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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
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To: Alberta's Child
More and more I tend to agree with you.
61 posted on 06/20/2003 9:13:08 AM PDT by SUSSA
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To: Alberta's Child
"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!"

Although this sort of scenario sounds like Recent News, it's been going on in the awl bidness for a LONG time. My uncle Don (rest his soul) spent most of his adult life working for Gulf Oil. Then one day in the 70's, he noticed two things - 1., he could retire at that moment on tenure - and 2., consultants to Gulf Oil made far more money that people on staff at his level.

So he "retired" and was immediately "hired" as a consultant to --- Gulf Oil. OK, there was a 6-month gap, which he had pre-planned as a vacation. But during the last 5 years of his productive career, he was a consultant to Gulf and made far more for less work than he ever had as a VP Exploration.

Of course, he was WORTH what Gulf paid him because he had a knack for getting things done ahead of schedule and a sixth sense for knowing the best way to find a reserve and extract it. He was spooky that way.

Michael

62 posted on 06/20/2003 9:13:17 AM PDT by Wright is right! (Have a profitable day!)
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To: american spirit
You want some populist like Jim Hightower? He's for all that but wants to make the "rich" pay to improve everyone's life.

Most of the populists and statists and one world government people aren't for real free trade. They are for the WTO NAFTA etc where unelected bureaucrats dictate trade terms. that's NOT free trade.
63 posted on 06/20/2003 9:17:17 AM PDT by SUSSA
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To: Wright is right!
Of course, he was WORTH what Gulf paid him because he had a knack for getting things done ahead of schedule and a sixth sense for knowing the best way to find a reserve and extract it.

He was also worth what Gulf paid him because they no longer had to worry about paying payroll taxes, unemployment insurance, and any number of other administrative costs related to their own employees.

64 posted on 06/20/2003 9:30:43 AM PDT by Alberta's Child
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To: SUSSA
Good analysis of lower and middle-class economic woes. You have an interesting perspective. I glanced at the real-estate section recently and was surprised at the number of foreclosures listed. There were no listings like that just a short time ago.
In California I've read (and observed) about how the hotel, cannery and now construction industries are mostly spanish-speaking only. These were jobs once held by Americans w/o higher education. Once a crew becomes spanish-speaking, then that is what is hired thereafter.
The 1.2 million H-1B and L-1 visa holders are hurting the middle-class; as is the increasing number of outsourcing that will number in the millions very soon.
OPIC and other government agencies that use billions of our tax dollars to enable corporations to outsource jobs are a disgrace. Our leaders need to hear our voices on these issues. Hopefully a Forbes article will reach some of them; I'm not sure they read our e-mails.
65 posted on 06/20/2003 9:53:14 AM PDT by LibertyAndJusticeForAll
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To: SUSSA
Look, over the horizon...could it be....THE PERFECT HILLARY STORM?
66 posted on 06/20/2003 9:59:29 AM PDT by Buckwheats
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To: goodnesswins
Thanks. I escaped the Silicon Valley thing three years ago. I've got one piece of advice for those trying to follow. Stop looking at money for what it can buy and start seeing it for what it can generate. $1M at 1% in a money market yielding $10k a year starts to not look like much at all.
67 posted on 06/20/2003 10:09:45 AM PDT by CA_soon_gone
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To: Buckwheats
Look, over the horizon...could it be....THE PERFECT HILLARY STORM?

Forget it. Hillary is a big fan of Indian outsourcers, she was instrumental in bring Tata Consultancy to New York.

68 posted on 06/20/2003 10:12:11 AM PDT by dfwgator
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To: Buckwheats
It could be her or worse. I have to believe there is someone getting ready to pounce on this as it gets worse.
69 posted on 06/20/2003 10:13:32 AM PDT by SUSSA
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To: Zevonismymuse
The automation industry is in the pits right now. I know because I've been in it for more than 20 years. Your husband should try to go solo; I know people in a similar predicament that have done quite well. Independent PLC programmers (especiallly Allen Bradley) can compete quite well when compared to System Integrators or AE firms. FreeMail me for details.
70 posted on 06/20/2003 10:18:01 AM PDT by bribriagain
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To: FreedomCalls
VERY well said!
71 posted on 06/20/2003 10:22:57 AM PDT by arasina (Did too! Did not! Did TOO!)
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To: SUSSA
OTOH, a populist could harness the growing resentment against too much government interference in our lives, and favoritism to existing Interests.

In fact, that 'populist' route may be the only viable avenue to reduce the State to its Constitutional limits.

Support the Party of the Young Men; in their hands rests the future. ;^)
72 posted on 06/20/2003 10:24:09 AM PDT by headsonpikes
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To: lelio
What's the Next Big Thing? Bioinformatics. According to the dot bomb rumor site Accelrys, a major player in the field, is going to ship software development to India.

Most of the Next Gen powerplays that will obsolete companies like Accelrys are being developed in R&D facilities in the US. Companies like Accelrys are pretty weak sauce technologically, and won't remain competitive long. Yes, a lot of software development is shipped overseas, but most of that is low-rent software development. Most of the really fancy stuff is done solely in the US.

As a general note on outsourcing software, I think it is relatively clear that it is mostly a fad. Most of the companies that I know have done it (and I've done it myself as well) have been totally underwhelmed by the value proposition in practice. There are a lot of companies in Silicon Valley who would no longer seriously consider outsourcing software development because they tried it and it didn't work. It is difficult to justify the investment when all is said and done -- most of the big outsourcing ventures by major companies is a political move in some of their major growing markets i.e. greasing the politicians of the local governments.

73 posted on 06/20/2003 10:25:15 AM PDT by tortoise (Would you like to buy some rubber nipples?)
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To: dfwgator
Huh? Is your point that Hillary wouldn't tell a lie?
74 posted on 06/20/2003 10:25:35 AM PDT by Buckwheats
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To: Azzurri
Maybe it's just me but spending $45,000 on a six-week vacation is a bit risky, even with nearly $1 million in paper wealth.

Yeah, spending at least 4.5% of one's entire paper wealth on one vacation strikes me as a wee bit extravagant, too.

MM

75 posted on 06/20/2003 10:32:34 AM PDT by MississippiMan
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To: dfwgator
Reality means nothing when you are a product of media invention. This issue is going to be huge because the millions of displaced workers are going to want government programs to replaced what they have lost because of the private sector white collar jobs meltdown. And the Dems will promise them just that; health care, and all the rest.
76 posted on 06/20/2003 10:38:08 AM PDT by oceanview
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To: Zevonismymuse
I strongly recommend age discrimination suits for older workers who are fired without due cause.
77 posted on 06/20/2003 10:40:47 AM PDT by oceanview
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To: headsonpikes
It depends on who you are calling a populist. Hughie Long was a populist and Jim Hightower is a populist. Both support big intrusive government and handouts. They would be as bad as what we have now. IMHO :)
78 posted on 06/20/2003 10:54:33 AM PDT by SUSSA
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To: MississippiMan
"...spending at least 4.5% of one's entire paper wealth on one vacation..."

On several occasions, I've spent virtually 100%(never more) of 'my entire paper wealth' on a vacation.

I've never regretted it for one moment.

Life is not a dress rehearsal.
79 posted on 06/20/2003 11:15:00 AM PDT by headsonpikes
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To: headsonpikes
Hey, if it works for you, more power to you, my friend.

MM

80 posted on 06/20/2003 11:18:56 AM PDT by MississippiMan
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