If the Middle Class Crumbles What Happens to Political Stability?

I wrote about the possible social backlash of the financial crisis back in April. Given the uproar over the size of the Goldman Sachs (GS) bonus pools, it’s time to revisit the topic and the picture isn’t pretty.

Simon Johnson, former chief economist at the IMF, recently reiterated his views on the effects of the financial crisis on US income inequality by saying, in effect, that America is becoming a banana republic:

The US increasingly displays characteristics that we have seen many times in middle-income “emerging markets” – new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged.

In an interview with the Washington Post, Elizabeth Warren, Chair of the Congressional Oversight Committee, stated her views of how the evolution of US society has affected the middle class:

When we compare middle-class families today with their parents a generation ago we have basically flat earnings-a fully employed male today earns on average about $800 less, adjusted for inflation- than a fully employed male earned a generation ago. The only way that houses could increase or families could increase their household income was to put a second earner into the workforce, and, of course that’s now flattened out because there aren’t any more people to put into the workforce. So you’ve got, effectively, flat income in this time period with rising core expenses; housing; health insurance; child care; transportation, now that it takes two cars to get everywhere, two jobs to support; and taxes, because you’ve got two people in the workforce and we have a somewhat progressive taxation system. So that families are spending a lot more on what you describe as the basic nut.

These folks have to work twice as hard just to tread water. But it isn’t just about the lack of income gains and flat real earnings over several decades, Warren went on to discuss the effects of credit, health care, college costs, the housing crisis and shifts in income distribution on the middle class and their expectations. She concluded that [emphasis mine]:

In the 1950s and the 1960s, coming out of World War II, we said as a government, as a people, what can we do to support the middle class. You know that’s what FHA was to help people get into homes, right? VA, GI loans on education, we looked at policies, like whether or not they strengthen and support the middle class.

Somewhere, that began to change in the late 1970s, early 1980s, and the middle class instead became like a resource to be pulled from, and you know, they became the turkey at the Thanksgiving dinner. Who could who could carve off a piece? Who can get this little piece? Who could make a profit from this piece and that piece or squeeze down on the wages? And the middle class has gotten shakier and shakier, hollowed out.

The consequences of that are far more than economic. The middle class is what makes us who we are. It affects the poor. A strong and vital middle class is a middle class that can offer a helping hand to the poor. A strong and vital middle class is a middle class that has room, is creating new jobs to basically to suck the poor up out of poverty and into middle class positions. The middle class is what gives us political stability. It’s what gives us an America that’s all bought into the whole process that what we do is not just about a handful of folks at the top who profit from it. We all profit from it, and that’s why we work, and that’s why we vote, and that’s why we accept that the outcome of elections. And that’s why we’re safe to walk our streets, because we have a middle class for which this ultimately works, this country.

If the middle class crumbles, what happens to political stability?

Windfall profits tax only the beginning?
There have been proposals about a windfall profits tax for investment bankers, which may only the beginning. Niall Ferguson has detailed other popular backlashes against bankers in history and the results were ugly.

US Rep. Marcy Kaptur (D-OH) has gone as far as to suggest that we are undergoing a financial coup d’etat. Barry Ritholz has supporting data for her position and has indicated that bankers run Congress and their lobbying efforts has been their best single investment in history.

Quell the mobs
Hopefully the adults can step in and quell the mobs. We could be witnessing the disintegration of the capitalist system. Watch for signs such as a debtors’ revolt (as per Naked Capitalism) and Michael Moore and his fringe beliefs becoming more mainstream.

That’s when things get really ugly.

Comments

[Michael Clark:]

As the middle class disappears into the lower class, political power swings toward the lower class. This will create another Democratic era (vs Republican) and more taxes on the rich. We are heading into a decade of political taxes on wealth in an attempt to balance the high and low.

I have written that the Middle Class joins the rich politically during the Day-Cycle because the Middle Class becomes convinced they, too, will become rich. The Middle Class joins the poor politically during the Night-Cycle because the Middle Class comes to realize that they might become poor.

Social legislation rules the Night Cycle.

Individual triumphs rule the Day Cycle.

