"but this clearly is a middle class recession because of the credit and foreclosure crisis"

Many times on this blog I've pointed out the fact that if you want smaller government, then you need a thriving and growing middle class that perceives itself to be middle class, and not just one misstep or accident above being truly needy. Otherwise, the middle class will favor large government until the end of time. Often, people try and tell the middle class that the numbers show them to be better off than they think that they are, or people are worse off elsewhere. The answer is something like "F--- Off". In the real world, such arguments are considered justifications for inequality by the better off, or, better yet, rationalizations. As well, I've posted about psychological and social research that people, by that I mean actual human beings, perceive their situation in relation to the situation of others in their society. That's why they say "F--- Off" when economists tell them to accept recessions as a cleansing enema for the economy. The middle class at least agree with the enema part.

With that in mind, from Reuters:

"In recession, poverty strikes middle class

Fri Jan 16, 2009 12:43pm EST

1 of 11Full Size

By Lucia Mutikani

WASHINGTON (Reuters) - Chaun Frost ran up her credit cards when the U.S. economy was booming, and now the single mother is paying a heavy price.

To service her debt and buy food for her two children, she has taken a second job selling pizza on weekends and some week nights, supplementing the $2,200 a month she earns from her job coordinating volunteers at a children's hospital.

"We have been hurt by the current state that the economy is in," said Frost, 32. "I am part of the new working poor( THIS IS WHAT I MEAN )."

About 37.3 million Americans were living in poverty in 2007, or about 12.5 percent of the population, according to the government, which defines poverty as an annual income of $21,203 or less for a family of four.

Figures due out in August will show that rose by about half a percentage point last year, analysts estimate, and more and more people like Frost will slip into poverty this year as the recession takes hold.( FOR SURE )

In many ways, Frost is typical of the many middle class people in the current recession who are falling into poverty. ( YES )

Many of the decisions she made seemed smart at the time( THIS IS IMPORTANT TO UNDERSTAND. WE ALL TAKE SOME RISKS. NOT ALL DECISIONS TO USE CREDIT ARE ASININE BY DEFINITION. ). Some of her many debts were accumulated as student loans. She also makes monthly payments for a big car whose value is now less than the amount she owes on it.

Repayments on the car and insurance bills are almost as much as the $850 rent for the modestly furnished two-bedroom apartment she shares with her 11-year-old son and a 9-year-old daughter in Washington.

In a move she knows could spell trouble for the future, she has slashed her retirement contributions ( WORKING LONGER LEADS TO MORE GOVERNMENT. SORRY CASEY. PEOPLE DON'T FANCY IT WHEN IT'S FORCED. )to $5 per check from $100, partly in response to a drop in the stock market.

And, underneath it all is the economic downturn, which has exacerbated her problems and shattered her financial self-confidence( THIS IS THE REAL PROBLEM. HOW REAL PEOPLE REACT AS INDIVIDUAL HUMAN AGENTS. ).

"Had I known that things would turn out this bad, I would have done things differently( THAT'S MY WHOLE LIFE LOVE )," Frost said.

UNEMPLOYMENT FUELING POVERTY

The worst financial crisis since the Great Depression of the 1930s, ignited by the collapse of the U.S. housing market, has sent the U.S. economy into a downward spiral.( A CALLING RUN ( DEBT-DEFLATIONARY SPIRAL ) FOLLOWED BY A PROACTIVITY RUN. )

Government data shows the unemployment rate jumped to 7.2 percent in December, the highest in nearly 16 years, as companies cut jobs( PROACTIVELY, IN ORDER TO GET AHEAD OF THE CURVE. ) to cope with a shrinking economy.

"My guess is poverty is going to go up from around 12.5 percent now by about half percentage point to 13 percent," said Rebecca Blank, a senior fellow at the Brookings Institution in Washington. "The main driving factor is rising unemployment."

Among those out of work is Shirley, 55, who has been living off a $195 weekly unemployment check since September.

"I never remember things being this bad( THE INCREDIBLE FEAR AND AVERSION TO RISK. )," she said. She declined to give her last name because she is in a legal battle with a bank over disconnected electricity at the apartment building in Washington where she lives.

"This is the longest I have been unemployed," she said.( I'M SURE SHE'S A CANDIDATE FOR WANTING LESS GOVERNMENT. )

With the economy not expected to recover before the second half of 2009 and the jobless rate forecast to top 9 percent by the end of the year, analysts said the number of people living in poverty is set to increase.( VERY BAD NEWS )

"How many more people fall into poverty as this recession continues depends on what policy choices are made( I AGREE 100% )," said Lisa Donner, Executive Director of the Half in Ten Campaign, an organization focusing on poverty in the U.S. capital.

MOVING POVERTY LINE

The Center on Budget and Policy Priorities, a private think tank, estimates that if unemployment reaches 9 percent, 7.5 to 10.3 million more people could fall below the federal poverty line.

The Congressional Budget Office has estimated that government spending on food stamps will rise to $50 billion this year from $39 billion in 2008, another sign that more Americans are struggling.( HURTING MATE )

Around the country, charity groups have reported an increase in the number of people using their services.( THIS IS IMPORTANT AS WELL )

"We have seen an increase of about 10 to 20 percent in people seeking help with groceries. They are from all racial groups, and about four fifths of them earn incomes below the federal poverty line," said food coordinator Jenette Chance of Bread for the City in Washington.

Some experts criticize government poverty measures( IT'S ONLY USE IS THAT IT MAKES GIVING BENEFITS OUT EASIER ), arguing that the methodology was developed in the mid-1960s and has had no major revisions, except to make adjustments for inflation.

Instead, they propose a poverty measure that takes into account variables such as taxes paid and credits received, medical expenses and work-related expenses.( GETTING THIS INFO IS MORE COSTLY AND TIME CONSUMING, AND CONSTANTLY NEEDS ADJUSTING. ERGO, GOVERNMENT HATES IT. )

"The official measure( ALL GOVERNMENT STATS ARE OF VERY LIMITED USE, PRECISELY BECAUSE THEY'RE MAINLY USEFUL FOR GOVERNMENT EASE. ) very much understates the number of people or households having a very tough time," said Ann Chih Lin a public policy and political science professor at the University of Michigan.

The collapse of the U.S. housing market means many middle class people are either living in poverty or are one pay check away from hard times( THIS IS WHAT I'VE BEEN SAYING ), she said.

"Recessions normally hit the people who are the poorest harder, but this clearly is a middle class recession because of the credit and foreclosure crisis( BINGO! )," said Lin.

President-elect Barack Obama is pushing for the swift passage of a spending package to promote economic recovery.

For Frost, anything would be better than the status quo( GOD YES ).

"I guess we all are looking for miracles( WE HAVE TO LOVE. ) and some good leadership for the good of the economy," she said. "When you look at who is in the unemployment benefits line, the food line, it's a lot of people who were middle class( BINGO! )."

(Reporting by Lucia Mutikani; Editing by Eddie Evans)"

If you truly want less government someday, then you are going to have to deal with this problem. In the short term, we need a strong and vibrant social safety net. In the long term, we need to compromise politically to develop a strong and vibrant middle class who feel comfortable forswearing government aid. In lieu of that, just keep braying about government being the problem. We need wankers like you for amusement in times like these.

"Nonetheless, I’d say that in terms of strict economics it’s wrong. "

Paul Krugman helps me illustrate the difference between Economics and Political Economy. From the NY Times:

"Do we need the middle class?

Kevin Drum writes that

One way or another, there’s really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can’t spend more unless they make more.

This is a widely held view, and I’m as much in favor of a strong middle class as anyone. Nonetheless, I’d say that in terms of strict economics( I AGREE ) it’s wrong. There’s no obvious reason why consumer demand can’t be sustained by the spending of the upper class — $200 dinners and luxury hotels create jobs, the same way that fast food dinners and Motel 6s do. In fact, the prosperity of New York City in the last decade — largely supported off of super-salaried Wall Street types — is a demonstration that you can have an economy sustained by the big spending of the few rather than the modest spending of large numbers of people."

Of course, you know my opinion that a society without a rising Middle Class and decreasing Lower Class is not sustainable. What Krugman gives is an Economic Explanation ( Theoretical, Kantian ), while what I have just given is an explanation in terms of Political economy ( Practical, Existential )

"the only way to accomplish this is to get America back on the course of rising median incomes."

Robert Reich has a post that I think is correct, but not necessarily for the same reasons:

"If this isn't a Great Crash I don't know how to define one. Stocks were down another 7 percent today. Since the peak of last year, major stock indexes have dropped 47 percent. We're in range of the Great Crash of 1929."

I think that this is a Stock Market Crash, but that doesn't mean it's like 1929.

"Why is the Great Crash of 2008 happening? First, because investors are beginning to understand the enormity of the bubble economy that began to form in the late 1990s when all contraints were lifted on borrowing in order to buy everything that was assumed to be increasing in value -- starting with houses and including securities and shares of stock themselves. So-called "margin requirements," first instituted in the wake of the Great Crash of 1929, were all but abandoned, as big banks and hedge funds found ways around them."

I agree that Leveraging was the problem, and that Deleveraging is the solution. However, I believe that this financial innovation has been an ongoing process, and I would offer the S & L Crisis as proof. I don't think it's that investors are beginning to understand the enormity of the problem, so much as being surprised that government action hasn't been more effective. You see, I believe that investors had a robust view of the size and efficacy of government intervention.

"Even more important, investors are starting to fathom the emptiness of American consumers' wallets. Retail sales last Friday and Saturday -- the first days of the Christmas buying season -- were disappointing. Had retailers not discounted to the point of taking losses, sales would have been abysmal. In other words, consumers have gone on strike."

I didn't see the sales being that bad given the enormity of the fear and aversion to risk now prevalent. I would say that consumers are being prudent.

"Why have they gone on strike? Not because of the difficulty of getting credit. Most consumers can barely afford to pay the interest charges on the debt they're already carrying. Consumers have gone on strike because their earnings haven't kept up. The recovery that officially ended December, 2007 (the National Bureau of Economic Research now tells us) was the first on record in which median earnings declined, adjusted for inflation. Since then, many people have also lost their jobs or are working part time when they'd rather be working full time, or else know they're in danger of losing their jobs."

Now, there's a big debate on this, which I've posted about, and I feel that Reich's figures might be off. However, he's not incorrect about how people feel, which is more important than numbers, which are only that.

"The speculative bubble still has some air in it; asset values will continue to drop before they hit bottom. That will take at least a year, possibly two. But don't expect asset values to bounce substantially back, even then. The only way to revive Wall Street is to revive Main Street, and the only way to accomplish this is to get America back on the course of rising median incomes."

I actually feel more strongly about this than Prof. Reich. Unless and until we have a Middle Class that feels itself to be middle class and not just above destitution, there will never be a serious movement to limit government. The feeling and security of wealth is necessary for a population to cut itself loose from a social safety net, which will always have to exist for the truly needy, instead of using government to remain just above destitution.

One other thing. I agree with this strategy. I would not accept a society of gross inequalities in wealth and power, and so, as Thoreau, I believe that people will only have less government when they are prepared for it.

How's The Middle Class Doing?

Greg Mankiw believes that the Middle Class is doing better than it's perceived to be:

"Tuesday, November 18, 2008

How is the middle class doing?

Better than many people think.

HT: MR.

Now, it turns out to be a link to the same research of this earlier post of mine on Oct. 30th:

Steven Chapman on Reason has a post about what I've called median wage stagnation. He says it isn't so:

"Terry Fitzgerald, a senior economist at the Federal Reserve Bank of Minneapolis, says the answer is simple. Far from declining, he writes, "the economic compensation for work for middle Americans has risen significantly over the past 30 years."

The mistake made by the School of Gloom is looking only at wages, narrowly defined. According to the Bureau of Labor Statistics, average hourly earnings of production and nonsupervisory workers, adjusted for inflation, fell by 4 percent between 1975 and 2005. But those figures deceive because they omit fringe benefits like health insurance, pensions and paid leave, which make up a bigger share of total compensation than before. The numbers also rely on a mismeasure of inflation.

When those flaws are corrected, a very different trend leaps off the page. Median wages, says Fitzgerald, rose 28 percent between 1975 and 2005. Nor were the gains restricted to Bill Gates and Hannah Montana: Significant gains occurred in the middle as well.

The same pattern holds for households. The figures that suggest families are struggling to stay even overlook some types of income, and they don't account for the fact that households have gotten smaller on average. After accounting for such things, Fitzgerald found that "inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006."

So I found the study:

"Conclusion

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here—and summarized in Chart 8—refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.

Why does the debate about middle America matter? Because an accurate assessment of the economic progress of middle America is a crucial input in formulating good public policy. Claims of long-term middle America stagnation—such as those quoted at the beginning of this article—are often part of a broader argument about the adverse impact of globalization, outsourcing and free trade. And middle class stagnation is used as motivation for a specific set of policies. But if middle America has not stagnated—as this analysis has shown—then this motivation for those policies is without merit.

Furthermore, if it is understood that middle America has indeed experienced substantial gains, policy priorities may change. For example, more emphasis might be placed on policies that promote continued economic growth or that target deeply rooted poverty rather than middle class stagnation. But regardless of the specific policy, policymakers and the public should base their decisions on an accurate assessment of how the economy has impacted and continues to impact people’s lives."

I agree with the idea that we should focus government on the needy, and really help them, and not on the middle class. However, we have to have a middle class that feels itself to middle class and not hovering above destitution.

I see a few debatable points in the study:

1) Overstated inflation ( I don't know, take your pick, but don't pick because you like the results )

2) There are fewer persons per household, so more for each person ( This cuts both ways. If households are smaller, it could be because people don't feel as wealthy as they used to and are having less children )

3) Expenses paid by employer, etc. ( This could actually cancel out a bit, if these expenses used to be cheaper and were paid by the employee )

It's a good paper, and Fitzgerald has more on the same subject.

Again, I agree with his emphasis, but not necessarily his conclusion, in the following sense: An emphasis that he and I both want needs to be based on how people actually see their situation. I'm not convinced studies like this can do that, however well argued.

I agree with Chapman about this:

"Thanks to American capitalism, ordinary workers and families are better off today than they were a decade or a generation ago. In the midst of scary economic times, that's a heartening fact to keep in mind. Even if certain Democrats would rather you didn't."

But not for the same reasons. It is still possible that median wage stagnation has occurred. Perhaps a libertarian can never be wrong about things always getting better.

Here's an opposing post from Oct.28th.

Another one here from Oct. 9th.

Here's one from Oct.2nd on Income Inequality:

"Via David Friedman, an article on income inequality in the U.S. by Arnold Kling and Nick Schulz. Here's the conclusion:

"Given the other forces driving inequality, there may be less that government can do than one might hope. Research from Heckman suggests that education is a relatively feeble remedy for the effects of family background (although Heckman believes that early intervention, in preschool or even before, shows promise).

In order to make a dramatic impact on inequality, government would have to do something about the fundamental causes: technology and marriage patterns. However, putting a brake on technological progress seems hardly feasible or desirable. And forcing people to select mates at random rather than on the basis of similar backgrounds and tastes seems similarly unlikely. As much as inequality may be a problem, no real solution is in sight."

This is terrible news for my vision of how we can have government take a much smaller role in our lives. My plan envisages our confining our social net to the truly needy, and then decreasing the number of truly needy through a growing economy. However, my plan necessitates that we have fewer poor people and that the middle class comes to be and feel truly middle class. My fear is that income inequality such as that described in the article will make it much harder to develop a middle class that truly feels middle class, as opposed to feeling just above being truly needy."

This is still my bottom line. If we don't have a Middle Class that feels middle class, then we will never have a substantially smaller government. This is my conclusion based on Politics and Political Economy.

Income Inequality In The U.S.: Some Bad News

Via David Friedman, an article on income inequality in the U.S. by Arnold Kling and Nick Schulz. Here's the conclusion:

"Given the other forces driving inequality, there may be less that government can do than one might hope. Research from Heckman suggests that education is a relatively feeble remedy for the effects of family background (although Heckman believes that early intervention, in preschool or even before, shows promise).

In order to make a dramatic impact on inequality, government would have to do something about the fundamental causes: technology and marriage patterns. However, putting a brake on technological progress seems hardly feasible or desirable. And forcing people to select mates at random rather than on the basis of similar backgrounds and tastes seems similarly unlikely. As much as inequality may be a problem, no real solution is in sight."

This is terrible news for my vision of how we can have government take a much smaller role in our lives. My plan envisages our confining our social net to the truly needy, and then decreasing the number of truly needy through a growing economy. However, my plan necessitates that we have fewer poor people and that the middle class comes to be and feel truly middle class. My fear is that income inequality such as that described in the article will make it much harder to develop a middle class that truly feels middle class, as opposed to feeling just above being truly needy.