Monday, November 9, 2009

What if the social fabric tears?

I have written before about what academics call anchoring, or expectations. My previous post was about the anchoring of inflationary expectations. This time, it’s about the social fabric of America, which is far more important.

The American Dream
The mythic story of America has been the American Dream. America has long held to be the Land of Opportunity, where people like Michael Dell could build an empire by selling computers out of his college dorm.

How much unravelling can the Dream take?
I posted previously that an OECD study showed that social mobility in the United States is actually lower than more “egalitarian” countries like Denmark and Norway. But those are only statistics and statistics don’t really impact the social psyche.

What is a greater concern to me is how the American Dream is unravelling in some parts of America in the wake of the Great Recession. A good example can be seen in a post at Naked Capitalism about the trials and tribulations of a family struggling with unemployment and credit card debt. Here are some messages from the family:

We haven’t eaten out in years, never pick up fast food, ever, don’t walk the malls, never received any public assistance, have a 2000 Tundra and a motorcycle to save on gas, make everything from scratch (even my own homemade laundry soap!)… frankly, I don’t know many folks around here that have saved for a stormy day. Saved? That’s a joke to most of us. We’ve gotten our phone disconnected and share a cell phone, we plan each and every trip to the store with a list of necessities, haven’t had a vacation in over 15 years, and up until my husband got a job last week, we were selling everything we could sell in the house on ebay. At least I am cleaning out the closets that haven’t been cleaned in years.

We had lentils and cornbread last night…yum yum, and we’ll heat them up tonight as well. I did mention that my husband got his first paycheck last Friday. Sent from Heaven. We celebrated with brats and homemade kraut and hard rolls! Beats a t-bone any day in our book. Hubby is from Austria, so he can make some great kraut.
A Naked Capitalism reader responded [emphasis mine]:

I am astonished at how many readers you have who have no idea whatever how the financial bottom fourth or fifth of America lives. When I was a kid in western Kentucky I had a few classmates who lived in unpainted old clapboard houses out in the country, in some cases former slave quarters and so a century old. I remember one such house that even had a dirt floor. When I was little my mom’s parents lived in a tiny mountainside house in Appalachia that had no indoor plumbing. They hand pumped water from a well and heated it on a coal stove, and for a toilet across the dirt road there was an outhouse that hung out over and dumped onto the weeds on the descending slope. Stunk to high heaven, of course, and there were lots of bugs. At eight years of age, having to go in the middle of the night armed only with a flashlight was a character-building experience.

Things are a little better in the rural south now, but they sure aren’t good, now that the small farms are gone. In my adult life I’ve seen one relative living in a broken-down trailer with a caved-in roof and a goat tied up in the yard. And I’ve seen my cousin, with a small-college degree in math no less, getting by for a good while in the middle of nowhere, south Carolina on $9,000 a year from intermittent and part-time jobs. We can be all snooty about the poor not working hard enough, but I’ve also seen a sister quit a job pulling visibly diseased tissue off of Tyson chickens on a production line rather than get campylobacter one more time. We demand they live and act all middle class, but as a society we honestly don’t give them half a chance.

These guys who talk about saving hundreds of $thousands in small-town rural America are particularly irritating. How do you do that on $9K/year or $12K/year exactly? The US Census Bureau says in 2007 the bottom 20% of US households earned less than $19,178, so these are not trivial numbers of people. We never won our war on poverty really. We just forgot about it when the conservatives become obsessed with the hordes of welfare queens (and drag queens) that they imagined were filling our cities.

One of my big shocks when I started traveling more was to discover that compared to a lot of places a large part of the central and southern US (including parts of the upper Midwest) was actually what used to be called a third-world country, with way more poverty, illness, and borderline illiteracy than Europe et al. Re literacy I remember in Turkey seeing Chekov plays for sale at a truck stop in the middle of nowhere. My Turkish friends thought it odd that I’d find that odd. To them it was perfectly reasonable that a truck driver might want something interesting to read.

Does the social fabric tears? How do people anchor expectations?
As the Great Recession takes its toll on the bottom half of the US population, what happens if people anchor move from America the Land of Opportunity to Third World America the Land of “broken-down trailers with a caved-in roofs and a goat tied up in the yard”?

The mood of America could very well turn from being aspirationally driven to one where “I want my slice of the pie.” The former promotes growth while the latter leads to social turmoil and highly investor unfriendly. At its worst, it can result in socialist and communist tendencies if dominated by the Left, or skinhead-like tribalism if dominated by the Right (think KKK or even Hitler).

