Debt Crisis Part I: How Middle Class Goes Broke Slowly

Down and Out in the Middle Class
You Think You’re Being Frugal
and yet You’re Still Losing Ground?

Welcome to the Economy of the ’80s
 San Jose Mercury News, Sunday, March 1, 1987.
West Magazine, pg. 14.

PART I: GOING BROKE ON $44,500 A YEAR
By David Sylvester | San Jose Mercury News | March 1, 1987

ABOUT 10 YEARS AGO, I HEARD OF AN ADVERTISING MAN IN CHICAGO who quit his job because the seat of his pants had turned shiny. Being young then, I didn’t understand the power of detail. Now I can imagine the man opening his closet and mechanically picking out a pair of dress slacks, and then catching himself, startled to notice an unfamiliar gleam on the dark fabric. He walks to the window. He rolls the material back and forth between his fingers, peering at the fibers. What memories this unlocked, I’ll never know. He quit and became a photographer, saying only: “I never wanted a job where I sat on my butt all day.”

I mention this incident to illustrate the power of detail, the significance of the insignificant because this is a story about the most insignificant details of all: the way we spend money every day.

A few months ago, I became obsessed with my family’s finances. Hunting in the attic with a flashlight, I dug out old boxes of checkbooks and bank statements. I hauled them into the study and started adding and subtracting, calculating and re-calculating like a little shop owner. Every time I had tried this before, I could hardly bear the boredom. Not this time. I began to see each expense as a quantum of desire, an expression of appetite, a judgment on our values. The expenses felt like hard edges, walls I could reach out and touch to guide me farther into a labyrinth, some maze circling around and around a central mystery. I had to know: Why has my family run out of money?

AN OBSESSION WITH MONEY MAY SEEM NATURAL IN THE 1980s, AN AGE of materialism. But I see this materialism as only a symptom of our uneasiness. Amid all the official economic optimism, there’s an awful sense of postponement. As a business reporter, I’m asked constantly: When will inflation pick up? Will the stock market keep climbing, or are we headed for a crash? Think a recession is coming? These aren’t questions; they are fears. In such a climate, remote statistics-federal debt, consumer debt, Third World debt-become symbols and omens.

Indebtedness has its own psychological suspense. We become like a crowd watching a ball knocked into a high arc, knowing by instinct where it will fall just by how it’s rising. We’re riding that ball in our minds, mistaking every pause for the peak of the flight. We’re dreading gravity.

My own vertigo appeared last summer, when I began washing the dishes by hand. I unloaded a few plates from the dishwasher and started scrubbing, the way I did before Chris and I were married. It’s one of the few economies remaining. We’re down to one car. We stopped our son’s after-school tutoring. We take walks in the foothills rather than treat the family to McDonald’s.

 

”Get serious,” Chris said. “How much do you think we really save, washing dishes by hand?”

”Not much,” I agreed. “I’m just trying to see what it will be like. We can’t afford to replace the dishwasher if it breaks.”

My head agrees with Chris, but my hands feel better. This gesture is only a ritual, a ceremonial observance of the economic relationship between my family and our possessions. This relationship is simple: We’re going broke.

By broke, I don’t mean bankrupt. We aren’t drowning in credit-card debt or battling unpaid bills. I also don’t mean we’re poor. I am not a single mother struggling to support children, or a new immigrant struggling with low wages, a language barrier and discrimination. The mystery that I wanted to solve with my calculations is not about the economics of poverty but about the psychology of affluence.

The dishwashing should have warned me. Right then, Chris should have seized my arms and yelled: “We’re living in a $105,000 house, spending $100 every day of the year to live, and here you are, saving pennies on dishwashing!” But instead, I waited until November. That was the month I needed a cash advance from MasterCard to make the mortgage payment. And property taxes were due in a month. And our car insurance was due. To my horror, I realized that if I paid off all our MasterCard debt and a small car loan as well, then the sum of all our checking and savings accounts, not including an IRA, would come to exactly $902.36. This total was a very small amount of economic oxygen, enough to sustain our spending for only nine days, two hours and 53 minutes. Then, we’d have to break open the reserve tanks, rob our IRA, sell off all 29 shares of stock and call up banks for a second mortgage. The money had run out.

How was this possible? I wondered. Our family income is $44,500 a year, more money than we ever imagined. It is exactly 162 percent more than the mere $17,000 we earned as a young married couple only nine years ago. It is four times more than my father earned when he was my age. It is also more money than about 60 percent of the people in Santa Clara County are earning and more than 75 percent of everyone in the United States.

