 53-58) between the lower and upper middle resource groups at five time points: 1994, 2000, 2006, 2012, and 2018.

Obviously, there already were differences between the lower and upper middle class in 1994—otherwise you couldn’t separate the two groups. But existing differences grew by a lot between 1994 and 2018. For the upper middle class, things generally got better in that timeframe: their wealth, health, and life expectancy improved. For the lower middle class, however,

• Annual pretax resources declined by 18% between 1994 and 2018, controlling for inflation;

• Home ownership declined by 31% between 1994 and 2018;

• Health insurance coverage declined by 11% from 87% in 1994 to 78% in 2018. This means that almost 1 in 4 middle-aged adults in the lower middle class didn’t have health insurance in 2018.

These data make clear that the security offered by middle-class life—exemplified by homeownership and health insurance—is no longer within reach for millions of people in the lower half of the middle class. Their flywheel has stopped spinning.

In tandem with these changes, health outcomes declined for the lower-middle-class group. For example:

• Chronic illness went up much faster than in the upper-middle-class group;

• Frequent moderate or severe pain was reported by 33% of lower-middle resource men and 39% of lower-middle resource women by 2018, up from 19% and 22%, respectively, in 1994. In the upper-middle resource group, this was true for 22% of men and 25% of women in 2018.

As a result, while expected years lived in good health (QALYs) went up or stayed high between 1994 and 2018 for upper-middle-class folks, they declined after 2006 for the lower middle class. Put bluntly, life simply got worse since the turn of the century for the lower half of the middle class. Here is a graph showing this change:

Source

You might be wondering whether there are any government programs helping out the lower middle class. But one key feature of this group is that—on paper—they are not living in poverty. The 15th percentile of the resource distribution, where this group begins, sits at 138% of the federal poverty level, which happens to be the threshold used by a number of states to determine whether someone is eligible for government-subsidized health insurance (Medicaid). So people in the lower middle class are deemed too rich to receive government support. By traditional thinking, this makes sense, because the middle-class flywheel should take care of them. But what this study really shows is that we need to revise our image of the middle class as an “elevator for quality of life”. There is no one middle class, there are two, and the bottom one is in serious trouble.

This research conjures up a new image. There are not one, but two flywheels determining our fate. They spin in opposite directions, separated at about 45% of the income distribution. One of them turns forward and helps you along, just as the middle class was always supposed to do. But the other one spins backwards and slowly erodes your abilities to improve your life. If you are lucky enough to sit on the forward flywheel, you can invest extra income in a better future, which shields you from risk and downward social mobility. But if you’re on the backward flywheel, you don’t earn enough to buy a home, meaning you spend more than you want (and more than mortgage payments!) on rent, are vulnerable to inflation, can’t move if your neighborhood deteriorates or your company moves, are dependent on the limited stores in your area, and so on. You live a life of ever-increasing dependency and uncertainty and it becomes harder and harder to climb.

An AI-generated image of two opposing flywheels

Of course, one’s position on these flywheels is not entirely static. Movement does happen. But unfortunately, especially downward movement can be very fast. I attended a hearing at the U.S. Senate last week where witnesses spoke about their experiences with long-term elderly care. One infuriating story was told by the widow of a man who had dementia with Lewy bodies, a terrible neurodegenerative disease that necessitated a move to an assisted living facility. The witness, Patty Vessenmeyer, ended up paying $13,000 per month for low-quality care for her husband (see her testimony here from about 34:00). Vessenmeyer said: “If he hadn’t passed away rather quickly […], it would have used up all of my nest egg.” This is just one example of how a case of bad luck can make you slip and fall all the way down the wealth ladder into poverty. One-off events, such as a disease or loss of a job, can lead to feedback loops, vicious cycles, that can ruin your livelihood. These are the loops that power the backward flywheel.

The forward flywheel, meanwhile, is powered by fear. The fact that there’s a backward flywheel means you can never feel comfortable on the forward one. This leads upper-middle or high-income families to stockpile resources such as income, jobs, neighborhood safety, and exclusive education. Such “opportunity hoarding” takes many forms, from the growing popularity of expensive management schools to the trend of marrying within your own social class. And it comes at great cost of happiness and health, even for the rich. The steeper the socioeconomic gradient, the more anxious they become.

In my view, both flywheels are additionally fueled by uncertainty. An unstable job market, for instance, makes it even harder for the poor to fight the backward flywheel and makes social climbers even more eager to hoard opportunity. And thus, in this age of uncertainty, we should expect even more status anxiety, competition, fear of falling, helplessness, depression, and breakdown of cooperation across class lines.

So here’s my Educated Guess: If we are to enjoy a saner, sweeter society, the flywheels must be slowed down. Good governance can play a key role in this by building backstops that might slow the dual flywheels of modern life. This works both ways: for instance, we can curb the backward flywheel with insurance and the forward flywheel with wealth taxes and fair college admissions. Once proper backstops are in place, a lot of uncertainty is taken away and we can replace fear and strife with cooperation and trust—netting out with greater health and quality of life.

This isn’t rocket science: universal health insurance would be a good place to start. But given that this is politically controversial where I live, we might need to get more creative and find other ways to build security in our communities. In my neighborhood, church organizations are already serving free meals and developing housing blocks with decent, predictable rents, providing a much-needed break from the backward flywheel. I am very interested in learning about other such initiatives. If you know of other local/community ideas that may rein in the twin flywheels of inequality, please leave a comment down below so I can research them for my upcoming book on uncertainty. Thanks!