The American middle class may be squeezed … but why?

Middle class under attackIn recent years, there have been numerous analyses and articles addressing threats to the middle class in America, and who or what is to blame for what’s happening.

The latest article, The American Dream, Downsized, is written by Amy Sullivan, a writer and former editor at TIME and Washington Monthly  magazines and was published in the National Journal magazine this past week.

The statistics presented by the author – including those showing the middle class “squeeze,” a smaller proportion of Americans falling within the middle class as compared to poorer or richer segments – are indeed sobering.

But in reading the article, I also got the sense that the premise of the argument – that the economic conditions in the America of 50 years ago represented the “norm” – may be flawed.

What if the conditions today represent the “norm” and the conditions back then are the ones that were “skewed”?

I shared the article with my brother, Nelson Nones. As someone who has lived and worked outside the United States for years (in Europe and Asia), to me his thoughts on world economic matters are always worth hearing because he has the benefit of weighing issues from a global perspective instead of simply a more parochial one (like mine).

Here’s what Nelson shared with me:

I have a very no-nonsense view of what’s happening to the American middle class, and why. The American Dream was “real,” the article says, during the post-World War II prosperity of the 1950s when a “middle-class family bought a house, put a car (or two) in the driveway, and raised children who ran around a safe neighborhood and later went to college with their parents’ support.”

This characterization paints a scene that is peaceful, tranquil, secure and prosperous – but it completely misses a couple salient points:

  • The Cold War – The 1950s were also a time of fallout shelters and fighting Communism. It’s easy to forget all that.
  • The Communist and Socialist countries – two of which today are part of the “BRIC” countries (Brazil-Russia-India-China). Russia (then the Soviet Union) and China barricaded themselves and their vassal states behind the Iron and Bamboo curtains – and slowly but inexorably starved themselves to death economically. The other two, Brazil and India, barricaded themselves to a degree as well. As an example, they threw out Coca-Cola and forced the locals to drink the disgusting domestic variants Campa-Cola in Brazil and Thums Up in India, just to thumb their noses (no pun intended) at those wicked ex-Colonialists and American capitalists.

In other words, while income equality and middle class prosperity were peaking in America between 1945 and 1970, the situation at the global level was exactly the opposite.

As we all know, the political and economic barricades fell quickly in late 1980s and early 1990s. The effect is precisely what political economist Adam Smith predicted in The Wealth of Nations (1776):

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it from them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

Not coincidentally, Singapore’s per capita GDP today, at US$50,800 (according to the CIA World Factbook) exceeds that of the United States, at US$48,400. Of course Singapore is a small country and it’s just one example – but it’s a telling one.

I would argue that the American Dream, or at least the ideal of it framed in the 1950s, might have been “real” at the time (people, after all, were buying real houses and cars with real money).  But it was temporary. And it could never be permanent if you believe Adam Smith.

Consider this: Many of the middle-class breadwinners were union workers. Their rising incomes were directly attributable to collective bargaining agreements that American companies could afford to enter into because they had little or no foreign competition and hence could pass rising costs on to the very consumers who benefited from those agreements.

Today, some of those same companies are bankrupting themselves just to rid themselves of unions and the unfunded pension liabilities they took on board when the good times were rolling. And why is this? Because they have to fight foreign competition just to stay alive.  (This CNBC article, published just a few days ago, says it all.)  

I would also contend that today’s “scaled back” notions of the American Dream might reflect the more realistic (less idealistic) views of the vast number of immigrants who have come to America since the barricades have fallen – many of whom fall squarely within the article’s definition of “middle class” (which I calculate to be $13,725 – $39,215 per year per capita, using the per-household figures quoted in the article divided by the current average U.S. household size).

For these immigrants, the assurance of being able to “hold on for dear life” is actually a big step up from the mayhem, extortion, hidebound traditions and general hopelessness that often run rampant in the countries or societies they’ve fled.

It astonishes me that this National Journal article hardly mentions any of the above: The word “foreign” can’t be found anywhere in the article … “immigration” appears only once in the context of how Hispanic immigration is exerting a “steady downward pull on income” … and “union” is stated only once in the context of children in the 1950s skipping college and entering the workforce with a “secure, often union-protected job.”

How could the article’s author have missed what is so obvious? I’m quite sure she’s not so ignorant … so she must have an agenda. But if that’s the case, and if I were to believe her agenda-based screed, what would that make me?

Just like author Any Sullivan, my brother Nelson has a strong point of view about the current situation of the American middle class!

As for me, I think the article’s statistics are real. But I also believe that post-war conditions in America were an anomaly borne of special circumstances. For the author to treat them as the “baseline” for evaluating the “fairness” of all that has come since … reveals a serious flaw in the underlying argument.

Besides, what’s “fair” today versus what was “fair” 50 years ago takes on a completely different complexion based on where one lives in the world!

