Responsibility

There's a phrase going around lately that strikes me as unsavory. It seems likely to me that you've heard it. That phrase is "the war on the middle class."

I would like to take a moment to discuss why I find this term unsettling. But before I do, I should make a few points clear:
1) I am not an economist
2) While I am considered good with personal finance, I am not certified as special at it in any way.
3) I'm going to be mixing personal observation and opinions with other people's statistical data.

The war on the middle class is apparently a term being bandied about to accuse the wealthy of being generally unfriendly to those less wealthy. It stands in contrast to the widely-held belief that the United states is composed entirely of one enormous middle class, with no members poor or rich enough to be willing to admit that they fall either above or below what it describes. To say that there is a war on the middle class, to me, means that it is being argued that there is some form of governmental policy designed to change the 100% middle class ideal into a society in which there clearly exist both upper and lower class individuals, in addition to a still-large middle class. It strikes me as unlikely that anyone feels that the middle class is in any danger of becoming an outright minority, as it was in old fashioned monarchies, for example.

To give an example of a seemingly middle class-hostile policy, we could say that a flat tax would war with the middle class because it would result in a less wealthy person spending a greater portion of their income on their basic living expenses and taxes, while making that same portion of a budget go down for a wealthy individual. That shift would mean that the wealthy would have a larger portion of their remaining cash flows for investing and luxuries, while the poorer would have to try to force through with a much lower possible savings rate.

My basic model is pretty simplistic, and is being put out only for adding a simplistic clarity. To rephrase, I am proposing that everyone uses their money for four basic things:
1) Necessities (N)
2) Taxes (T)
3) Luxuries (L)
4) Savings (S)

A basic assumption in the war on the middle class seems to assume that in a stable version of our society, there is a perfect ratio of these four variables that more or less everyone should use, and that the exact dollar amounts for each individual get scaled according to his or her actual income. That is, it appears to me that people like to think that everyone should be spending about 30% of their money on necessities and saving about 10% (use whatever numbers you think "feel" right here). However, very few people (who we'd call communists) argue that everyone should make the same amount of money and thus spend roughly $10,000 on necessities while saving roughly $3,500 per year. Americans as a group do not dislike the fact that some people will make more money than others.

But despite most people thinking that there is a good, universal savings or necessity rate, people rarely worry about the fact that the wealthier currently pay a higher percentage of their money in taxes. In thinking that way, some things tend to get lumped to make the opinions feel correct. Making the combined ratio of (Necessities + Taxes) go down for the wealthier while it goes up for the poorer is an idea that most people are quick to agree is not a fair trend. It looks wrong, because the wealthier tend to have conspicuous dollar amounts of (Luxuries + Savings), which is where that extra money would go if their taxes dropped. By contrast, the poorer have fewer, if any, conspicuous (Luxuries + Savings) meaning that they appear to be seriously missing out, even if no one would think it wise to erase this impression by advocating that poorer people spend, say, 70% of their incomes on luxuries to make things look even.

Again, the above paragraph should be taken as simply my summary of what I – in my own mind – appear to be seeing. I'll add in that I agree with the idea that people in general should (regardless of their incomes) be living life with a roughly similar ratio of Necessity, Tax, Luxury, and Savings income usage rates. I'll also add that it does seem to be awfully hard for the poorer to match the savings RATE of the wealthier (keep their Savings ratio up), seemingly because of how when the dollar value seems so much smaller, it is so much more tempting not think before spending. That is, it's much easier to spend $100 on a whim than $1000, simply because of how many more temptations there are that cost $100 or less.

If that were the extent of it, I would say that people are fallible, and I would have a great deal of sympathy for poorer people. In so doing, I would still tend to dismiss the idea of a "war on the middle class" as propaganda, for the simple reason that no one seems to be advocating giving the rich a greater ratio of their incomes to spend on non-Taxes than everyone else (aside from the people who want to eliminate the income tax – a group that no one currently expects to accomplish anything). To do so, you would literally have to argue that when a person increases their income by a certain amount, their tax rate should go DOWN. No one in the government has proposed this, that I am aware of. It's the sort of idea that would cause riots.

That said, the war on the middle class must be referring to something else. A luxury-based society (I will take the stance that we live in one without bothering to prove it) tends to make luxuries so easy to obtain that only endless personal vigilance will prop up the poor to keep up with the savings ratio (not dollar rate) of the more cash-flexible rich. But I'd still have argue that they have a responsibility to do so, and point out that a personal habit of not carrying lots of ready cash would be an easy way to avoid temptation. Since the government cannot mandate irresponsibility in its citizens, and since the government is not actually trying to (en masse) tax the poorer at a higher rate than the wealthier – either in terms of percent of earned income or in terms of actual dollar amounts – I conclude that there is no governmental plan to wage war on the middle class.

