April 24, 2007
UI Professor: American Middle Class In Trouble
A University of Iowa sociologist is studying how middle-class Americans might appear to be thriving financially -- driving new vehicles, living in large homes and wearing snappy clothes -- but in reality are increasingly dependent on credit and debt to support their lifestyles.
Kevin Leicht, professor of sociology in the College of Liberal Arts and Sciences and co-director of the UI Institute for Inequality Studies, says the economic standing of the American middle class has plunged in the past three decades.
Leicht writes about the issue in his most recent book, "Postindustrial Peasants: The Illusion of Middle-Class Prosperity" (Worth Publishers, 2007). He co-authored the book with Scott Fitzgerald, who earned a doctorate in sociology from the UI and is an assistant professor at the University of North Carolina.
"There's plenty of blame to go around" for the plight of the middle class, Leicht said. The book addresses several factors affecting the economic status of the middle class: globalization trends of the 1990s leading to job instability, rising college and health care costs, tax breaks favoring the wealthy, including loopholes for corporations, uncertainty about the future of Social Security and pension plan cuts.
Another issue is deregulation of the banking industry in the 1980s, which Leicht said paved the way for transformation of the consumer credit landscape, leading to a dramatic rise in types of credit available and profitability of lending.
With deregulation, home equity loans, leased vehicles, car title loans, pawnshops and rent-to-own stores have become popular ways for middle-class Americans to fall further into debt. According to the book, the number of pawnshops has nearly tripled, rising from 4,849 in 1985 to about 14,000 in the late 1990s. Rent-A-Center grew from 27 stores in 1993 to more than 2,000 stores in 2000.
Americans have been able buy homes with no money down, borrow more than the value of a home or take on exotic mortgages. Some have gotten into trouble, Leicht said, by buying more home than they can afford or taking on adjustable-rate mortgages where they can afford initial payments but not balloon payments.
"We don't say that credit is bad. The deregulation of credit and banking has done plenty of good things, like allow people to buy homes who wouldn't have had that opportunity in the past. However, the changes have also provided infinite opportunities for people to get themselves into financial trouble," Leicht said. "There's nobody looking over your shoulder to tell you to stop borrowing money anymore. In the '60s and '70s, there would have been a banker saying, 'You know, you shouldn't borrow more money.' Now, you can really end up in a rut."
Leicht also looked at how middle-class Americans get in over their heads with credit cards. Aggressive marketing has fueled the use of credit cards. In 1998, credit card companies sent nearly 3.5 billion "pre-approved" offers to nearly three-quarters of U.S. homes. Today, consumers can expect to receive between 35 and 75 of such offers per year. Some companies have targeted youths. In 2004, Sanrio introduced a "Hello Kitty" debit card geared toward 10- to 14-year-olds.
"I think a dog could get a credit card offer if his name sounded somewhat human," Leicht said. "Congratulations, George the Great Dane! You've earned it!"
According to the book, average U.S. credit card debt per household rose from $4,000 to $9,000 from 1990 to 2004. More families are using credit cards and failing to pay them off. In 1970, half of families used credit cards; by 2001 three-quarters did. In 2004, 62 percent of bank credit card holders carried debt from month to month, instead of paying them off at the end of the billing cycle.
Leicht also found that families are working more and saving less. Between 1970 and 1997, average for-pay hours per week worked by all married couples rose from 52.5 to 62.8, and the percentage of families in which both husband and wife worked for pay rose from 35.9 percent to 59.5 percent. Meanwhile, the savings rate peaked at about 11 percent in 1973, then dipped to about 2 percent in 2004.
"We're trying to get people to realize that the middle class needs some help policy-wise," Leicht said. "Someone's got to decide that good jobs with good wages are a family value. Find the politician who will do things to economically help the middle class, and don't accept conventional answers on how to do that."
The book challenges consumers to be reasonable about what they can afford and to carefully read fine print for loans and other forms of credit.
"When borrowing money, people need to back off on whatever assumptions they are making about future income," Leicht said. "Jobs are unstable, marriages don't work out, people have health problems. You have to watch out for yourself."
STORY SOURCE: University of Iowa News Services, 300 Plaza Centre One, Suite 371, Iowa City, Iowa 52242-2500.