Death of the Middle Class?

Middleclassicus Americanus

You’ve heard all about this. Well, at worst, U.S. middle class earnings have been pretty flat; though actually that doesn’t mean flat living standards, as technological advancement improves quality of life in ways beyond counting. And indeed, for all the whining, the great majority of Americans still live far better than most people elsewhere, and virtually everyone throughout past history.

Nevertheless, we are not complacently satisfied, and that’s a good thing. So how do we ever boost incomes? Answer: by producing more. Many fail to get this simple point. Rich countries are rich because they produce a lot. A poor country like Haiti is poor because it doesn’t. By producing things people want to buy, the poor can get richer without making the rich any poorer.

So what about us producing more? Well, actually, we do. But David Brooks recently wrote about a bifurcation of the U.S. economy. “Economy I” is the competitive, globalized, dynamic part, where businesses face life-or-death pressure to be fiercely productive. “Economy II” mainly comprises three gigantic industries ­— government, health care, and education—free from this global economic competition. Around half of us live in Economy II. And the key fact, noted by Brooks, is that Economy II is growing in job numbers, but (not surprisingly) lagging in productivity, compared to Economy I.

Indeed, it’s precisely because of Economy I’s increasing productivity that Obama and Democrats are wrong to harp on “manufacturing” as a jobs panacea. Productivity means producing more with less labor. The factory of the future has only two employees: a man and a dog. The man’s job is to feed the dog. The dog’s job is to keep the man away from the machines.

The economic divide is also political. As Brooks observes, Democrats and liberals are basically Economy II people. That’s their comfort zone. They don’t really understand Economy I and often actually hate it – in their eyes, brutal dog-eat-dog capitalism that needs being restrained. Republicans have an opposite perspective: Economy II is suffocating us, and getting in the way of Economy I, where our future prosperity lies (if at all). (Not in old-time manufacturing, but in services and brain work.)

Another revealing economic dichotomy is elucidated in the recent book, Why Nations Fail, by Daron Acemoglu and James Robinson. They distinguish between “extractive” economies, structured for the few to leech off the many, and “inclusive” ones (with dispersed power, rule of law, and free markets) where the many can thrive. It’s the difference between, say, Zimbabwe and America.

Of course, the 99-percenters think the few milk the many in America too – again forgetting most Americans live better than people ever have anywhere. But The Economist has published an interesting essay suggesting that two segments, at least, of Western economies are indeed “extractive” in the sense described by Acemoglu and Robinson. One (the 99-percenters will enjoy hearing) is the banking/financial sector. But the other is government.

(Some recent personal bills, for health care and university tuition (Economy II), seem awfully extractive to me as well.)

The Economist suggests that the banking/financial industry has amassed such economic power that it can extract wealth from the rest of the economy, regardless of the true worth of its “products.” That may be arguable; but the case of government is much more clear. The poster boy is Greece, where a public sector racket soaks up the wealth that society produces (or, worse yet, doesn’t produce). We also saw it in the battle of Wisconsin where, basically, public employee unions had colluded with politicians to milk taxpayers. Gov. Walker broke that up, and his now defeating the union-promoted recall is a tremendous victory for the public over government extractionism.* (See my past post on the scandal of so-called “collective bargaining” by government worker unions.)

I have written about a local pizza joint fined heavily for breaking an obscure government rule. Just recently a nearby family-owned pharmacy was cited for inadvertent paperwork mistakes. The fine? $1.46 million. The local paper’s story makes clear that protecting the public is merely camouflage for the state regulatory agency’s true mission of filling New York’s revenue coffers by draconian application of a byzantine rulebook. This is extraction. This is Economy II sucking the blood of Economy I.

All this is relevant to middle class income stagnation. What can you expect when ever more of us are in Economy II, while Economy I is where the productivity growth, wealth creation, and profits are? Economy II (again, government, health care, and education) tries to subsidize itself by extracting the profits of Economy I. That effort is supported, in effect, by liberals and the 99-percenters. It completely undermines their professed aim of improving middle class prosperity.

And, unfortunately for them, it isn’t really 99% against the rest; it’s more like 50%. A 99-to-1 class war would be mercifully short. But beware a 50-50 conflict.

