The problem with the middle class is that it’s shrinking… that much is obvious. There seem to be two basic approaches to reversing this trend. The governrnment can either raise taxes on high-income earnrners so that funds can be redistributed in the form of tax credits or deductions to others, or lower taxes on businesses so that companies are more profitable and can afford to pay their employees more.
How about neither one? That’s my vote, since I don’t think either program has much chance of moving families very far up the income ladder.
In trying to bring back the middle class, we’re fighting a trend that is much larger than one administration or another. We’re trying to recreate something that was an anomaly — the 1950s and 1960s.
It won’t happen.
I covered this topic in depth in the October 2012 issue of Boom & Bust, and the situation hasn’t change. This is not a domestic political issue — it is geopolitical, and rooted in global economics.
Before WWII there was a high level of inequality in our economy. As the U.S. industrialized, owners of capital did pretty well. With a steady flow of new workers moving to cities from rural areas, they could keep wages low since they could simply hire new employees if the current crop demanded more income.
Labor unions were formed to help bring about better working conditions and better benefits. The one tool that labor unions could use was the solidarity of workers to either slow down work in a factory or bring it to a complete stop. Either action would cost the business owners money.
The problem was that simply organizing labor didn’t change the facts on the ground — there were more people willing to work than there were jobs available, which kept a lid on wages.
The start of WWII changed all of this.
The U.S. ramped up production of war supplies ahead of December 1941, and then engaged in the war completely. Suddenly workers were scarce.
Many expected the end of the war to bring a recession, since production of war goods would stall, but it didn’t happen. WWII was different. Not only had the industrial base of Europe and Japan been obliterated, but U.S. infrastructure had emerged unscathed. Suddenly, the U.S. was the provider of food and industrial goods to much of the world.
This tremendous increase in business required a lot of investment capital and a lot of workers. This gave employees the upper hand… at least for a while.
As Europe and Japan rebuilt, they slowly took business away from the U.S. By the early 1970s, Europe was back online and Japan had become a low-cost producer of goods. At the same time, the boomers hit the workforce, which added more potential employees to the economy.
This combination of adding workers and losing business to overseas markets started the downtrend in wages in the U.S. from what had been an exceptional period for workers.
The issue of rising inequality isn’t about too little or too much taxation.
Raising taxes will simply drive those who can afford to avoid them further down the rabbit hole of misallocated funds as they seek out and use more loopholes.
Lowering taxes will provide more income to owners of capital, but there’s little proof that this necessarily leads to workers earnrning more.
To change this situation, Americans will have to change the supply and demand for employees. We can make more goods and provide more services here, which would lead to more work, or we can shrink the number of people available for work.
Or even better, we can do both. Only, that’s easier said than done.
If we made more goods and provided more services domestically, then Americans would have to be willing to buy them, even at a premium. It’s amazing that so many people are focused on where their food comes from, but don’t take the same approach when asking where their shoes, shirts, cups, watches, sheets, or anything else originated.
We all know if a car is domestic or foreign, and many goods are aspirational based on where they come from, like Swiss watches and Italian suits, but a lot of daily living goods aren’t in those categories.
Unfortunately, at this point, many things aren’t made in the U.S. at all, so choosing an American brand is impossible. But even if people could buy American, would they?
Would people specifically pay 10%, 20%, or even 40% more to purchase an item made domestically just to support American employment? This extra cost comes right out of family budgets, where they would have less to spend on themselves, or less to save for education or retirement.
That sounds like a hard sell.
As for changing the supply of workers, that is already happening naturally. The baby boomers are aging out of the economy. While many more boomers than their predecessors are working past age 65, the overwhelming majority of them still retire at the traditional age. As this large group exits the workforce, there will be more opportunities, and hopefully more income, for younger workers. Unfortunately, this change in the complexion of our workforce will take another 10 years to occur.
So for now, our best option is to buy American — not 100%, or even close, but a bit more than we do today — and to encourage our family, friends, peers and colleagues to do the same. This would be the quickest way to provide greater opportunities for workers, and bypass the inefficient involvement of the governrnment.
P.S. In the summer of 2013 we noted that an iconic American company was on the brink of failure. The company was Radio Shack, and it had failed to keep up with changing American buying habits. It had a large bond payment due in August of that year, and the company was low on cash. Just before the funds were due, the firm secured new financing, which was surprising. Unfortunately nothing else changed. Now Radio Shack was just officially delisted from the stock exchange, as the firm prepares to enter bankruptcy.
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Ahead of the Curve with Lance Gaitan