Tuesday, April 14, 2009

Elizabeth Warren: The Coming Collapse of the Middle Class

Elizabeth Warren is the Leo Gottlieb Professor of Law at Harvard Law School, where she teaches contract law, bankruptcy, and commercial law. In the wake of the 2008-9 financial crisis, she has also become the chair of the Congressional Oversight Panel created to oversee the U.S. banking bailout, formally known as the Troubled Assets Relief Program.

Embedded above is the video of an excellent speech given by Elizabeth Warren titled The Coming Collapse of the Middle Class: Higher Risks, Lower Rewards, and a Shrinking Safety Net. It is a bit long, with a run time of just under an hour, but it is well worth your time.

Ms. Warren provides some excellent economic statistics that shows exactly how the middle class has been getting squeezed over the past 30 years. Here is a brief summary of some of the more important points she makes:
  1. Families today spend comparatively less money on small ticket items (clothing, food, appliances) then they did 30 years ago but spend more on big ticket items (housing, cars, health care)
  2. Household income is up slightly but that is mostly the product of most households having two incomes (most mothers now work) instead of the typical single earner family of 30 years ago. This is because men now make less than their fathers did.
  3. For most households, if either the mother or the father lose their job, they can no longer afford to pay the mortgage. This has lead to a huge jump in bankruptcy filings overall, with a particular jump for those with children and especially for single mothers.
I would argue that this speech is improperly named - if you digest the numbers presented and agree with the arguments made by Ms. Warren then the middle class has already collapsed. If the middle class falls much more from current levels then it becomes pretty much extinct which is quite scary because we are in the midst of a very deep recession.

Ms. Warren does not state this, but if you understand how badly families have been hurt by spending such a large portion of their earnings on housing (up 76% from just 30 years ago), you would realize that the best medicine is for a steep fall in housing prices so that a median income family can comfortably afford a median priced house. On cue, the market has been repricing housing to the new economic reality but certain politicians see this as far too painful for them to endure. This is not an argument you will hear being made by talking heads on TV.