I'm really struck by the honesty at several levels in this Financial Times piece on The crisis of middle-class America. (HT: Instapundit).
It describes the deterioration in financial security experienced by a couple middle class families, and I believe it hits many of the bases (if not all).
I also like the honesty of the Financial Times with respect to signaling their status as the organ of the elite: both the families are "sensible", and make sympathetic subjects, because both are Democrats. Of course.
When I asked what the American Dream means to them, Mark looked despondent. “It’s not a dream,” he said. “I would hate to sound like one of those Tea Party people but I really do want my country back. I just don’t feel like that is going to happen.”
Yes, God forbid you should sound like a Tea Partier. Wouldn't do. Yet earlier in the piece, they let this slip:
Combine those two deep-seated trends with a third – steeply rising inequality – and you get the slow-burning crisis of American capitalism. It is one thing to suffer grinding income stagnation. It is another to realise that you have a diminishing likelihood of escaping it – particularly when the fortunate few living across the proverbial tracks seem more pampered each time you catch a glimpse. “Who killed the American Dream?” say the banners at leftwing protest marches. “Take America back,” shout the rightwing Tea Party demonstrators.
The FT is of course the mouthpiece for the bright and the beautiful elites to tell us what's going on with ourselves. And yet (sadly) they have stuff worth reading in any case.
And it's got me realizing more and more that if we really do end up "taking back the country", there will be some strange bedfellows in the political crew which accomplishes it - but only really strange in the context of the political dichotomy which the elite organs are feeding us: and, as the quoted paragraphs hints subtly, that dichotomy may largely be false.
Clearly there are decent sounding Democrats like Mark who have simply been lied to about what Tea Partiers "sound like". And there may be folks out there spouting leftist shibboleths because their friends are still letting them watch the news. (Bad friends).
Even some elites get that something is afoot.
The barometer is economic. But the anger is human and increasingly political. “I have this gnawing feeling about the future of America,” says [Nobel Prize winning economist and Spence. “When people lose the sense of optimism, things tend to get more volatile. The future I most fear for America is Latin American: a grossly unequal society that is prone to wild swings from populism to orthodoxy, which makes sensible government increasingly hard to imagine. Look at the Tea Party. People think it came from nowhere. While I don’t agree with their remedies, most Tea Party members are middle-class Americans who have been suffering silently for years.”
So while the elite Dr. Spence cannot abide our remedies (and I'm not sure we even agree on them), we are at least granted a kind of grudging legitimacy - we didn't "come from nowhere".
There are a bunch of folks out there who cannot imagine themselves as "Tea Partiers" and yet their consciousness is ripe for expanding (as we who used to be on the left used to say).
I'm more and more convinced these days that we're going to go through some kind of transformation politically. I care deeply about certain political principles but I'm afraid that not all my sacred cows are going to make it into the new pasture. Might be time to cull that herd of mine.
FINALLY, an article addressing the predicament of the "working" class. Most articles along this vein sketch people who live in a $350,000 home and have an income to match. Lick thumb, turn page.
ReplyDeleteThis article was interesting. Income for many Americans HAS stagnated, no doubt about it. Entrepreneurship, if you attempt it legally, is so burdened with government paperwork and tax forms that there's little time left to actually grow/work your business. If you work in a factory, chances are you make only a dollar or two more than the snot-nosed eighteen year old new hire they hand you to train.
In the meantime, the COST of everything goes up, up, up. Groceries. Clothes. Medicine. Gasoline. In addition, we're now told to put a million aside for retirement, because the social security fund we've paid into since we had our first job at thirteen will be broke by the time it's our turn. What? How can honest, working people living paycheck to paycheck in this sucky economy put aside ten cents, let alone enough to retire?
I don't know what it's going to take to fix this mess, but I do know we MUST drastically cut spending to ease the burden on the working class. We MUST get more Americans working and paying taxes.
Lewy, I think you glitched the quoted paragraph from Spence a bit, there seem to be words missing.
ReplyDeleteI agree with the opinion that globalization has essentially caused this mess.
It allowed, the stockholders, CEO's etc to have no repercussions from the continuing collapse of the American job market. In fact, those people were rewarded, since it increased corporate profitability to be able to outsource work from the US to areas much lower labor costs.
Of course, during that time, we were propagandized that we were becoming an information and service economy, and Wasn't That Just A Wonderful Thing?
Well, no in fact, it was not. Any job that does not create something tangible(like mine, for example), does not add to the wealth of the nation, and as necessary as those jobs may be, all they are doing is moving around fictitious wealth, until in the end that wealth is moved to where tangible things are actually produced.
At this point in time, that end happens to be in China, from where the fictitious money that they now own is then LOANED back to us to continue the circle.
That circle has become a downward spiral for us, and will remain so until such time as we begin to actually MAKE things again.
