“It has been my experience that bankruptcy is a devastating experience for a person. I have seen many tears shed in my office—I have seen grown men sobbing,” says Terrie Harman. A Portsmouth bankruptcy attorney, Harman is a daily witness to the darker side of today’s middle and working class economic reality—continued job insecurity, real wage stagnation, significant jumps in the costs of transportation, home heating, health care and education, an uncertain housing market and an increasingly untenable debt position.

Despite a reportedly strong economy, the forecast looks increasingly bleak for the middle class.

For some, the situation became even more extreme when the new bankruptcy reform bill went into effect on Oct. 17. Because the bill has made individual bankruptcy more punitive, people who saw bankruptcy in their future raced to file under the old law, resulting in an onslaught of filings all over the country.

Also on Oct. 17, the Office of the Comptroller of the Currency initiated a plan that required credit card companies to reduce their current payback periods from 20 years to 7-10 years by the end of the year. For everyone with a card, this means their monthly minimum credit card payment is about to double.
These sweeping changes will affect more than the usual high-rolling scofflaws. Over the past decade, and especially during this current housing market boom, the average American has taken on unprecedented levels of debt. Why? Because their inflation-impacted incomes do not cover the cost of living a basic American life.

According to the Federal Reserve, total consumer debt increased from $7.6 trillion in 2001 to $10.2 trillion in 2005—a 63 percent increase and over 90 percent of total U.S. GDP. In 2001, consumers had borrowed a total of $464.5 billion in mortgages. By the second quarter of 2004, that number was $892 billion—an increase of 80 percent. Outstanding balances on credit cards have risen to more than $800 billion, or $7,200 per U.S. household, triple the amount in 1989. The United States debt-to-income ratio rose as much in the past five years as it had done in the previous 15 years.

A new report entitled “The Plastic Security Net,” published last month by two think tanks, Demos and the Center for Responsible Lending, is a national survey on credit card debt among low- and middle-income households—those whose incomes are between 50 percent and 120 percent of local median income. The survey provided new information about why households are in credit card debt, how long they have carried their debt and the impact this debt has had on their economic security.

The survey revealed how many families use their cards to purchase essential items. For example, seven out of 10 households reported using their credit cards to cover “safety net” expenses—car repairs, basic living expenses, medical expenses or house repairs. One out of three households reported using credit cards to cover basic living expenses—such as rent, mortgage payments, groceries or utilities— because they didn’t have money in either their checking or savings account an average of four out of 12 months. Only 12 percent of households did not report any type of safety net usage.

The report also took a look at the critical use of homeowner equity to cover rising levels of household debt. While this can help a consumer break the cycle of credit card debt, the act, in effect, takes money out of a wealth-producing asset and transfers it to pay off short-term debt. The survey found that 40 percent of the homeowners in the survey had refinanced or secured a second mortgage during the past three years. Over half of them used proceeds to pay down credit card debt, paying on average $12,000.
Many Americans have fallen into debt to make up for the loss of income or cover extraordinary events, such as an illness; of course, there is also misuse of short-term debt and some consumers have made some incredibly bad decisions. “Thirty and Broke,” an article published this week in Business Week Online, delves into the lasting impact of student loans and credit cards on 30-something Americans. “Last year 76 percent of college students had credit cards and their average debt was $2,169. ‘We wink at the magical thinking that credit-card companies encourage us to engage in,’ says Darryl Dahlheimer, a program manager at Lutheran Social Service Financial Counseling in Minneapolis. “The bitter 30-year-olds are the ones who are still paying off the pizza they ate when they were 20.”

And it goes without saying that consumers’ over-reliance on credit cards and the home-equity debt market is tied to the fact that, as a nation, Americans no longer save. Reckless, perhaps lazy, or perhaps counting on too little income to cover too many basic expenses—the reasons are too great to discuss here. Whatever they are, in August, on a national level, the nation’s savings rate officially hit zero. By the end of 2005, the United States may record a “negative” savings rate, which hasn’t happened since the Great Depression. As dangerous as this may seem, American consumers continue to whistle past the graveyard, use their credit cards as an emergency safety net and hope that the rising value in their home will pay for a retirement. Which brings up the decline in worker pensions. With a minority of Americans now covered by traditional pensions, the 401k is now the retirement savings plans of choice, though experts claim that the majority of these plans will never have sufficient assets necessary to fund comfortable retirements. One wonders if Americans plan to charge their retirements as well.

