Outside the Box

The Crisis of the Middle Class and American Power

John Mauldin

January 11, 2013

Thinking about the long term is all too rare a talent these days and one I really appreciate. When you take a longer view, it is easier to see how all the moving parts, the bits and pieces, fit together. And you can see other streams of action impacting your original line of thought.

In today’s Outside the Box, my (and our) old friend George Friedman thinks about the future of employment and how it impacts the expression of American social order and geopolitical power. Sitting here in Stockholm tonight, that was the very point we were making in our dinner conversation with the management team of the Skagen funds. It is not just a US problem, although George looks at the US. This is a global issue as the gulf between the middle class and the upper income classes is widening, and it is widening for structural reasons. There are no easy answers. Dennis Gartman quotes PJ O’Rourke, who basically launched a shot from the right. It speaks for itself:

 Mr. President, the worst thing that you’ve done is that you sent a message to America in your reelection campaign that we live in a zero-sum universe.

There is a fixed amount of good things. Life is a pizza. If some people have too many slices, other people have to eat the pizza box. You had no answer to Mitt Romney’s argument for more pizza parlors baking more pizzas. The solution to our problems, you said, is redistribution of the pizzas we’ve got—with low-cost, government-subsidized pepperoni somehow materializing as the result of higher taxes on pizza-parlor owners.

In this zero-sum universe there is only so much happiness. The idea is that if we wipe the smile off the faces of people with prosperous businesses and successful careers, that will make the rest of us grin.

There is only so much money. The people who have money are hogging it. The way for the rest of us to get money is to turn the hogs into bacon. The evil of zero-sum thinking and redistributive politics has nothing to do with which things are taken or to whom those things are given or what the sum of zero things is supposed to be. The evil lies in denying people the right, the means, and, indeed, the duty to make more things.

 But George notes the other side (bold emphasis mine):

 Last week I wrote about the crisis of unemployment in Europe. I received a great deal of feedback, with Europeans agreeing that this is the core problem and Americans arguing 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.

These issues and the threat they pose have to be resolved. The structural mechanisms are creating the inbalance. We need to nurture creativity and we need to reward it, but it creates a wide dispersion of income.

I think you will find George’s analysis quite thought-provoking, and you may find yourself wanting a Stratfor subscription. They are offering my readers a discount on their excellent products, and, you can get on board by clicking here: https://www.stratfor.com/subscribe/mauldin-jmf.

I am in Stockholm tonight (and did Copenhagen and Oslo) on my way to the south of Spain for a few days, for what is hoped will be a vacation, then a day in London for a Soc-Gen Conference and one of my famous “dinners with interesting people.” Dylan Grice (Soc Gen), Anatole Kaletsky (GaveKal, Simon Hunt (serious expert on copper and China), Dan Stetler (chief econ and Boston Consulting and wicked brilliant), Jonathan Tepper (of Variant Perception and my co-author). Just found out Richard Howard of Hayman Partners (Kyle’s Bass’s operation) and a few others will be there, too. I shall learn a lot. Then I’m off to Greece for five days with Christian Menegatti of Roubini Economics before ending up in Geneva and then returning to Dallas.

Have a great week. I am having a blast and will write your Thoughts from the Frontline letter tomorrow. Three computer crashes in five days! What are the chances? Ugh. But Life is fun and you take it all in stride. Just means I needed to think more about this next letter – maybe I will get it right.

Your ready for some Costa del Sol analyst,

John Mauldin, Editor
Outside the Box

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The Crisis of the Middle Class and American Power

By George Friedman

Founder and Chief Executive Officer

Last week I wrote about the crisis of unemployment in Europe. I received a great deal of feedback, with Europeans agreeing that this is the core problem and Americans arguing 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…

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donschott@aol.com

Jan. 19, 3:49 a.m.

