This is a good article on the middle
class, how it came about and why it's getting it's head handed to
them.
The Crisis of the
Middle Class and American Power
By George Friedman
Founder and Chief
Executive Officer/StratFor
Last week I wrote
about the crisis of unemployment in Europe. I received a great deal
of feedback, with Europeans agreeing that this is the core problem
and Americans arguing that the United States has the same problem,
asserting that U.S. unemployment is twice as high as the government's
official unemployment rate. My counterargument is that unemployment
in the United States is not a problem in the same sense that it is in
Europe because it does not pose a geopolitical threat. The United
States does not face political disintegration from unemployment,
whatever the number is. Europe might.
At the same time,
I would agree that the United States faces a potentially significant
but longer-term geopolitical problem deriving from economic trends.
The threat to the United States is the persistent decline in the
middle class' standard of living, a problem that is reshaping the
social order that has been in place since World War II and that, if
it continues, poses a threat to American power.
The Crisis of the American Middle
Class
The median
household income of Americans in 2011 was $49,103. Adjusted for
inflation, the median income is just below what it was in 1989 and is
$4,000 less than it was in 2000. Take-home income is a bit less than
$40,000 when Social Security and state and federal taxes are
included. That means a monthly income, per household, of about
$3,300. It is urgent to bear in mind that half of all American
households earn less than this. It is also vital to consider not the
difference between 1990 and 2011, but the difference between the
1950s and 1960s and the 21st century. This is where the difference in
the meaning of middle class becomes most apparent.
In the 1950s and
1960s, the median income allowed you to live with a single earner --
normally the husband, with the wife typically working as homemaker --
and roughly three children. It permitted the purchase of modest tract
housing, one late model car and an older one. It allowed a driving
vacation somewhere and, with care, some savings as well. I know this
because my family was lower-middle class, and this is how we lived,
and I know many others in my generation who had the same background.
It was not an easy life and many luxuries were denied us, but it
wasn't a bad life at all.
Someone earning
the median income today might just pull this off, but it wouldn't be
easy. Assuming that he did not have college loans to pay off but did
have two car loans to pay totaling $700 a month, and that he could
buy food, clothing and cover his utilities for $1,200 a month, he
would have $1,400 a month for mortgage, real estate taxes and
insurance, plus some funds for fixing the air conditioner and
dishwasher. At a 5 percent mortgage rate, that would allow him to buy
a house in the $200,000 range. He would get a refund back on his
taxes from deductions but that would go to pay credit card bills he
had from Christmas presents and emergencies. It could be done, but
not easily and with great difficulty in major metropolitan areas. And
if his employer didn't cover health insurance, that $4,000-5,000 for
three or four people would severely limit his expenses. And of
course, he would have to have $20,000-40,000 for a down payment and
closing costs on his home. There would be little else left over for a
week at the seashore with the kids.
And this is for
the median. Those below him -- half of all households -- would be
shut out of what is considered middle-class life, with the house, the
car and the other associated amenities. Those amenities shift upward
on the scale for people with at least $70,000 in income. The basics
might be available at the median level, given favorable individual
circumstance, but below that life becomes surprisingly meager, even
in the range of the middle class and certainly what used to be called
the lower-middle class.
The Expectation of Upward Mobility
I should pause and
mention that this was one of the fundamental causes of the 2007-2008
subprime lending crisis. People below the median took out loans with
deferred interest with the expectation that their incomes would
continue the rise that was traditional since World War II. The
caricature of the borrower as irresponsible misses the point. The
expectation of rising real incomes was built into the American
culture, and many assumed based on that that the rise would resume in
five years. When it didn't they were trapped, but given history, they
were not making an irresponsible assumption.
American history
was always filled with the assumption that upward mobility was
possible. The Midwest and West opened land that could be exploited,
and the massive industrialization in the late 19th and early 20th
centuries opened opportunities. There was a systemic expectation of
upward mobility built into American culture and reality.
