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Outside the Box

The Crisis of the Middle Class and American Power

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:

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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Jan. 12, 2013, 6:11 a.m.

George’s 2700 words may become the most important to be found on the Internet in 2013. Sadly we are only in early January and have yet to deal with all the more important hanging threats, that will impact the United States and by extension the rest of the world for generations.

For those of us who attempt to highlight that the 21st century is not going to be a repeat of the last half/generation of the 20th, all I can say these great words all need to hear and join with their vision of reality.

As George discussed the rise of the United States came about by the rising productivity and efficiency (and innovation) of our corporate communities (our common corporate jobs). As those jobs ceased being “good jobs”  we began to believe that our economic living standards could be maintain by magic, voodoo economics, and essentially an incestuous relationship between these evolving crony corporations, crony federalism and transfer payments. Why do the hard work, when we can create a “Debt SuperCycle Endgame” and kick the debt can down the garden path?

We will create a new working community structure in the 21st century that is productive, efficient and innovative. That historic first community along that line we called “hunters and gathers.” Hopefully we will begin to significant remold the current structures before we fall that far.

Jan. 12, 2013, 5:21 a.m.

In the US, we have a cycle of creating a good system which is then gradually degraded by special interests.  It is time to recreate a good system, but incorporate rules which make it more difficult for rent seekers to distort.  Here are some ideas.
1. Abolish all subsidies and tax breaks. Reduce taxes to compensate for 90% of the scheduled increases.  Receipts will increase by more than the 10% as people operate more rationally, and the economy works more efficiently.
2. Constitutional amendment requiring that all subsides and tax breaks require a 2/3 majority, sunset in one year and require a labeled offsetting tax increase in income taxes.
3. Replace FICA with a petroleum tax.  Require all properties sold to switch from oil to alternate fuel, preferably natural gas, in order to get title recorded. Also require insulation and other weatherization. Federal government will finance and collect on utility bills.
4. Legalize and tax drugs.
5. Abolish rent control and proposition 13
6. Require that corporations and state and local government use realistic assumptions for investment returns.
7. Require that all election districts be created by impartial panels with the aim of creating the maximum number of swing districts. Nationally adopt the California system of one primary.  This will encourage moderates of both parties to appeal across party lines.
These will greatly reduce federal deficit and the balance of payments deficit.  They will force needed state and local government reforms, and improve the effectiveness of all governments.

hugh owens

Jan. 12, 2013, 4:26 a.m.

George has done a fine job pointing out consequences of the economic trajectory of post war America and he is rightly fearful of a country’s future with no middle class. What he has missed is the failure of the US model which went from an innovative population with a disciplined working class manufacturing high quality products the world wanted with finance 10% of US GDP in the 50’s to a parasitic financial class personified by the likes of LLoyd Blanfein and Romney dominating US GDP this century. The 50’s workforce used energy, innovation and resources and actually made things of value which they and the world purchased. The current financial class made nothing of value . Quite the reverse. They co- opted the political class, enacted regulations favorable to them and within the past decade created fraudulent financial instruments and engaged in criminal behavior that brought the US and the world to its knees. To date they have not been punished and when their leveraged bets went south, they had the US middle class bail them out.
  This has been aided and abetted by the banking cartel we call the Fed using both the flawed Keynesian economic assumptions and the equally flawed neo conservative market assumptions that all boats will be lifted by growth. What is also missed is that this whole growth paradigm was possible because of the enormous amount of free energy that the US possessed post war. As late as 1970 the US was consuming nearly 80% of the world’s oil. Today, less than 25%. The cheap oil, gas and coal made it possible. The dynamic working inventive population made it happen. The final nail in the coffin to US and indeed much of world growth is the absurd notion that you can have a country in which 70% of GDP is consumption and debt based and not production based. This has been again aided and abetted by the IMS adoption of the dollar as the world’s reserve currency which allowed the FED to print vast mountains of dollars to end up in and central bank’s reserves and create an exponentially rising debt far above the lowly GDP curve only gradually rising the past few decades. The growth period is over,caput, finished, done. Political kabuki drones on reported by an uncritical and largely captured media which allows the perception management arm of the government issue propaganda reassuring the milling multitudes that the recession is over, housing is recovering etc. The debt will not be paid off and when the world finally throws in the towel on US debt,interest rates will likely soar. Three guesses what the Fed will do. This mirrors the last gasps of the Roman Empire with engineered degradation of the currency to support far flung armies and a lifestyle dependent upon deficit spending.  No figures in positions of power are telling us the grim future ahead because if they did and started telling the US population that it needed to think about adopting a whole new economic model of austerity and fairness, there would be a chorus of catcalls from the financial elites and the bulk of the indebted sinking middle class. The debt started climbing with Bush and his bank cronies and has been really soaring under Obama and his banking cronies. It can not end well. Economic stagnation is baked into the cake. Collapse is inevitable.