In the long run, the heavy debt loads are weakening our future.

The bankruptcy reform bill makes filing under Chapter 7 a great deal more difficult, forcing more individuals to file under Chapter 13 bankruptcy provisions. Under a Chapter 7 bankruptcy, a persons’ assets (except for those exempted by state law) are liquidated and given to creditors, with many of the remaining debts cancelled. Chapter 7, in effect gives a person a fresh start in life.

Under a Chapter 13 bankruptcy, a person is put on a repayment plan of up to five years. Lobbied heavily by the financial services industry for over eight years, proponents say the law will prevent consumers from abusing bankruptcy law and get out of paying for debts that they can clearly afford. But detractors find it highly ironic, if not hypocritical, that after actively pursuing so many people for their debt services and allowing them to extend their credit past the ability to pay,  the credit card industry sought to place more of their customers under punitive bankruptcy provisions to ensure spending discipline. Consumer groups also note that the credit card industry will be the biggest benefactor of the bill, as it is expected to earn more than $1 billion from repayment plans due to the switch to Chapter 13 filings.

These changes, explains Terrie Harman, reduce the remedial reasons for bankruptcy law. Harman, who started her legal career providing legal assistance to indigent people, said she became a bankruptcy attorney because she likes helping people, and “bankruptcy (Chapter 7) was a remedial event. For the debtor could start over with a clean slate, and the creditor in the business community would get a tax write-off and could remove a long term receivables off their books.”

Harman believes that the new legislation promotes a misperception that debtors are abusing credit. She also finds the new requirement that all filers attend credit counseling sessions misplaced. “It has been my experience with my debtors that they haven’t had trouble with credit card balances. Some don’t even use a credit card. The bill is trying to fix something that isn’t broken.”

Harman will be watching very carefully to see what the real impact of the bill will be on debtors and consumers. Because “the financial service industry got what it wanted,” she hopes that consumers might see a reduction in interest rates and a reduction of predatory lending practices that ensnarl consumers in the first place. Though, she concludes, “I’m pessimistic that this will happen.”

how did we get here?
Why do we owe so much? Despite a growing economy, we’re not making as much as we used to. We don’t even, it would seem, make enough to live the lives of our parents.

The U.S. economy has experienced continuous growth, with a current rate of 3.8 percent annually, for over three straight years. Over the same time period, unemployment has dropped from 6 percent two years ago to just over 5 percent today. As for New England, the Granite State is its economic star. According to an economic forecast released last Wednesday by the New England Economic Partnership, New Hampshire “is forecast to lead the way (in 2006) in gross state product (for New England), with an annual growth rate of 3.5 percent compared with 3.1 percent for the region.”

But any discussion of the consumer pocketbook must include the impact of inflation. As of Oct. 31, the overall consumer price index is up 4.7 percent, the biggest 12-month change since June 1991. A 34.8 percent rise in energy prices over the last year is responsible for the big jump. This was substantially larger than the 3.3 percent rise in average weekly earnings or the 2.7 percent gain in average hourly pay over the same period. Though gas prices at the pump continue to fall because consumers began to conserve gas after Rita, the brunt of winter has yet to hit. Home heating oil and natural gas are expected to rise in a range of 30 to 70 percent.

When the Bureau of Labor Statistics adjusts for inflation, both wages and compensation (wages plus benefits) are losing growth in real terms, down 2.3 percent and 1.5 percent respectively, as slower nominal wage growth is colliding with faster inflation. “In both cases, these are the largest yearly real losses on record,” concludes a review of the recent Bureau of Labor Statistics employers cost report (Oct. 28), by the Economic Policy Institute.

People who rely on wages as their main source of income are losing ground. And they’ve noticed. In August,  a Hart Research national survey of American workers revealed that a majority (53 percent) of workers say that their income is not keeping up with prices. Five times as many workers are claiming that they are falling behind than feel they are getting ahead.

