Background
The article Poof Goes the Middle Class in the
Los Angeles Times by Doyle McManus (10/23/2013) and the documentary Inequality for All featuring former
Secretary of Labor Robert Reich, currently playing in theatres, have inspired
me to write this paper.
The subject of rising inequality has been a hot topic ever
since the US economy began contracting in 2008.
McManus' dire predictions describe an America “in
which real wages for most workers decline year after year, a future in which
middle-class jobs disappeared in the Great Recession, and a future in which
young Americans either squeeze into an increasingly wealthy elite or tumble to
the bottom”, fewer and fewer, in what we once called the middle class.
At the current
rate, economist Tyler Cowan in his book, Average
is Over, predicts, based on current trends, over the next 20 years:
· More wealthy people than ever.
· More poor people than ever.
· Automation and outsourcing will continue to eliminate
many jobs.
· Downward pressure on wages for all except the most
skilled.
· Growing inequality between the wealthy and everyone
else.
· Officials incapable of slowing these trends, let alone
stop them.
· Rather than balancing the budget with higher taxes or
lowering benefits, real wages for many workers will continue to fall.
· Resulting in a growing underclass.
Dismal predictions?
That’s not all! Cowan goes on to
point out that employers will constantly measure employee productivity, and will
quickly weed out underperformers. He sees a scenario where retirees, their
savings exhausted, move to newly built shantytowns in low cost regions or to
developing countries, where cost of living is much lower. Rather than rebelling, the underclass will
console itself with online entertainment and improved narcotics in order to
make life more livable.
As the American economy, spurred by global
competition, becomes ruthlessly more efficient and more productive, Cowan forecasts
that the economic elite will grow to 15% of the population. They will be the elites of today, plus
technologically adept professionals from the fields of robotics to heath care
whose jobs cannot be exported overseas, below there will be a servant class of
service workers to the rich.
Social mobility will still be there. On-line education, within reach of most
Americans, will permit the most gifted and motivated in the underclass to
rise. But they will have to be very
smart, very diligent, and highly motivated.
Secretary Reich, in his documentary Inequality for All, traces the root
causes to five main events:
1.
Changes in the
taxation system during the Regan administration.
2.
The start of
globalization in the mid-1970s.
3. The excesses of
the financier class throughout the last 30-50 years and the years preceding the
1929 crash.
4. The introduction
of stock options in executive compensation, starting in the mid 1990s.
5. The decline of
the American labor unions from 35% to less than 10% of the workforce.
He illustrates the phenomenon of increasing inequality
in America with a brilliantly clear presentation of economic data from 1929 to
2008, the peak years preceding the two dramatic declines in GNP.
Reich sounded the alarm in the early 1990s but few, if
any, paid attention. He was the lone man
in the wilderness warning us of the impending crisis. Many dismissed his message as that of an
alarmist and of a union sympathizer.
Others accused him of being a socialist or a communist. With self-deprecating humor, Reich dismantles
the logic of his critics. He tells us
that he left government after Clinton’s first term, frustrated by the lack of
attention to this emerging debacle.
The documentary features a successful CEO and wealthy
investor to debunk faulty economic assumptions.
For example, it is customers who create job, not wealthy people.
(demand-side or mid-class up rather than supply-side or trickle down
economics). As an investor in
Amazon.com, this CEO points out that Amazon is able to do with about 60,000
employees what previous methods would have required 600,000 employees. He makes a good case for consolidation in
order to achieve economies of scale.
Reich also walks us through the increasing role of
women in the workforce, initially to supplement family incomes as male wages
began to stagnate or decline. He goes on
to suggest that declining wages encouraged people to over-extend themselves and
out-of-control credit card borrowing, all encouraged by a growing housing
bubble. Many folks were encouraged to
take home equity loans to finance a lifestyle beyond their means. When the bubble burst, many lost their homes,
as the value of their value submarined.
Reich shows a table ranking several nations with
respect to the differential between top earners and the working class. The US occupies a dismal 46th place,
closer to developing countries and much lower than most developed
countries. This comparison alone justifies the need for change.
Reich’s documentary closes with a call for viewers to take
action, and to get involved in pressuring our politicians to fix the
problem.