Jan. 12, 2013, 4:21 a.m.

Dear Sirs;

You should be able to reply to a comment.  The Board is much more dynamic that way, and maybe John could respond to a few comments that are actually worthy. 

Just my two sense

Jan. 12, 2013, 4:01 a.m.

Bruno de Landevoisin from lower Manhattan, rotten to the core.

I wholeheartedly agree with P.J O’Rourke’s zero sum pizza parlor thesis on paper, or on cardboard box for that matter, if you are out of paper.

However, the trouble in today’s real world, is that the largest pizza makers are actually stealing the dough to make their Sicilian pies, and that is a problem for all of us.

Might be a good idea to get them to play within the rules first, before letting them keep all the anchovies.

Jan. 12, 2013, 3:49 a.m.

Morning John from the big, rotten to the core, Apple.

Although I wholeheartedly agree with P.J. O’Rouke’s thesis on paper, the real life problem these days, is that many of the largest Pizza makers are actually stealing the dough to make their pies, and that is a problem for all of us at the moment.

Jan. 12, 2013, 3:13 a.m.

We have gotten luck again.  The huge natural gas reserves the have been discovered under layers of rock and made viable buy the wonders of modern drilling technology not only give a cheap clean energy source which make american built products more competitive, it also gives us a resource that can be sold abroad to help improve our balance of payments problem and our debtor nation problems.  Theanti fracking hysteria in this country is not helping.

Jan. 12, 2013, 3:09 a.m.

Very interesting article. Although George starts by decrying the redistribution of wealth, the entire article seems to lead one down a similar path. Maybe I can only see these issues through wealth ddistrubtion glasses, but follow me: It seems that the author would have the country fix a social and an economic problem. Where does society make such decisions? In government, of course. And where is the confluence of social and economic guidance greatest? In the tax structure, of course. Government, and by proxy, the society most efficiently influences people’s behavior through the incentives and disincentives built into the tax code. So it seems inevitable that the use of tax incentives should be the prime tool. It is not necessarily wealth distribution ( the wealthy tax payer should be able to keep his money by doing X instead of Y), but it is social guidance. It is only incidentally wealth distribution in that those refuse to do X instead of Y lose some of their wealth to higher taxation and those who do X instead of Y gain some wealth through lower taxation or higher subsidy. This worked well, in the 20th century, but not now. It seems to clear that the insistence on cutting taxes willy-nilly for everyone as well the reluctance to give guidance to those “re-engineers of corporations” ( e.g.,tax penalties for busting unions or incentives for providing health benefits) has robbed government and society of the ability to preserve an important value. In short the tax code needs to seen again as a social engineering tool, not just as means to fund the big bad government. Government does not really need taxes to run:It can print all the money it needs. Taxes instead serve economically to hold down private demand and influence behavior. Or so it seems it should.

Stephen Davis

Jan. 12, 2013, 3:06 a.m.

Dear Mr. Friedman,

Congratulations on writing an article that I have written in my mind and have spoken at cocktail parties many times.  I expand your conversation by giving the layman “real” examples of falling living standards.  I tell the it is like a quiet steady snow storm where standards fall like one flake at a time. 

Just in our city, Cincinnati, you have rising taxes, reneged Government promises, privatization of local parking meters, free bridges replaced by toll bridges, rising health co-pays, rising ticket prices and food prices (smaller portion sizes as well), evaporating pension promises.  That doesn’t even mention the lack of innovation and creation of structure that guarantees future progress. 

A car gets old over time.  You don’t realize just how many things are falling apart until something major goes wrong.

william kennihan

Jan. 12, 2013, 2:42 a.m.

I agree completely with Mr.’s Friedman, Rourke, Blum and Risser. I believe that the psychology of our culture has changed dramatically, and the reason is the forced march from a Republic to a Democracy by the politicians buying votes with our taxes, and the courts becoming enablers with their liberal interpretations of the Constitution. It is a complete lack of leadership in our political arena that has allowed this transition. From the welfare programs that have decimated the family structure and fiber of our neighborhoods, to the complete entitlement mentality now cemented in the minds of over half the nation, this belief that you can vote yourself anything you want and it won’t cost you anything has led to this destruction of our culture. And now that this march has culminated in the election of a clearly socialist leader I doubt that there is the moral strength or leadership left in the country, that could get elected, and open that gate to restructuring our nation to a Republic again. And thus Mr. Blum will be correct when he politely calls it “civil discord” that will be the anarchy that will ensue and make the changes necessary. Unfortunately unlike Mr.Friedman who doesn’t believe unemployment will lead to political disintegration I think that is exactly where it is headed.

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