Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

Upper-Middle-Class Dropouts
Forbes ^ | 6/23/03 | Rich Karlgaard

Posted on 06/19/2003 8:04:02 PM PDT by technochick99

The Smith family--yep, like Jayson Blair, I'm making this up--lives in Redwood City, 20 miles south of San Francisco and on the northern edge of what is known as Silicon Valley. The head of the household, John, works as a software coder at Sun Microsystems. He's a good coder but not a superstar on the level of Sun's cofounder, the legendary Bill Joy. John Smith makes $95,000 a year, which sounds plentiful to most Americans. In truth, it doesn't go too far in Silicon Valley, where the cost of a modest 1,900-square-foot house with three bedrooms and one and a half baths crowded onto an 8,000-square-foot lot is--hold your breath!--$786,000. But that's the house where John, his wife, Rosa, and their two children live.

Rosa met John at Sun, back in the early 1990s. She was a newly minted English major writing brochure copy for $38,000 a year; John was making $80,000. After marrying, John and Rosa's combined income was $118,000, plus bonuses. With one child on the way, that was a pretty good sum.

Even better financial conditions lay ahead for the Smiths. After Sun's stock started on its rocket ride during the late 1990s, John's options were worth $360,000. Wisely, in 1999 he and Rosa decided to exercise and sell half their options, using the aftertax $142,000 of their capital gains proceeds as a down payment on their first home in Redwood City. They purchased it for $420,000, which left a mortgage of $278,000. With John's $80,000 base salary (not counting bonuses that averaged $40,000 a year--an amount equivalent to the salary of Rosa, who had quit her job upon learning she was pregnant again), monthly payments were a snap.

Good times rolled for John and Rosa Smith. A second child arrived, and so did job opportunities for John. He weighed offers from software giant Oracle, as well as from three dot-coms--two of which were backed by brand-name venturecapital firms and looked like sure bets to do an IPO and make their early employees rich. This was a heady experience. John decided to stay put because Sun kicked up his base salary to $95,000. John's boss at Sun also granted John more options, a six-week sabbatical and more flex time. Now that was a package!

John felt like a master of the universe! Every employer inSilicon Valley wanted him. He was calling his own shots. The money was pouring in. The Smiths were almost millionaires--on paper, anyway. It was time to trade up to an executive-style house. Time to apply to a private golf club. Time to think about private schooling for their oldest daughter, Kirstin, now 5.

Slide Down the Matterhorn

Sun's stock peaked at $65 in September 2000--six months after the Nasdaq stock composite index peaked at 5031--and the Smith family's paper worth climbed to more than $1 million. John felt like a million bucks. When Sun's stock sagged to $40 in November, he wasn't too worried. The Smiths were in good shape. John's weighted average option strike price at Sun was, after all, $22. The Smith family's paper net worth might not have been $1 million anymore, but it was easily three-quarters of that, counting their home. Thus buoyed, John flew his family (business class) to Italy, where they enjoyed their six-week sabbatical, and spent $45,000.

But Sun's stock kept falling. And falling. It fell so fast that John and Rosa felt paralyzed and missed the opportunity to exercise their options and sell. When Sun's stock fell below John's weighted average strike price of $22 in early 2001, John realized that his Sun paper wealth had vanished. Another type of compensation also vanished later that year--John's bonus. Sun suspended bonuses in 2001, and again in 2002. By then, the company's stock price was hovering around $3.

The Smiths were lucky in two respects. They had their home. And John still had his job, with its $95,000 income. But now this income had to support the entire Smith family concern. Out of the $95,000 had to come the money for taxes, food, clothing, the monthly mortgage, insurance, preschool payments and vacations. Reluctantly, the Smiths put Kirstin in public school. The closest the Smiths came to Italy in 2002--and again in 2003--was a wet slide down the Matterhorn ride at Disneyland. The Toyota Sienna minivan that propelled the Smiths to Disneyland was paid for, but it had 107,000 miles on it and smelled like sour milk.

At work, John no longer feels like a master of the universe. He feels lucky to have his job. He suddenly feels like a commodity, and he doesn't like that feeling one bit. During the last three years, thousands of software jobs like John's have migrated to Bangalore, India. John is so worried about his job that he doesn't take the flex time promised to him. He doesn't sleep well. After two hours of coding at work, the trapezius muscles connecting his neck to his shoulders feel as hard as cast iron. He would like to go for a sauna and a massage, but the $95 that costs would blow the Smith's weekly budget.

