The Decline of the American Dream…For the Working Class

This article (1) seems to be cautiously worried and partially intrigued about the American public’s failure to increase consumer spending when wages have increased and energy costs have fallen. Yet, through its explanation of the factors that could be attributing to this dilemma for capital the article points to the logic of capital and its inherent bias against labor - the working class.

Where are Americans spending all the money they’re saving on gas? Not at Wal-Mart, it seems. Wal-Mart Stores was one of several large retailers, along with Target and Costco, to post disappointing October sales totals yesterday. The results suggest that lower- and middle-class Americans are holding on tightly to their wallets even as energy prices fall and wages rise.(2)

And holding on tightly they should, because American consumers bank accounts are in the red, America has a negative savings rate folks, that is not good for the lower and middle classes.

The slowdown in business at big-box retailers like Wal-Mart is one sign that some consumers are cutting back as the weakening housing market is dragging down overall economic growth.(3)

This is also not good news for two reasons (1) the housing bubble has to deflate at some point in time and (2) all the individuals just scraping by who bought a house during the low interest rate boom of 2003-2004 are just now starting to declare bankruptcies and this should become an even bigger problem as interest rates rise. Most lower income and middle class families turned towards ARM – adjustable rate mortgage - loans when interest rates hit historic lows in 2003-2004. Unlike traditional fixed rate loans whose rates are fixed over the life of the loan, typically 15, 20, 30 or now 40 years the new ARM loans have low teaser rates for 1, 3, 5, 7 or 10 years which then adjust after that initial low rate to the going market rate and then can readjust as soon as every year after that. In addition, during the initial low teaser interest rate period the home owner can also choose P&I – principal and interest - or IO – interest only - payments, P&I pays off the interest on the loan as well as the loan itself, while interest only merely pays the interest on the loan and does not even begin to reduce the actual loan amount.

Now, the ARM loans are appealing to lower income and young buyers who believe they will be making more money in 5-10 years and they better be, because when their ARM adjusts or the P&I payments start kicking in their monthly payments will skyrocket. An example:

For Inga Rogers, the party ends in 38 days. On Nov. 1, the adjustable-rate mortgage, or ARM, she took out three years ago at the spectacular rate of 3.875 percent will get considerably more expensive. Ms. Rogers, a single mother of two living in a three-bedroom ranch in suburban Boston, faces a rate increase of three percentage points, raising her monthly house payment by $300, to $1,419, and putting her at a financial crossroads(4).

Now, this situation is not in the best interests of lenders nor homeowners, the American government and the business industry does not want individuals to grow sour on the myth of obtaining the American dream and lenders with high bankruptcy rates make no profit. But with so many people taking on ARM loans it signals the main problems that the lower and middle classes are facing: HIGH HOUSING PRICES and LOW WAGES.

Another topic we could address in a future article is what is going to happen to the generation coming out of college now that is being priced out of the housing market on the West and East coasts and is forced to either (1) move back in with their parents and save money to buy a home or (2) rent for a majority of their life and pray that the housing market crashes so they can find an affordable house.

Think about how much rent you pay or the cost of your mortgage for the year...if it is over 30% of your annual income then where you live does not meet HUD’s (U.S. Department of Housing and Urban Development) definition of affordable housing.

The generally accepted definition of affordability is for a household to pay no more than 30 percent of its annual income on housing. Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care. An estimated 12 million renter and homeowner households now pay more then 50 percent of their annual incomes for housing, and a family with one full-time worker earning the minimum wage cannot afford the local fair-market rent for a two-bedroom apartment anywhere in the United States.(5)

Based on the 2003 American Community Survey:

In 2003, more than one-third of renter households in every state lived in unaffordable housing...nationally, 47 percent of renter households paid over 30 percent of their income on housing in 2003 (up from 45 percent in 2002).(6)

There is not a single jurisdiction in the country where a person working 40 hours a week, 52 weeks a year at the prevailing minimum wage can afford a one-bedroom apartment. On a national basis, a person needs to earn a Housing Wage of $15.78 an hour, working 40 hours a week, 52 weeks a year, to afford a two-bedroom apartment at the Fair Market Rent.(7)

Obviously, there is a housing crisis in America, everyone should not only be guaranteed a place to live, but one that is affordable. These statistics display just how precarious the lives of the lower classes really are, how individuals struggle day by day to not just put food on the table, but a roof over their head. For more information on actions going on to remedy this situation check out: National Low Income Housing Coalition(NLIHC) or The Joint Center for Housing Studies(JCHS)

In essence, by paying worker's little they are forced to take out high-interest high-risk loans to purchase a home and live out the American Dream and when interest rates increase and their paychecks do not they will have to default on their loans and possibly declare bankruptcy, which will no longer wipe their slate clean, but force them to pay back their debt - no chances to screw up anymore. The capitalist class will get its money one way or another. The extension of credit to the masses, one way to increase profit levels - to bridge the gap between low worker pay and the high cost of commodities - can be seen as one way to attempt to squeeze as much capital from the hands of workers as possible.

Another interesting point, giving high-interest high-risk loans to individuals who are realtively unlikely to afford these loans in the long run benefits financial capital but does not benefit other forms of capital - such as entertainment capital, for consumers who are burdened with housing debt are no longer able to enjoy time out on the town anymore, because their housing payments eat up all their disposable income. This displays the contradictory nature of competing capital - they fight with each other over the same nest egg.

Back to issues of consumer spending:

But even as the economy continues to downshift, wages are increasing and Americans are finding themselves with more disposable income, in part because of falling gas prices. Instead of spending that money, low-and middle-income consumers appear to be sticking to their budgets…There is some evidence to suggest that Americans are putting more money aside. This week, the Commerce Department reported that the national personal savings rate in September came the closest it has in a year and a half to being positive. It was negative $15 billion, its healthiest level since May 2005.(8)

Excuse me? The healthiest level since May 2005, back in the 1980s the savings rate of the U.S. was 8%, it has been negative for several years now. If this is a not a key example of the lower and middle classes getting screwed by the capitalist class then I do not know what is. The fact that so many families are spending more than they take in is definitely not good news for the working classes, especially in light of the recent action by congress, which passed their heavily class biased bankruptcy bill that in essence prohibits working class families from declaring bankruptcy and starting over, it is now harder to do that, most will have to pay back their debt. So much for a new lease on life.

Explain how good the retirement of the working classes will be if they are forced to live day-to-day for their entire lives? With no savings means no retirement, abysmally low social security payments, elongated working lives and the loss of leisure and relaxation in one’s old age.

Welcome to the fifth layer of hell.