Broke: Who Killed the Middle Classes?

People could be teachers, or civil servants – not rapacious capitalists, but ordinary, quiet, middle-class people – and still live in detached houses, and buy new cars, and go on holiday to the south of France. And they had decent pensions to look forward to afterwards. That was what being middle class was all about. You passed your exams. You got a job. You stayed out of trouble. In return, you felt safe. And now, it looks like all of that is slipping away. And who knows, soon it might be gone for good.

That description feels right. It is the sheer lack of ambition that used to be such a feature of middle-class life that this captures, and it does indeed feel like it is slipping away. Increasingly, the middle classes are finding that they can’t afford it, even when they are earning twice the average income. Why should that be? What went wrong? The answers are in some ways the same as the ones given by Deep Throat in an underground car park during the Watergate affair. The key lies in following the money.

‘I feel like I’m stuck, like I can’t breathe, like I’m in quicksand,’ said Brooklyn Davis, unemployed in Pittsburgh, about his financial plight.

Davis was not middle-class, even in the USA, but it is strange, once you start researching the current plight of the middle classes, how this word ‘stuck’ keeps coming up over and over again.

‘We are stuck,’ one human resources manager told the Guardian newspaper in 2011. ‘At the end of the month, what with rent and extortionate costs of travel, we have nothing left. In fact, less than nothing, which is a bit of a shocker.’

Shona Sibary used the same word describing the plight of her family when they had their home repossessed. As Deborah Lane implied, this feeling of being ‘stuck’ emerged before the banking crisis and the downturn. When the Department of Work and Pensions began investigating the so-called ‘squeezed middle’ in 2006, it found that – even then – a quarter of middle-income earners could not afford a week’s family holiday. Six per cent of them couldn’t afford to send children swimming once a month. According to the TUC, the same proportion of middle-income people were worried about their jobs as were the very lowest earners. Not all of them paying school fees by any means.

Even by the middle of the last decade – years before the financial crisis – the number of middle-class families earning more than £30,000 who were looking for debt advice had tripled.

These were the boom years. It had nothing to do with the global downturn.

When the Bath University professor Guy Standing coined the phrase ‘the Precariat’ in 2011, to describe those on low to middle incomes that exist in a precarious succession of short-term contracts, my impression is that it wasn’t intended to include the traditional middle class (he calls them the ‘salariat’).

But in fact the same precarious existence, struggling with the costs of a respectable, civilized life, while the generous Victorian provision of parks and libraries shrinks before their eyes, is affecting the middle classes too. Perhaps not so corrosively, but as a terrifying future prospect that they can see all too clearly, it is there. The Precariat has no control over its time – that is Guy Standing’s definition – and one definition of the middle classes since the Industrial Revolution is that they have leisure time.

Of course the middle classes still have some control over their time, over-mortgaged and over-indebted as they are, but it is increasingly uncertain.

There is also no doubt that middle-class life has grown more and more precarious, all part of the complicated relationship between the costs of mortgages, childcare and transport which make all the difference in the Micawberesque calculation that families have to go through these days: mortgage payments, food, fuel, childcare, holidays, credit card bills £4,001 a month; income £4,000 a month – result: penury.

Partly because of the cost of accommodation, the plight of middle-income earners is again not that different from the plight of the lower-income earners. Even those on higher incomes (over £66,600 a year) face housing and fuel bills up 110 per cent during the last decade: 17 per cent of them can’t afford holidays and 40 per cent have no savings for retirement.

This is, after all, the biggest squeeze in living standards since the 1870s according to the economist Roger Bootle.

There is a financial squeeze going on, and this is what it looks like:

The Mortgage Squeeze Until 1988, mortgages worth more than three times the joint salaries of couples were extremely rare. By 2005, a fifth of all mortgages were based on multiples of four times joint salaries or more. Almost a third of Londoners say they expect to be driven out of London by rising housing costs (a typical London deposit is now £85,000).

Nor is it just London: Dorset and Wiltshire are actually the least affordable places in the UK. House prices in Truro and Edinburgh have gone up by over 500 per cent in the last quarter of a century.

