Wednesday, October 21, 2009

Political stability and the middle class

I wrote about the possible social backlash of the financial crisis back in April. Given the uproar over the size of the Goldman Sachs 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.

1 comment:

Roger Heath said...

It may be true that there is crony capitalism (highly placed indivivuals and corporations using influence to gain advantage through use of government as a club on the competition - see bondholders of large banks and GE). And to the extent that it is pervasive, it should be exorcised. That's one of the many reasons libertarians urge limited government. But...

Comparing the median income at two different points in time to ascertain the relative financial health of the "middle class" is logically invalid. The two different snapshots are made up of different people, some of whom are on the way up, some on the way down. Without looking at the same cohort group (say, the middle class of the earlier period) at both times, you can't tell how its income changed.

Roger Heath