The Smiths have dropped out of the upper middle class. Should we feel sorry for them? To be a middle-middle-class American in the early 21st century is to occupy the 99.99 percentile of human existence, in terms of nutrition, wealth and ease. But the Smiths don't feel that way. For a few years in the late 1990s the Smiths had tasted something better. They were upper middle class, or at least close enough to feel like it. They miss that. They are frustrated. They want back in.

Millions of American families are just like the Smiths. Politicians, take heed. The Smiths will decide the election of 2004.


TOPICS: Business/Economy
KEYWORDS: economy
Navigation: use the links below to view more comments.
first previous 1-2021-4041-6061-8081-100 next last
To: Torie
I think it goes far beyond just technology people, in case you haven't been reading other threads on this subject. Accounting and legal jobs are being outsourced, as well as customer service, etc.

The point is that perception can play just a big of a role as reality.

41 posted on 06/20/2003 7:02:48 AM PDT by technochick99 (Self defense is a basic human right. http://www.2ASisters.org julib@2asisters.org)
[ Post Reply | Private Reply | To 38 | View Replies]

To: technochick99
It fell so fast that John and Rosa felt paralyzed and missed the opportunity to exercise their options and sell.

Wow, so now it's Bush's fault that these goofs "felt paralyzed."
42 posted on 06/20/2003 7:05:24 AM PDT by Xenalyte (I may not agree with your bumper sticker, but I'll defend to the death your right to stick it)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Fishing-guy
Why is the housing prices still so high in California? It boggles the mind.

I wonder the same also. In my part of CT housing is thru the roof (not quite as bad as in this article, but still ridiculous). I think it has to do with the extremely low interest rates. I don't see how the high prices can be justified forever though, since I've also been seeing many former white-collar professionals taking jobs at temp agencies and WalMart. For the time being I think a lot of what's driving the high prices is that all of those who got out of stocks w/o losing their shirts are putting that money into real estate. Eventually this demand has to decline, and interest rates have to creep up (with deflation fears) so we may see a shakout in real estate. Just one man's opinion.

43 posted on 06/20/2003 7:19:31 AM PDT by YankeeReb
[ Post Reply | Private Reply | To 20 | View Replies]

To: technochick99
I love to do the math on these stories. First, the net worth numbers. They were worth about $1M, but the house represented around $500k of that. The rest was in Sun stock options which before taxes was let's say $500k. Most options in established companies are the type you pay ordinary income rates on so they really only had about $250k there after tax. They had a mortage of over $250k which a few years ago had to cost them at least $15k a year. Property tax would be about $5k. All the other taxes from a $95k income had to be in the $30k range meaning they had about $45k left to live on with real assets not including the house of only the Sun stock, which isn't exactly money in hand. In spite of this they take a $45k vacation!!! Even flying business class $45k for six weeks is spending nearly $1000 a day! That's Four Seasons living, and an entire year's after tax and mortage income. These people will decide the next election alright, just like they always have. And they're too stupid to be allowed to vote.
44 posted on 06/20/2003 7:41:09 AM PDT by CA_soon_gone
[ Post Reply | Private Reply | To 1 | View Replies]

To: Alberta's Child
This has to be the most bizarre job market I've seen in years. The same big engineering firms in my area that are laying off some of their staff are also posting a bunch of "help wanted" ads in every professional journal I read.

It is odd... I have had my engineering degree for more than 5 years now, and out of three instances of being on the job market, I have yet to get a single offer for a private-sector engineering job. My last two positions have been state government bureaucrat jobs (environmental engineering from a regulatory standpoint), where I can at least get experience toward a PE, but I would have preferred a private-sector position. But I had no trouble at all getting the state jobs -- in fact they were practically begging for engineers. I have yet to figure out why it was so easy to get a gov't job and so hard to get a private job.

45 posted on 06/20/2003 7:46:50 AM PDT by Sloth ("I feel like I'm taking crazy pills!" -- Jacobim Mugatu, 'Zoolander')
[ Post Reply | Private Reply | To 26 | View Replies]

To: Sloth
I have yet to figure out why it was so easy to get a gov't job and so hard to get a private job.

Environmental engineering is probably one of those fields that is more heavily tied to government regulations than others. As a result, you tend to have more positions available in government oversight and/or compliance roles than you might have in other fields.

I wouldn't be so hesitant about taking a government position in a field like yours -- once you get your P.E. (and maybe some work toward a graduate degree as well), you will be a very attractive candidate for a private sector job.

46 posted on 06/20/2003 7:59:34 AM PDT by Alberta's Child
[ Post Reply | Private Reply | To 45 | View Replies]

To: Alberta's Child
The same big engineering firms in my area that are laying off some of their staff are also posting a bunch of "help wanted" ads in every professional journal I read.