House prices have quadrupled in real terms during my lifetime (I was born in 1958), as I said. If they had stayed steady, the average home would now cost £43,000 at today’s prices, rather than £250,000, which is the actual cost.

The University Squeeze The US middle classes have been hit by an unprecedented increase in the cost of going to university, with fees rising from 10 per cent of median income at US public-sector universities in 2005 to 25 per cent now, and the same process is clearly happening here. Already we have £35 billion outstanding in student loans, and the fees look set to burst through the current barrier of £9,000 a year.

The Childcare Squeeze Childcare in the UK is said to be the most expensive in the world, and takes up to 28 per cent of the average income of a two-income family – it costs £5,000 a year for twenty-five hours a week for a single two-year-old in a nursery. This is the main factor forcing a quarter of parents into debt.

Part of the problem is that, unlike Scandinavia and North America, we have lost our mutually run nurseries – mainly through misplaced fears about ‘safeguarding’, and a general and unaccountable feeling that parents are the last people who should be trusted to look after children.

The Pensions Squeeze The stock-market collapse, and the end of the long boom in stock prices, has meant miserable returns for those private pensions so many of us took out in the 1980s and 1990s. Gordon Brown’s decision to tax pensions income in 1997 looks as if it also reduced the money going into pensions by about £5 billion every year. The number of ‘defined benefit’ schemes open to new members has been falling steadily for a decade and has now trickled down to almost nothing. People are left increasingly with the far less valuable ‘defined contribution’ schemes. Final salary schemes are also being replaced by average lifetime earnings. All this means that most middle-income groups look set to lose 60 per cent of their income in retirement, and low bond yields, low stock-market returns and slowing house prices will put them further at risk.

The Education Squeeze Education is central to the whole idea of the English middle classes, but for a long time now most of them have been priced out of independent education (average fees are now £23,000 for boarders and £11,000 for day pupils, with more for uniforms and extra-curricular activities, and that is for each child) – the ‘preserve of the super-rich’, according to the former High Master of St Paul’s.

The result is the extraordinary worry and struggle to get into good state schools, which drives up property prices around the best schools by around 35 per cent (up to £77,000 extra).

This is a nightmare labyrinth, according to a report to the Greater London Assembly, where the middle classes ‘play the system’.

True, but they play it against each other, putting ever more pressure on their poor overstretched children with frenetic after-school CV-building activities.

The Status Squeeze ‘I feel stuck’ – that familiar cry – said Andrew Schiff, marketing director for the New York brokers Europe Pacific Capital, whose bonus was down to $350,000 and no longer covered private school fees and summer rents. ‘People who don’t have money don’t understand the stress,’ explained the New York accountant Alan Dlugash. ‘I got three kids in private school; I have to think about pulling them out? How do you do that?’

These are extreme examples, but the same is increasingly true in the UK. Our parents’ generation could feel reasonably secure once they had reached a certain income. Now it doesn’t matter how successful you are – there is always someone paid staggeringly more who can make you feel as if you are struggling, and who pushes up the prices to make it even worse. ‘These people never dreamed they’d be making $500,000 a year,’ Dlugash said about his clients, ‘and dreamed even less they’d be broke.’

There is the middle-class crisis at a glance. It is about money, and about much more than money, but the heart of all this is still house prices, which are the subject of the next chapter. Middle-class homeowners put up with spending between 20 and 40 per cent of their income on mortgages because the prices are rising, and it seems like a more reliable pension than when they invested so nervously and pointlessly in the stock market. Conventional wisdom also suggests that this will at least mean a huge transfer of value from one generation to the next, just in time to pay the vast deposits on their children’s houses – and 63 per cent can’t buy a house now without help from relatives. And it wouldn’t come a moment too soon, because those born after 1985 are the first UK generation not to enjoy better living conditions than those born ten years before.

But we should hardly hold our breaths, because this cascade of wealth down the generations is actually slowing down. Homeowners need the money for other things. For one thing, they are living much longer and their homes are also their pensions. For another thing, about half of them will need their homes to pay for care bills as they get older, and 50,000 homes a year are already sold to pay for care.