*Those who say Walker’s victory was “bought” are simply wrong. They forget the amounts spent, and the union manpower mobilized, on the other side (much by outsiders too). It was a pretty even fight.

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8 Responses to “Death of the Middle Class?”

  1. Jeremy McCann Says:

    I agree with all of what was said, but I also believe that until we realize the root of our problems which is the Federal Reserve system and a fiat based fractional reserve monetary system, things will remain stagnant and in fact get much worse. Anyway, keep up the great blog!

  2. Harry Husker (@Harry_Husker) Says:

    The American middle class IS producing and is dying because wages have been stagnant since the 1970s. The distribution of wealth in society is breaking those outside of the elite and uber-rich classes.

    The gains in productivity are going straight to the top. We are a increasingly rich and productive country so it’s rather farcical that the majority of Americans are quite worse off than the previous generation.

    Decrying the abuses of regulation and the public sector unions is a completely separate issue, and in my mind so minor as to be irrelevant to the discussion.

    [FSR comment: You overstate your case. “The majority of Americans” is certainly not “worse off than the previous generation” (let alone “quite” worse off). Even if wages have been stagnant — and this can be debated, on the numbers — such calculations generally do not count health care, which is a major life enhancing benefit most people enjoy, worth (and costing) a lot. Nor the benefits of technological advancement which actually make (inflation-adjusted) dollars worth more than in the past in terms of quality they can buy (cars, TVs, phones, computers, so much else).
    Wealth inequality is not because the rich are hogging it. It’s overwhelmingly because some people earn a lot more than others. And that, overwhelmingly, is a function of education and skills.
    The non-wealth-producing public sector sucking wealth out of the economy is not at all irrelevant.]

  3. rationaloptimist Says:

    Thanks for your comment. I’ve added my own to it. Frank

  4. Harry Husker (@Harry_Husker) Says:

    Here’s an example of the disingenuous language that so often accompanies these discussions: “The non-wealth-producing public sector sucking wealth out of the economy…”

    “Non wealth-producing public sector”, really? Wow, that’s a pretty narrow vision of what comprises wealth-producing.The pro “Business, business, captialism, capitalism!” mantra ignores that it can only exist and thrive in a society that complements it with a the necessary public goods that private interests cannot or will not provide.

    Wealth producing business men are not hatching out of eggs and franchising McDonalds on Day 1. They are born into a public infrastructure that allows them and encourages them to succeed. Among other thing that the government provides:

    – free education
    – public roads to transport private goods
    – an effective legal system that protects property rights
    – law and order

    The point is, the majority of what makes up “the non-wealth producing public sector” is in fact contributing greatly to the wealth of society by complementing the business goals. In my city we have code enforcement officers to make sure that neighborhoods and business districts don’t become blighted. So are those code enforcement officers blood sucking parasitical government employees or public servants who facilitate the wealth and productivity of society by keeping business free from blight, and, therefore, prosperous? Are judges a scourge on taxpayers or part of a system that ensures it will be profitable for businesses to create and innovate without being stolen from?

    You can argue the finer points of when the public sector is “milking” taxpayers but that’s not really what is in the public discourse right now. There’s a large segment of the population that has bought this small government ideology to the extreme, having no concept of why and how the public sector is necessary for wealth of the many, instead of just the few.

    [FSR comment: All these things you mention must be paid for. Government does not provide them for “free.”
    The only place the money comes from is a private sector producing goods and services that people will pay for. Europe is now finding out the fallacy of imagining all they need is the public sector creating all these public goods and handing out benefits. They must be paid for.]

  5. Timothy F. Travis Says:

    Frank, you write “Productivity means producing more with less labor. The factory of the future has only two employees: a man and a dog. The man’s job is to feed the dog. The dog’s job is to keep the man away from the machines.”
    My question; what is to happen to all the people put out of work by the machines? And who owns the machines? Or, When Robots Do All The Work, Who Will They Be Working For?
    -Timothy F. Travis

