Messing with the Middle

You have undoubtedly picked up on a couple of themes in many of my blogs, like “no investment in education, infrastructure and research = no future,” “our military expenditures – almost half of such allocations on earth – are bankrupting us,” or “America without a middle class just isn’t America,” but the linkage between such themes is staggering. As our middle class loses their home-equity-piggy-bank, faces unemployment and probably equally importantly (but under-reported) under-employment, as commodity prices rise from global demand making everything proportionately more expensive, and as wealth shifts to more to those at the top, their children are living in a world of unaffordable education with absurd levels of student loans, face a future of pothole-laden streets and collapsing bridges, are going to have to find what jobs they are in companies short on the kind on innovation that made us great and will face a deficit payback obligation and retiree support that their lower pay levels will never be able to extinguish.

It’s not exactly a secret that our middle class is in jeopardy. Corporate America is lowering its economic targeting towards budget-conscious shoppers whose financial capacities and economic fears have them entering the lower classes or at least acting as if they were (see my “Hourglass Marking” November 6^th blog), but data from our recent Census is pretty telling as well. Preliminary analyses of Census data noted the impact of the economy on the poverty-level families, but paid little attention to the “next level up” – people who make 50% or less above that poverty line.

“When the Census Bureau this month released a new measure of poverty, meant to better count disposable income, it began altering the portrait of national need. Perhaps the most startling differences between the old measure and the new involves data the government has not yet published, showing 51 million people with incomes less than 50 percent above the poverty line. That number of Americans is 76 percent higher than the official account, published in September. All told, that places 100 million people — one in three Americans — either in poverty or in the fretful zone just above it.” New York Times, November 18^th.

That next level from the bottom is called “near poor” by some social scientists, but their growing numbers and their longer term pressures on programs like Social Security and Medicare do not bode well for the stability of our nation’s future. What’s bad for Wall Street is that they simply are dropping out of a prime consumer base that corporate America has relied on since WWII. “They drive cars, but seldom new ones. They earn paychecks, but not big ones. Many own homes. Most pay taxes. Half are married, and nearly half live in the suburbs. None are poor, but many describe themselves as barely scraping by.” NY Times. Except for necessities, and these are bargain basement brands, they’ve just stopped spending.

For those at the top of the economic food chain, however, life has never been better. We do live in an increasingly polarized society of haves and have-nots. “Since 1980 about 5 percent of annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion beyond what they would have had if the economic pie had been divided as it was in 1980, according to Census Bureau data.

“The typical U.S. household, meanwhile, has yet to regain the ground it lost during the recession. The median income of $49,445 at the end of 2010 remains a shade below the level reached in 1997, adjusted for inflation. ‘Income inequality in this country is just getting worse and worse and worse,’ says James Chanos, president and founder of money managers Kynikos Associates. ‘And that is not a recipe for stable growth.’” Bloomberg Businessweek, November 16^th. As wealth shifts increasingly to these individuals, the world in which they live is clearly deteriorating around them, at least for the vast majority of Americans. And if you are a rich investor looking to make money in a growing American market… maybe you are living in a world where that growth potential just vaporized.

“In the 1960s economists such as the late Arthur M. Okun, who was chairman of the White House Council of Economic Advisers, believed that societies could emphasize equality or growth, not both. Today, when the quality of the workforce plays a larger role in determining who prospers, many economists—including Federal Reserve Chairman Ben S. Bernanke—now believe that equality and growth are linked. As Branko Milanovic, a World Bank economist, wrote in September: ‘Widespread education has become the secret to growth. And broadly accessible education is difficult to achieve unless a society has a relatively even income distribution.’

“Thus the growing chasm in the U.S. between the haves and the have-nots has serious consequences. Societies that manage a narrower gap between rich and poor enjoy longer economic expansions, according to research published this year by the International Monetary Fund. Income trends in the U.S. mean that future U.S. expansions could last just one-third as long as in the late 1960s, before the income divide began widening, says economist Jonathan D. Ostry of the IMF. The average postwar economic boom lasted 4.8 years, according to the National Bureau of Economic Research. The current expansion, which is just 27 months old, may peter out within a few months. Goldman Sachs said on Oct. 3 that the U.S. would be ‘on the edge of recession’ by early 2012.

“Expansions fizzle sooner in less equal societies because they are more vulnerable to both financial crises and political instability. When such countries are hit by external shocks, they often stumble into gridlock rather than agree to tough policies needed to keep growth alive. Raghuram G. Rajan, the IMF’s former chief economist, says political systems in economically divided countries become polarized and immobilized by the sort of zero-sum politics now gripping Washington. ‘It makes the politics more difficult, and that makes it more difficult to grow,’ says Rajan, now a finance professor at the University of Chicago’s Booth School of Business. ‘There is no consensus on any of the solutions that are proposed.’” Businessweek.

Yeah, well, maybe there is “no consensus” for the solution, but the answer isn’t that illusory. If the emphasis is on growth and value-added policies, then the kind of money our society spends needs to tilt more toward return-generating investments – like education, infrastructure and research – and move away from writing checks that have no real reward – like absorbing 44-47% of the world’s military expenditures to support a military that hasn’t won a major war since WWII.

I’m Peter Dekom, and it does seem that politicians really prefer mythology to pressing the easy – okay, the “easier” – button.