Week of 2.1.08
Helping the Middle Class
An Interview with Tamara Draut
This week, David Brancaccio talks to Tamara Draut, a leading expert on major economic issues facing Americans and author of the recent report, By a Thread: The New Experience of America's Middle Class. Draut shares her groundbreaking findings on middle class economic anxiety and what should be done about it.
Director of the Economic Opportunity Program, Demos
DAVID BRANCACCIO: How do you define middle class? It's a notoriously slippery idea in America. What is a middle-class family?
TAMARA DRAUT: Well, certainly middle class is more of a social construct than anything else. But we did our best to try and put some quantitative measurements around it. So, do you own your home? We know that for most Americans that is the major source of their wealth and an important piece of financial stability.
So, basically, we looked at housing, level of education, how much people spend to meet their basic needs, and how much they have left over, and whether they have health insurance coverage. Based on all of those factors, we were able to look and say, about 1 out of 4 people that we could consider middle class, are actually very vulnerable in terms of falling out of the middle class.
They're at risk on three or more categories. Meaning, they spend too much on housing, they don't have health insurance coverage, or they have a level of education that makes them not as competitive as they could be in this economy.
But another way to think about it is almost all middle-class families are very vulnerable on one, major indicator. And that is, four out of five middle-class households, don't have enough to replace three months of their income should somebody lose a job or have to stop working for some reason.
DB: What are ways to encourage people to save in case something goes wrong?
TD: One of the things we need to do is have a really comprehensive savings policy in this country, so that we can help low-income and middle-income households build up their savings. In doing so, make sure that they don't fall vulnerable to a lot of predatory lenders out there offering fast, easy cash at very exorbitant costs.
DB: So, back to the policy prescriptions—encourage savings, prudent home ownership, protections against predatory lending, what else?
TD: Well, the big thing is, we have got to figure out a way to lower college tuition and stop what I call the "debt for diploma system," which is really hurting a new generation of people trying to get into the middle class. It's really hurting their chances because it's weighing them down with way too much debt—about $19,000 on average.
But, even more importantly, the cost of college and the type of aid available, is preventing too many bright kids from going to college in the first place, or from finishing their studies.
DB: Let's look at that. One of the risk factors for falling out of the middle class in your report is, if you don't have more than a high school diploma.
DB: You list it as a risk factor. Yet, if you have more than a high school diploma, it probably meant you paid a lot of money for that Bachelor of Arts degree, and then you have debt.
DB: There's a crucial connection between levels of education and security later in life, as well as earnings later in life.
TD: Correct. You know, the irony is, a generation ago, it wasn't necessary to have a college degree to get into the middle class. We had good manufacturing jobs that provided middle class wages for people with just high school diplomas. Now that it has become the bare minimum required to get into the middle class. We've increased the cost of entry into college, and saddled a whole generation with insurmountable levels of debt.
DB: But Tamara, I still don't understand what middle class is. When we were out talking to people, we would say, you know, people who are not rich. They know who they are. And, people who are not really poor.
TD: Right. We define middle class, and again, this was a very tricky enterprise because, you know, middle class—it's an aspiration. It's a sense of security that people have. It's about the American experience, being middle class.
That said, there are things that I think everybody would agree on. It's a certain level of income. So, we've said middle class is two times the poverty level to six times the poverty level, which is roughly about, $40,000 to $120,000 for a family of four. Do you own a home? If you own a home, that's considered being part of the middle class. We looked at college level of education.
DB: Then, people who have certain degrees of education might also be added, even if they didn't make the income, or no?
TD: No. So, the whole pool is households that have incomes between $40,000 and $120,000. Income is the starting point, and then you add layers on to that. How much do you spend on your rent or your mortgage? If you spend more than 30 percent, you're considered pretty vulnerable on your housing costs. If you have only a high school degree, you're considered more vulnerable than if you have a college education.
DB: I mean, you really have three asteroids hitting at once in this regard. You have this endemic insecurity that's grown up over decades. You have the sub-prime mortgage happening. And you have this general slowing in the economy that some say is leading to a recession, this presidential election year. Somehow it has to come together to get this issue on people's radar.
DB: If it's as bad as your data suggests, for so many middle-class Americans, why hasn't there been a political uprising already, in which people, essentially, take into the streets—either in a real way or a virtual way at the polling both—to really shout about this? Because, the data suggests that people are consumed by this insecurity.
TD: You know, I think there's a lot of latent anger and frustration out there. And one of the things we need is a real leader to galvanize people and get them fired up and in a place where they feel empowered to demand change.
But, you know, one of the things that have kept so many people from standing up and saying, "It's time that we change courses," is that they've had some pretty good coping mechanisms that are now starting to falter. One is debt. You know, if we didn't have credit cards and if families couldn't cash out $1.2 trillion in home equity over the last seven years, I think we'd have a very different political climate.
DB: But you remove that, all you're left with is politics. What will policy-makers do? What will leaders do to help you out?
TD: Right. And you know, that's a very American idea. When you're up against the rails and you need some sort of economic, safety net, to do whatever you can first—charge up the credit cards, take out a home equity loan. Now those things are largely off the table. And more and more households are finding they have nowhere else to turn.
That's when we're going to start saying, what should the government be doing? And, that's a question that the typical household doesn't ask until they've exhausted all of their options.
DB: You have all these candidates out there scratching their heads going, "All right. How am I going to cut through? How am I going to articulate a message that will finally win me enough primaries to get into the general election." I mean, in a sense, you may have it here in this report, which is, look what we found. You can get a lot of voters listening to you, if you talk about this issue.
TD: Absolutely. Not only if you talk about what you're going to do to strengthen the middle class today, but what are you going to do to ensure that the next generation has the same opportunities to get into the middle class, and that when they get there, they're going be able to stay there. That would be a really winning message.
DB: The people are buying lots of flat-screen TVs, I see, in the newspaper. There must be disposable income flying around this economy. How is it possible that middle-class Americans are so vulnerable [but] buying all this stuff, even now?
TD: Well, you know, it's funny. If you really zero in on where the lion's share of a middle class household's income is going—
DB: And you checked. You looked.
TD: And we looked. And other researchers like Elizabeth Warren have looked very carefully. It's going to the big ticket items, [they] aren't flat-screen TVs. The big ticket items absorbing the lion's share of the monthly budget are the mortgage payment, the car payment, childcare, and healthcare.
And after you make all of those basic payments, payments that can't really be cut back, there's less disposal income to your typical middle class family today, than there was a generation ago.
DB: We have an economy that's in large part driven forward by consumption. And can't the wealthier Americans power the American economy forward? Yes, it's terrible that middle class Americans are feeling insecure. But do they need to be secure for the American economy to succeed?
TD: You know, I think that most Americans would agree that the health of a nation is not just about its consumption expenditures. And that one of the things that makes America such a great nation, and why so many people aspire to this American ideal of middle-class security, is that it's about more than that.
It's about more than how much you can purchase with the dollar. It's about this feeling of security and about being able to give your kids a better life than you had. And that is really the foundation—one of the major founding principles of our country. So it's not just about what is GDP.
It's about: Can I send my kids to a decent school? Can I give them the college education they always wanted? Can I retire with some level of dignity? And, as Americans, we believe in that social contract. So, it's about more than GDP and consumption. It's about a very fundamental American ideal.