Oct 21 04:31 AM

[Dave Wrixon:]

The US needs to pay much more attention in regard to size and shape of its bananas and the European regulations on such matters are very explicit.

Oct 21 05:59 AM

[User 353732:]

1. Free markets, free speech, free elections, a decent civil society, the rule of law rather than the rule of men, government by the consent of the governed are anchored by and are Middle class values. The Upper Class always seeks a monopoly on wealth and power and the Lower Class seeks bribes and the instant gratification of the bases desires. The Upper Class uses the Lower Class to intimidate both psychologically and physically the Middle Class.

2. The great arc of American ascent into an exceptional nation, a high and grand experiment, the first and sole global hyperpower, and the only Great Power that sought to liberate rather than conquer is but the lagged arc of Middle Class ascent . As the Middle class is now compressed, fragmented and diminished economically, socially, culturally and politically so America is diminished as both a great geo-strategic power and, even more importantly, as a great moral force in the world. The debasement of the dollar and its perversion from a symbol of national honor into a stigma of national disgrace is proceeding in parallel with the degrading of the Middle class.

3. If the Middle class is " scattered, diminished and enslaved" not only will the American Experiment end, America itself will cease to be in any form recognizable by or morally acceptable to the Founding Generation.
Either the USA fragments into 3 to 5 new nations (since there will be neither Constitution nor shared memory nor great common purpose to bind the people) or it becomes yet another totalitarian , brutal and stagnant internal empire under a new Stalin or a new Mao or a new Hitler. But even this is not end game.....Totalitarian inland empires do not last long; they are either destroyed by the external enemy or become mere vassals to another Nation that is on its own rising arc of ascent.
4. In my view, the Middle Class will not continue to retreat. It will regroup around the remnant that still believes in liberty , sacrifice and in living rather than merely existing. It will first reform and regenerate itself by rejecting materialism as the governing Idol, turning away from instant gratification of every whim and twitch and undeserved entitlements and rediscover America's historical virtues and reclaim its heritage.
There will be a new, regenerated America.....Or no America. The status quo will not endure.

Oct 21 06:07 AM

[Faisal Humayun:]

The real household income for a middle-class American has hardly changed in the last decade...The real income is calculated by taking into consideration the CPI...which again is a highly flawed measure of inflation...

So, one can safely assume that the standards of living for a middle class American has gone down in the last 5-10 years...

However, many Americans are still not aware of how inflation is eating up their incomes...The day people are generally more aware about this and many other things...it would not be very surprising to see a civil uprising...

Oct 21 06:09 AM

[Leftfield:]

When I have economic difficulties (more than usual, anyway), I cut back on spending and figure out how to raise cash. When our leaders have a problem in their fiefdoms, they figure out how to get another chunk from you and I and reward themselves with an even higher bonus.
Bernanke claims to be a disciple of the Great Depression, I mean, student. But, there is the Keynesian part about using the government balance sheet as a flywheel to counterbalance economic conditions, not to remove the flywheel and put it in your back pocket.
If there are enough adults in America who wish to wake up in America, they need to awaken soon.

Oct 21 08:35 AM

[Pat C:]

User 353732, you need to go public. Well written

Oct 21 08:44 AM

[Tony Petroski:]

Mr. Cam Hui. I trust you are a good man. You wrote:

"Hopefully the adults can step in and quell the mobs. We could be witnessing the disintegration of the capitalist system."

I'm more optimistic than you. There has been an attack on the middle class. The upper classes, those that go to Harvard and Yale and Princeton (come to think of it, that includes all our Presidents since George Bush the Elder) have allied with the lower classes at the expense of the middle class. Obama spreads the wealth around. George Bush the Younger was a compassionate conservative. The upper class is the broker in the deal that robs Peter to pay Paul. Paul is the lower class and Peter is the middle class.

You don't improve things by dragging down a few Wall Streeters. You go back to what worked: Shuck off the malaise and improve the rewards for the producers, most of whom inhabit the middle class.

Oct 21 09:09 AM

[Graham and ...:]

Here's my center of aggression theory, whereby the center of aggression has been moving east.

