When I wrote about the crisis
of unemployment in Europe, I received a great deal of feedback. Europeans
agreed that this is the core problem while Americans argued 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:
The GI Bill, which allowed
veterans to go to college after the war, becoming professionals frequently
several notches above their parents.
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.
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.
George Friedman, Stratfor, January 01, 2014
"The Crisis of the Middle Class and American Power is republished with permission of Stratfor."
"The Crisis of the Middle Class and American Power is republished with permission of Stratfor."
Cameron also said he would do to help, warns Business Secretary david cameron Vince Cable was stripped of the responsibility.
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