Once before, when I was trying to figure out why we have no savings, I went to a financial planner. He shrugged and glanced at me thoughtfully: “You’ve got to think about raising your income.” Nonsense! I’m not asking how to turn Chris into an employee or how to turn my job into more money. I’m asking why we can’t live a middle-class life, with children and a house, on $44,500 a year.

The fact is we’re no different from any other middle-class family, sinking our money into a house, raising two children and putting what we can’t afford on MasterCard. And that is precisely the problem. In some ways, our economic behavior mirrors the direction of the general economy in the United States. Daniel Van Dyke, chief economist at the Bank of America, sums it up: “We’re overconsuming, underinvesting, undersaving and borrowing from abroad to pay for it. It’s not a sustainable course.”

You’d never suspect this from all the hoopla of the economy. In its January issue, Fortune magazine presented a special report on the economy in the 1990s and concluded, “The middle class will prosper.” So long as prosperity is measured by spending, not by saving, this is correct. Economic optimists may cheer at our rising per-capita income-and disregard our declining size of families. They may argue that our personal income is up-without pointing out the percentage of income we receive in wages is falling.

If you have rental income, or own a private business, or have large investments, you may escape. If you and your spouse both work and never intend to quit working, or if you’re satisfied with few or no children, you may be safe. But if you belong to the amorphous expanse of middle-class homeowners raising a family and earning between $15,000 and $50,000, you are in trouble. The trouble is the squeeze of stagnation: declining real incomes for families, rising prices, untrammeled consumption. After rising at nearly 30 percent in both the 1950s and the 1960s, the median income for working husbands with families actually dropped between 1973 and 1984. It was one pressure that pushed women into the labor market. By working, a wife rescued the family; its real median income rose by 6 percent during those 11 years. Otherwise, the median income fell by 7 percent.

No one would suspect this from the way Americans have been consuming. Consumer debt has exceeded the growth of the overall economy, the Gross National Product, for four years straight. “Consumers must realize they’ve been on a four-year spree,” Van Dyke says.

Frank Levy, a professor of public policy at the University of Maryland, has studied the economic changes in the young-middle-age middle class, and he thinks time is running out. “More than two-thirds of young married couples now rely on two wage earners,” he wrote last December in The Washington Post. “There is no third earner in reserve to keep consumption growing. The birth rate stopped falling in the late 1970s, and families cannot expect continued reductions in mouths to feed. The rest of the world will not lend us increasing amounts forever. In sum, we cannot expect consumption to continue rising unless productivity and wages begin to grow again.”

His conclusion: “The young middle class, principally the baby boomers, has experienced a dramatic decline in its ability to pursue the conventional American dream: a home, financial security, and education for children.”

THE CONVENTIONAL AMERICAN DREAM! WHOSE conventions? What dream? All right then, the choices are:

  1. A home.
  2. Financial security.
  3. Children.

Now what do you choose?

If you have lots of money, choose two. If not, choose one. See what I mean about values?

Like many other middle-class baby boomers, Chris and I grew up in the 1960s and saw what the economy showered on our parents. I remember my father, a university professor, standing in the middle of our living room and saying, in 1968: “I never dreamed we’d have all this, never dreamed of it.” The room was an ordinary room, well-heated, carpeted, furnished, in an ordinary three-story Victorian house. I had no idea what he was talking about.

He had worked in the 1950s and 1960s, when the economy boomed, incomes rose and families had lots of children. In the 13 years from 1955 to 1968, the median income for a man my father’s age rose from $15,300 to $21,200, adjusted for inflation. Not only was that a real gain of 39 percent, but it was also entirely unexpected.

Like everyone else, my parents learned to spend their extra money. My father stopped taking the bus to work and bought a second car, a 1955 Buick. My mother began chatting with her parents on the telephone, long-distance, rather than writing letters. They preferred steak and lamb chops to spaghetti and fish.

Chris and I inherited these habits. It wasn’t a problem nine years ago, when we were a young married couple. It was 1977, when we lived in a second-floor apartment in Lowell, Mass. Chris was making a meager $125 a week as a mental health worker at a Veterans Administration Hospital; I had just received a massive raise for becoming a second-year reporter and had a salary of $183 a week. Our income was $17,123 that year.

