The Fragile Middle Class Hear the Cracking

Journal Issue

Sep 2002

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In April's Consumer Corner, we began to consider whether the middle class is about
to shatter. While the April article examined the trend between 1980 and 2000,
this article focuses on the 90s—a decade that saw bankruptcies explode during an
eight-year period of sustained economic growth.

The downward trend in business vs. the upward trend of non-business bankruptcies
indicates that the economic growth of the 90s benefitted businesses to a greater
extent than it did wage-earners and salaried individuals (the majority of consumer
bankruptcies). Other data indicate that, while the middle class may have been left
behind in terms of income growth, with respect to spending habits they stayed the
course, blissfully continuing their spending spree.

<ol>
<li>Consumer bankruptcies increased from 8.78 per thousand households in 1995
to 11.14 per thousand households in 1996, increasing to 13.46 in
1998, then falling to 11.45 in 2000 (Table 1).

</li><li>Between 1990 and 2000, business bankruptcies decreased from 64,853
to 35,472, while non-business bankruptcies increased from 718,107 to
1,217,972. Non-business (consumer) bankruptcies increased from 91.72
percent of the total bankruptcies filed in 1990 to 97.17 percent in 2000
(Table 2).

</li><li>Between 1990 and 2000, personal consumption (spending) increased from
66.02 to 68.25 percent of the gross domestic product (Table 3).

</li><li>Between 1990 and 2000, average consumer debt increased from 21.76
to 34.73 percent of median consumer income (Table 4).

</li><li>Between 1990 and 2000, employee compensation (the group within which
the bulk of the middle class fall) decreased from 72.19 to 71.61 percent
of national income (Table 5).

</li><li>Disposable personal income, after rising between 1980 and 1990,
decreased from 87.57 to 84.52 percent of personal income (Table 6).<a href="#2" name="2a">2</a>

</li><li>The percentage of personal disposable income spent increased from 92.21
percent in 1990 to 99.04 percent in 2000, with a corresponding decrease
in savings (Table 7).
</li></ol>

<hr>
<big><center>
Individual bankruptcies may serve as a societal
safety valve. Debt is not spread evenly over
the spectrum of the middle class: Some have
little debt, while others are over-encumbered.
</center></big>
<hr>
</blockquote></blockquote>

The income, spending, savings and debt increase of employees and proprietors in
1991-2000 was (in billions of dollars):

<ul>
<li>Aggregate Disposable Personal Income: $56,403.2

</li><li>Spent: $53,594.2 (95.02 percent)

</li><li>Saved: $2,809.0 (4.98 percent)

</li><li>Increase in Total Home Mortgage Debt: $2,409.8

</li><li>Increase in Home Equity Mortgage Debt: $394.6

</li><li>Increase in Consumer Debt: $768.8
</li></ul>

Compare this to 1981-90 (in billions of dollars)

<ul>
<li>Aggregate Disposable Personal Income: $31,999.1

</li><li>Spent: $29,227.2 (91.34 percent)

</li><li>Saved: $2,771.9 (8.66 percent)

</li><li>Increase in total Mortgage Debt: $1,597.2

</li><li>Increase in Home Equity Mortgage Debt: $235.9

</li><li>Increase in Consumer Debt: $439.9
</li></ul>

In the 80s, individuals saved $2,096.1 billion more than the increase in
combined consumer and home equity debt; $734.7 billion dollars more than the
combined increase in total home mortgage debt and consumer debt. In the 90s, the
differential between savings and combined consumer and home equity debt decreased to
$1,645.6 billion, while increased total home mortgage debt plus consumer debt
exceeded savings by $369.6 billion. It is also important to note that
$1,754.1 billion of the $2,809.0 (62.45 percent) saved in the 90s
was saved in the first half, and only $1,054.9 billion in the second half.
During the second half-decade, consumer debt plus home equity debt increased by
$803.3 billion and total debt by $2,020.6 billion. Despite a robust
economy throughout most of the 90s, in the second half the increase in debt exceeded
savings. While the relative income of wage earners and salaried individuals decreased,
non-farm proprietors' income (the other significant component of personal income)
increased by 1.09 percent of personal income in the 90s, compared to 0.06
percent in the 80s (Table 8).