Historical Tidbits
Is inequality something new? Primitive man started to domesticate animals
so that he would have easier access to food, clothe himself, and help in his burden. He mastered agriculture so that the soil
would produce what he needed in quantity that he could trade. He established
hierarchies so that those at the top would have more food, more privileges, and
more security.
It was during the Renaissance that the middle class
got its spurt with the recognition and appreciation of the contribution of the
guilds. Prior to that, there were only
two classes: top and bottom. The elite populated the top: nobility and military
brass. During this period, we see the
elite recognize and reward the most talented amongst the painters, architects,
writers, sculptors, etc. Thanks to the
largesse of patrons, a class of masters (middle class) and apprentices was
created, permitting with time apprentices to rise to the master level, and a
few to migrate to the elite group.
During the Enlightenment period, we witness, for the
first time, the preoccupation with equality under the law. The concept was enshrined in the American (All
men are created equal) and French (egalite’) constitutions. Prior to that, the top enjoyed unquestioned
mastery over the bottom – often of the despotical kind.
Darwin discovered that species evolve and adapt to
change in order to survive and grow, and that the stronger have a better chance
at survival. This principle was in
evidence during the Industrial Revolution.
Scientific management made it
possible for the unskilled, illiterate bottom to work in factories and earn
substantially better wages. From this
workforce, the middle class emerged in grander numbers. The economic boom following WWII accelerated
the middle class’ growth.
Lenin’s musing that capitalists would sell you the
bullets needed to kill them summarizes the antipathy of the proletariat toward
capitalism and their sympathy toward laws that help the masses.
Judeo-Christian principles, all throughout history,
have tried to temper man’s unbridled urge to profit from or exploit others. Islam too has counseled its believers
to be generous toward others.
A strong realization emerged during the past century
that, given natural man’s primal urge, regulations would have to be put in
place to prevent certain business behaviors.
We see the enactment of strong laws to prevent monopolies, restrain of
trade practices, unsafe, unfair or discriminatory labor practices, and to
ensure consumers’ protection.
My take-Away
Few predicted the side effects of a globalized
economy.
The developed world saw globalization as an
opportunity to buy desired goods at a cheaper price. The developing world saw it as an opportunity
to increase its exports and thus increase the number of jobs and standard of
living. The higher the demand for
cheaper goods, the higher would the wages in the developing countries would be.
The effect on wages has reached unexpected
proportions. When globalization started,
most countries relied on a 4-tier compensation scheme. Most jobs would pay according to prevailing
local rates, some according to regional rates, a few according to national
rates, and a tiny minority according to international rates. The 4-tier scheme evolved in the 1990s to a
3-tier as regional and national rates began to converge. In this century, increased skilled-level
employee mobility has shrunk the 3-tier scheme to a 2-tier as local rates have
become somewhat national. As lower level wages
reach global equilibrium, in 10-20 years a global rate scheme is likely. At that time, the differential between workers’
pay throughout the world will pretty much disappear.
Countries must then find a different way to gain
competitive advantage.
Unions share responsibility in the decline of the
middle class. With their aggressive and
unchallenged approach to collective bargaining, they saddled many industries,
primarily in the manufacturing area, with exorbitant wages, rigid work rules,
and unfunded liabilities. The labor
costs in the auto, rubber, and steel industries climbed so much that once
global markets opened-up, companies were unable to effectively compete. As a result, the destruction of our
manufacturing base was sealed.
Soon work performed in developed countries by
marginally efficient operations began to migrate to lower cost countries
leaving many workers in the developed world unemployed. A structural class of unemployed folks
emerged. People whose skill set and
education are obsolete. Attempts to
re-train them have yielded marginal results.
The middle class shares also in the debacle. Nurtured over the years by consumerist
propaganda, it abandoned the true and tested teachings of the previous
generation … "to save for the rainy days."
In fact, the very notion of saving was seen as passé and an unfortunate legacy from
the Great Depression. Americans have
the lowest saving rate in the developed world.
Immediate gratification fueled spending beyond one’s means in the hope
that the nest egg would continue to grow thanks to the housing market bubble and
inflation. Keeping up with the Joneses
became the norm.
Another factor that has made the problem worse is what
has been happening to the nuclear family.
The number of one-parent families has increased substantially during the
past 50 years. The result has been that
many families now cannot make it on a single wage earner’s income, especially
during an inflationary period such as the one we have experienced since the mid
1970s. Coupled with a culture based on
consumerism, many families have been forced to make up the difference by
borrowing.