It was a lot of money because we had the greatest luxury of all: We were utterly unconscious of money. We paid $178 a month for rent. We cheated OPEC by not turning on the heat until we both came home from work, and we ordered heating oil only once all winter. We had two cars, a sturdy 1973 Toyota Corona with 90,000 miles, and a 1966 Chrysler Newport whose odometer had broken two owners before at 74,000. Our budget was simple: What we didn’t spend, we saved. As I reconstruct it now, we saved nearly 30 percent of our income, more than three times the national rate.

I want you to compare some figures, not because I relish public display but someone needs to tell the truth about the choices hidden within the economics of the Illusionary ’80s.

First, I adjusted all our figures for inflation, an essential step to deflate the air out of the measuring system. The 1977 dollar was worth $1.80 in 1986 dollars. This made our $17,283 actually worth $31,138 in last year’s currency. After taxes, we were left with $25,492 to spend. Here is what happened:

Apartment $5,604 (22.0%)

Food $2,215 ( 8.7%)

Two cars $2,049 ( 8.0%)

Children $0 ( 0.0%)

Life insurance, union dues $216 ( 0.8%)

All other $7,950 (31.2%)

CONSUMED $18,034 (70.7%)

SAVED $7,458 (29.3%)

 

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In 1987, two cities, two children and two houses later, Chris works at home as a mother. I piece together our income from wages, interest, some small gifts and free-lance assignments. We’re driving an 85,000-mile, eight-year-old Toyota. In winter, our furnace burns all day. We’re living on an after-tax income of $37,545. Excluding the costs from an educational leave in the East, here is how we spent our income in 1986:

 

House $16,722 (44.5%)

Food $5,800 (15.4%)

One car $2,110 ( 5.6%)

Children $3,542 ( 9.4%)

Life insurance, union dues $1,026 ( 2.7%)

All other $7,180 (19.1%)

CONSUMED $36,380 (96.9%)

SAVED $1,165 ( 3.1%)

 

There it is, the illusion and the reality. We believed our income had jumped, in round numbers, from $17,000 to $44,500, an amazing 162 percent. But after inflation, our income was up only $13,400, or 43 percent. And our consumption had soared $18,300, or 102 percent.

THIS ISN’T THE END OF MY SEARCH, HOWEVER. Now, turn another corner in the maze and see where the money went.

Of our $18,300 of increased consumption, I discovered we have virtually no control over about $2,000 in expenses. Some is inevitably required by age, like life insurance. But most of it pays for price increases that exceed the general rate of inflation. For example, at our local grocery store, the cost of a single items of food-fish-is $3.50 a pound higher than it was nine years ago in Lowell. It takes only two fish dinners to wipe out all we save for the week in 1987’s lower gasoline prices.

Another example: in Lowell, my union, the Newspaper Guild, charged me $18 a month in dues, adjusted for inflation; it now charges $44 to $66 a month.

These expenses aside, what are we spending on? A house and children.

Between Lowell and San Jose, we managed to spend $11,100 a year more for shelter. That includes mortgage, taxes, insurance, repairs, utility bills, home improvements. By chasing every bill, I was astonished to find that we fell into the habit of spending between $200 to $400 a month in repairs on our San Jose house, an accumulation of errands to the hardware store a couple of times a week. Off-setting these expenses of owning a house are $2,000 a year in federal tax breaks and $6,000 a year in “appreciation.”

As for the children, we’re spending about $5,000 a year to raise our 7-year-old son and 3-year-old daughter: $1,500 on food and $3,500 on extra classes, clothing, everything from toys to coloring books. It’s uncomfortable to weigh our children in dollars, but expenses symbolize the choices and values they represent. There are no words for comparing angels with money.

Since Lowell, we cut back on our “discretionary” expenses, all those other little pleasures like late-evening pizzas, indulging in woks and fondue pots, strolling through the malls and shopping for trinkets. In our spending, we are as frugal as the typical reader of Consumer Reports. According to the January issue, last year, its average reader earned $43,300, and spent $5,850 on food, $3,950 on transportation, and $10,716 on all shelter costs. Our only “excess” is our house, but here, in California, spending $105,000 on a four- bedroom, two-story house is not extravagant, even with an 11.5 percent mortgage.

WHAT’S THE PROBLEM, YOU MAY be thinking? Aren’t we still saving $1,100 a year?