There, in a nutshell, is the heart of the fear: that once the middle classes peer towards their children’s future, there seems no way that they will be able to afford a home themselves. Halifax, now part of the banking conglomerate HBOS, calls this next generation ‘Generation Rent’. They mean children whose parents are homeowners but who will be raising their own children in rented accommodation, and at hugely inflated rents, because rents are also related to the cost of buying property.

How will they ever be able to buy homes or shake off their debts, or even the housing debts of their parents? Especially when policy and economic circumstances have combined to provide an extraordinary shift in resources backwards from the next generation to their baby-boomer parents, the phenomenon outlined by the higher education minister David Willetts in his much-debated book The Pinch. Willetts showed how the baby-boom generation benefited from free higher education, low house prices and inflation to eat away at their debts. And now when the debts are almost paid off, they benefit from low income taxes and low interest rates. ‘The boomers, roughly those born between 1945 and 1965, have done and continue to do some great things but now the bills are coming in,’ he wrote, ‘and it is the younger generation who will pay them.’

The middle classes – those that dare to look ahead – see their children being flung into a proletarian struggle to maintain any kind of roof over their heads. ‘It is as if your parents die leaving a treasure chest,’ wrote Willetts, ‘and, when you open it, you discover a pile of IOUs which you are obliged to pay.’

But there is something else going on here which affects the middle classes, however you define them, in many developed countries. Middle incomes in the USA and Canada have flatlined for three decades now. Even in Germany, real monthly incomes have been falling. In fact, the term ‘squeezed middle’ came originally from the United States, where the term ‘middle class’ is usually used to mean what it says – those on average incomes – rather than the extra superstructure of values and social aspirations that the term has come to stand for in the UK.

There certainly is a middle-class problem in the USA, where 4 million families are believed to be in danger of sliding into poverty and one in four middle-class households are about to drop down onto the lower rung, spending a quarter of their incomes just servicing debt.

It is different over there, but there are important parallels between the UK and USA, which is why the Labour leader Ed Miliband borrowed the American phrase ‘squeezed middle’ in 2011. The parallel has also been noticed by one of the most important commentators on world affairs. Francis Fukuyama is busily charting the decline of the middle classes in all developed nations.

Into the misty past, the middle classes have benefited from rising above the undifferentiated masses, Fukuyama implies. Now they are being driven back into the undifferentiated mass by a new global elite which is benefiting from the shifts in the financial world over the past generation. Once the middle classes siphoned off wealth to provide themselves with comfortable lives, now they are the victims of the siphoning – and siphoning on a vast scale.

What is happening is most obvious in the USA, where it drove the massive growth of inequality over the past generation. In 1974, the top 1 per cent of families took home 9 per cent of GDP. By 2007, that share had increased to 23.5 per cent. But this isn’t just the USA, because the same global and technological shifts are happening everywhere, says Fukuyama, from off-shoring to replacing skilled jobs with IT systems. ‘What if the further development of technology and globalisation undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?’ he asks:

The other factor undermining middle-class incomes in developed countries is globalisation. With the lowering of transportation and communications costs and the entry into the global work force of hundreds of millions of new workers in developing countries, the kind of work done by the old middle class in the developed world can now be performed much more cheaply elsewhere. Under an economic model that prioritizes the maximisation of aggregate income, it is inevitable that jobs will be outsourced.

We have become so used to the idea that the middle classes are the winners, as they have been since time immemorial, that it is difficult to get our heads around the fact that this has now changed. The middle classes are no longer winning. They are losing out, and losing out devastatingly, to the rise of a whole new class which has become known as the ‘One Per Cent’ (1 per cent may be an overstatement: in the UK, 0.6 per cent of the population earns more than £150,000 a year). It was this phenomenon that the great investor Warren Buffett referred to in 2006 when he confirmed the existence of a ‘class war’. ‘But it’s my class, the rich class, that’s making war and we’re winning,’ he said, fearful of the consequences.

The One Per Cent is dominated by people in financial services, and at the top of the global corporations, plus perhaps a handful of global bureaucrats. It is a deeply interconnected world – one study showed 94 directors holding 266 directorships in 22 corporations.

