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: 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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Vincent Roach

Jan. 12, 2013, 8:41 a.m.

This is well thought and well written.  I would put forth the following thoughts:
1.  As the author says, upward mobility is currently built in to our psyche.  Each of us translates this differently, but in the end it mostly requires greater income and or accumulation of greater wealth. It is critical to determine whether this is a learned thing (which means we can go back to having say what we had in the 50’s and be happy as the author says he was then) or whether we will continue to sell or rent out or most cherished (I hesitate to say possessions) - our mates, our children (by deciding to defer or pass on their birth), our souls, and anything else not contributing directly to material increase.  If it is built in then there will continue to be ebbs and flows of increases in pain and pleasure distributed among people based on how well their skills match up against what is needed to “get ahead”.  You can look at it from an individual view (will I be one of those lucky people) or a global view (will there be more total happiness across the population.  If it is learned then there is a possibility of changing things (or maybe people will just adapt) over time - managing expectations instead of trying to control outcomes.
2. Redistribution of income is not a yes/no thing.  Income is ALWAYS redistributed, and that is how economies prosper at all levels.  The productive few (because they are ingenious or big and tough and live on productive land) distribute by spending some of their income to buy things from those who own less basic capital. The questions are fairness (whatever that is) and effectiveness in producing whatever economic goal we have in mind (presumably in our culture, a utilitarian one).  If the tough guy who owns much productive land piles up his pineapples so he can be lazy next year, instead of trading them for a new pair of sandals, the economy as a whole suffers.  In this kind of case, lesdership is correct in finding ways to motivate trading the pineapples and to put a cost on hoarding them.
3. Plenty of states in history have remained very powerful without a strong and growing middle class.  But we members of the middle class can still try to convince leadership and the rich that without us, they will become weak and lose their privileges.
4. We cannot forget the difference between money and stuff.  If we want to get people to sell their pineapples we could deflate the currency and so people would sell to get what they could while they can ge it. On the other hand if they have cash but no stuff, they will hoard their cash because it becomes more valuable as the currency deflates.  This is what lies beneath the rise of the financial world - they can pile up wealth by never having to get their hands dirty, and with the flick of a switch (which now can be done in picoseconds) increase their wealth and power with no true understanding of any other aspect of economics.


Jan. 12, 2013, 7:26 a.m.

Good piece. In particular i appreciated his highlighting the correlation between public policy (GI Bill, GI Mortgages, & Interstate Hwy system) to changes in US society and economic growth. 

Another public policy change was the complete abandonment of US Anti-Trust Law.  We used to embrace the idea that competition among many entities was better than a smaller landscape of big conglomerates. Once we stopped blocking the mergers that created corporate giants, we empowered the executive managers and large investors to do what humans often do - selfishly hoard as much as you can get away with taking.

The re-engineering trend initially (80’s & early 90’s) brought about productivity growth benefitting the domestic employees as well. But once again public policy brought about change. Namely the Internet made the world smaller and enabled the global collaboration required to move some employment offshore. However I would argue that the labour jobs lost were simply replaced by new IT and ‘international business’ specialists. Unfortunately, we shipped off the entry-level and low-level management positions which used to be the training grounds for future corporate leadership (the middle rungs of our corporate ladder). I fear the biggest employment crisis (eventually affecting lower, middle, and upper-middle classes) is just beginning. It’s the vacuum of available domestic talent for middle and upper management jobs.  US competitiveness has always relied on this on-the-job-training approach to building an exceptional talent pool. Our corporations will increasingly have to draw upon talent from other countries to fill these ranks and we’ll loose any remaining national loyalty from these businesses.  That’s when we’ll see the real drain on our middle class.  In a nutshell - “you ain’t seen nothin’ yet”.

Peter Coffin

Jan. 12, 2013, 6:57 a.m.

1- higher taxes are not about redistribution. There about paying our bills rather than pushing off for the next generation. We should pay for our pizza.
2- recapitalizations of American companies haven’t created greater efficiencies. They’ve replaced equity with debt, while enriching short-term investors.
3- China’s currency manipulation has been the great enabling factor in the destruction of our middle class - and the huge imbalances that exist today.

Jan Czekajewski

Jan. 12, 2013, 3:26 a.m.

While the most of the article, especially historical background is true, one aspect is missing. What is missing a is transfer of technology and capital to overseas which undisputable contributed to unemployment. Unemployment not only in the middle class, but also increasingly in the upper middle class.
Article doe’s deal with “globalization”, where profits of corporations increase due to income from overseas manufacturing sites while income to middle class diminishes.  In my own family I have an example where profitable US based company was purchased first by Dutch Philips and then manufacturing transferred to China.  My brother, an engineer, lost his job but not before he trained his replacement in China.
I agree that there should be incentives to entrepreneurs and US economy is not a zero sum pizza, with constant number of jobs and products. Unfortunately Mr. George Friedman analysis does not account for a leak of capital and jobs to the distant locations, outside jurisdiction of US Government. Maybe “globalization” is not good for US?
Jan Czekajewski


Jan. 12, 2013, 2:58 a.m.

I disagree with the author’s statement that “American society on the whole was never egalitarian.”  Merriam-Webster defines egalitarianism as “a belief in human equality especially with respect to social, political, and economic affairs” which seems to mirror nicely the Declaration of Independence assertion that “all men are created equal.”

When I grew up in the ‘60’s (down the road from GW), it would be un-Christian to live as ostentatiously as today’s CEOs and movie-stars while those that they employ or entertain struggled with subsistence livings.  A 10:1 income ratio of highest paid owner/CEO to lowest paid employee was the norm.  I’m not a big fan of Warren Buffet’s politics, but he STILL observes this uniquely American custom of taking a salary that is 10X his lowest paid employees.  On the other hand, many CEO’s make 100-200x more than their employees.  How does one believe that “all men are created equal” and justify that?  I mention CEO’s, but this tenet carries true across all the higher earning professions.  Yeah, yeah, yeah; there’s effort, degrees, etc, but on a moral basis, how much more can you value one human life over another?  And how long can one systematically devalue a human life, via their pocketbook, before they believe you and become totally useless?

The author’s thesis is that we’ve undergone “structural changes.”  OK.  But what about changes to our moral convictions?  There have always been doctors and lawyers, degreed and non-degreed, etc.  Yet in the past 50 years, as a nation we’ve decided that our college degrees, chosen work or business connections justify earnings that are 20-50-100x more than “the little people.”  (Hat tip to Leona Helmsley.)  This gives no acknowledgement that there is value in human gifts other than raw intellect.

When I hear the invective “entitled,” I know we’re about to cuss and discuss those darned “takers” again.  (And I won’t deny many takers share in the blame.)  However, the bigger elephant in the room is the sense of entitlement among our CEO’s, attorneys, bankers, stock-(choose your noun), engineers - all of us that either believe we deserve so much more because of our [degrees, hours worked, fill in the blank] or are just plain greedy and don’t care.  Well, we should care because our last fatted calf is headed for the slaughterhouse.  The “fair compensation” rubric has fundamentally changed.  There’s a new morality in town.

As for crafting a solution, it’s called leadership.  Maybe a wildly popular and persuasive George Bailey will run for President and provide the first truly moral, sacrificial leadership we’ve had since Harry Truman.  Not that the American electorate would be smart enough to vote him or her into office.  I personally think we’re doomed.

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