The Great
Depression was a shock to the system, and it wasn't solved by the New
Deal, nor even by World War II alone. The next drive for upward
mobility came from post-war programs for veterans, of whom there were
more than 10 million. These programs were instrumental in creating
post-industrial America, by creating a class of suburban
professionals. There were three programs that were critical:
1.The GI Bill,
which allowed veterans to go to college after the war, becoming
professionals frequently several notches above their parents.
2.The part of the
GI Bill that provided federally guaranteed mortgages to veterans,
allowing low and no down payment mortgages and low interest rates to
graduates of publicly funded universities.
3.The federally
funded Interstate Highway System, which made access to land close to
but outside of cities easier, enabling both the dispersal of
populations on inexpensive land (which made single-family houses
possible) and, later, the dispersal of business to the suburbs.
There were
undoubtedly many other things that contributed to this, but these
three not only reshaped America but also created a new dimension to
the upward mobility that was built into American life from the
beginning. Moreover, these programs were all directed toward
veterans, to whom it was acknowledged a debt was due, or were created
for military reasons (the Interstate Highway System was funded to
enable the rapid movement of troops from coast to coast, which during
World War II was found to be impossible). As a result, there was
consensus around the moral propriety of the programs.
The subprime
fiasco was rooted in the failure to understand that the foundations
of middle class life were not under temporary pressure but something
more fundamental. Where a single earner could support a middle class
family in the generation after World War II, it now took at least two
earners. That meant that the rise of the double-income family
corresponded with the decline of the middle class. The lower you go
on the income scale, the more likely you are to be a single mother.
That shift away from social pressure for two parent homes was
certainly part of the problem.
Re-engineering the Corporation
But there was, I
think, the crisis of the modern corporation. Corporations provided
long-term employment to the middle class. It was not unusual to spend
your entire life working for one. Working for a corporation, you
received yearly pay increases, either as a union or non-union worker.
The middle class had both job security and rising income, along with
retirement and other benefits. Over the course of time, the culture
of the corporation diverged from the realities, as corporate
productivity lagged behind costs and the corporations became more and
more dysfunctional and ultimately unsupportable. In addition, the
corporations ceased focusing on doing one thing well and instead
became conglomerates, with a management frequently unable to keep up
with the complexity of multiple lines of business.
For these and many
other reasons, the corporation became increasingly inefficient, and
in the terms of the 1980s, they had to be re-engineered -- which
meant taken apart, pared down, refined and refocused. And the
re-engineering of the corporation, designed to make them agile, meant
that there was a permanent revolution in business. Everything was
being reinvented. Huge amounts of money, managed by people whose
specialty was re-engineering companies, were deployed. The choice was
between total failure and radical change. From the point of view of
the individual worker, this frequently meant the same thing:
unemployment. From the view of the economy, it meant the creation of
value whether through breaking up companies, closing some of them or
sending jobs overseas. It was designed to increase the total
efficiency, and it worked for the most part.
This is where the
disjuncture occurred. From the point of view of the investor, they
had saved the corporation from total meltdown by redesigning it. From
the point of view of the workers, some retained the jobs that they
would have lost, while others lost the jobs they would have lost
anyway. But the important thing is not the subjective bitterness of
those who lost their jobs, but something more complex.
As the permanent
corporate jobs declined, more people were starting over. Some of them
were starting over every few years as the agile corporation grew more
efficient and needed fewer employees. That meant that if they got new
jobs it would not be at the munificent corporate pay rate but at near
entry-level rates in the small companies that were now the growth
engine. As these companies failed, were bought or shifted direction,
they would lose their jobs and start over again. Wages didn't rise
for them and for long periods they might be unemployed, never to get
a job again in their now obsolete fields, and certainly not working
at a company for the next 20 years.
The restructuring
of inefficient companies did create substantial value, but that value
did not flow to the now laid-off workers. Some might flow to the
remaining workers, but much of it went to the engineers who
restructured the companies and the investors they represented.
Statistics reveal that, since 1947 (when the data was first
compiled), corporate profits as a percentage of gross domestic
product are now at their highest level, while wages as a percentage
of GDP are now at their lowest level. It was not a question of making
the economy more efficient -- it did do that -- it was a question of
where the value accumulated. The upper segment of the wage curve and
the investors continued to make money. The middle class divided into
a segment that entered the upper-middle class, while another faction
sank into the lower-middle class.
American society
on the whole was never egalitarian. It always accepted that there
would be substantial differences in wages and wealth. Indeed,
progress was in some ways driven by a desire to emulate the wealthy.
There was also the expectation that while others received far more,
the entire wealth structure would rise in tandem. It was also
understood that, because of skill or luck, others would lose.
What we are facing
now is a structural shift, in which the middle class' center, not
because of laziness or stupidity, is shifting downward in terms of
standard of living. It is a structural shift that is rooted in social
change (the breakdown of the conventional family) and economic change
(the decline of traditional corporations and the creation of
corporate agility that places individual workers at a massive
disadvantage).
The inherent
crisis rests in an increasingly efficient economy and a population
that can't consume what is produced because it can't afford the
products. This has happened numerous times in history, but the United
States, excepting the Great Depression, was the counterexample.
Obviously, this is
a massive political debate, save that political debates identify
problems without clarifying them. In political debates, someone must
be blamed. In reality, these processes are beyond even the
government's ability to control. On one hand, the traditional
corporation was beneficial to the workers until it collapsed under
the burden of its costs. On the other hand, the efficiencies created
threaten to undermine consumption by weakening the effective demand
among half of society.
The Long-Term Threat
The greatest
danger is one that will not be faced for decades but that is lurking
out there. The United States was built on the assumption that a
rising tide lifts all ships. That has not been the case for the past
generation, and there is no indication that this socio-economic
reality will change any time soon. That means that a core assumption
is at risk. The problem is that social stability has been built
around this assumption -- not on the assumption that everyone is owed
a living, but the assumption that on the whole, all benefit from
growing productivity and efficiency.
If we move to a
system where half of the country is either stagnant or losing ground
while the other half is surging, the social fabric of the United
States is at risk, and with it the massive global power the United
States has accumulated. Other superpowers such as Britain or Rome did
not have the idea of a perpetually improving condition of the middle
class as a core value. The United States does. If it loses that, it
loses one of the pillars of its geopolitical power.
The left would
argue that the solution is for laws to transfer wealth from the rich
to the middle class. That would increase consumption but, depending
on the scope, would threaten the amount of capital available to
investment by the transfer itself and by eliminating incentives to
invest. You can't invest what you don't have, and you won't accept
the risk of investment if the payoff is transferred away from you.
The agility of the
American corporation is critical. The right will argue that allowing
the free market to function will fix the problem. The free market
doesn't guarantee social outcomes, merely economic ones. In other
words, it may give more efficiency on the whole and grow the economy
as a whole, but by itself it doesn't guarantee how wealth is
distributed. The left cannot be indifferent to the historical
consequences of extreme redistribution of wealth. The right cannot be
indifferent to the political consequences of a middle-class life
undermined, nor can it be indifferent to half the population's
inability to buy the products and services that businesses sell.
The most
significant actions made by governments tend to be unintentional. The
GI Bill was designed to limit unemployment among returning
serviceman; it inadvertently created a professional class of college
graduates. The VA loan was designed to stimulate the construction
industry; it created the basis for suburban home ownership. The
Interstate Highway System was meant to move troops rapidly in the
event of war; it created a new pattern of land use that was suburbia.
It is unclear how
the private sector can deal with the problem of pressure on the
middle class. Government programs frequently fail to fulfill even
minimal intentions while squandering scarce resources. The United
States has been a fortunate country, with solutions frequently
emerging in unexpected ways.
It would seem to
me that unless the United States gets lucky again, its global
dominance is in jeopardy. Considering its history, the United States
can expect to get lucky again, but it usually gets lucky when it is
frightened. And at this point it isn't frightened but angry,
believing that if only its own solutions were employed, this problem
and all others would go away. I am arguing that the conventional
solutions offered by all sides do not yet grasp the magnitude of the
problem -- that the foundation of American society is at risk -- and
therefore all sides are content to repeat what has been said before.
People who are
smarter and luckier than I am will have to craft the solution. I am
simply pointing out the potential consequences of the problem and the
inadequacy of all the ideas I have seen so far.