At half the pay. My husband works for a HUGE oil company. At his lease, 6 guys all around 50 years old were laid off. My husband was demoted. My husband has been a super star automation guy since Allen Bradley hit the market. A great guy, best in the business.

But this HUGE oil company discovered they could pay a guy just starting out half of what my husband was paid. The best thing of all for this HUGE oil company is that although my husband was demoted and had his pay cut almost in half, in order to keep his crappy new job must help the new kid do my husband's old job. This is a must because the new kid couldn't complete these difficult tasks without my husband's 30 years of expertise.

The good news is that we still have each other and our children and we will have a great life no matter what this HUGE blood sucking bunch of bastards do. It was very difficult for my husband to see a lifetime of achievement and rewards be unfairly taken away from him, but I just keep telling him, "That is your job. We are your life."

47 posted on 06/20/2003 8:08:01 AM PDT by Zevonismymuse
[ Post Reply | Private Reply | To 26 | View Replies]

To: oceanview
I used to own 1/3 interest in a mortgage brokerage. I sold out to my partners and am still friendly with them. They are in the telecom area and do lots of mortgages with hi tech workers. Things are so bad for these guys some can’t qualify to refinance their mortgage.

Guys who were making 90 and 100K are working in fast food joints and convince stores. The ones who bought their houses with 5%, 3%, or 0 down and lost their jobs are hurting even though home prices are up a little here.

I’ve been buying houses for a year now and I get calls every day from people who are laid off, ran through their savings, and can’t find a job that pays enough for them to afford to keep their house. Most of them I can’t help because they need too much to get out. I can buy a foreclosed house from the bank for less than they owe.

I’m also buying rent houses and most of the ones I own were foreclosures. The little guy is hurting too. One REO manager I know real well, told me there is a flood of cheap houses working their way into the pipeline. His said unless the employment picture changes, foreclosures will reach the levels we saw in the 80s. (He is looking at loans his bank is holding where the payments are 2 months, or more, late. These are likely future foreclosures.)

There is a lot of resentment among the high tech people about the HB1 law and the bonuses paid to the corporate big wigs whoses companies are not doing well. There is building resentment among the little people too They are upset about immigrants taking their jobs and the companies who lay them off but pay millions of dollars to the boss.

All of my tenants are black and they complain a lot about Mexicans taking the jobs they used to get. One guy is a carpenter. When I was collecting his rent on the first, he was raising hell about a job he was on where he was the only carpenter who spoke English. He said the contractor hires illegals and pays them cash; he pays no SS tax and no unemployment tax on them. This guy told me he wouldn’t be on the job except the contractor brought him in to redo some cabinetwork the illegals messed up.

All this is going to translate into a political opportunity for someone. It may not boil over for 2004. It may not hit until 2006 or 2008, but is coming. Unless things turn around, people are going to start blaming politicians. When they do, someone is going to feel their pain and they are going to vote for him.
48 posted on 06/20/2003 8:14:49 AM PDT by SUSSA
[ Post Reply | Private Reply | To 28 | View Replies]

To: SUSSA
Let's face it, all of these great technological advances brought about by software and engineering are usually motivated by one goal, to reduce dependency on human labor and skill. Humans are expensive compared to machines, any business owner worth his salt is going to try to minimize costs, and if that means using a machine over a human, that's what they do. Advances in software and hardware mean that we don't need as many skilled programmers as we used to, just "good enough" will do as faster processors and increased memory make systems more forgiving for bad programming.
49 posted on 06/20/2003 8:23:56 AM PDT by dfwgator
[ Post Reply | Private Reply | To 48 | View Replies]

To: Zevonismymuse
I don't mean to diminish the hardship that you are going through, but what you've described here is exactly the risk that one takes when you go and work for someone else. You will always be beholden to your employer, no matter how talented and capable you are.

Is there any way your husband could leave his job and start a small consulting business on his own? His first client would be his old employer -- because it sounds like they really do need him!

50 posted on 06/20/2003 8:24:00 AM PDT by Alberta's Child
[ Post Reply | Private Reply | To 47 | View Replies]

To: Zevonismymuse
I can follow that up with a good example:

My old company was bought out by a major engineering firm, and the first thing they did was lay off one of the senior mechanical engineering project managers.

The day after they laid him off, the company received a call from a client of his. The guy was calling to let us know that we had just been awarded a contract for a major design-build project, but when he found out that "[Mr. Smith] is no longer employed here" he asked to speak to the office division manager who was now in charge of all mechanical engineering work in the new company.

