Is the Middle Class Really Lost? What the Pew Income Study Tells Us

There are some important questions about the US economy and the direction it is heading that we must answer. Unfortunately the media and many of our political leaders are ignoring these questions.

The three most important questions are: is income inequality really increasing, is the middle class really shrinking, and are average Americans actually getting poorer? To answer these questions I took a look at the Pew Research Center’s Income Study which came out in December.

The experts at Pew analyzed data from the US Census Bureau and the Federal Reserve’s Board of Governors and what they found was disturbing. Some of the highlights of the Pew study include:

• Upper income households had nearly half the money in the United States in 2014. In 1971 upper income households controlled 29% of America’s aggregate income (all the money and assets in the country), but by 2014 49% of aggregate income in the United States went to households described as upper income. This figure alone proves that income inequality is real and a growing problem.

 

• The middle class is getting poorer. In 1971 around the middle class was accruing or receiving around 62% of the aggregate income in the United States that figure fell to 43% in 2014. This means middle class Americans are accumulating 20% less wealth than they were in 1971.

 

• The middle class has not yet recovered from the Great Economic Meltdown of 2007 and 2008. The value of the assets or median wealth of the average middle class family fell by 28% between 2001 and 2013. The median income of middle class households in 2014 was 4% lower than it was in 2000.

 

• The number of poor Americans is increasing. In 1971, around 16% of America’s population was defined as being in the lowest income bracket, in 2014 that number had grown to 20%. Pew described the lowest income level as under $31,000 a year.

 

• The middle class is shrinking. In 1971 around 61% of the US population fit the description “middle class”, by 2015 only 50% of Americans were in the middle class.

 

• The middle class has actually been shrinking for some time. In 1971, around 61% of Americans lived in households with a middle class income, that percentage dropped to 59% in 1981, 56% in 1991, 54% in 2001, 51% in 2011 and 50% in 2015.

 

• There was some good news in the Pew Study. Part of the middle class shrinkage came from the growth of the upper class, the percentage of Americans living in upper class households rose from 14% in 1971 to 21% in 2015.

• There are more rich people than ever before in America. In 1971, only 4% of American adults belonged to the highest income bracket, by 2015 around 9% of US adult residents were in the top income bracket.

 

• The upper middle class is not growing but it is not shrinking either. In 1971, around 10% of America’s population was classified as being in the upper middle class, but in 1981 around 12% of US adults were placed in that category. That percentage was exactly the same in 2011 and 2015. This indicates that the upper middle class is stagnating.

 

• The percentage of the Americans in the two highest income brackets exceeds the percentage in the lowest income bracket. In 2015, 21% of Americans could be described as rich or upper middle class while 20% of the population was in the lowest income levels.

 

• The lower middle is also very stable. In 1971 around 9% of Americans could be described as lower middle class that percentage held steady for the years 1981, 1991, 2001, 2011 and 2015. This indicates that the lower middle class is not gaining ground but is not losing it either.

 

• The rich are the fastest growing class in America – in 2001 7% of Americans were in the highest income group that rose to 8% in 2011 and 9% in 2015.

The full story of Pew’s results can be found at this website it is well worth reading.

There are more Rich People than Ever Before

Interestingly enough, Pew might have uncovered a cause of income inequality that has largely been ignored. A big reason why the wealthy have a larger percentage of the national income is that there are simply more rich people around.

More wealthy households have more opportunities to accumulate more wealth. For example the rich have more money to invest in the stock market and real estate. They also have more opportunities to take advantage of new technology and invest in other areas such as venture capital.

Part of the reason for this is that opportunities for wealth accumulation are increasing, but not everybody is in a position to take advantage of them. For example a Gallup poll from April 2015 discovered that while around 55% own stocks, 90% of Americans with an income of more than $75,000 a year own stocks.

The Effect on Politics and Culture

The growing percentage of adults living in the highest income households will have a massive impact on our society and country. Since wealthy people are more likely to vote and participate in the political process – they will have more political power.

Much of that power will come from their money and access to technology. A Congressman or state legislator will be far more likely to return an email from a hedge fund manager than one from a Walmart cashier.

One major problem is that the working and lower middle classes have largely been shut out of politics, which explains both the Trump presidential fantasy and protest movements such as Black Lives Matter. The only way that lower-class voters can get attention from politicians these days is to crash party events because the politicians are only listening to the people with the money.

We already see this on the campaign trail where most of the Presidential candidates including Hillary Clinton and establishment Republicans such as Governor John Kasich (R-Ohio) and US Senator Ted Cruz (R-Texas) largely refuse to discuss economic issues. Instead they pander to those for whom the economy is working – the rich – and talk mostly about the cultural issues the rich care about such as gay rights. At the same time the media largely refuses to cover the candidates’ economic positions and instead concentrates its coverage of the race on national security, cultural issues or increasingly politicians’ sex lives.

A major result of this could be an increase in political violence. Particularly if figures like Donald Trump that encourage it gain national popularity. My guess is that it is only a matter of time before a leftwing Trump with appeal to angry non-white as well as angry white working class voters pops up. Another effect will be the growing popularity of politicians like Trump and US Senator Bernie Sanders (D-Vermont) who advocate radical anti-business agendas.

The growing number of rich people also affects culture and entertainment as creators increasingly tailor content to appeal to wealthier viewers who tend to have more sophisticated tastes in programming. This is why you see more complex dramas like House of Cards on Amazon and Netflix than reality shows such as Duck Dynasty.

How Investors can Take Advantage of the New Economic Reality

Investors can take advantage of these trends by buying companies that cater to the growing upper class such as Nordstrom (NYSE: JWN), Chipotle Mexican Grill (NYSE: CMG), Amazon.com (NASDAQ: AMZN), Whole Foods Market (NASDAQ: WFM), Tata Motors (NYSE: TTM) – which owns Land Rover and Jaguar and Apple (NASDAQ: AAPL). Another strategy to is invest in those companies that cater to the growing percentage of the population that has lower incomes such Dollar Tree (NASDAQ: DLTR), Supervalu (NYSE: SVU), Dollar General (NYSE: DG) and Big Lots (NYSE: BIG).

A good way to hedge your bets is to look for companies that try to sell to both growing groups. A good example of such a company is Kroger (NYSE: KR) which owns the high-end supermarket brands Harris Teeter, Mariano’s and Main & Vine in addition to the grocery discounters Food4Less, FoodsCo and Ruler Foods.

Another is Walmart Stores Inc. (NYSE: WMT) the nation’s largest discounter which also owns Sam’s Club and has a large online retail presence. There’s also Costco Wholesale (NASDAQ: COST) which is capable of attracting both upper and lower-income shoppers.

There is one important lesson to we must learn from the Pew findings: we have start taking measures to deal with growing income inequality and the decline of the middle class. Income inequality and middle class shrinkage are dramatically reshaping America and changing it in ways we might not like.

Disclosure: the blogger and writer owns shares of Kroger.