If you listen to politicians, they talk about the middle class all the time which is the reason why nothing gets done. There are many theories to how to help the middle class and part of the concern is while the rich can spend, they can only buy a limited number of goods and services. For the economy to do well, the middle class has to spend, however if the middle class is spending, at some point they spend too much. What is good for the economy is not necessarily good for each household.

The question is why are households including two income households increasingly going broke or declaring bankruptcy? In a book written by Elizabeth Warren and Amelia Warren Tyagi titled The Two Income Trap – Why Middle Class Mothers & Fathers are Going Broke? published by Persues Books, NY, 2003. The first thing they tackle are the myths of why they are going broke because the statistics indicate their parents made less money but managed. One of the myths heard around the holidays is the over-consumption myth – they spend too much on things they do not need. While one can always find examples, the reality is clothing and food are actually decreasing in price. The real reasons are generally something else.

A dream of many people is to own a house in the right neighborhood and for the price to increase in the years to come. The choices have costs associated with them. The right neighborhood can be those with great preschool course for the children to have all the advantages. The problem is the best preschool comes with higher house prices and there is a theory about keeping up with the neighborhood. If everyone has a relatively  new SUV and you drive a 10 year car, do you fit in or would you update? These and many other costs can increase the cost of living in a home. Ideally pick a home you can afford according to the old budget formula, including making a down payment to avoid extra fees. If you choose a house and your fixed expenses consume a high proportion of your income, what will you do when things begin to break down and need replacement? in the home and in your life? House prices affect the declining middle class.

We all hope we are healthy, when a baby is born we ask is it healthy. If not health costs and insurance costs drive the budget as they are part of the fixed costs people have. If you are healthy, life is easier.

Women’s role play a good and bad part of the decline of the middle class. When women were generally at home, they were the great all-purpose safety net. Even though they were not paid, they could and did many jobs which kept families together including finding work. They were the ultimate insurance in case of unemployment or disability of their spouse. With two income families – there are extra costs but there is little leeway for the non fixed expenses.

An addition fact for the middle class is through no fault of their own, there is a high probability that one or both of the wage earners will be laid off or lose their work. In the 1970’s it was 2.5% chance; in the 1990’s the odds were  6.3% will have a “pink” slip. In the 2000’s it is likely higher.

Linking to dividend paying stocks, often what is good for the company may not be that great for the workers. As dividend investors we want the company to control costs as well as make profits to continue to pay for the dividends. In the information age, the most effective cost to cut is people; which of course means people have to adjust to something.

There are more questions than answers, till the next time – to raising questions.