Obama and Romney can’t do much to aid the middle class. They face a dilemma. The middle class can’t regain its self-confidence and financial health without a strong economic recovery. But the economy can’t recover strongly without a financially healthy middle class, which provides most consumer spending. Not surprisingly, the economic expansion is glacial. Household debt is reduced gradually. Wealth is slowly rebuilt through higher saving and stock prices — and the hope that home values will follow.
There is also a larger conflict. Sooner or later, broad-based tax increases will be needed to reduce budget deficits. How large depends on how much federal spending is cut. This creates an unavoidable conflict between workers and retirees, because workers are the biggest taxpayers and retirees are the biggest beneficiaries of federal spending. Which middle class deserves support? Cut Social Security and Medicare and help workers. Raise taxes and help retirees.
For now, what’s telling is the resilience of middle-class norms. About 11 million homes are “underwater,” reports CoreLogic: Their mortgages exceed their values. Still, most owners make monthly payments even though defaulting might be advantageous.