The point about how few people in the US still belong to unions, and the concomitant claim that this is part of the problem is 180 degrees from fact. It was partially due to excessive pay & benefits won by unions under threat of destruction of the businesses for which their members worked which made outsourcing so much more likely.
More to come . . .
Unions, no matter how much they may have been worth during the industrialization of America, have now taken over the role of the robber barons they were first formed to counter.
ReplyDeleteAdd to that the fact that as their (essentially unfunded, now) pensions all come due, and that no politician who ever hopes to be elected will fail to dip into the public purse to make good on promises from union leaders to the rank & file, will make our current troubles seem mild.
I am a fan of Ronald Reagan, for his bringing hope back to the US after the collapse of our society caused essentially by my generation, the first oil crunch, and Carter-induced malaise, as well as his final defeat of the greatest existential threat to the free world.
However, that said, his free trade policy has become a disaster, beginning with NAFTA, exactly as H. Ross Perot said it would.
In the course of conversation with two people in the last couple of weeks, I've beeen amazed to still hear 'Reaganomics' vilified by otherwise conservative types. They do have a point.
HOWEVER, there is also the equally, if not more, important fact that business, most especially manufacturing, in this country has come under such harsh rules, mostly environmental, but also dealing with 'diversity' that those costs, and the attendant harrassment by the enforcers of those rules have driven the 'hard' parts of business out of the country, as well.
All in all, something must change, and the authors of this FT piece have no more idea what changes must be made than I do.
Obviously, more of the same, with increasing socialism is not the answer, although those people who think that money appears magically when gov't snaps its collective fingers, to be given out without let or hindrance to those poor downtrodden folks who never considered working, even if there were jobs, believe that it.
We talked about 'South-Americanization' of the US a few times at our old home place, a few years before Michael spence brought it up in this article, and I fear that this is where we are heading, most especially as we hold the floodgates open for more and more and more unskilled, uneducated people to wash over the country, bringing not only their poverty, but the attached mind-set with them.
I have feared for my country for at least 30 years, now, beginning after I woke to the facts of what my generation had done to American society.
That fear is growing exponentially with our current government, and I worry that there is no end in sight, except perhaps with both a bang and a whimper.
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ReplyDeleteYour financial troglodyte here. How about, for starters, we ban, on penalty of death, or life with Britney Spears, the printing, sales, issue, or any bogus security devices or derivatives? No, Virginia, the "bundling" of 100 bad bets doesn't make a good bet. It makes manure.
ReplyDeleteNo security document to be issued that doesn't have a GAAP derived expectation of profitability (and value)....and no security document betting against a market to be sold as uptick "investment" to customers by any firm...ala' Goldman Sachs and Mr Blankfien...whose mere appearance on the telly makes me want to go slap somebodies' momma.
I see nothing in the current "reform" bill that prevents this, nor any reform of Fanny Mae or Freddie Mac.
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ReplyDeleteOh, and I should add...anyone who "naked short sells" should be imprisoned for 50 years minimum....it's fraud by any other word.
ReplyDelete"Selling" represents that you have the means to convey, which you do not if the short sale of somebody else's property goes sour...e.g., you are fucking liar and a fraud. Jail for you, or intimate sex with Helen Thomas, for life, preferably both.
Okay, Lewy can unload in my direction now .:-(
ReplyDeleteJust an offhand thought... I think the economy will start healing when grown adults who should know better stop acting like greedy teenagers.
ReplyDeleteBut as long as Real Housewives and Jersey Shore have top entertainment slots, I don't think that's going to happen.
Wow - I'm glad that article generated some interest! I'm busy right this moment - I'll respond to the comments in a bit.
ReplyDeletelady red - yeah, I'm glad you felt the article hit home - I did as well - it's the kind of article which puts the Tea Party in perspective, which is why the MSM here won't run stories like it. (The FT recognized this, which is why they took pains to trash the Tea Party - like I said, the FT is an organ of the ruling class. In this case the FT feels its duty to let its fellow ruling class mates know the peasants are restless.)
ReplyDeleteI think you hit on an important point - We MUST get more Americans working and paying taxes. I agree. I have another FT piece which I'll post soon which addresses this issue.
DWT - re globalization - I don't discount your view but my perspective is that the issue is more complex. In fact complexity is at the root of it - "service" jobs are sustained by increased complexity of manufacturing (of "real" widgets), which goes along with increased productivity.
Productivity increases are enormously consequential: check out this graph (from Morgan Stanley) of global manufacturing share since the 1700's:
imgw:"http://i35.photobucket.com/albums/d170/lewy14/Mfg20output.jpg"
Note that the US, with some dips corresponding to the rise of Japan, the Asian Tigers (S Korea et al), and China, in that order - has been holding market share since the 70s. Yet manufacturing employment has clearly cratered - why? Productivity, which has increased substantially - due to automation, which is capital intensive.
