The Middle Class Fallacy Revisited

I already wrote about this before, but I'm going to write about it again.

The middle class is a fallacy.

This is not a diatribe linked to political ideology. I could sit here and regurgitate a whole bunch of facts and figures, and what has happened to the economic standing of the middle class of the past 10 years. I could talk about how that same article released yesterday related American mindset where they blame just about anything and everything -- to big business, to big banks, to Wall Street, the government policy, to Obama, to Bush, and so on. I've already given what I believed happened, and I'm going to do it again, in brief.

Before I do that, I want to illustrate that the middle class was never a legitimate socioeconomic standing; it is almost as a believable of a demographic as supply-side economics is a believable school of economic thought. It is a socioeconomic concoction fueled out of total bullshit, first coined in 1745 in James Bradshaw's pamphlet Scheme to prevent running Irish Wools to France, and subjected to more meanings  than most people today would really care to keep up with. These days, the middle class takes on a populist romanticism meaning, which the more and more I hear about it, the more and more foolish I come to realize it really is.

There's really two types of people that participate in today's capitalist economy -- those that can "make it" and those that "cannot". Anything beyond that is by definition of relative personal comfort and convenience: someone that makes $25,000 year may be living comfortably and feel like he or she has it made thanks to a very cheap standard of living; someone that makes $47,000 a year may feel that he or she is living marginally based on factors such as education attained, a personal view on the value of their skill, personal debt, and just really a relative desire for more money.

I know, I know - the whole "middle class" label gives people a certain sense of belonging and purpose; that's more or less why it takes on so much meaning as it does now. Because of the meaning that it takes on, it became legitimately seen as part of social hierarchy; the unfortunate side effect is that because of people not seeing the payoff, as in, "I worked my ass off and now why is all of this happening to me?", we get to be inundated by whining, bitching, and polls by Gallup demonstrating why people are so scared to consume.

I'm sticking by the things I've been pointing out the last few weeks: that labor has become devalued thanks to automation and globalization, that profit superseded volume as the barometer of success, that personal debt is still too high, and this is largely the end game of what happens when a country moves further along as a post-industrial economy. In short, it wasn't a matter of if it was going to happen, but when it was going to happen.

But of course, we're so far off in populist romanticism when that the question gets asked "I've done everything right, and now why is this happening to me?", we'll look for answers anywhere and everywhere, now matter how ludicrous or empty the answers may be. We wait and salivate for the personality that will assuage the middle class that feels sick and tired of being sick and tired, never mind the fact that the modern middle class was just a side effect from the massive pent up consumer demand and cheap energy prices after World War II. We listen for candidates that espouse "middle class values", despite spewing out rhetoric and suggestion policies that really don't do anything to solve the problem.

But what irritates me is that the modern concept of the middle class is a fallacy that only amounts to being an end within itself, yet we refuse to recognize it. Instead of answering the question "Well, what we can do about preserving the middle class", the question that should be asked is what will happen to consumerism when private debt levels stabilize? And beyond that...Will we consume smarter? Will banking systems discourage loose credit? Will we finally find value in human capital once again like before? Will the current barometers of success still stay the same? Are we seeing what could possibly the new reality of the Information Age?

My biggest gripe of all is using the "middle class" jargon as a political tool, continuously allowing one of the biggest socioeconomic fallacies ever bought into to persist. This is not really about the decline of the middle class -- this really needs to be a discussion as to how more people can effectively participate in today's economy.

The Value That Isn't Labor

I recently came across this humorous chain status message:

Recently, while I was working in the flower beds in the front yard, my neighbors stopped to chat as they returned home from walking their dog. During our friendly conversation, I asked their little girl what she wanted to be when she grows up. She said she wanted to be President some day. Both of her parents, liberal Democrats, were standing there, so I asked her, "If you were President what would be the first thing you would do?" She replied... "I'd give food and houses to all the homeless people." Her parents beamed with pride! "Wow...what a worthy goal!" I said. "But you don't have to wait until you're President to do that!" I told her. "What do you mean?" she replied. So I told her, "You can come over to my house and mow the lawn, pull weeds, and trim my hedge, and I'll pay you $50. Then you can go over to the grocery store where the homeless guy hangs out and give him the $50 to use toward food and a new house." She thought that over for a few seconds, then she looked me straight in the eye and asked, "Why doesn't the homeless guy come over and do the work, and you can just pay him the $50?" I said, "Welcome to the Republican Party." Her parents aren't speaking to me anymore.

