The Fragile Floor Below the Middle Class

For low- and middle-income families, the nation's prolonged economic recovery has offered little economic security. Despite the economy’s growth, occasionally even at a very strong rate, the labor market has struggled for the past three years to regain its footing. Real wages remain stagnant and employment relatively scarce. The result is not surprising: the Census Bureau’s most recent consumer income report shows that the poverty rate rose for the third consecutive year in 2003, while median family income failed to rise. At the same time, important benefits such as health care are becoming scarcer. In this climate of economic insecurity, opportunities to expand the middle class have ceased to exist, and middle-class families are facing the heightened chance of falling into poverty.

The Census Bureau report released yesterday shows the economic conditions of low-income families have worsened. The number of people living in poverty in 2003 reached 35.9 million, an increase of 1.3 million over the previous year. The poverty rate now stands at 12.5 percent, the highest rate since 1998. Children under the age of 18 living below the poverty line rose to 17.6 percent in 2003, up from 16.7 percent in 2002.

The report also found that 45 million Americans lacked health insurance coverage in 2003, an increase of 1.4 million from 2002 and 5.2 million from 2000. In addition, the percentage of people covered by employment-based health insurance declined for the third straight year to 60.4 percent, reaching its lowest level since 1993. This continued decline reflects the reduction in employer-sponsored benefits during the weak labor market recovery. In 2003, health insurance premiums also rose by 13.9 percent, a rate much higher than the rate of inflation, which added yet another cost burden to families.

At a time when costs are rising, working families are also facing stagnant wage and job growth. Throughout the recovery, employment has been weak; by the end of 2003, the economy still had 2.5 million fewer jobs than at the start of the recession in March 2001. Anemic employment growth also translated into low income growth. In fact, the data released by the Census Bureau show that median income remained unchanged in 2003. More recent data show that these trends continued. Aside from one month, March 2004, employment growth in this recovery has continuously been below average, and we still have 1.2 million fewer jobs than at the start of the recession. Not surprisingly, earnings have been weak, as well. Real weekly earnings have declined 0.9 percent since the start of 2004.

These statistics demonstrate that the average middle-class family is significantly worse off today than in 2000, the last year in which poverty rates declined. The trend is especially troubling given that the economy is almost three years into a recovery that has failed to generate jobs and income growth. On top of these concerns, households have taken on record amounts of debt to sustain their consumption in the face of unemployment and low wage growth; the impending increase in interest rates could exacerbate these debt burdens.

One important source of debt is college. For many families, this is a necessary expense to move up the income ladder and achieve a middle-class lifestyle. Tuition and fees at colleges are soaring, while federal aid programs are experiencing cuts. When adjusted for inflation, the maximum Pell Grant was worth $500 more in 1975-76, when tuitions were significantly lower, than in 2002-03. Rising costs and decreasing aid require students to take out more and larger loans. Student debt has risen rapidly in the past few years; according to Nellie Mae's National Student Loan Survey, average undergraduate indebtedness rose 66 percent from 1997 to 2002. Increasing college tuitions and decreasing financial aid create obstacles for middle-class families and their children.

The Bush administration’s response to the stagnant economy has been to enact tax cuts targeted toward the wealthy. By several measures, these tax cuts have failed to create a strong, growing and durable economy. They have also failed to show compassion to those who have struggled most over the last few years and are either mired in poverty or teetering on the edge. A recent report from the Congressional Budget Office showed that the top 1 percent of earners received a tax cut that reduced their effective tax rate by more than four times the rate reduction for low-income families earning an average of $14,900 a year.

The difficulties that low- and middle-income households will encounter paying the rent, affording health care, and sending their children to school is in and of itself a cause for concern. And from a macroeconomic perspective, a faltering middle class also means a large number of consumers will no longer have the resources to continue buying goods and services to sustain the economy. The decline in consumption growth during the second quarter of this year, to its lowest level in three years, is an indication that the almighty American consumer may finally be reaching her capacity to spend.

The increase in the portion of Americans living in poverty last year is, unfortunately, no surprise given the disappointing performance of the labor market over the last few years. And the growing anxiety of middle-income families struggling to make ends meet is also sadly reflected in yesterday's numbers. The Census Bureau's report should be a wake-up call to policymakers that unless they embrace the policies that firm the floor for the middle class and reaffirm the possibility of upward growth for low-income families, economic insecurity is here to stay.

Jenna Churchman is special assistant for economic policy and Radha Chaurushiya is economic policy analyst at the Center for American Progress.

For more information see For Retirees, Health Insurance Squeeze is Here

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