Preserving America’s Middle Class
To say America’s middle class is threatened is a common refrain. But there is no malevolent force operating to shrink America’s middle class. America’s middle class is challenged by the momentum of history. Technology automates jobs at the same time as the capacity of foreign manufacturers continuously improves. At the same time, American taxpayers confront the challenges of providing for an aging population as well as choosing what is affordable from an expanding array of social welfare and safety-net choices. In some respects, America’s middle class is a victim of its own success – we live longer, we have better medical technology, our productivity is continuously improving, and American military power – expensively purchased – enables competitive global commerce. Here then, relieved of ideological cant, are the reasons for America’s shrinking middle class:
(1) More money is needed to take care of retirees, and investment returns will no longer cover most of the costs. America’s aging population creates higher demand for liquidity, because retired people need to sell assets to generate cash to pay bills. As an ever higher percentage of America’s population are retirees, there will be more sellers in the investment market, dampening prices and price appreciation. This will lower rates of return on retirement investments and, in turn, all assets.
(2) Advancing technologies have automated millions of jobs. From office information systems to robotic manufacturing, innovation has eliminated the need for millions of highly educated, highly skilled workers. Despite rising productivity, workers have been relentlessly displaced. Entire industries have experienced steady growth at the same time as they have reduced their workforces.
(3) International competition to export products has never been more challenging. Nations create jobs more easily if they are net exporters. During the half-century beginning around 1950, America went from being the only industrialized nation left standing in the wake of WWII to being reduced to 25% of global GDP. Still the world’s largest economy by far, the U.S. has not been a net exporter for nearly twenty years – instead the U.S. relies on foreign purchases of U.S. assets to offset chronic trade deficits.
(4) The ability of the U.S. economy to sustain a trade deficit via debt accumulation is not unlimited. The sheer size and diversity of the U.S. economy buys time, but Americans already carry an unusually high debt load. To the extent that interest payments are remitted to offshore creditors or offshore corporations, American borrowing to finance imports is sending cash and jobs overseas.
(5) Failure to regulate speculative lending, combined with the internationalization and automation of trading in stocks and other assets has enabled America’s debt bubble to reach unprecedented levels. The last time the total market debt in the U.S. exceeded 300% of GDP, America’s economy experienced the great depression. Total market debt in the U.S., not including derivatives, approaches 400% of GDP.
The way to preserve America’s middle class requires embracing disruptive innovation and competition.
In a age where the U.S. no longer owns virtually all the productive assets in the world, the ebb and flow of trade balances between nations requires them to take turns either relying on debt accumulation and asset inflation to finance their trade deficits, or being nations that eliminate debt and have positive cash flows through being net exporters. Because innovations deliver increasing productivity, this ebb and flow can yield aggregate net asset values of all nations combined continuously increasing. As long as these asset values increase, debt accumulation does not have to stop completely. If collective global asset formation has sufficient momentum, even nations who are net importers and are accumulating debt can still improve their debt to asset ratios, rendering them economically healthier.
The key to economic growth, however, is not just to increase productivity through supporting technological innovation, which is difficult enough by itself. Nations also must support policies that lower the costs for basic resources, energy, water, land, materials. This requires competitive resource development, something that is resisted by powerful special interests, corporate, labor, environmentalist and government, who all benefit from high prices and high profits for basic necessities. But if competitive resource development enabled these commodities to be consumed at lower prices, this would release capital for investment in, as well as consumption of, entirely new classes of assets that technological innovation is delivering at an accelerating rate. Increasing productivity through technology is creative destruction, and, crucially, results in asset deflation and lower profit margins in the monopolistic sectors being disrupted, but this is nonetheless desirable because it is the only way sufficient capital can flow instead into investments in entirely new classes of valuable, previously nonexistent assets. Only by creating new assets in new industries can technological innovation ensure a continuous increase in global economic wealth, and hence more collateral to improve debt / asset ratios. These new areas for investment and asset formation will issue from ongoing and dramatic technological innovations in the fields of health care and life-extension, entertainment and transportation, expansion of settlements and industry into outer space and the deep ocean, and myriad other compelling products and services we can’t yet imagine.
This is one of the unheralded tragedies of a malthusian “setting limits” mentality common to environmentalists and coopted by corporate and union cartels. Despite daunting challenges that span every continent and culture, human civilization is experiencing a golden age of technological advancement – steady improvements to the collective global per-capita standard of living – and that golden age may be denied fruition by misguided policies designed to curtail development of energy and other basic resources. By encouraging competition to provide these commodities at lower prices, capital becomes available to eliminate debt and invest in new industries. This allows for more rapid increases in per capita wealth and lower birth rates. Ultimately, tomorrow’s global energy consumption and resource depletion will be less if rapid energy development occurs today.
America’s middle class faces new rules, but these new rules are actually the historical norm for peoples in the world. The aftermath of WWII, which bestowed on the U.S. a pent-up ability for consumer product innovation, a uniquely intact industrial base, and an explosion of births that, for a while, kept pace with advances in life-span, was an aberration without precedent in human history. The good news is that the absolute median standard of living for Americans continues to improve. From the poorest person to the richest in America, as well as throughout the polarizing middle, the available amenities consistently exceed, year after year, what has come before.
America’s middle class is indeed threatened, insofar as the economic distance between those at the top and those at the bottom is widening, and the percentage of people in the middle is declining. But by embracing competition and innovation of all types, Americans, who remain at all strata better off than they have ever been, can climb out of their debt quagmire and usher in the next phase of the digital renaissance.
Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
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When Obama got elected I actually expected the middle class to gain strength. He mentioned to create jobs in green technology and aimed to become market leader in that field. That would indeed create an enormous amount of jobs. Though it never happened. Instead the middle class kept shrinking and the lower class kept increasing unfortunately. In my opinion just innovation will get us out of the circle. One thing is for sure that lowering the wages won’t work. We simply won’t ever be able to compete with east/south Asia. Apartments and housing are too expensive here and the cost of living in general, too.