"We've got a $40 million design-build project that we'd like to award to your company," he said, "but you aren't going to get it unless you hire [Mr. Smith] on a contract basis to serve as the project manager."

My company ended up hiring Mr. Smith to serve as the project manager on that job, to the tune of $300 per hour. Those stupid bastards had no idea what they were getting into when they bought my old company and started laying people off. Within one year, 90% of the senior people in the most successful division (mine) -- who had no concerns at all about being laid off -- had left the company to work for competitors. My old division is now on its third division manager in two years, and the CEO of the new parent company was just fired for managing the acquisition so badly.

51 posted on 06/20/2003 8:33:17 AM PDT by Alberta's Child
[ Post Reply | Private Reply | To 47 | View Replies]

To: CA_soon_gone
Nice analysis....and so correct....these people were living IN A BUBBLE .....and pretending they were rich. People who do not understand FINANCES seem to do this really well.
52 posted on 06/20/2003 8:38:19 AM PDT by goodnesswins (FR - the truth, and nothing but the truth.........getting to the bottom of journalistic bias.)
[ Post Reply | Private Reply | To 44 | View Replies]

To: dfwgator
From what I hear, most of the people complaining aren't mad about machines taking their jobs. They are mad about foreigners and less skilled younger workers taking their jobs. But either way, when people are hurting, they are ripe for someone who promises to make it better. More people vote their pocketbook than anything else.

I’m worried that these people will turn to some populist nut when they think they have suffered enough.
53 posted on 06/20/2003 8:49:37 AM PDT by SUSSA
[ Post Reply | Private Reply | To 49 | View Replies]

To: technochick99
bump
54 posted on 06/20/2003 8:51:39 AM PDT by VOA
[ Post Reply | Private Reply | To 1 | View Replies]

To: Alberta's Child
I'm just saying all this adds up to a growing opportunity for some sleazy politician to exploit the problems. There are already trial lawyers looking at suing corporate boards that reward executives who perform poorly with huge bonuses. I have to think that there are politicians who are gearing up to exploit the problem if they see it growing worse.
55 posted on 06/20/2003 8:58:15 AM PDT by SUSSA
[ Post Reply | Private Reply | To 51 | View Replies]

To: SUSSA
Well, compared to these other idiots who love illegal immigrants, free trade at all costs, UN mandates, unlimited welfare, etc. how bad would it be to have a "populist nut" at this time?
56 posted on 06/20/2003 9:04:06 AM PDT by american spirit (ILLEGAL IMMIGRATION = NATIONAL SUICIDE)
[ Post Reply | Private Reply | To 53 | View Replies]

To: Alberta's Child
when you go and work for someone else
(This isn't meant to sound patronizing) But even if you own your own company you're "working for someone else" when you have a contract.
So I don't think you're much safer if you own your own independant software business as that's becoming a commodity market as well.
57 posted on 06/20/2003 9:05:08 AM PDT by lelio
[ Post Reply | Private Reply | To 50 | View Replies]

To: SUSSA
I have to be honest with you -- I generally hold "big business" with the same contempt that I hold "big government." I don't trust them, and they are actually among the strongest opponents of free-market capitalism that you will ever see.
58 posted on 06/20/2003 9:07:25 AM PDT by Alberta's Child
[ Post Reply | Private Reply | To 55 | View Replies]

To: lelio
But even if you own your own company you're "working for someone else" when you have a contract.

That's understood. The difference, though, is that you can work for a number of different clients. If you are good at what you do, then the one client who treats you like crap is going to end up at a competitive disadvantage to the ones who treat you well.

That's exactly what happened to "Mr. Smith" in the example I cited in #51. After his contract with his old company was completed, he went to work for one of our competitors. And we never won another job with that client again -- because his new company did.

59 posted on 06/20/2003 9:11:11 AM PDT by Alberta's Child
[ Post Reply | Private Reply | To 57 | View Replies]

To: Arkinsaw
delivering pizzas is not too bad if you have a radio in your car.

That's what I figger. That, or lawn mowing.

As a new grad, I have got me a good-paying job lined up for the next 2, 3 years. Have no idea what happens after that. I do know that I don't plan to blow my entire salary with the blank assumption that I'll find another job just like it.

I have lived spartan for years and I don't plan to change much. Except for a Harley. Hehe...

60 posted on 06/20/2003 9:13:00 AM PDT by maxwell (Well I'm sure I'd feel much worse if I weren't under such heavy sedation...)
[ Post Reply | Private Reply | To 9 | View Replies]


Navigation: use the links below to view more comments.
first previous 1-2021-4041-6061-8081-100 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson