MasterPo says: This blog is about topics and issues that are of importance to me. I am not one of the countless blogging lemmings that are tripping over each other scurrying down the hill and off the cliff of blogging oblivion trying to write the greatest blog on the latest topic de'jour. Your comments are welcome.

November 6, 2008

The Middle Class Myth

Politicians, pundits and activists love to use the example of a family of 4 making $50,000 (gross of course) as "typical" middle class Americans (this is up from $40,000 in the 90's which I suppose is an improvement).


Personally, I think it's grossly over simplified. I don't see how 4 people (2 adults, 2 kids) can live decently much less "middle class" in $50,000 in a place like New York City or Long Island. Even in other parts of the country (I have lived outside NY too) things food, medicine, clothing, energy really weren't all that cheaper than NY.

But going with this example, let's project into the future using the standard compound growth equation T = P(1+I)^T where P is the principle amount (the starting amount), I is the rate of growth (interest rate) and T is the time in years. This is a standard equation you will find in any High School math or accounting book.

At 3% inflation, in 20 years that same family of 4 making $50,000 today will need to make $90,305 to have the same purchasing power as they do today at $50k! And if we assume 4% inflation they will need $110,000 (rounded)!

Let's look at it from the other end – future back to now using the same equation to compute the present value.

Assuming 3% average annual inflation, in 20 years someone making today's "middle class" income of $50,000 will be like someone now making just $28,000 (rounded)! And assuming 4% inflation that $50,000 income in 20 years is only worth $23,000 (rounded)!

For those readers who may be old enough to remember the 70's (kids – ask your parents if you don't) you remember the high 7-8-9% inflation we had, even the 10%+ inflation for a brief time. All you need is a year or so of very high inflation to drop those purchasing power amounts even more!
And of course, this is well before the effect of taxes is added in, which at present all politicians seem to be gleefully promising to raise!

I don't want to quibble of numbers, how inflation is computed, tax policies etc. I agree there are several factors that could sway this analysis for the worse or the better (my bet is on the former).
The point of this analysis is to show two things:

1) The disconnect from reality that politicians and pundits et al. have when referring to this mythical 4 person family making $50,000.

2) To ponder: Will politicians, pundits and their kind continue to refer to $50,000 as middle class in 20 years? Will they ever say "The typical middle class family of 4 making $90,000…."??? They would need to if they really want to be honest. Or in 20 years will they still think $50,000 or so is middle class?

I also hope this will be received by my readers as a wake-up call to understand all the factors that affect you income and realize it isn't because of some vast conspiracy (now there's an oxymoronic term!) but natural forces.

MasterPo says: If you enjoyed this article make sure to subscribe in a reader (one of the last good free things in life!)

No comments: