Wednesday, January 13, 2010

The Plight of the Middle Class

Government programs are sinking the American middle class. Private schools provide the metaphor that best describes the problem. Private school tuitions are high. But, they are made higher because some of the tuition that is paid is diverted to scholarships for other students. This puts tuition out of the reach for many in the middle class who would, otherwise, be able to afford the tuition.

The same practice prevails at major universities and colleges. The wealthy are subsidizing other groups through higher tuition. The problem is that this higher tuition puts the middle class in a squeeze. They are not in the favored groups who receive the money siphoned off from the higher tuition charges. The middle class simply stares at higher costs with no offsets. The result: more and more of the middle class are caught in the cost squeeze and are priced out of colleges and universities that they once could afford.

This metaphor applies to health care costs. The official line is that the wealthy are subsidizing the poor, but the cold hard truth is that the middle class will pick up the tab for the health care nightmare that the Obama Administration wishes to impose upon the country. The effort to have the "rich pay" always results in higher costs for the middle class and no way for middle class Americans to protect themselves.

The result is a steadily declining after-tax and after-benefits disposable income for the American middle class. Nothing will change this unless there is a complete rethinking of the modern welfare state. The position of the middle class will continue to erode as the middle class faces increasing staggering tax bills and mandates imposed by the wealthy Democrats who control Congress: Pelosi, Kerry, Feinstein, Boxer, Schumer, Warner, and others. These folks don't care because they are rich and none of this will ever affect them.

But the middle class is doomed without a major shift in direction in government policy. The middle class faces three severe economic problems: 1) permanently higher levels of unemployment, 2) permanently higher taxes to fund a government debt problem that is unsustainable, 3) permanent loss of control of disposable income due to the increasing mandates imposed on employment. This third item simply reflects the fact that employees, not employers, ultimately pick up the bill on employer mandates. These mandates reduce employee disposable income without increasing the overall economic package that employees receive.

The politics of this war on the middle class reflects the true situation. The rich and the poor vote for all of this and the middle class votes, by overwhelming numbers, against this. Obama was the darling of the rich. His campaign contributions from rich people were unprecedented. It is no accident that Warren Buffett and Bill Gates support Obama. Almost all of the old line wealthy American families are hard core Democrats -- not just the Kennedys. The rich pay no price for being supportive.

Buffett is all for higher income taxes, because most of his income is not subject to the taxes that he favors. Wealthy folks have a unique ability to shift income from ordinary income to special itesm like capital gains, tax free income from municipals. They can benefit from conservation easements and other devices that are simply unavailable to middle class Americans. All of these things protect the wealthy from the tax and spend policies of their Democratic protectors.

The middle class picks up the tab for all of this. But, in 2010, it is beginning to look like the middle class is ready to fight back.