Such “savings” are an illusion, too. They exist only by evading a full accounting for the cost of our consumption. Turn another corner in the labyrinth. The truth is, we all have more ways to spend, many more, ways we try to ignore.

For starters, we use up our possessions. Day by day, as we get dressed, sit at the table, scuff up the carpets, lie on the couch and watch television, we are exhausting our things. One day they will wear out and need to be replaced. If we haven’t saved up the money, we’ll have nothing.

So I figured out what an accountant would call our “depreciation.” I made a list of everything we own, estimated when it would need replacement and how much we needed to save every year until then. This way, I discovered we should save $2,000 a year, $600 for our car alone. Commonly called “savings,” this figure is nothing but deferred consumption.

We also ignore the future consumption in our retirement. I have tried to save in an IRA, but without much success. Now I realize what I am unconsciously doing: relying on a bail-out. By not saving now, no matter what we say we believe, our actions reveal that we will demand Social Security in old age.

We are thinking of Social Security as an asset, even though the Federal Reserve Board, the official keeper of household finance statistics, doesn’t. Social Security is only a tax paid from one generation to another. There is no Social Security bank account to which you have any claim, only the good will of the politicians. Glen Heard, a financial planner at Private Ledger Financial Services, advises against relying on Social Security in retirement, even though it is expected to be solvent for the next 75 years through higher taxes. It’s my guess that, counting some company pension money, I need to save $3,000 a year for 30 years to maintain Chris and myself on half our current salary.

Am I accounting now for every hidden bill? No, I’m not. There’s one from the federal government. Like everyone else, I owe 20 percent more on my federal income taxes each year. That’s my share of the $200 billion federal deficit, now running at 20 percent of tax income. Ronald Reagan may think of government services as loss-leader items at a going-out-of- business sale, but it isn’t his store. It’s ours. I owe $640 in federal taxes for my share of last year’s federal deficit. I should put this debt in savings for future tax increases.

We’ve rounded the last bend. There is no terrible beast in this labyrinth, only a resounding echo of our annual debt. Including $2,000 in depreciation, $3,000 for retirement, $640 for future tax increases, our apparent $1,100 of “savings” for last year vanishes. The true measure of our overspending last year is $4,540.

WHEN WE BEGAN NINE YEARS AGO, CHRIS and I might have scoffed at any talk of missing out on “the conventional American dream.” But now, our actions have revealed our choices: We chose a house and children and sacrificed financial security.

This was our choice. What was yours?

Many rational consumers in the middle class did everything to they could to buy a house and maintain spending. The first to go were children. Of the families buying homes in California last year, one survey shows a majority depend on two paychecks and don’t even have enough children to replace themselves. These home-buyers have only 0.6 to 1.1 children in each house, according to a survey by Great Western Financial Corp.

Thorstein Veblen, the sociologist, traced the low-birth rate of what he called the “leisure class” to its desire for “a standard of living based on conspicuous waste. The conspicuous consumption, and the consequent increased expense, required by the reputable maintenance of a child is very considerable and acts as a powerful deterrent,” he wrote. “It is probably the most effectual of the Malthusian prudential checks.”

The second thing many consumers did was assume consumer installment debt. Chris and I, for example, succumbed to MasterCard. We liked to think we always paid the credit cards off each month, but in fact, we slipped. Month by month, the total amount grew larger. By last November, when our mortgage was due, we owed $1,500 to MasterCard.

And we were better than average. Nationally, consumers now owe a record 20 percent of their disposable income-their income after taxes-in installment debt, not counting mortgages. For our income, that would mean $7,000; between our credit card and car loan, we only owed $3,300.

As usual, it’s worse in the West. In 1980, the middle- range consumer in the West consumed 101 percent of his after-tax income, according to the Consumer Expenditure Survey of the federal Bureau of Labor Statistics. By 1984, this consumer was spending 103 percent of his after-tax income.

Plenty of economists aren’t worried about this. They say consumers are so much more wealthy, from the exploding stock market, that they can handle the extra debt. They say that, while consumer debt is a record when compared to income, it is perfectly normal when compared to assets. The average consumer is protected because he held $8.30 in “liquid” financial assets for every $1 in consumer debt last year, a much stronger position than in 1979.

But press these economists farther, and they admit to dangers. For one thing, rich people have the most assets, but less-than-rich are in the most debt. Ranked by incomes, the top 10 percent of families own 72 percent of the stocks, but hold only 28 percent of the debt. And stocks certainly aren’t the primary asset of the middle-class. That asset is the house, the single-family dwelling that soaks up so much of our money.