    [FSR comment: People have been asking this ever since the start of the Industrial Revolution. Economists even have a term for it: The “lump of labor” fallacy. The idea that there is only so much work to be done in the world, and if more is done by machines, fewer jobs for humans. Thus the Luddites, smashing machines to save jobs. (Similarly, “if more jobs are taken by immigrants …” etc). If the Luddites were right, hardly anyone would have a job today (to buy the things made by the machines). In reality, liberating people from one kind of work frees them to do different things that couldn’t be done before. Most people today have careers undreamt of a century ago! The biggest example is agriculture. Previously it took almost the totality of human labor just to feed ourselves. Today, due to technological advancements, we do it with a tiny fraction of that labor. All the others, freed from the farm, are able to do other useful things, and that is why living standards have risen so dramatically. The more things we can do with less labor, the richer society as a whole becomes. “Lump of labor” is a fallacy because there is no limit to human ingenuity in coming up with new ways for people to be productive.]

  6. Timothy F. Travis Says:

    Frank,
    I do not know if we can have a discussion on this topic.
    You would seem from your response to be, excuse me for being blunt, a faith-based libertarian in that you seem to believe without evidence that libertarianism is the best government model. Mexico would seem to be an example of what you get when you do not have effective government regulation and laissez-faire capitalism. Can you name a time or a county where libertarian principles have worked? You stated your opinions most confidently. I suspect, aside from be tedious, it would be futile for me to respond to each.
    What am I missing?
    Timothy

    [FSR comment: Mexico a libertarian paradise? Please!! Mexico is an example of pervasive government economic intervention, crony capitalism and rent-seeking — a poster country for everything a libertarian despises. The fact is that virtually all capitalist countries are far from “laissez-faire,” hence it is difficult to cite examples where that philosophy has worked. Yet there are in fact a few. Germany in the early 1950s threw out almost all economic regulation, letting the market rip — the result was termed the “German economic miracle,” speedily rising from war’s devastation into one of the mightiest and most prosperous societies on earth. Hong Kong is perhaps the best test case for about as minimal a government hand in the economy as has been tried anywhere. Result: in less than a century Hong Kong vaulted from abject poverty to a wealth level at the tip-top of world charts. And indeed, China itself is a very salient example. Yes — China! Because in fact China for 30+ years has been just about the most laissez-faire capitalist nation on earth — in that part of its economy not government controlled. And it is that non-government sector that has been the source of China’s economic growth. And what growth! Improving incomes severalfold and moving hundreds of millions of people out of poverty. China demonstrates that whatever benefits you imagine you get from government regulating business, and whatever harm you think comes from non-regulation, all of that is simply overwhelmed by the human benefit of wealth creation that economic freedom provides. I have written about this aspect of China’s economy in a previous post: https://rationaloptimist.wordpress.com/2011/04/02/bamboo-capitalism/
    I trust this answers your question!]

  7. Timothy F. Travis Says:

    Frank, I do not know enough about the German economy and society in the early 50’s but I do know I would rather live in Germany today (and I did in the 70’s) and in the northern European countries than in Hong Kong and China. -more personal freedom, more democratic, more transparency, more income equality, better standard of living and quality of life,
    -Timothy

    [FSR comment: You asked about laissez-faire economics. China has that, and it’s a very good thing. They also have political repression, and that’s a very bad thing. Whether they can have both indefinitely is an open question. In the sweep of world history, economic and political freedoms tend to go hand-in-hand; and nations without economic freedom rarely have the other kinds.]

  8. Timothy F. Travis Says:

    Frank, you wrote, “In the sweep of world history, economic and political freedoms tend to go hand-in-hand; and nations without economic freedom rarely have the other kinds.”
    Is there ever a conflict between “economic” freedom and political freedom? What if the elites, big money, banks, Wall Street, corporations buy the elections? Reference our propaganda based “news” channel, the money it takes to run and stay in office, and the fallout from the Supreme Court’s Citizens United ruling.
    If so, then what?
    Timothy

    [FSR comment: It is a fantasy to imagine there could ever be a system where some people do not have (much) more effective wealth than others; or where such wealth does not translate into disproportionate power and influence. Certainly not under any actual communist system that ever existed.
    In America, the rich are still outvoted by the non-rich. That is why (contrary to what some think is the case) the top 5% of taxpayers (with about 30% of national income) pay over half the income taxes; and the top 1% contribute 30% of the entire income tax revenue.]

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