You gloss over the forty year history of affirmative action in America where education and employment slots are taken from general competition and given to African Americans regardless of income- a pernicious zero sum game.  Our President and First Lady, solidly Middle Class Americans in their youth, benefited from Affirmative Action to the Ivy League and have never looked back, and their academic records have been sealed.  Legacy programs for African Americans are just as wrong as Legacies for the politically powerful Chicago bosses’ children (University of Illinois Law School) or rich alumni (Notre Dame and Princeton).  However, Affirmative Action is worse than a zero sum game when lazy, dumb rich kids (Black and White elites) are taking education and employment slots from our smartest and most enterprising youth—Jews, Chinese and Japanese Americans, etc.
This Zero sum American Heritage goes on steroids when at the bottom, impoverished, rural Latin Americans are sold the American Dream by coyote criminals, drug transporters and our President and Congress.  For their vote, they receive free health care, education, food stamps, housing and whatever else their Precinct Captain can give out during election day.  Whole communities from Central American have been uprooted to this “illegal” American Dream while millions of educated Middle Class Hispanics are denied immigration.

Jim Summers

Jan. 17, 1:04 p.m.

PJ O’Rourke is wrong.  Conservatives are claiming it is a zero-sum economy, not the president.

Over the last few decades, the economy has grown; we are producing more pizza.  But, all of the extra pizza is being taken by the pizza parlor owners; the workers aren’t getting any of the extra pizza we are now producing.

Conservatives are claiming that if we try to tax away any of the extra pizza that is going to the parlor owners, the extra pizza will disappear; the only reason there is any extra pizza is because we let the owners keep all of it.

That sounds like a zero-sum argument to me: there is no way to make the pizza workers better off.  We have to let the owners keep all the extra pizza or there will be no extra pizza, and workers are getting all the pizza they are ever going to get.

Maybe that’s right; but for most of history before Reagan, it was possible to give workers a share of the extra pizza.  What changed?

mstrvlr@hotmail.com

Jan. 17, 3:04 a.m.

Where does unemployment count on the efficiency scale? Why isn’t efficiency measured across all of society, as opposed to measuring it for some particular company?. Wal-Mart may be considered and efficient company, but how do you count the fact that many of its US employees have to depend on government for medical care? Why is that not counted as a detriment to the company efficiency rating?

Seems to me that a re-structured company claiming to be more efficient now that is has fewer workers leaves out the fact that society at large inherits responsibility for those unfortunate souls who no longer have work. Unless we shoot them, or kill them off in some other way. But, as George says, once this unemployed cohort gets large, they will definitely shoot back. Wouldn’t you?

Daniel Plager

Jan. 15, 3:11 a.m.

I think George Friedman is way off base here, and he seems to have built quite a franchise by bloviating about subjects and issues that really have no verifiable manner in which to conclude he is right or wrong.

To wax nostalgic about the wonderful American middle class of the post war era, and to wring one’s hands about the ‘broken promise’ that has been made at the core of our struggles, misses the entire point.

Globalization and the flattening of the world are the reasons why our middle class feels more strained.  There is competition from people and places that weren’t in the game as recently as 30 years ago.  The US middle class needs to step up its game in order to meet this competition.  The theory, of course, is that the global pie will grow such that, even while American dominance necessarily diminishes, the standard of living for all can continue to rise, even for the US middle class.  But it takes work and effort, and both of these virtues are in less evidence in America 2012.  We’re a soft entitlement driven society, so what do we expect??

dawood@verizon.net

Jan. 15, 1:38 a.m.

Might flag and add emphasis to a few issues

1) Illegal immigration has driven down the income of lower income Americans
2) Increased international trade has increased the competition with low wage workers in foreign countries
3)The increased use of computers has reduced the need for large sectors of employees
4)  With respect to women entering the workforce - running the household used to be a full time job - lots of work.  Moderb conveniences reduced that workload so that it os now only natural for women to enetr the workforce.  In the good ole days they didn’t have that freedom because there was too much work to do at home.