In the 18th and 19th century, the center of aggression was France (Louis XV and Napoleon). Then the center of aggression moved east to Germany (World War I and World War II). Russia became the center of aggression from 1945-1991.

The next center of aggression will be China. America will pull itself together in one last noble and successful effort to contain this center of aggression. In so doing, America will become the latest center of aggression. End of story.


On Oct 21 06:07 AM User 353732 wrote:

> 1. Free markets, free speech, free elections, a decent civil society,
> the rule of law rather than the rule of men, government by the consent
> of the governed are anchored by and are Middle class values. The
> Upper Class always seeks a monopoly on wealth and power and the Lower
> Class seeks bribes and the instant gratification of the bases desires.
> The Upper Class uses the Lower Class to intimidate both psychologically
> and physically the Middle Class.
>
> 2. The great arc of American ascent into an exceptional nation, a
> high and grand experiment, the first and sole global hyperpower,
> and the only Great Power that sought to liberate rather than conquer
> is but the lagged arc of Middle Class ascent . As the Middle class
> is now compressed, fragmented and diminished economically, socially,
> culturally and politically so America is diminished as both a great
> geo-strategic power and, even more importantly, as a great moral
> force in the world. The debasement of the dollar and its perversion
> from a symbol of national honor into a stigma of national disgrace
> is proceeding in parallel with the degrading of the Middle class.
>
>
> 3. If the Middle class is " scattered, diminished and enslaved"
> not only will the American Experiment end, America itself will cease
> to be in any form recognizable by or morally acceptable to the Founding
> Generation.
> Either the USA fragments into 3 to 5 new nations (since there will
> be neither Constitution nor shared memory nor great common purpose
> to bind the people) or it becomes yet another totalitarian , brutal
> and stagnant internal empire under a new Stalin or a new Mao or a
> new Hitler. But even this is not end game.....Totalitarian inland
> empires do not last long; they are either destroyed by the external
> enemy or become mere vassals to another Nation that is on its own
> rising arc of ascent.
> 4. In my view, the Middle Class will not continue to retreat. It
> will regroup around the remnant that still believes in liberty ,
> sacrifice and in living rather than merely existing. It will first
> reform and regenerate itself by rejecting materialism as the governing
> Idol, turning away from instant gratification of every whim and twitch
> and undeserved entitlements and rediscover America's historical virtues
> and reclaim its heritage.
> There will be a new, regenerated America.....Or no America. The status
> quo will not endure.

Oct 21 09:20 AM

[Bob 123:]

But......but.......where do the jobs that made the middle class come from?
The destruction of the middle class has been underway for thirty years or so, commencing from about the time of the Reagan administration. Globalization, free-trade --- many saw this from the beginning for what it was -- the oligarchs shifting the cost of labor to the cheapest parts of the planet. Initially focused on blue-collar/manufactur... it now reaches deep into the white-collar workforce as well. Almost no one's job is safe, save the local service jobs that do not pay a middle-class living wage.
No U.S. administration of any political stripe has moved to stop the destruction and sell-out of the U.S. workforce, including the current one. When all the wealth is concentrated in a few hands and a massively impoverished society collapses into violence and anarchy -- the kingpins will flee abroad with all the plundered loot of this once great Republic, as a parasite would leave a dying host.
The deception they play upon the people as this is accomplished is breathtaking in it's scope and audacity. The greatest swindle of all time, not only of our own wealth, but all our kids, grandkids -- probably many more generations to come.
And we let it happen, blinded by political ideology and fooled into thinking we are a nation of 'me' rather than a nation of 'we'.

Oct 21 09:50 AM

[enigmaman:]

The key to the destruction of the middle class is to get them hooked on more Government, free money to buy cars, buy homes, buy appliances, public health care, then in return you tax them in submission so they have little recourse because the are indebted to the Government for their existence and must comply, " dont bite the hand that feeds you" then as they are now re-evaluate who is classified as the poor and then provide additional subsidies to help these, then before you know it you have increased and strengthened the number of poor insuring complete compliance and have empowered the elite rich so that its money supply is insured, a match made in heaven all at the expense and destruction of the middle class, just look at South American countries, Russia, China, N Korea etc where you have the elite rich the poor and no middle class, a perfect world when control of ones country is the goal and ultimate prize.