But why, with relatively low unemployment numbers and a growing economy, are worker wages stagnant?

One reason, explains Ross Gittell, professor of management at the University of New Hampshire Whittemore School of Business and forecast manager for the New England Economic Partnership, is that during the current economic growth cycle, American businesses have become more productive. They need less labor and are less likely to give in to normal wage increase pressures that usually occur during a relatively tight labor market. The reality of globalization, and the ability of companies to outsource a range of jobs to highly skilled, but much cheaper, workers abroad, has inhibited U.S. worker demands for higher wages, according to Gittell.

The unemployment rate may also under-identify the number of unemployed. The U.S. employment rate does not count workers who, after a long stint of unemployment, choose to drop out of the labor market though they may still desire work. The uncounted unemployed may be found through the labor participation rate, which measures the percentage of civilians either working or actively seeking jobs. The current labor participation rate is 66 percent, still 1.2 percent below the peak rate reached in March 2001, when the last recession began, according to a recent paper by Katharine Bradbury of the Federal Reserve Bank of Boston.

Based on previous economic cycles, it is “untypical” for the participation rate to remain basically flat four years after the end of a recession. Considering average trends for the previous eight economic recoveries starting in 1948, Bradbury calculated that there could be as many as 5.1 million fewer Americans participating in today’s labor force than are accounted for by the official participation rate. If those 5.1 million people were added to the 7.9 million Americans officially described as unemployed, the U.S. unemployment rate would be closer to 8 percent. If the unemployment rate is actually three percentage points higher than is being reported, then business can continue to grow without parallel growth in wages or benefits.

None of this takes into account the impact of the so-called “underemployed,” the people who would leave their low-paying, usually service jobs, if they could find a better-paying one.

The bottom line for middle America is, despite official pronouncements on low unemployment, there is enough “labor slack” in the U.S. economy to suppress appreciable increases in workers’ wages for the foreseeable future.

Another blow to both the pocketbooks and the morale of the middle class is the rising cost of health care. For many, good health care is becoming more of a privilege than an assumed fact of middle American life.

An Aug. 30 report from the U.S. Census Bureau confirmed a rise in the number of uninsured Americans. In 2004, the number of uninsured rose to 45.8 million as compared to 45 million in 2003 and 39.8 million in 2000. Nineteen percent of this number were working adults (18 to 64), a 750,000-person increase from 2003. The bottom line: six million more people lacked health care in 2004 than in 2000.
As was the case with 26 other states, the August U.S. Census Bureau report stated that New Hampshire experienced a rise in uninsured residents, 16 percent from 2003 to 2004.

To have the medical coverage of a working man from a generation ago, Americans today must spend money like a rich man. For some, the price for wellness, or a few added years of life, can lead to financial ruin.

The annual Kaiser Family Foundation survey, considered the definitive survey of employer-employee health care cost, noted in its September 2005 report, that the 2005 premium price growth rate of 9.2 percent outpaced both the growth in U.S. wages (2.7 percent) and inflation (3.5 percent). Since 2000, premiums for family coverage have gone up by 73 percent, while during the same period, wages rose 15 percent. After the health insurance premium is deducted from their paychecks, American workers are taking home less money each week.

To further illustrate how expensive health care insurance is for Americans, the Kaiser study stated that, in 2005, the average cost of annual premiums for family coverage is now $10,880. Amazingly, this is more than what a full-time minimum wage worker makes in one year. Of course, employees pay, on average, only $2,713 of that bill, but that’s $1,094 more than five years ago. And this figure doesn not include the amount of money an insured worker pays for office co-pays and deductibles.

Some economists define the middle class as those whose annual household incomes fall between $25,000 and $75,000; others set the upper income limit at $140,000. Another definition includes all households with an income between 75 percent and 125 percent of the median household income ($44,389 in 2004). Then there is the definition that breaks U.S. household income down by quintiles, with the first quintile containing the lowest incomes and the fifth quintile containing the highest. The two through four quintiles are the realm of the middle class.

Perhaps as much as economics, though, the middle class defines itself by access to higher education.
In its annual report on the costs and benefits of higher education, released in October, The College Board, a nonprofit association of 4,500 colleges and universities, analyzed the lifetime earning trends of those who earned a bachelor’s degree.

