The Biggest Problem with the Middle Class Is?

If we believe this video that went viral on the internet, Wealth Inequality in America, the problem with the middle class is that a CEO make about 380 times more money than the average worker. This video is based primarily on the charts created by the Mother Jones article, It’s the Inequality, Stupid. The Mother Jones charts make it pretty obvious that they think the problem with the middle class is that the rich are paid too much. Their fix for the middle class is some  income adjustment on the wealthy.

Paul Caron argues that raising the Estate Tax will curb wealth inequality and spur economic growth, Using the Estate Tax to Curb Inequality and Spur Economic Growth. In his analysis the problem with the middle class is a wealth problem. The rich have too much wealth and redistributing their wealth via estate taxes is the most equitable way to fixing the middle class.

So lets see if I understand this problem correctly. The rich are paid too much and have too much wealth. For this privilege they pay the government a disproportionate share of all the income taxes collected. Okay, I get it that everyone is in favor of taking another million dollars from Warren Buffett or Bill Gates but what does that have to do with middle class wealth and income problems? Just maybe, the problem with the middle class is not the rich. It is not the poor. The problem with the middle class is the middle class. The problem with the middle class is they made bad life style decisions. Instead of saving and investing like the rich folks, the middle class took the easy way out and used long term mortgages, permanent credit card balances, and student loans to avoid or postpone tough decisions. The results are not surprising since debt seems to encourage bad decision making. If you accept the argument that this bad decision making has been going on for at least the last thirty years, then it is logical to conclude that the primary reason the rich are so rich is because the middle class has been so dumb with their money. Ploys to increase consumer spending and bubbles seem to be the favorite tools used by policy makers to extract wealth from the middle class and give it to the rich. When these ploys inevitably do not work, the follow-up strategy is to claw back some of the success of the rich. It is a never ending circle until the middle class has no more to borrow. It is the microeconomic solution to the unintended consequences of misguided macroeconomic policies. Increased consumer spending is the solution until … it isn’t!Nowadays we call it the Dave Ramsey strategy. It requires both sacrifices and tough decisions to work up the wealth and income ladder. The goals are simple, too. It is hard for a middle class family to live beneath their means but it is necessary if a family wants to pay down their debt. It is hard for a family to pay down its debt but it is necessary if they want to save the money for retirement and their kid’s college education. With a clear vision of where you are going, the hard work translates into results the middle class can see in their bank account. It does not depend on how much we tax the rich or cut the benefits for the poor and elderly. It depends on the middle class living beneath their means, making good spending decisions, and saving for the future. For those middle class folks whose parents lived through the Great Depression, they are embracing the financial strategies of their parents.

Why are we not seeing more inflation?

I got my latest Duke Energy bill and added to my spreadsheet to analyze the cost increases. In 2013 we spent an additional $338 compared to last year. Some of the cost increase can be attributed to 18% more heating days than last year but about $200 of this increase is a result of higher electrical distribution costs. So far 2013 I have seen higher home and health insurance costs, higher income taxes, and higher electrical costs. Although my health insurance is more expensive, the costs are still covered by my HRA at work. I have not seen any costs that have come in lower than last year. Hmm…

Is Walmart’s quarter atrocious?

From Yahoo Finance we get a story that calls Walmart’s quarter atrocious. When I heard Bloomberg’s discussion on the report this morning, they had a more positive view on the report. Here is what Yahoo Finance says.

Walmart is seeing what’s called a pronounced pay check cycle. That means store traffic spikes twice monthly when most people get paid. That speaks to a strapped consumer that lacks the confidence to spend unless they literally have cash in their pocket. Living paycheck to paycheck isn’t something you typically see in the fourth year of an economic recovery.There’s a limited pool of winners from Walmart’s weakness but they do exist. Sozzi thinks Amazon (AMZN) and Best Buy (BBY) of all companies may have picked up some of the sales Walmart didn’t get, but that’s not a ton of comfort.

"The big theme: they can’t get any margin, they have no pricing power and the consumer is not going to the store as much as they used to," says Sozzi.

Although the small business I work for has not seen the pay check cycle in our orders, we have seen in February that both the number of orders and the average order amount is smaller than last year. After several months of slightly positive year to year comparisons in February we swung to a slightly negative comparison. It is not pretty but it is not the end of world either. Walmart is confirming our somewhat pessimistic view of the retail market for 2013.

My State Of The Union

Chris LoCurto asked the following questions in his post, State Of The Union.

If you didn’t watch, what do you think anyway. How is your “State of the Union” as you or your business stands right now? I don’t care which side of the aisle you’re on, I would like to hear your thoughts, and your comments.

I have a long tradition of not watching State of the Union addresses. I disregard this event regardless of the party in power. This week was no different. Like most people who responded to this post we have a much greater interest in our own assessments of our “State of the Union.”

This year my wife and I will have been married thirty years. Like most married couples we had our rough times but for the most part we have been happy. Although I am not looking to growing old in this brave new world she makes my day a little brighter. I cannot imagine doing it without her.

My job and by extension the business I work at are in a more precarious situation. Although my skills as a web developer are in demand, my specific skills with ASP and SQL have a more limited appeal. Although I do not expect a pay raise this year our family finances are strong with a good savings record. Since most of our basic necessities have gone up in price, the challenge for us is how to cut costs elsewhere. An expanded and more productive garden is one of the more attractive areas of opportunity. Each year I have expanded the garden and improved my skills. At this stage of our life our financial plan is focused on saving for retirement and a significant part of the plan for saving for retirement is to stay healthy. Hospitalization or extended illness could easily extinguish our savings. With our continued good health and affordable health insurance, we can continue and possibly accelerate our savings for retirement. So far the Affordable Care Act and the Individual Mandate has not caused the dramatic increase in insurance premiums in the individual insurance market that many have predicted.

The bad news is that the business I work at  has declined significantly from four years ago. The good news is that the decline stopped last year and we showed a small increase over the previous year. Our sales seem to follow national retail sales figures so our sales forecast for next year is for small gains. In this scenario our business will be playing a zero-sum game with our competitors. The market is not big enough to afford marketing or inventory mistakes. Although we are a small business who competes with Amazon, Walmart, Home Depot, and Lowes on some products I do not expect much of change. It probably is not profitable segment for them and it will take a lot of work to expand their modest efforts.  Price, product selection, and having the “right” inventory in stock always separates the men from the boys. Our strong financial condition combined with better better marketing and inventory management in our market niche should allow us to take market share from our competitors who are not up to the task. You snooze, you lose!