Oct 21 09:59 AM

[kebu77:]

An economy is only as strong at available energy at an acceptable cost grows to support it (supplemented of course by technology improvements that promote energy efficiency).

The great expansion of the US middle class from 1945 to 1973 corresponds with a DOUBLING of US oil consumption every 10 years (while population was increasing 20%/decade). During this period of really cheap oil, the ratio of oil recovered to the energy invested to recover it (EROEI) was really high - - around 100:1.

With the '70s oil crises, oil consumption flattened, as did incomes. Per capita oil consumption peaked and began to gradually decline in the '80s to present, and overall oil consumption peaked earlier in this decade. EROEI has been falling during this period as the world has had to resort increasingly to deep water, polar, heavy oil, ultra deep water, and oil sands to increase supply. Average EROEI now is running at under 20:1 and falling.

Pretty soon, the cost of recovering energy supplies (including coal and natural gas) will increase to the point where this (as of now) hidden tax on the economy will exceed efficiency gains. Then, avoiding energy waste via conservation is the last step before real declines in the overall standard of living occur.

The above is, of course, a tad oversimplified, but to make the point: The middle class is in jeopardy for real, secular-trend resource reasons having nothing to do with economic cycles or political matters.

Oct 21 12:16 PM

[LilBob:]

Cam Hui, turns out I'm getting a lot of exposure by getting everyone riled up so I'm going to see if I can jump on this bandwagon and make this one like the "Greatest Depression" article.

In the late 19th and early 20th century many new Americans were living in slums and working in factory conditions that-by modern standards-would be considered rather quaint and picturesque. Granted, there were no guards on the machinery and fires were an occasional difficulty but at least you weren't constantly monitored by cameras and subject to non-stop beepings and buzzings. Nonetheless, those 14 hour days proved rather tiresome, and the low wages and lack of health-care and legal protections for workers could also be difficult so people organized and fought for union representation and better working standards. It was the development of a solid capital base-abetted by GI pay, Rosie The Riveter wages and interest on US war bonds from WWII that made the prosperity of the 1950s possible.

Now that the unions are largely a thing of the past, thanks to out-sourcing, we are once again in the throes of a rapidly volatile stock market much like we had between the years of 1895 and 1936. Many will tell you (and with a straight face; something which absolutely amazes me) in one breath that the solution to the problem is to reduce wages, thereby making American workers more competitive so we can restore domestic capacity, then they will tell you (without even snickering) the other problem is how do we get consumers to start buying again. So the solution to the problem-according to that log-is how to get people who are already in debt, and who are seeing their hours and benefits cut to spend more money. If it were somehow possible to get the minimum wage down to only 4 dollars an hour, then figure out how to get people who are only making 4 dollars an hour to spend like someone who makes $150k/yr, then everything would be fixed; oh, and in the process we have to get rid of all the taxes and also figure out how to spend more on the military at the same time.

As I said in my other comments, the real problem is when you get an excessive accumulation of capital at the top of the income scale you have too many investment dollars chasing too few consumer dollars. That's why the amount of investment required to generate additional GDP continues to rise, and it will continue to rise until we see consumers being more careful about how they spend their money, and we see Congress start to regulate American Business rather than just selling favors for campaign donations. Wages paid to working people are akin to fertilizer that's spread over a field. If you keep taking more and more out of the ground, eventually you aren't farming-you're mining, and once the ore is gone it's gone.

The real fear, the one thing that American business leaders are likely most worried about is that their little club might start to fraction as markets become more competitive. In other words, their afraid they might actually have to compete. The notion of trying to go beyond what your competitor offers to attract customers, rather than just relying on oligopolistic market structures to ensure one's own survival must be nightmarish to leaders in the Fortune 500 set-probably makes things a little awkward around those country-club bars.

Oct 21 02:55 PM

[Tom E.:]

A relative labor shortage and representative government is what helped to build the middle class.