The first thing it demonstrates that anybody will try to turn into a "Republican" or "Democratic" thing. In these suspect economic times, its this type of partisan stupidity that leads to issues such as what I highlighted in my previous post.

The second thing it demonstrates that nobody recognizes the value of labor.

I'm not talking about the labor theory of value that is associated with Marxian economics that states that the value of a commodity or good is related to the amount of labor that was put into it. I'm talking about the concepts explored in this excerpt from Richard Cantillon's An Essay on Economic Theory (which is the Libertarian Economic Church  Mises Institute's English translation of Essay on the Nature of Trade In General and a rant from a Wisconsin farmer. While the former looks into the classical approach of laborer versus laborer and the farmer's rant looks at it from the point of view of how labor has been weakened in modern corporate America, I'm going to approach this from a standpoint that largely combines both ideas.

First thing's first, and while this is a sales and marketing euphemism, its actually true for a whole lot of things beyond it: people only buy when value exceeds price, or in other words, when the buyer can justify spending his or her money on the sellers product. In this case, when someone that is in need of a labor service (the buyer) can justify paying wages to the prospective employee, subcontractor, etc. (the seller). Now that is settled, I'm going to emphasize three things:

Thanks to the shift from finding value in how many units are produced to how much profit is made from each unit produced, its always a race to the bottom line. While others may call this efficiency, this shift that took place starting in the 1970s and accelerating into the 1980s and 1990s is what led us more than anything to the current socioeconomic situation of today. It brought on the globalization and subsequent offshoring phenomena, that while this movement brought new jobs and revitalized economies in developing and emerging countries, it stagnated incomes in the West due to the expanded labor pool. Advances in technology, which brought on automation, allows companies to save money and keep prices low. That's good until you consider the inevitable consequence that the depressed value of labor has led to more people competing for fewer jobs available, depressing wages and payroll size. (Before you whine, I'm well aware that local economic diversity helps alleviate this).

Romanticism heavily distorts reality. Post-war American romanticism created great expectations and as this current economic end game is being played out, it's more or less fucking with people's heads. What led to the massive boom period after World War II? Pent up consumer demand, fueled by post-war euphoria, along with a population spurt with the Baby Boomers, suburbanization, and the industrial Northeast reaching its zenith, it created a perfect storm for growth that lasted relatively until the early 1970s. People romantically remember Ronald Reagan's supply-side economic recovery which provided for a boom period that lasted from the end of 1982 to 1990 -- the truth is that service sector weathered the storm and the real credit goes to the energy prices that managed to stabilize, which helped rebound the manufacturing sector. Greenspan-era loose credit during the 1990s and early 2000s was the biggest catalyst to the boom periods of the Clinton years and the mid Bush years.

Resisting the shift only exacerbates problems. Where the Industrial Revolution's inertia was rooted in forming resistance social changes resulting from urbanization, improvements and new benchmarks in living standards, the newly formed relationship between corporate business structure and the worker that led to an increased awareness in human rights (albeit loosely), as well as the advancing of the relationship between business and government, the Information Revolution's inertia is rooted in popular rejection of the quantitative approach, devoting glorifying or criticizing energies in directions that are pointless, and denial. American economic discussion should be geared towards how to make labor and the worker in general more valuable instead of Americans -- both constituents and politicians -- actively crying and bitching with mercantilism, and attempting to pass it off as capitalism.