So with money (which we had) and tech (which we're good at) we make (and sell) the same amount with less labor.
I'm not eager to sign on to government policy which would hinder or reverse that trend.
It is still the case that a dollars worth of manufactured goods which we make (or which Germany makes) is more sophisticated than a dollars worth of stuff which China makes. (This advantage will erode over time, as it did pretty thoroughly with respect to Japan and S. Korea).
So I think the proper question to someone like me is - OK, if we do globalize and automate - how did things get so very far out of whack?
The conclusion which I've come to is that it was largely interest rate policy. With a sensible rate of interest on short term loans, the trade deficit would have never gotten so bad - at least in part because we would have had some nasty recessions in the late '90s, and wouldn't have imported so much crap.
I'm also pretty certain that if Greenspan had kept rates where hindsight dictated they needed to be to keep the global economy balanced, he would have been run out on a rail. Cheap money - too cheap - was a popular thing, for businesses big and small, consumers, corporations, housing activists, Wall St, Main St, you name it. If Greenspan hadn't existed, we would have had to invent him, and we would have.
(cont from above)
ReplyDeleteSome scammers (Japan, the Arabs, China) offered us easy credit and like chumps we took it.
Note - absent that easy credit, the massive increase in foreign capital accounts to offset our current account deficit would not have happened, and our imports wouldn't have exceeded our exports because the credit to buy those imports wouldn't have existed.
Low interest rates on HELOCS, credit cards, etc, enabled that consumption. These rates were in turn enabled by the Fed.
Foreign countries were all too willing to do vendor financing, however. If capital controls are going to happen, I'd rather see them keep foreign money out rather than keep US money in. The former has been adopted in some Asian countries with a stabilizing effect; the latter is a bit totalitarian for me. As a free marketer one of my sacred cows is "no capital controls" but like I said, those sacred cows are nervous these days.
Capital controls which build a Berlin Wall to keep money in are a feature of South American crap governance. So probably that's the next stop. If there is a Treasury Bond crash (long rates shooting up a la Greece), you'll see it in the blink of an eye.
Ari - as a thought experiment - if the financial deregulation (which was, again, very bipartisan) in the late 1990s and beyond hadn't happened - yet interest rate policy had remained too low - would we have this mess we're in now?
ReplyDeleteYes, I believe we would - regulations can be skirted and gamed. Money flows. Maybe it wouldn't have been as bad or as sudden, at the margin - but the global imbalance would have built up regardless.
Another scenario: dereg happens, yet interest rate policy from say 1987 to 2010 is _sensible_ - at or close to a natural, market rate price of money. I claim the imbalances would not have built up. There would have been some chaos and scary times - in particular, the nice stretch from 1992 to 2008 with only one eensy teensy recession (2002) would have been more boomy and busty. No "Great Moderation". Stocks, bonds, housing prices would not have seen their huge appreciation - and it they had, it would have been based on sounder real wealth. Unemployment would never have been driven down below 5% - but then it might not have been driven up past 10%, either - and if it had, it would have been temporary.
Just painting a picture of how I see alternate realities playing out. I will claim (for now) that interest rate policy was the necessary and sufficient condition.
This goes to afw's comment as well - money that was way too cheap for way to long infantilized us as a culture. (Or contributed, anyway).
What to do now? All options have embedded suckage (ES).
ReplyDeleteSeems to me the option which preserves the most freedom and avoids the South American Scenario is to slash spending.
This may mean massive defense cuts as well as entitlement cuts - like mothballing half our carriers. (Of course if we retreat from the Pacific, confidence in the US could deteriorate to the point where the Treasury Bond crash becomes a self fulfilling prophecy - see, this policy-making business is a tricky thing...)
Absent a more comprehensive crisis I don't see how the massive spending cuts happen.
Rahm gets crap for his "never let a crisis go to waste" comment. Really, this is a Kinsley gaffe - saying something out loud, which is conventional wisdom, but which is nonetheless scandalous. President Ron Paul or President Sarah Palin would no doubt use a crisis to reshape things according to their policy view as well.
How far can the state expand via patronage - effectively buying votes - and squeezing productive people?
South American examples say "pretty damned far".
Too tired to post this as a top level post - Clive Crook on the gridlock which will raise everone's taxes next year.
ReplyDeleteLewy, I don't think defense cuts are the answer to our problems; in fact, it could easily create a new set of problems. If we are to keep our status in the world, we must have the military might to protect our assets.
ReplyDeleteI know discretionary spending is a drop in the bucket, but we must impose some discipline on our elected (and appointed) officials. Also, we must trim the government payroll, and bring government salaries in line with the public sector. Many government programs should be discontinued or outsourced to the private market.