Business has now flooded the labor market and off shored much work. We have been turned into a labor surplus country.

Its not too late to set things right again, but we must overcome many interests who don't want a strong middle class.

Oct 21 03:22 PM

[Leftfield:]

Lil Bob: John D. Rockefeller said, "Competition is a sin."

Oct 21 07:26 PM

[Graham and ...:]

Reagan's "Morning in America" had the middle class join the rich during the day cycle in hopes of getting rich (the Yuppie 80s). But now is the night cycle and the middle class fears becoming poor.


On Oct 21 04:31 AM Michael Clark wrote:

> As the middle class disappears into the lower class, political power
> swings toward the lower class. This will create another Democratic
> era (vs Republican) and more taxes on the rich. We are heading into
> a decade of political taxes on wealth in an attempt to balance the
> high and low.
>
> I have written that the Middle Class joins the rich politically during
> the Day-Cycle because the Middle Class becomes convinced they, too,
> will become rich. The Middle Class joins the poor politically during
> the Night-Cycle because the Middle Class comes to realize that they
> might become poor.
>
> Social legislation rules the Night Cycle.
>
> Individual triumphs rule the Day Cycle.

Oct 21 07:31 PM

[Teutonic Kn...:]

Graham -

I concur with you. The Chinese look upon the Americans as a bunch of Huns, Tartars, and Mongols, no wonder...

TK


On Oct 21 09:20 AM Graham and Dodd Investor wrote:

> Here's my center of aggression theory, whereby the center of aggression
> has been moving east.
>
> In the 18th and 19th century, the center of aggression was France
> (Louis XV and Napoleon). Then the center of aggression moved east
> to Germany (World War I and World War II). Russia became the center
> of aggression from 1945-1991.
>
> The next center of aggression will be China. America will pull itself
> together in one last noble and successful effort to contain this
> center of aggression. In so doing, America will become the latest
> center of aggression. End of story.

Oct 22 02:26 PM

[Justanother...:]

Free Trade / Corporate America / Government / and Higher Learning has cause the middle class worker to become the new minimum wage worker.

Free Trade allowed corporate America to pull in more and more greed. What happen to the days of Christmas bonuses? The workers no longer see this only the CEO's. Why do these directors, executive, and board members get all the bonus money instead of throwing your hard worker a small bone to help provide for their families?

I worked at places in my early 20's if you worked hard you received the benefits as well. If you finish a job early you got a nice hefty bonus, if your attendance was outstanding you received a bonus, Christmas bonuses was always nice to have for your family, then slowly year after year the bonuses would get smaller as well as the lack of wages.

The small plumbing company you use to work for got sold to a corporate owner. No more raises and no more PTO and etc. Wage increases do not even seem to meet a 3% anymore. You are lucky to get the so called cost of living increase anymore.

There is so much I could talk about and rant about but here is how I see it. The way the country has gone you either need to be a entertainer, come from a rich family, or be lucky and not get the shaft on your invention. Americans will never rise up and all complaints go on deaf ears. The people will continue you vote in the same trash year after year.

Oct 23 03:47 PM

[Teutonic Kn...:]

User 504203 -

You finally have got it. Congratulations! Since this is your first comment, I gave you a thumb up.

The colleges, particularly the graduate schools, have now become ghettos for foreign students. Guy like Pandit was smart, quit engineering early and head out to Wall Street, scope a few hundred millions, and got it made - New American Style in full swing.

It is the name of the game. Everyone for himself. Do it quick, do it dirty, and get away with it for being too big.

TK


On Oct 23 03:47 PM User 504203 wrote:

> Free Trade / Corporate America / Government / and Higher Learning
> has cause the middle class worker to become the new minimum wage
> worker.
>
> Free Trade allowed corporate America to pull in more and more greed.
> What happen to the days of Christmas bonuses? The workers no longer
> see this only the CEO's. Why do these directors, executive, and board
> members get all the bonus money instead of throwing your hard worker
> a small bone to help provide for their families?
>
> I worked at places in my early 20's if you worked hard you received
> the benefits as well. If you finish a job early you got a nice hefty
> bonus, if your attendance was outstanding you received a bonus, Christmas
> bonuses was always nice to have for your family, then slowly year
> after year the bonuses would get smaller as well as the lack of wages.
>
>
> The small plumbing company you use to work for got sold to a corporate
> owner. No more raises and no more PTO and etc. Wage increases do
> not even seem to meet a 3% anymore. You are lucky to get the so called
> cost of living increase anymore.
>
> There is so much I could talk about and rant about but here is how
> I see it. The way the country has gone you either need to be a entertainer,
> come from a rich family, or be lucky and not get the shaft on your
> invention. Americans will never rise up and all complaints go on
> deaf ears. The people will continue you vote in the same trash year
> after year.

Oct 23 06:07 PM

[metalpipe:]

The wealthy have always fed on their own. They will always exist. If things progress, and unemployment gains another 10% next year, which I suspect it will, the political climate will become very interesting in the face of mass defections from 'accepted' behavior. Non-payment of mortgages and credit card debt, crime, anarchy, homelessness, bankruptcy will cause our present consumer driven economic structure to completely collapse, like a snowball effect. The ultra wealthy will have little choice but to leave the US for greener pastures, or attempt to persuade the Govt to quickly form a police state in the chaos. I really do see the makings for a full blown version of Orwell's 1984 in the works.


On Oct 21 02:55 PM LilBob wrote:

> Cam Hui, turns out I'm getting a lot of exposure by getting everyone
> riled up so I'm going to see if I can jump on this bandwagon and
> make this one like the "Greatest Depression" article.
>
> In the late 19th and early 20th century many new Americans were living
> in slums and working in factory conditions that-by modern standards-would
> be considered rather quaint and picturesque. Granted, there were
> no guards on the machinery and fires were an occasional difficulty
> but at least you weren't constantly monitored by cameras and subject
> to non-stop beepings and buzzings. Nonetheless, those 14 hour days
> proved rather tiresome, and the low wages and lack of health-care
> and legal protections for workers could also be difficult so people
> organized and fought for union representation and better working
> standards. It was the development of a solid capital base-abetted
> by GI pay, Rosie The Riveter wages and interest on US war bonds from
> WWII that made the prosperity of the 1950s possible.
>
> Now that the unions are largely a thing of the past, thanks to out-sourcing,
> we are once again in the throes of a rapidly volatile stock market
> much like we had between the years of 1895 and 1936. Many will tell
> you (and with a straight face; something which absolutely amazes
> me) in one breath that the solution to the problem is to reduce wages,
> thereby making American workers more competitive so we can restore
> domestic capacity, then they will tell you (without even snickering)
> the other problem is how do we get consumers to start buying again.
> So the solution to the problem-according to that log-is how to get
> people who are already in debt, and who are seeing their hours and
> benefits cut to spend more money. If it were somehow possible to
> get the minimum wage down to only 4 dollars an hour, then figure
> out how to get people who are only making 4 dollars an hour to spend
> like someone who makes $150k/yr, then everything would be fixed;
> oh, and in the process we have to get rid of all the taxes and also
> figure out how to spend more on the military at the same time.
>
>
> As I said in my other comments, the real problem is when you get
> an excessive accumulation of capital at the top of the income scale
> you have too many investment dollars chasing too few consumer dollars.
> That's why the amount of investment required to generate additional
> GDP continues to rise, and it will continue to rise until we see
> consumers being more careful about how they spend their money, and
> we see Congress start to regulate American Business rather than just
> selling favors for campaign donations. Wages paid to working people
> are akin to fertilizer that's spread over a field. If you keep taking
> more and more out of the ground, eventually you aren't farming-you're
> mining, and once the ore is gone it's gone.
>
> The real fear, the one thing that American business leaders are likely
> most worried about is that their little club might start to fraction
> as markets become more competitive. In other words, their afraid
> they might actually have to compete. The notion of trying to go
> beyond what your competitor offers to attract customers, rather than
> just relying on oligopolistic market structures to ensure one's own
> survival must be nightmarish to leaders in the Fortune 500 set-probably
> makes things a little awkward around those country-club bars.

Oct 26 07:46 AM