So back to the little viral "anecdote":

She can go over there and do all of that yard work -- so as long as the homeowner finds value in her work. When the homeowner no longer finds value in her work (i.e., starts questioning why the fuck she's paying out $50 for yard work), then the prospective laborer is screwed.

The real lesson that should be that whatever you do in regards to labor will only be valuable so as long as the employer sees value in your labor. While there are a lot of things that you yourself can control, there are other factors that can't be controlled. Education is indeed key, especially in today's economy where the tertiary sector reigns king, and the primary (agricultural) and secondary (manufacturing) becomes more automated -- thanks, in part, to the tertiary sector. However, the bottom line is that the root cause of the anemic global economy is the decreased value of labor, which depresses wages and raises unemployment, which cause tax revenues to fall, governments to go broke, and countries to become schizophrenic in policy and culture. 

The Dangers of Political Solutions to Economic Problems

While heart of Keynesian thought in the eyes of many protractors and detractors is invariably deficit spending, in my mind the most important argument he ever made was his stance that aggregate demand was the main economic driver. This is strange considering Alvin Hansen, who introduced Keynesian thought in the 1930s to the United States, made two predictions -- after the 1937 recession and World War II -- that was proven wrong by the growth of international and domestic demand. However, the real issue with Keynesian thought is how fertile it is to political exploitation.

But this will not be necessarily about Keynesian economics, neither as a vindication or an indictment. This is going to be about when government intervenes in an economy and conjuring solutions out of politics and not out of economic realities. The greatest example of this ever -- and I mean ever -- would be the Russian Revolution which bore the Soviet Union, but that's a whole 'nother subject for a whole 'nother day.

The exploitation is illustrated more so than ever with today's issues. Here's the truth: a lot of the economic turmoil of today is centered around public perception, the explosion in private debt, and more importantly, the decreasing value of labor through automation and globalization and the relative end game to what was a major philosophical shift in the 1980s where financial standing superseded production as the benchmark of success. Where government intervention would almost always focus on trying to spur investment and consumerism, it fostered not only unrealistic expectations amongst people; it also continued to deny the real issues at hand in exchange for political points.

I stumbled across an article a few months back about Canada's austerity programs in the 1990s. It noted that the Liberal Party, led by Prime Minister Jean Chretien and Finance Minister (and future Prime Minister) Paul Martin, bucked the social liberal tradition of the Liberal Party in favor of one of the infamous -- and successful -- austerity programs, ever. While many look at Canada's austerity model as inspiration (think Europe), it was largely buoyed by the Bank of Canada lowering interest rates, a weak Canadian dollar that made Canadian goods cheap, and international demand for Canadian products increasing throughout the later 1990s -- all things that made labor valuable. Yet, one point that got noted was that the Liberal Party still managed to win elections despite the austerity programs -- and I would imagine so whenever the cards fell into place like they did and turned Canada into an exception and not the rule.

However, the Liberal Party did not embark on an austerity program to score political points or to merely give the presence that they're "doing something about it" to the degree of what you see in Europe -- they embarked on it because they were one of the few countries in the world to actually get the new economic reality: how well finances are managed, not how high production levels are, is the new benchmark for investors to decide if a country's economy is worth it. That lesson, if anything, is the biggest lesson to be learned from Canadian austerity.

Turning back to the United States: we may credit the Bush and Obama stimulus packages for stabilizing the economy, but in truth, labeling it "stimulus packages" instead of the proper term of "stabilization packages" is nothing more than a glorified hedge bet of political capital. The programs did little to address the new economic world, but they sure did a whole hell of a lot to try to convince Americans that these programs would get the country "back to where it was." Even Obama's campaigning about gearing policies towards a "21st century economy" is more of "getting back to where it was" and less about moving forward in today's economic reality. These days, on both sides of the political spectrum, the loudest voices, from whatever arms of the media, are reinforcing the American economic romanticism which allows reality to be seriously distorted.