Identifying the issues is easym the hard part is quantifying them.

Christopher Gable

Jan. 14, 5:31 a.m.

I think this piece ignores a number of large factors and singles out a straw man often used by the Left.  The joint stock enterprise form has been around since 16th century England.  If it caused a systemic problem, there would be a pattern of it by now.  I have not seeen any that survied scrutiny.

There are alternative explanations to the depressed wage growth of the middle class. The introduction of the Japan/India/China populations into the global work force greatly increased the supply of labor.  That alone would have depressed wage growth in the U.S.  You could check if the other Developed countries has a similar experience.  If so, and the emerging markets did not, yuo can’t blame it on the corporate form.

The U.S. Dollar,  as the world’s reserve currenty, exascerbated the effect.  An overvalued dollar makes imports cheaper and exports more expensive.  The artificial lack of competitiveness would place pressure on wage growth.  Although Manufacturing may be singled out, the effect would impact Services as well.  Witness the migration of call centers overseas. 

Christopher Gable

eric.lannert@gmail.com

Jan. 13, 7:48 p.m.

I agree with Mr. Friedman’s excellent analysis of the problem and the need to focus on solutions.

First, *everyone* needs to read <a >The Fourth Turning</a>. This book explains the role of generational theory over modern history - nothing I’ve read in 20 years comes close to the explanatory power of this book to understand the current social and economic situation. I vote the authors deserve a nobel prize.

Second, we need to get back to the healthy tension between fostering competition (distributed power) vs. acquisition rights (concentrating power).  We are currently way out of equilibrium here. I’m going to talk about banking, but the same applies in most industries. Over the last 30 years, in banking, we have seen a reduction in competition from 18,000 institutions in the 1980s to under 8,000 today. 

Let’s do some basic math on that - that’s 10,000 fewer CFOs (150K salary positions), 10,000 fewer CMO’s, CIO’s, etc. There’s a multiplier effect there as well, as each one of those C-level exec’s had teams. While we focus on the loss of manufacturing jobs, the reality is that knowledge workers are and will be our middle class base going forward.

Couple this with how much we all hate our banks (both commercial and personal), and the total lack of innovation in banking (see this <a >article</a>) and it’s pretty obvious to me a simple 2 step policy response is 1 - enabling more competition by enforcing existing laws that prohibit further concentration of the industry and 2 - making it easier for entrepreneurs to create new banks. The same applies in other industries. A policy focus on competition and wealth accumulated from organic growth is good for jobs and good for customers.

The problem is that there is nobody in Washington owning pro-competition policy. It’s either pro-redistribution, or pro-accumulation. We need one of the two parties to shift.

Third, the shifts to the “agile corporation” that Mr. Friedman describes will be ultimately liberating for the middle class if we have truly competitive markets. In such markets, your people matter equally with your shareholders, your customers and your environment. Our current imbalances are evidence we don’t have efficient markets in most industries.

Matt Wilson

Jan. 13, 1:52 p.m.

Looking at complexity theory suggests that we may never pull out of this mess short of a large crash. And that crash might come in the form of war.

Do a little thought experiment on your own life. Is tomorrow going to be heavily influenced by the past? Sure it is. Everything we do in the future is heavily by the past if you think about it. While there is a randomness component to the future, the past makes a huge mark.

If your future is like this, then which other systems work this way? What about a growing forest, growing sandpile, earth movement, financial markets and wars? All of these systems have a positive feedback causing the past to heavily influence the future, plus a randomness component.

All of these systems automatically crash with no help needed. Suppress small crashes and you get bigger crashes. Suppress bigger crashes and you will get the mother of all crashes. Suppressing that crash means you will be stuck in an unstable state forever, or until a crash is forced. Welcome to Japan.

If you thought our problems were related to the economy, then you would be wrong. They are about the spread of bad ideas, bad decisions and corruption. These have gradually spread to all corners of society. The nation cannot move forward without clearing these away. And that means crash. No crash equals no solution. I didn’t say this was going to be painless.