People managed for years without 3-4 cell phones per
family, without cable or satellite TV, with a 19” or 36” TV, etc. Now these expenditures are a must. Living within one’s means is no longer an
honored principle. A culture of excess
is tough to reign even during a time of austerity.
Soon politicians started to step in. Moved by compassion or opportunism, they
began to carter to a growing constituency of unhappy campers. How?
· War on poverty programs. Billions have been spent since the mid-1960s. Yet the percentage of poor folks has not
budged.
Union contracts in the public administration sector, that gave employees exorbitant pensions, often unfunded, and other costly perks to secure the votes of union members.
· Pressure on banks to approve mortgages for people who
were unqualified. 100% loans were
approved. Many loans were made based on
false financial statements.
· Bail-outs to cover unfunded private sector's liabilities
or to provide cashflow relief.
· Economic assistance available to a single parent with
two children continued to grow.
In the
state of Hawaii, the amount in tax-free economic assistance is over 60,000dollars, in California, New York, Massachusetts, and several other states over
50,000.
· Segmentation of the population to show greater impact
on chosen constituencies, e.g., Blacks, Hispanics, undocumented, etc.
· Poorly administered financial assistance, often used
to supplement income rather than complete valuable education.
· Polarizing policies and solutions.
· Tea party fanatics.
We see, in some cases, an underclass stuck in
comfortable misery, lacking the motivation or rational basis for escaping
current conditions. The response from
the electorate to perceived abuses has been swift and brutal.
Needless to say, the answer is never at the extremes,
but in the center. We are still debating
the role of government in polar terms, when we actually need to have a balanced
approach.
In my view, the real culprits of the social problems are the financiers. Someone from Wall Street always manages to
show up as our Secretary of Treasury, regardless of who is elected, democrat or
republican. They manage to push through
loopholes that favor them. For example,
taxing the income of traders at the 15-20% level. It is an abomination for a billionaire to
pay a tax rate lower than an office worker. Fixing this
problem should be priority one. Private enterprise often gets unfairly blamed for the actions taken by a a handful of financiers.
The discourse has been high-jacked by activists and
politicians that pit one class against another, the poor against the rich, the
nativist against the immigrant, one region of the country versus another, and
so on.
In my view, the root cause of inequality comes from
lack of economic and political leadership.
We can only solve inequality by raising those at the
bottom, not by bashing those at the top as greedy, heartless, and unscrupulous sobs.
Americans are the most generous people in the
world. Avarice is not in the American
DNA. The issue of growing inequality is a national issue, not one that affects
others, it affects all of us, whether we are rich or poor. It is to our country’s benefit that we fix
it.
Solving the Root Problem
If we examine those countries where the gap between
the top and the bottom is the smallest, we will find many Northern European countries. Sure, their population is more homogeneous
than America’s, but immigration is increasing there too. What is unique about them? Some generalizations ...
· The tax rate for the top is significant higher than in
America, e.g., fewer loop holes, fewer lawyers and accountants driving the tax
code.
· They are OK with solidarity toward the less
successful. It is probably a legacy from their
Protestant roots.
· They are industrious and law abiding.
· They are more communal than their US cousins.
· They tend to work to live, not live to work.
· They have more progressive national economic policies.
The Germans, in particular, offer a great example that
America could emulate.
First, identify niches where our expertise is strong
and capitalize on it. Second, identify
areas that we want to be an expert in, and invest in becoming one.
By doing so, the Germans continue to enjoy an
expanding economy, low unemployment, and a generous welfare system. Solidarity to Germans is not a dirty word. It is part of their culture and history.
In America, its individualistic history and its
multicultural milieu see solidarity as a ticket for deadbeats and
profiteers. No doubt, some will do just that, but not the great majority.
Americans may not admit it, but we are not a
melting pot, never really were. Each group
looks at the other with suspicion and, in some cases, with contempt. Some groups think of themselves as being in
the right or better than their cousins, based on flimsy rationale: I was born here, this is our country, we were
here first, we are a Judeo-Christian nation, etc. Wedges, designed to keep folks separated and
at each other’s throat.
We need to marshall the will and the resources to attack this issue before it gets out of hand. I welcome your thoughts and ideas.