Thanks to globalization and automation achieved by technological advances, blue collar work, which was ultimate back bone of the American economy, is less valuable than ever thanks to the aforementioned philosophical shift. Financial deregulation throughout the 1980s and 1990s, culminating in the termination Glass-Stegall Act, made executive, financial, and other white-collar positions increase exponentially in value, and thus salaries. Technological advances led to greater automation, decreasing the need in anthropogenic labor, yet increasing the value of well-paid technological/computer engineers, designers, and developers that aim to maximize efficiency and thus maximize financial standing. A host of other factors, centering on globalization and the emergence of new economic powers and markets, led to the double whammy of stagnating and depressing wages and offshoring (incorrectly called "outsourcing"). Private debt, thanks to the loose credit of the late 1990s, remains astoundingly high (on average at 114% terms of percentage of disposable income here in the United States as of last year), which is one the leading factors hindering consumerism (the other, of course, are people just being straight up scared).

While there is some blue collar work still in existence in the United States (thanks shale boom), this blue collar work is extremely vulnerable because its rooted heavily in speculation-induced booms (shale gas) or jobs that are vulnerable to offshoring (such as manufacturing), granted some companies are bringing jobs back stateside -- credit the Federal Reserve's quantitative easing measures, which is also why you're seeing inflation right before your eyes at the grocery store.

While I just described mostly the American economy, this story can be replicated in any country that failed to gear their economic policies towards this new reality. And looking at Europe, led by austerity hungry Germany, it is a grave illustration of what happens when economic issues try to be solved politically. Sure, Greece, Spain, and Italy are all saddled with debt, but it is an example of why the Euro, which was a political, not an economic creation, would be eventually doomed: a uniform currency fails to solve sovereign problems. Countries have to be able to develop their own solutions to their own economic problems. This is why Iceland, whom refused to bail out financial institutions because they simply could not afford it, is slowly on the way back to recovery thanks to currency manipulation that made it cheaper to do business -- and thus more attractive -- to do business in Iceland; its an option not available for any country that is pegged to the Euro.

Yet, Europe buries itself a bigger hole by trying to solve a politically-induced economic problem (the Euro) with an even bigger politically induced economic problem (austerity). While it is clear they were all influenced by the Canadian model, Europe is hampered by the fact that there's no demand binge for European products to actually produce the expected payoff, let alone the fact that Europe, to an almost greater degree than the United States, has been hit hard by labor's devaluation.  

But going back to the bottom line about this whole rant. It's sickening to see, on both sides of the aisle, that any economic solution that can be conceived is just made to score political points with lots of over promising and under delivering. Lassiez-faire advocates insist that the dissolution of government intervention in the economy would provide for an economic paradise, when that's not even the major economic sticking point; government invention advocates will claim the greater deficit spending and addressing debt later is the key to economic success, even while this still fails to address elevated private debt and depressed labor value. There's no critical thinking...just advancing political ideology for political points.

What is the solution, you ask? It goes beyond the argument as to whether or not the government should be involved in the economy, it goes beyond any argument that could be made by the social justice tinged Keynesian or Post Keynesian ideas or lassiez-faire pockets of the Chicago monetarist school and the Austrians, it goes beyond any argument that can be fueled by any nationalist romanticism that reminisces about days that existed, in truth, in complete contrast to what they thought. It comes down to public and private sectors adjusting to this Information Age, to this post-industrial world. It comes down to public and private sectors reestablishing value in anthropogenic labor and appreciate how many units of a product gets sold as much as how much profit it is gained from each unit. It comes down private debt reaching 65 to 75% of disposable income. It comes from people divorcing themselves from adhering to a political ideological adjective, and critically think about the large scale transition taking place as we move further along in this post-industrial revolution.

The Wire creator David Simon said it in a 2009 interview with PBS's Bill Moyers. When referring to urban blight, Simon noted that in today's economy, specific to the United States, "there's 20% of the population we just don't need." When you look at the decreasing value of labor, his assessment is not so ludicrous after all.

What is disturbing, however, is when governments gear economic policies towards scoring political points and just simply ignoring the real issues at hand.