<h3>Interpreting the Data</h3>

What does this tell us? First, consumer spending constitutes a greater share of
the Gross Domestic Product, but many, if not most, consumers may be realizing a
lesser share of national income. Second, consumer debt is increasing at a rate
significantly greater than the rate at which income is increasing. Third, consumers
increased spending so much that in 2000, they spent nearly their entire income—all
but ceasing to save. Since 1929, only 1932 (-0.8 percent) and 1933
(-1.5 percent), the height of the Great Depression, have shown a lower personal
savings rate. Even 1930 and 1931 had savings rates of 4.3 and 4.0
percent respectively, and 1934 had a savings rate of 1.2 percent.<a href="#3" name="3a">3</a>

The second half of the 90s defies logical explanation. With a sustained period
of steady economic growth, one would expect the number of consumers encountering
financial difficulty to decrease. Yet, in the middle of economic growth, personal
bankruptcies skyrocketed, and stayed at historically high levels through the rest of the
decade. Paradoxically, during the same five-year period, instead of "tightening its
belt" the American consumer continued spending, with borrowing exceeding income by nearly
a trillion dollars. At the end of the decade, the economy stalled, beginning a
relatively mild recessionary period. In 2001, a record number of non-business
bankruptcies were filed; indeed, the non-business bankruptcies alone exceed the total
bankruptcies filed in the previous record year, 1998. [Preliminary numbers indicate
that the filings per thousand households rebounded to approximately 13.5, equaling
or exceeding the 1998 level.]

<h3>Implications</h3>

Where does that leave the American middle class? The sky is not yet falling, nor
should it. However, a significant thunderstorm has formed on the horizon, and is
rapidly approaching. As with many thunderstorms, this one may spawn tornadoes in
the form of personal bankruptcies that, like tornadoes, sporadically and randomly
strike. While it may not be the "perfect storm," it very well may be within the
category of a 100-year storm.

Just as there is a limit on the ability of an individual to spend and borrow
before outgo exceeds income (bankruptcy), logically there should likewise be a societal
limit. The unanswered questions are these: What is that limit, and what happens if
it is reached? I do not profess to be wise enough to answer either question. But
I do question whether the limit, whatever it may be, will ever be reached.
Individual bankruptcies may serve as a societal safety valve. Debt is not spread
evenly over the spectrum of the middle class: Some have little debt, while others
are over-encumbered. As over-encumbered individuals reach the point of bankruptcy,
debt is discharged, the over-encumbered get a fresh start, relieving societal
pressure.

The real danger may lie in reducing the ability to relieve the pressure of mounting
societal debt. Those of us who have represented individual debtors have seen first-hand
the debilitating impact the burden that excessive debt can have. People frequently cease
to function efficiently, which only exacerbates the situation: It tends to become a
downward spiral at an ever-increasing velocity. We have also seen many of those people
rebound to a former level of productivity when the pressure of excessive debt burden
is removed. If the number of individuals reaching the point where debt burden is
overwhelming rises too high without the "safety valve" bankruptcy provides, the resulting
long-term decrease in productivity could spell economic catastrophe.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> The author is a private practitioner in Anchorage, Alaska, with 22 years of bankruptcy practice experience. He is vice chair
of ABI's Consumer Bankruptcy Committee and is board-certified in business and consumer bankruptcy law by the American Board of
Certification. <a href="#1a">Return to article</a>

<a name="2">2</a> Disposable personal income is total income (employee compensation plus proprietor's income) less personal tax and non tax payments. <a href="#2a">Return to article</a>

<a name="3">3</a> Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table
4.—National Income and Disposition of Personal Income (August 2001). <a href="#3a">Return to article</a>

4 Source of household data: Bureau of the Census. Source of filings data: Administrative Office of the U.S. Courts (AOUSC).

5 AOUSC.

6 Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table 1—Gross
Domestic Product (August 2001).

7 Source of income and household data: Bureau of the Census, and consumer debt: Federal Reserve. Household consumer debt is
computed by dividing the total consumer debt reported by the Federal Reserve by the number of households used by the Census Bureau.

8 Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table 4.—National Income and Disposition of Personal Income (August 2001).

9 Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table 4.—National Income and Disposition of Personal Income (August 2001).

10 Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table 4.—National Income and Disposition of Personal Income (August 2001).

11 Bureau of Economic Analysis—Survey of Current Business, GDP and Other Major NIPA Series, 1929-2001:I, Table 4.—National Income and Disposition of Personal Income (August 2001).

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Journal Authors

Thomas J. Yerbich

Journal Date

Sunday, September 1, 2002 - 12:00

Bankruptcy Rule

2002