Zev pointed me in the general direction of Huffington Post and their posts about the disappearance of the middle class and what they refer to as “Third World America” and what we need to do to save it. As I was reading more and more I felt more like grabbing someone and shaking themcompelled to write an answer. Unfortunately, I ran out of space on their site, so here goes:

I’ll tell you what “we” need to do. The middle class needs to start by taking a very serious look at itself, because all the problems that the middle class is undergoing could have been prevented by making different choices.

The middle class can be divided into consumers and savers/producers. In recent times, consumers have far outweighed savers and producers (unlike say during more thrifty times) and so the middle class is often confused with consumers.

Those of us who belong to the saver/producer side are positively thriving in this economy—the only thing we have to deal with is consumers who keep telling us to buy more stuff, because apparently stuff makes you happy. I guess my former neighbors who had so much stuff stored in their garage that they had to park their car in the street must have been supremely happy. Irony aside.

As a country, America is very productive. There are enough resources to live very well if those resources are spent wisely. We are twice as productive as we were 50 years ago. By all rational means it should be possible to work only two weeks a month and live perfectly happy lives. Alternatively, it should be possible to work for less than a decade and then retire early.

I did just that. You can do just that.

Unfortunately, many people did not. They spent their riches without a second thought.

Here’s the exact problem with middle-class consumers. As a group it’s net-negative productive. It takes more than it gives. Despite how hard it works, it consumes more than in produces. It spends more than it earns. It lives above its means. This is possible because banks and credit cards have enabled this behavior through cheap credit.

Whether this is the fault of the banking system or the middle class, that is, the creditor or the debtor is an age-old question. It’s like asking who’s responsible for murders: The person pulling the trigger or the person giving him the gun. It comes back to personal responsibility. I’m not touching that one with a ten foot pole in this post—I suspect you know where I stand on this issue.

The worst part of it is living in culture knowing that this didn’t have to happen if people would just wake up. I’m middle-class. As an academic scientist, I made less than newly graduated college grads in my field for most of my career (with a two year exception at the end). However, instead of spending my money and going into debt buying the biggest house I could get my hands on; buying a new car and a new TV with the only concern being whether I could make payments and generally maxing out my lifestyle to the best of my ability and to the extent my salary would allow, I saved money.

In fact, I saved a lot of money. I lived far below my means. Now, many people don’t want to do this. They don’t want to “give something up”. They don’t want to “sacrifice”. That’s how they see it. The way I see it, I’m not giving up anything I like. I spend very deliberately. Some people call that pinching pennies. I call it prioritizing and not wasting money.
In particular, I don’t waste a lot of money on interest and fees(*) because I want to buy something now rather than wait until I actually earned the money; and even then I only buy things which I’m sure I’m going to use and enjoy.

(*) This alone means I’m getting things 20% cheaper than someone who’s carrying a year’s worth of spending on their cards.

It’s curious to me how people don’t want to “sacrifice” yet are perfectly happy to “struggle”. My goal is tranquility. Not instant gratification.

As a result, while people were partying it up with home equity loans during the past decade period I was saving. As people are now struggling to make ends meet, I have retired, financially independent. We’re both middle-class. We both made the same income. We just made different choices of whether to spend or whether to save the money.

Maybe I understood how to handle my money better than most. Yet whose fault is that? It wasn’t for lack of trying to explain the concept of savings, yet it’s hard to convince someone who’s having fun that maybe they should save a little for a rainy day, just in case. It’s even harder to convince them to put aside 30% of their income; and if you think that’s hard, try convincing someone to save 60% or more than that. Why should they, when their house has been appreciating by 30% a year for the past three years? It’s like having your own personal ATM machine, right? < sigh >

When you have two people in similar circumstances with the same options but making different choices and consequently ending up in different places, we should not blame external circumstances. Yet what it seems like now is like the day after the big party. People are hung over and they blame the bartender (the banks). It’s like they completely miss the connection to all the booze (credit) they were drinking the day before. Like the example in this post, people just don’t seem to get it.

Maybe it’s because for some it was their first real drinking binge; like someone just passing legal drinking age with no experience of alcohol and consequently going overboard rather than learning slowly and being wiser about it. Maybe they should have listened more to their parents or grandparents just like we could learn a few lessons about money from ours. Sure, we can now stick together and commiserate on our collective headache, but that doesn’t solve the booze problem. The bartender or cheap credit is really not a problem if people are not abusing it. It becomes a nonissue.

Maybe people need more financial education? It’s pretty clear to me that anyone who care to self-educate about credit and savings (and it’s not rocket science, you know) would do just fine as a middle-class person. If anything, if the middle class is disappearing as the Huffington Post says it is, it’s not because it’s being killed off. It’s because a group living on credit above its means is simply not viable as a “species”. Not in nature, not in sociology, not in economics.

That really shouldn’t be surprising to anyone.

But apparently it is.

We have a long way to go, but until we actually go, this problem will keep repeating itself over and over getting increasingly worse as long as people are blaming everyone but themselves.

See a longer discussion about the middle class on early-retirement.org.

Originally posted 2010-10-10 01:03:20.