But here's where my argument gets darker.

With my last full paragraph, I concluded that the government has not been waging a war against the middle class. I did NOT conclude that society itself isn't doing so itself. Personally, I feel that it is, and that it's doing so in the one way that I can almost claim to endorse.

The detail that makes me say this is the way that money is moving in time. The concept of charging interest for loaned money is not new. However, making the charging of interest a foundation of every financial transaction for certain groups of people and not others is very new. I am referring to credit cards.

Previously, it would have been extremely difficult to route every financial transaction through a creditor. Now, it's an extremely easy thing to do. In fact, it can have benefits. Not only can credit cards be used to gain leverage over possibly questionable vendors, they can also track purchases, and in some cases directly reward loyalty with cash or rewards returned. However, they also charge interest... sometimes.

The segregation of the two groups is shockingly simple, and astonishingly voluntary. If one chooses to pay for all the things bought during the term of a credit card statement, he or she breaks even. Developing a track record of doing so reliably can develop into opportunities to actually make a net financial gain on all purchases. If one chooses to pay for only some fraction of what was purchased – even if it's a very high fraction – one pays interest on everything.

It's very simple. A person's behavior decides if he or she receives a reward or is punished. One's actions are the only factor deciding which occurs. It's extremely equal opportunity. One can even opt out of the system entirely, since credit cards are SECOND to cash in universality. But the system is unarguably in place. People who handle their money in one way are rewarded over and over again. People who handle their money another are punished exactly as often. The strategy required to switch from one group to the other is just as simple and accessible as the original choice.

Despite this, only a small minority of the participants in the credit card system chooses the "reward" option. People sign up in droves for credit cards, and on some level, they are aware that they are losing money for the privilege of free money in the present. It's a perfectly visible tax on excessive consumption. I'll call it a "sociologically-even luxury tax." If one wants to consume more than he or she was willing or able to produce in the present, he or she will have to eventually sacrifice more money total in order to do so. Personal income is not a factor. The cost punishment can be stopped at any time by simply choosing to balance one's life to produce more than was consumed. Punishment is proportional to the level of excess, while rewards are usually capped. (That is, unused rewards do not compound to generate even more rewards.) That said, there is even more incentive to be on the reward side, since the punishment side is a two-tiered effect.

There is a reason I am focusing on credit cards. They are completely optional items, and they are a novelty in – not a keystone of – the economy. They are tools people can use to punish themselves in the future for pleasures in the present. This is not a secret.

The long-term results, despite this, are amazing. Let's assume that we have two "average" families, both earning $35,000 a year. The first family is also "average" in that it has about $8000 in credit card debt. The second family has no credit card debt, and gets 1% cash back on all their credit card purchases. To get to that point, there was some period in which the first family got an extra $8000 in stuff while the second family was stressing out paying their bills in full on time, every time. Yet since things have stabilized, and for each year after, the first family could owe as much as $2400 to maintain the same level of debt – all without acquiring any more bonus stuff. If the second family manages to make half their purchases through their rewards card, they get a bonus of $175 cash back per year.

You can't call this $2400 charge for the first family a tax, because the government was not involved. However, the first family – the one that is average in both income and consumer debt pays $2400 per year to get nothing new. That's awfully similar to a ($2400/$35000 = ) 6.9% income tax rate increase. The second family is getting something awfully similar to a ($175/$35000 = ) 0.5% income tax rebate.

There are certainly emergencies and crises that can push planned and measured people into credit card debt. But those same people can and do recover from it. Most don't, just as most did not acquire the debt for an emergency. What we see, overwhelmingly, is really nothing more than people's long-term, repeated, and sustained choices to be punished instead of rewarded. The choice was not forced, because the credit card system is optional.

This trend is widening. People being punished with these "sociologically-even luxury taxes" tend to be more and more punished as their situation continues. People being rewarded tend to use those rewards to make other wise choices and to save more money, but those are rare individuals. Americans as a group are spending more than they earn, and no one is forcing them to do so. I would argue that this is what is separating out more visible poorer and wealthier groups, not any unofficial government mindset.

That said, allow me to put forward a very cold idea. People should be aware of how their behavior affects their lives both in the short and long terms. You would never guess that anyone in their right minds would actively pursue choices that lead them to something equivalent to a 7% (or higher) income tax hike. And yet, according to data typical of average Americans, it appears that many, many people have done exactly that, or worse. The inability of most Americans to take good, even-handed looks at facts like these will inevitably separate out poorer and wealthier people. It's not an effect that requires blame. It's empowering that wise choices have strikingly better results than hedonistic ones, and it builds our society up to have it structured that way. The onus is on the individual to do his or her part in our society and to reap the rewards of having done so.