America's decimated middle class

Now that the mining investment boom is rapidly coming to an end, Australia should be ready for a slow switch to what is happening in the US – the decline in the middle class and the rise in the wealth and power of upper income people.
That trend will affect a wide range of enterprises ranging from retailers to independent schools.

Right now it's affecting our trade because, as the latest statistics show, China's exports to the US are struggling which in turn affects our export revenue. China is planning to develop a much larger middle class but it will require major changes in policy (Solving the China puzzle, August 17)

Governments, whether they are in Australia or the US, will require very different policies to change the trend that shows the middle classes in decline. See interview with Philip Blond (Monti, Draghi and the Goldman pact, August 20)

My graph this morning comes from the Economic Policy Institute and shows that US income per person grew by just over $11,000 between 1980 and 2008 but 98 per cent of the wealth went to the richest 10 per cent of the population. From Blond's work we see that the top one per cent of Americans own 23 per cent of the wealth of the nation.

Research from the Pew Centre this week shows that this trend is not slowing and in the last decade those on middle incomes have fallen from 61 per cent of the population to 51 per cent. Some managed to get to upper incomes but the majority went to lower incomes.

American politicians understand that if they can get the vote of the hard-hit middle class they will win.

Pew's research shows that about half (52 per cent) of adults who self-identify as middle class say they believe Barack Obama's policies in a second term would help the middle class, while 39 per cent say they would not help. By comparison, 42 per cent say that Mitt Romney's election would help the middle class, while 40 per cent say it would not help.

The problem is that both sides of US politics are funded by Wall Street.

My guess is that neither Obama nor Romney will change the situation but the 2016 presidential candidates will have to address the problem, which by then will have become worse.

To underline this looming political issue, Pew says that the middle class believe five major forces are causing their problems: the Congress, banks and financial institutions, the Bush administration, foreign competition and the Obama administration. Effectively it's all about their political leaders and those who fund them. Just 8 per cent blame the middle class itself.

I fear that the next generation of politicians will be far more protectionist than the current generation because globalisation has not delivered for the middle classes.

Meanwhile, prepare to follow the US along this trend – although I think we might avoid the horrific house price reduction that Americans suffered as a result of Wall Street trying to make quick dollars.