Taxes...what a joke. Until we touch a match to the paper mountain which is our tax code, our efforts are for naught. We need a simple tax on consumption. It's the only way to raise tax revenue without cutting the throat of small business, IMO. An added bonus is that more Americans would actually be vested in our system, and perhaps vote a bit more wisely.
Social subsidies have cascaded to the point of no return. Literally ANYONE can drink at the public trough. We must come up with a better way to allocate our charity funds, while focusing on KEEPING FAMILIES TOGETHER and GETTING EVERYONE BACK TO WORK.
Social Security...the third rail...oh what the hell, I'll go there.
1) Make an impassioned plea to our senior citizens. Ask wealthy seniors to voluntarily cede their social security benefits. Ask middle-class seniors to voluntarily take a cut, say 10% or 20%.
2) Raise the retirement age by one year, each year, for the next five years. Concurrently, cut benefits for newly retiring boomers by 3%, each year, for the next five years (or whatever formula it takes to balance the system.)
3) Lose the cap on payroll contributions for social security. I'm not sure what the current limit is...a bit over $100,000? Lower wage earners pay 6.2% on every dime they make; higher wage earners should do the same. (Yes, I realize high earners will end up paying much more in than they ever get out. They also pay more in taxes. It's blatant wealth redistribution, but I don't have a better idea.)
By now, it should be obvious that I'll never be elected to anything, what with my radical ideas and all. ;)
Weird. Blogger yelled at me for my comment being too long, so I dutifully broke it into two parts. Then it proceeded to post my long comment PLUS the two parts. So I deleted the two parts, yet they still show up in the recent comments in the sidebar. 8-}
ReplyDeleteNow they're gone. Poof! Just like magic.
ReplyDeleteLewy, to address your thoughts about interest rates: would it have been an issue, or led to a financial meltdown, if credit had only been extended to worthy borrowers, regardless of the rate?
ReplyDeletePart of the reason we're in this mess is because too much credit was issued to people who couldn't afford to pay it back. Homes, credit cards...you name it.
lady red - yeah, blogger has some strange behavior when the comment is too long - but I'll note that it errs on the side of posting stuff rather than dropping it. There is some delay between the sidebar (which runs of the Atom RSS feed) and the main blog when comments are deleted, but the deletions eventually show up.
ReplyDeleteI agree defense cuts are problematic. What I'm wondering about is bang for the buck. It's commonly cited that the US spends more than the next ten countries combined or some such. I wonder about the "lethality per dollar" metric though. I'm betting China scores higher on that metric (no $1200 toilet seats etc). I'm very concerned our carriers might be vulnerable to ballistic missiles. Autonomous UAVs (and China's guided anti-carrier ballistic missile is just another kind of autonomous UAV) will radically change warfare - I'm not sure we're keeping our lead. I don't know how to effect change without a war. I'm not neo-con enough any more to suggest this option however.
With respect to social security: Glenn Reynolds linked a good NYT piece (yes they do write some) on this - and interesting to see the Times broach the subject. I disagree with cutting the benefits of boomers about to retire - the real crisis is still a decade out (and it is a real crisis), so there is time to cut back in a way that allows younger people the opportunity to plan accordingly.
Finally, with respect to credit standards - it's very difficult to legislate rules around who is credit worthy and who isn't. Frankly I'm not sure I want Congress's hands in this - they suck at it. If the wholesale price of money is reasonable (not crazy cheap, like it was), then banks and mortgage companies will be sensible. If money is crazy cheap, and banks figure uncle sugar will bail them out if they get in trouble, then they will make stupid loans - because it pays to do so.
I may stand accused of being a "free market fundamentalist" but it's not ideology; I just don't see any other control mechanism which can regulate halfway effectively except market prices for money and a healthy sense of self preservation (no moral hazard) with respect to the banks.
lady red, let me answer your credit question another way: if rates were artificially low, the only way credit would have been restricted to those "worthy" of it would have been extensive regulation - which, like I said, is liable to be gamed and punked - or distorted for patronage via congress. Enlightened regulations, like frictionless surfaces, exist only in textbook problems.
ReplyDeleteAlso, someone who is a "worthy borrower" at 5% might not be worthy at 8% - which means variable rate credit is a trap when rates are too low, and creates a trap for the Fed, because then they are inhibited against raising rates for fear of bankrupting too many people once rates have been too low for too long (which they were).
Bernanke _did_ raise rates 2005 to 2007 - which nearly broke the entire financial system, and was promptly forced to lower rates to zero again. This I think more than anything proves rates were too low for too long.
Lewy, thanks for the link to the NYT article. It was interesting!
ReplyDeleteCheck out this piece by Peter Ferrara in today's Spectator. Page two has most of the yummy goodness.