Like most people, Chris and I were willing to spend 44 percent of our income on a house, because we thought of it as “an investment.” We watched housing prices rise each month in the newspaper as if they were stock prices. We landscaped, painted, repaired, all in the name of “property values.” If we weren’t saving, our house was doing it for us.

But since I began studying our finances, I have begun to suspect this isn’t true. I suspect a house is much more a consumption good, or at best an “irreversible” investment.

The problem is, how do you cash out of a house? Normally, there are three ways, each with a problem:

  1. You sell it and move somewhere cheaper. But this assumes you have the luck of finding a desirable place to live that few others know about. If they did, it wouldn’t be cheaper.
  2. You sell and move into an apartment. But by the time retirement comes, rents may be as high as house payments, and our income will have dropped.
  3. You take out a second mortgage. This drives up the monthly payment, and in retirement we will need low payments.

The baby boomers seem to have overlooked the fact that, of all our economic inheritances, ever-more-expensive housing is the most recent. In 1951, my parents bought their first home and worried not about how much they would make on the investment, but how much more expensive it would be than renting. My father clearly remembers the advice of one friend:

“You probably won’t save any money owning a house, but you’ll live a lot better.”

My parents never made a dime on any house they owned until they sold their last one in 1980. In one city, Cleveland Heights, Ohio, they bought a small bungalow for $17,000 in 1957 and sold it eight years later-for $17,000. “It wasn’t until the great inflation in the ’70s that people started making money on their houses,” my mother says.

Unconsciously, I don’t think any of us are expecting to sell off assets to bail us out. I think we are relying on the economy.

We’re living as though the riches will swell from the ground, the economy will start growing again at 3.5 percent a year, and real incomes and wages will rise by some 30 percent in a decade. If you’re like me, a middle-class homeowner, you are imagining the household of your parents.

But I don’t think this economy is strong enough. No matter how well the stock market does this year, or how our “healthy” consumption buoys the economy, we aren’t saving enough for businesses to invest. We are caught in an economic paradox:

We are no longer saving enough to protect us from hard times when, in fact, good times are sustained only by savings. In his analysis of capitalism, sociologist Max Weber writes that two attitudes are needed for a modern capitalist economy.

One is a Calvinistic belief that work is a “calling,” a belief in working much harder than necessary for material survival. The other was the doctrine of “worldly asceticism,” a disdain for the wasteful profligacy of the aristocracy. Wealth, Weber wrote, is bad “only in so far as it is a temptation to idleness and sinful enjoyment of  life, and its acquisition is bad only when it is with the purpose of later living merrily and without care.”

 

The capitalist cosmos, some vast system into which we Americans are born, is held in its orbit by the balance of these two forces: the drive to work and accumulate capital, and the ascetic compulsion to save. Without this “fundamentally ascetic trait of middle-class life,” Weber wondered if the bourgeoisie had “a way of life at all, and not simply the absence of any. . .. “

I am not a Puritan. Neither are you. We no longer have these virtues, only the appetites. Sometimes, late at night, I walk through my house while when the children are in bed, and I look around me: a dishwasher that leaks, a power lawn mower that needs sharpening, an eight-year-old car with a bad transmission bearing, carpets that are spotted from spills. In the darkness of my living room, I think: Is this a way of life or the absence of any?

I check the lock on the front door and find my way to the children’s rooms. I untangle my boy’s arms from his legs, straighten his blankets. Upstairs, by the hall light, I smooth back my daughter’s hair and kiss her forehead softly enough so maybe she’ll think she’s dreaming. Our only way of life is being a family. Perhaps this is what is disintegrating in the economics of 1980s, when so many people of my age are not having children, sacrificing kids for careers, homes, consumption.

I know my family will recover its financial bearings. Soon enough, Chris will return to work; then we will save for our retirement. Meanwhile, we are on a strict budget and practicing “worldly asceticism”-not as a symbol of poverty, but as an escape from indebtedness. We’re unlearning the habits of the 1960s: No more long-distance calls, no second car, no more imported mustard. I’m content wearing old corduroys to work these days, knowing that is all I can really afford. I don’t bother to look at my dress pants in the light of a window. They might be shiny in the seat, and I can’t quit my job.

~ o ~

(Caption: Illustration by Michael Witte (color)

Cover Illustration by Michael Witte (color)

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