OK, readers:  Have at it. What’s your perspective? Please share your thoughts here.

3 thoughts on “The American middle class may be squeezed … but why?

  1. I would add the emergence of a large “salaried class” in the U.S. (and elsewhere) as an important 20th-century development that is now in flux.

    Prior to the Second Industrial Revolution (late 19th-early 20th centuries), many Americans worked the land, ran their own small shops/businesses, or worked for hourly wages. As new technologies (electricity, the telegraph, steam engines and railroads) emerged, thousands of factories and large enterprises popped up. Millions moved to be near the new jobs, and unions and a new “professional class” took root.

    That so many people found work as salaried employees was hugely consequential. It meant folks knew with more certainty how much money they’d be able to bank every month. That, in turn, facilitated an explosion in credit. It made possible an era of enormous economic expansion — and displacement. While new machines replaced many manual workers, the new professional, salaried class took out mortgages and bought all sorts of goods on credit because they (and their lenders) had confidence they could make the payments.

    I’d wager the Technology Revolution of the last few decades will be even more consequential than anything that has gone before. Increases in productivity and globalization have changed — and will continue to change — the economy forever.

    (Good) salaried jobs as a percentage of all employment may well have peaked as companies now outsource many functions and, on the factory floor, turn good jobs over to robots. Many of the salaried jobs that remain will require highly specialized skills.

    Most importantly perhaps, career security already is a thing of the past. Employment velocity has accelerated as people jump from company to company and many firms jump from employee to part-time help. Less security equals less propensity to borrow and consume. If our large salaried, professional class goes into decline as a result of technology, then we have a new paradigm, not unlike paradigms of yore: Owners and entrepreneurs prosper, a few others do well, but many get by doing whatever they can to scratch out a living.

    … And the era of extravagant consumption fueled by nice dependable monthly checks (and the resulting easy consumer credit) will come to a close.

  2. Like most analysis both of these – National Journal and Nelson Nones most likely come from narrow visions of Good and Bad and Right and Wrong and in their own ways they ‘fiddle’ the numbers to make their vision accurate.

    Yet another ‘truth’ and one which we seemingly refuse to want to acknowledge is the following one: Since 1980 and the advent of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom (the Great anti Union Crusader), the policies of unchecked laissez faire capitalism, with less and less checks and balances have worked in such a way that we have simply seen the greatest transfer of wealth from one group of people to another. In our case from the Middle Class to Banks, Venture Capital Groups, Hedge Funds – Cumulatively – Wall Street and the very select group known as the 1% that they represent. If one looks back at the cumulative amount of squandered money, fraud and simple theft that has taken place in the intervening years it is quite simply staggering.

    Following a timeline from 1980 to the present, there is a shameful thread of fraudulent activity that has taken place in the United States and Western Europe with no government resolve to help contain it or indeed stop it, which has led to the dissolution of the Middle Class. 1980: The First Savings & Loan Scandal/Fraud, 1986: Junk Bonds – Michael Milken and Ivan Boesky, Dennis Levine & Martin Siegel, early 1990’s (just 10 years after the first one), the Second Savings & Loan Scandal/Fraud, mid 1990’s through 2005, Worldcom (Bernie Ebbers), Enron (The smartest Guys in the Room – Kenneth Lay & Jeffrey Skilling), more fanciful and creative financing than I am able to list in this reply, one memorable fact though was Cisco Systems trading at 150 times earnings in March of 2000.

    All of this leading to the Grand Dad of all Frauds; the Sub Prime, Credit Default Swap, Derivative Manipulation of the economy and in effect squeezing the last penny’s left from the Middle Class. Cumulatively we’re quite literally talking about hundreds of TRILLIONS of dollars that have shifted from ordinary, house owners with 2 cars in the driveway and kids in school – The Middle Class to what we now know to be the faceless 1%.

    The money had to come from somewhere, so why not from what has always been the backbone of any good Capitalist economy – The Middle Class? Why is the Middle Class then Shrinking? Because it has been held up at Proverbial Gunpoint and has nothing more to give. Having lost virtually everything over the last 3 1/2 decades and with the Wizards of Wall Street realizing that the bottom of the barrel has been reached, focus has ben shifted elsewhere. In the Quarterly World of Wall Street where Numbers have meaning in 3 month increments, the only way that manufacturers can afford to make progress is by closing Stateside factories (no more jobs for the Middle Class) and farming out work to countries where workers earn $35.00 a week … or is it a month? In buildings that collapse (Bangladesh), or in factories where workers commit suicide (Foxconn – the irony of the name is amusing if its troubled work habits weren’t so tragic in human terms).

    Hopefully now that the millionaires have become billionaires and trillionaires, they may come around to understanding that killing the Goose that laid the Golden Egg may not have been such a clever idea after all. But that would be asking for a conscience and a bit of real education and not simply street smarts.

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