But the real point is that they are doing very well. The number of billionaires in the world grew from 225 in 1996 to 946 in 2006. These are the customers for $45 million personal Gulfstream jets. They control two-thirds of the world’s total assets. They are the reason why house prices are so high in London and the south-east.

All this explains to some extent the vast transfer of public money to the banks from 2008 onwards, but we all know about that (£1.5 trillion in the UK alone). What is less understood is that there is something bigger going on: a huge transfer of assets from the middle classes to the new elite. Labour’s business secretary Peter Mandelson once said that the Labour Party was ‘intensely relaxed about people getting filthy rich’, but actually it does matter. House prices are higher as a result, the salaries of those lower down the food chain are squeezed, pensions are top-sliced, while the financial class has become a new kind of landlord, living off the rents and charges of the financial system which funnel wealth upwards – while real wages, and real salaries, haven’t risen in real terms since 1970, and since 1960 in the USA where the process is most established.

This all sounds a little like a conspiracy theory, but the figures are stark. And although the phenomenon is hardly ever discussed in the media, it is discussed among the very rich. In 2005, the first of three reports was published privately by the US banking giant Citigroup, especially for their wealthiest clients; they coined a word to describe the phenomenon and tried to explain it. The first report was called ‘Plutonomy’, and it explained the idea like this:

The world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the US. We project that the plutonomies (the US, UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization. In a plutonomy there is no such animal as ‘the US consumer’ or ‘the UK consumer’, or indeed the ‘Russian consumer’. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the ‘non-rich’, the multitudinous many, but only accounting for surprisingly small bites of the national pie …

Two more reports followed in 2006, explaining that plutonomy was a result of a kind of financialization of the economy – a huge expansion into financial assets, which are the target for investment rather than real assets, and which the financial sector repackages and repackages, inflating their prices each time. When the financial bubbles burst, they buy back the assets again at a lower cost. Even bursting bubbles make the One Per Cent better off. This is helped by the fact that the most powerful governments of the world see the value of those assets – property, bank shares etc. – as the touchstone of economic success, which is why so much of the banking bailout was designed to reflate their value.

Citigroup came to regret publishing these reports, presumably because it encouraged the idea that they were cheerleaders for plutonomy. Over the years, copies began to leak out via the Internet, much to their horror. There was a concerted attempt to suppress them. By 2010, Citigroup lawyers had managed to remove them all from the Web, only to find them seeping back again. The revelations are important because not only are these vital resources sucked out of the middle classes, just as they are sucked out of all classes, they also affect the middle classes in other ways. Unless they work in the financial sector themselves, they find their factories and real-world businesses starved of investment and their professional skills automated.

Even so, it isn’t really a conspiracy. It is a peculiar twist of the way our economy has become unbalanced towards financial products rather than real ones, and it is a real phenomenon. It is a practical acceleration of the division between two worlds – one where money is infinitely elastic and where mistakes get bailed out, and the world of the rest of us, including the indebted middle classes, for whom money is concrete and unforgiving. There is something about the frenetic generation of outsourcing, streamlining and offshoring, and the whole business of permanent restructuring, that has quietly shifted power and profit away from the middle classes. ‘Instead of democracy widening and deepening as we had hoped,’ writes the eminent Conservative writer Ferdinand Mount, ‘power and wealth have slowly and unmistakably, begun a long migration into the hands of a relatively small elite’.

When 1 per cent of the world owns a quarter of all the wealth, leaving the middle class scrambling for the crumbs that fall from the rich man’s table, then a different kind of lifestyle becomes necessary. Over the past generation, it slowly began to dawn on the English middle classes – who believed with some reason that the financial service professionals and their institutions were firmly on their side – that it wasn’t like that at all. Something had shifted, very quietly, very dangerously, and actually the signs were there a generation back.

Christopher Stockwell was a successful businessman and property developer. He was the very model of middle-class success, the son of a clergyman and an innovative campaigner for development causes in his youth. But in the mid-1980s he began to be sucked into the peculiar – and now largely forgotten – story of financial incompetence and staggering callousness (and probably worse) at the ancient insurers Lloyd’s of London. Within a few years, he had been made bankrupt, lost his home and found himself at the head of a campaign to unravel what had happened to so many ordinary middle-class families, and get them some kind of redress.