Since bad ideas, bad decisions and corruption affect every corner of society, they also affect national security and your thinking about national security. You have been led down the wrong path in the thinking about your safety. You know you are safe, and anybody who thinks otherwise is crazy. Except it ain’t true. For those actually paying attention, they know there are ominous storm clouds forming ahead concerning China and Russia.

We should not be surprised if a large economic shock is followed by a large war. They are simply two forms of a crash.

Jennifer Watson

Jan. 13, 7:22 a.m.

World War II fostered the idea that we are all in this together and a pride in the country and our culture that enabled us to solve many problems. Today, some groups being favored over others (affirmative action for anyone not white), some illegals tolerated, and other non-achievement rewards destroys the morale necessary to work together to create solutions. It is like a workplace where favoritism reigns, morphing into nihilism. You wouldn’t run a football team this way!

barry_hartland@yahoo.com

Jan. 13, 3:50 a.m.

Dear Mr. Mauldin,
I truly enjoy your work and look forward to your articles.  Your meanderings are intelligent, enlightening,  readable,  and quite entertaining.  I also value the opportunity to read the offerings of your learned colleagues, such as the recent message from Mr. Friedman.
Like you, I profess to be apolitical, however, in truth I must confess to being a financial conservative, and that influences how I vote.  I am retired.  My family background is lower middle class.  I grew up in suburban Pittsburgh, PA, steel country.  My 3 brothers and I went to college, (the first in our extended family to do so), and by most measures are considered to be successful upper income Americans.
I’m not a letter writer or emailer,  but Mr. Friedman’s article bothered me to the extent that I felt compelled to respond.  I think he has it all wrong, or chooses not to write what’s really going on in America.  I’m sure he’s a brilliant guy and has vast resources to draw on for his analyses.  I, on the other hand, am not brilliant and am without the resources.  But, I have lived what he wrote about, and he has it wrong.  I could write forever on this subject, but few care and I don’t have the time or inclination.  So allow me to tell you what’s wrong in as few bullet points as possible.
 It’s over.  Get over it.  the post-war American dream was just that, a dream.  Who really believed that our prosperity could continue at the expense of the rest of the planet?  Could we have continued to produce the majority of the world’s steel?  Of course not.  Apply this example to the rest of the US economy.
 We must redefine the middle class.  It ain’t what it used to be.  We live in a middle class world of 2 or 3 car families, $100 dollar a month Wi-Fi plans and going away to college as a birthright.  Try walking or riding a bus, putting a dime in a pay phone and not putting your family in debt with outrageously expensive college tuitions.  We are entitled today, and that must change. 
 Politicians lie.  With a few exceptions, they know what has to be done, but the will to address the reality isn’t there.  A fire has started; will they put down the fiddles and get to work?
 Statistics and statisticians lie.  Mr. Friedman refers to the widening gap between the middle class and the rich.  Does he do an apples to apples approach when he makes middle class comparisons?  Does he acknowledge the influence of 10’s of millions of uneducated immigrants on an economy that is in trouble?  Mine is a family of immigrants and I am pro-immigration.  But, one has to address this complicated issue when comparisons are made.  If a true comparison is made, is the wealth gap greater in the US than other civilized nations?  I’m skeptical.  Demonizing those who have accumulated wealth is a slippery slope.
 Government, in all its forms.  We have allowed the creation of a monstrosity.  Forget the intrusion into our daily lives.  Look at the enormous overhead burden.  We see intrusion because legions of bureaucrats feel compelled to justify their existence.  Talk about re-arranging deck chairs on the Titanic!  No wonder we don’t have a budget.
I believe we have been and exceptional Nation and can continue to be a beacon.  We are caught in a very tricky maze today and we must find a way out.  If we are to remain exceptional we will do just that.  It will require another exceptional effort.  I pray that we have it within us.

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