The centre cannot hold

The middle class is disappearing, the OECD says. Having flourished for decades, those of middle income are facing a squeeze that is causing many to struggle. More recent generations are increasingly unlikely to have the opportunities that middle incomes allow, says the club for rich countries in the report Under Pressure: The Squeezed Middle Class, released earlier this month.

There is perhaps no clearer sign of fairness becoming unbalanced, the middle class being the centre of the fairness balance. Archimedes said give me a fulcrum and I will move the world; as the economic fulcrum of those enjoying middle incomes become squeezed, it is becoming harder to predict how our economies will move. Certainly, the OECD reports, “The middle class feels that the current socio-economic system is unfair”.

Some will not weep for the middle class. Perhaps this will be especially true in the UK, where only 40% admit to being middle class — in spite of the middle income portion of society being as large here as it is in other developed economies. Using as its metric those earning 75%-200% of the median national income, the OECD calculates that an average of 61% of the population in developed economies are middle class (it is around 50% in Chile, Mexico and the US, and 70% in the Nordics; it is as low as a third in South Africa).

That 61% figure is the mid-2010s number; in the 1980s it was 64% — and it has seemed to decline by a percentage point a decade, with those leaving the centre moving both up and down the income scale. These averages mask some striking results in individual countries, with a much bigger fall among the middle class in Sweden and Finland, and and increase in Ireland, France and Denmark.

The statistics imply that life is getting harder. Half of middle-income households report struggling to make ends meet — as well as the three-quarters of lower income households. Fully 40% are financially vulnerable, either being already in arrears or being unable to cope with unexpected expenses or falls in income. Perhaps this is not surprising when fully 20% of middle income households spend more than they earn: 

Middle class overspend

The OECD, not a natural scare-mongerer, suggests that we should be worried. It is not sanguine about the shift we are experiencing:

“The investment of the middle class in education, health and housing, their support for good quality public services, their intolerance of corruption, and their trust in others and in democratic institutions, are the very foundations of inclusive growth.”

The middle class have too much to lose to riot and rebel, the OECD implies. Yet now the anchor of property ownership cannot be taken for granted: “in many countries, being middle class is traditionally associated with owning a home, so soaring house prices have touched on the very meaning of being part of the middle class”. Things fall apart, the centre cannot hold.

BoE wealth QE inequalityHouse price increases far in excess of income rises are a remarkably global phenomenon. The biggest increases were before the financial crisis (after all, they were one driver of it) but rather than unwinding since, the policies of central banks in terms of low to non-existent interest rates and the generosity of quantitative easing have served to freeze and even bolster the disparity in outcomes that the rise in property prices has driven, as shown in this chart from the Bank of England. It is only fair to note that this is the absolute wealth effect; the percentage effect for each income decile appears much more evenly balanced. But perhaps percentage terms are not the fairest way to consider these issues. The absolute absolutely does matter.

I suggest there are elements of middle class decline more important than property ownership. Psychologically, I would argue that the middle class is defined most by an aspiration for one’s children, that they should have a better life than their parents. Yet, it appears, it is this aspiration that is most under threat. Now, according to the Risks that Matter report, 60% of parents in the OECD list the risk that their children will not achieve the level of status and comfort that they have as one of the top-three greatest social and economic long-term risks. In several countries, this rises to 70% or more — including in Austria, France, Greece, Italy and Slovenia. The coincidence with the rise of populist politics is obvious.

We should be careful about overstating these latest dynamics. Recently released research from the LSE, based on a remarkable detailed database of more than a century of probate (inheritance) records, suggests that in effect the middle class never existed at all. Neil Cummins concludes: “the median English person died with almost nothing throughout. All changes in inequality after 1950 involve a reshuffling of wealth within the top 30%.” Cummins probate wealth

This is obviously a wealth measure rather than an income measure, but it does show that in practice there may be little recent loss of an anchor of wealth. However, the loss of an expectation that one’s children will be better off does seem to be a recent phenomenon. And that investment in the future is perhaps the greatest wealth that the middle classes have ever possessed. 

On tackling this perceived unfairness, the OECD’s policy prescription is clear: “The main tool to foster fairness is the tax and benefit system”. Noting that middle income earners have less scope to minimise their tax burden than those at the top of the income bracket, the OECD suggests: “policies should consider effectively lowering the net tax burden on middle-income households while maintaining the sustainability of public finances. In many countries, the income tax system could be made more progressive, in particular for top income earners, and fairer for the middle class … the tax burden should be shifted from labour to broader bases, including income from capital and capital gains, property and inheritance.” The OECD also proposes policies to tackle the challenge of the rising cost of living, and the increasing labour market vulnerability felt by the middle classes.

It’s a long and ambitious list. We will have to see whether any of it is achievable, but without some steps this unsettling of the balance of fairness will persist, and its consequences will be significant.

 

From WB Yeats’ magnificent The Second Coming (1919, still fresh and vital a century on):

Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,

The best lack all conviction, while the worst
Are full of passionate intensity.

 

Under Pressure: The Squeezed Middle Class, OECD 2019

The distributional impact of monetary policy easing in the UK between 2008 and 2014, Philip Bunn, Alice Pugh and Chris Yeates, Bank of England Staff Working Paper No. 720, March 2018

Risks That Matter survey report, OECD 2018

Where is the middle class? Inequality, gender and the shape of the upper tail from 60 million English Death and Probate Records 1892-2016, Neil Cummins, Economic History Working Papers No 294, the LSE (2019)

2 thoughts on “The centre cannot hold

Comments are closed.