In 2003, workers with bachelor’s degrees earned a median of $49,900, while those with a high school diploma averaged $30,800. The study also stated that based on a 40-year projection, a college graduate will earn approximately 73 percent more than a high school graduate.

The challenge for middle class families today is finding the money to pay for that critical degree. The same College Board report also states that for the 10th straight year, the increase in college tuition outpaced the U.S. inflation rate. Today, the full cost of tuition is $29,026 per year on average at private colleges and $12,127 at four-year public universities. Multiply these costs by four years, and the price of a four-year degree can be in the six figures.

Given these sticker prices, 63 percent of students do receive some form of aid, including grants and loans. Over the last 10 years, the amount of federal aid has increased by $8 billion, while loans to students from colleges and universities rose $11 billion. However, the amount and percentage of grant money, as compared to the amount of student loans, has dropped over the same time period. The 2004-2005 increase in inflation-adjusted grant dollars was the smallest in the past decade, and grants represent a smaller percentage of students’ aid package. The College Board also found that the average debt for graduating college seniors who borrow to finance their undergraduate degree is just under $20,000. And loans from private sources, often based on interest rates greater than those offered by federal programs, are growing more common.

For students attending post secondary education in New Hampshire, affordability is a major hurdle. According to “Accessing Higher Education in New Hampshire,” a 2005 White Paper prepared by state Sen. Robert Odell for the New Hampshire Legislature, the report states that New Hampshire ranks third highest in the nation in tuition and fees at comprehensive state colleges and universities, and that over 42 percent of N.H. residents seeking financial assistance cannot even cover the average costs (full-time tuition and fees) charged by our state’s Community Technical College system Not surprisingly, an estimated 50 percent of New Hampshire students chose to enroll in out-of-state colleges and universities.

The ability to afford a college education is not just an issue for individual families. It has national economic implications as well. If more high school graduates opt out of a college education because of an inability to pay, U.S. businesses will have access to fewer skilled workers and will be less competitive in the global marketplace.

from housing bubble to house of cards
One pillar of the middle class that has stood firm up to now has been home ownership; never before have so many Americans—close to 69 percent—been home owners. Consumers over the past four years have ridden an accelerated wave of housing sales and increased property values. The hot housing market, often termed “the housing bubble,” has had a major impact on the structure of today’s U.S. economy.

The hot housing market has created a “wealth effect” that has contributed significantly to consumer spending, the engine behind U.S. economic growth. According to Richard DeKaser, chief economist for National City Bank in Cleveland, by turning home equity into cash, homeowners have spent an average of 5 cents for every dollar in increased home value as compared with 3 cents for every dollar in the increased value of stocks and bonds. Federal Reserve Chairman Alan Greenspan has also stated that “a significant amount of consumption” has been fueled by homeowners taking equity out of their residences.

The housing market also spurred needed job creation. It has been estimated that employment in the housing and related industries accounted for 43 percent of the increase in private sector payrolls since the economic recovery began in November 2001. Jobs were created in banks and home mortgage companies, at home repair stores like Home Depot, and in thousands of construction, real estate, landscaping, and interior decorating companies.

However, home owners should be mindful of the most basic law of both physics and economics: “what goes up, must come down.” Given the number of households dependent on the housing market and their homes for both long-term wealth and short-term cash flow to pay for basic expenses, a steep deflation of the housing bubble would have a considerable negative impact on both individual households and the economy. That said, there are new indications that the  housing bubble in both New Hampshire and across the country is beginning to deflate.

No matter how it defines itself, middle America is groaning under the strain of financial obligation. A record number of Americans have turned to the debt markets to cover essential purchases; consumer spending is the basis for 70 percent of the U.S. economy; 40 percent of new jobs are dependent on a debt-driven housing bubble; individual credit card debt has replaced portions of the traditional state and federal safety net; and people are investing in homes as a replacement for saving for retirement. After more than a decade of providing mountainous profits for the credit card industry, middle America is now up against the wall of its own debt position, cornered by new bankruptcy laws and with very little new income growth for wiggle room.