Where the middle class goes, so goes social stability. If there are significant tears in the social fabric, then does the world start anchoring on America the Superpower to America as another country, just like Brazil is another country?

Before you dismiss this as leftish claptrap, consider this Randall Forsyth commentary in that bastion of socialism Barrons about the captain and galley slaves who are at risk of getting thrown overboard. (And if this mentality is getting into the pages of Barrons, what does this say about the rest of the country?)

Watch this space. While I don’t believe that a descent into chaos is inevitable, it is definitely a risk and would create incredible social, political and financial upheaval not only in the United States, but the rest of the world.

Those risks are now just starting to show up in the currency and commodity markets.


Roger Heath said...


I wouldn't dismiss what you write as leftist claptrap. However, your post, uncharacteristically, seems unfocused and less than convincing. To prove that there is inequality and a lack of economic mobility, you use anecdotal evidence (no evidence at all) and a logically invalid study about social mobility.

While I agree with you that the American Dream is in danger, I think the likely proximate cause is rooted in the tax laws and politics. The top 50% of the households by income pay 97% of the federal income taxes. When more than 50% pay nothing, they'll vote themselves benefits, compliments of those doing the paying. This natural urge combined with the demonization of of the "rich" by politicians and media sources will do significantly more to destroy the American Dream.

As government spending crashes towards 50% of GDP, and the current administration takes over more of the private market, the likely outcome is socialism.

Like you, I fear that the American Dream is losing purchase. We differ on the threat. Yours seems to be either right-wing or left-wing extremism. I fear big government in cahoots with big business trying to get a place at the table.

Keep provoking,

Patrick said...

The difference between the US in 2011 and other countries such as Russia in 1998 or Argentina in 2001 is that the State in the US is so entrenched with monolithich power, technological and logistical as well as financial, that its collapse will be very cacaphonous. This may seem to have been true in Russia, but the infrastructure was too loose there. Consider surveillance, legal precedents that pave the way for martial law, and last but not least, all the spooky military stuff that DARPA has been cooking up, and you have a recipe for a decline unlike any since the fall of Rome.

Offshore real estate might be worth recommending to clients.

Kevin Maher said...

This is really interesting and I believe that we saw the underpinnings of this visious circle starting 20 years ago. As companies shifted well paying domestic jobs offshore, profits rose and investors made tidy returns. I saw this time and time again last year travelling through rural Illinois. One town lost MayTag, Wheaton, and Case in two years!

Unfortunately,investment income doesn't produce the taxation revenue that payroll does. Spending on many social programs in general, and education in particular, fell at the same time as deficits rose. But due to a number of factors, not the least among them vast amounts of ridiculously easy credit, nothing outwardly changed in society for quite a while.

I am not sure what the answers will be, but I am sure that they will need to be long term and painful.

Thanks for all the effort that you put into "Humble Students," it exercises my brain in areas that it otherwise doesn't exercise!

Kevin Maher

FIFO said...

I think a large portion of the American lower and middle class has been effectively dumbed down by the media to the point where they are not a threat and if they were the US military has a noncombative technology where a mob can be controlled without firepower.

But your point is very well made about our markets. I can not think of any sustainable rags to riches microcap stock stories created since the 2000 bubble where I can name a handful of them in the UK and Canada. I think naked short selling has been a factor in this fact.

Most of the wealth created in the USA was from being on the right end a hedge fund trade.

Anonymous said...

@ Roger Heath @ 9:55

"When more than 50% pay nothing, they'll vote themselves benefits, compliments of those doing the paying."
One often sees this proposition cited, yet what % of this 50% who "pay nothing" (e.g., not even no SS taxes, no sales taxes?) are registered voters and of those what % actually vote?
As yet, I believe this is a straw man argument.

Matt said...

@Roger Heath:

The top 50% of the households by income pay 97% of the federal income taxes.
Just for shits 'n' giggles, wouldn't it be useful to also know how much of the income they get, no? If they make 97% of the income then I would say this is an EXTREMELY fair situation. Moreso when you consider the overall tax burden which is NOT limited to income tax (many taxes, such as sales tax, have more impact at lower incomes [as %-of-income].

When more than 50% pay nothing, they'll vote themselves benefits

So why aren't they? You say that, but it doesn't actually happen. What happens is that the richest people in the country get their way, every. single. time., regardless of which party is in power.

Your fears and reality disagree. Cam's do not, or at least don't appear to.