Middle Class: The Big Squeeze


Part One: Job Loss due to Globalization

The modern information age has lifted millions of people out of poverty, notably in China where the government has mostly dismantled the communist economic system in favor of capitalism, exports, and foreign investments. The creation of a new middle class estimated at 500 million in China alone testifies to the dynamism of the emerging markets. If you are a globalist, the rise of the middle class in emerging countries is a cause for celebration because that is where most people of the world live, and where immense inequalities are being eliminated.

Unfortunately, the middle class of the developed world does not fare as good, even much worse. Among the industrialized countries, Japan is still mired in stagnant growth since the 1990’s. The United States inflicted upon itself a financial meltdown in 2008, and is struggling to recover from the deep recession that followed. Europe is now going through a debt crisis as some of the Euro members such as Greece and Italy teeter on the brink of default. The middle class of the developed world is hurting due to anemic economic growth and lack of jobs.

The big squeeze of the middle class has finally come to the developed countries after many years of prosperity. It will last into the future unless they know how to grow out of it. Most people like to blame the emerging countries for stealing their jobs. Ironically, their own corporations are laughing all the way to the bank for having made billions of dollars by investing overseas to avoid high wages at home.

The emerging countries have attracted all the low-wage manufacturing jobs, rather than stealing them actually. As they gain manufacturing experience, they will attract higher-wage jobs, too, such as design, marketing, accounting, legal and other associated services. This is adding tremendous pressure for the developed world to act. It should be emphasized that bleeding low-wage jobs is not a monopoly of the developed countries. China and the others that belong to the first-tier of emerging countries are shedding their low-wage jobs, too, to the second tier, because low wage is only relative. Low-wage jobs tend to flow to a new place where a lower standard of living exists.

What can the developed countries do? They cannot forbid their corporations from profiting overseas via labor outsourcing and technology transfer. Why? The emerging countries are magnets for profits and investments due to great demands coming from the new middle class being created. Thus the only solution is to reinvent and move on to higher technologies that afford to pay higher wages. In fact, they have done this all along. Did the Industrial Revolution and the Information Revolution originate in the developed countries? Yes! That’s why they have achieved advanced development in the first place. No doubt, the private sector has the capability and the will to perpetually reinvent. What is lacking is the political will, especially in the United States. Without the political will, it will be hard to create the right kind of environment for job growth that benefits their middle class.

Let’s look at what causes middle class anxiety. In the developing world where the great majority of people are poor, there is no such thing as middle class anxiety because no such class exists. The problem is to lift people out of poverty first. The emerging countries such as China, India and many others are succeeding in that respect. Their middle class is growing and full of hope for the future despite enjoying less prosperity compared with the developed world. They make a living on any job available despite low pay, work 10 hours a day or more, buy something they could not afford before, and save for a rainy day. In short, the goal is to work and grow out of poverty. They have little to lose but much more to gain.

The situation is completely different in the developed world. Their middle class represents the majority of population. They have grown accustomed to heavy consumption that tends to deplete their savings over time. They have enjoyed a safety net provided by governments or employers in the form of social security, health care insurance, or retirement benefits. They are protected from business exploitation by minimum wage, labor laws and safety regulations. Their anxieties are the fear of those benefits being eroded or totally lost. Those fears become real when the economy stagnates, companies are not hiring, and government is drowning in red ink. This is the toxic combination that is brewing in the developed world today.

One consolation is the relatively low inflation for many years in the developed world despite spiraling oil prices. This is probably due to the huge amounts of cheap consumer goods imported from low-wage countries that offset the increases in oil prices. High inflation can easily devastate the middle class by reducing their spending power and wiping out their savings accounts. You will appreciate the great damage done if you read about the situations in Germany after World War One, and China after World War Two, where the entire middle class was wiped out due to hyperinflation. What followed were the ascent of Hitler and the Chinese Communist Revolution.

The squeezing of the middle class in the developed world represents the first major disruption of globalization where low-wage jobs flow to the emerging countries. In this way, there is little prospect for wage inflation because the poor masses in emerging countries are happy to work for any pay. China still has 700 million people living below the poverty line in the countryside. India probably has one billion. These huge numbers can easily bleed the developed world to death in terms of job loss. However, they should not fear if they know how to reinvent themselves like they used to. Moreover, China and some others will probably join the developed world in a decade or two. At present, they are in fact creating more jobs because of their huge domestic markets, and are bleeding low-wage jobs to the second-tier emerging countries.

Despite no shortage of cheap labor, the second major disruption of globalization is the shortage of food and raw materials, and fast environmental degradation. To cite one example, there are more than 150 million passenger cars in the US, averaging about two people per auto. Imagine if the Chinese would achieve close to the American standard, could we still breathe any fresh air? What would happen to the price of oil? One Chinese high official has said that it would be unsustainable because they would use up all the world’s supply of oil. In addition, how much would be the increase in meat consumption, raw materials for housing, and many other kinds of food and raw materials? The mass consumers of the emerging countries would devour the entire supply of anything available, resulting in a material-led inflation never seen before in history. This will really squeeze the entire middle class, wherever they may be in the world.

Part Two: Middle Class Woes in America

The middle class in America is being attacked from all sides. The current high unemployment rate of 9% is only one new problem. The others include: spiraling oil prices, health care inflation, housing bubble, spiraling college tuition, cuts in social security, and stagnant wages, plus the potential danger of global material inflation. The convergence of these pressures can easily break a nation unless something is done to forestall the looming calamity.

The squeeze of the American middle class began a few decades ago with the first oil crisis of 1973. Because the American economy is heavily dependent on oil, successive oil crises after 1973 have almost decimated its auto industry, resulting in the eventual bankruptcy of General Motors and Chrysler in 2009, leaving Ford as the sole survivor. The auto industry used to be an American jewel and the biggest employer offering the best wages. Its drastic decline is best seen in the rise of foreign imports from insignificance to around 53% of the US auto market today where Japanese cars dominate. The job loss from the auto industry is estimated at 400,000 since the year 2000, not to mention losses during earlier periods. These are well paid manufacturing jobs being lost because the industry cannot compete with foreign autos in fuel efficiency, besides reliability, performance and styling.

The relentless rise of gasoline prices, although affecting all countries, has hit the American consumers hardest because their way of life revolves around the automobile. Before the first oil crisis, US oil expenditure accounted for about 5% of GDP. Now this figure has increased to 8%. This roughly translates to $440 billion over 40 years, or an average of $11 billion per year. That means consumers will have this much less to spend after paying for gasoline.

Second, health care costs have run out of control. While most developed countries offer universal government-subsidized health care, the US relies on private companies to provide health insurance to their employees. Although many Americans ridicule government health care as socialism, they spend close to 18% of GDP on health care, which is the highest but does not appear to be any better. Due to high costs, the medically uninsured has risen to 47 million people today. According to a CNN report in June 2009, more than 60% of bankruptcies in the US are caused by high medical bills.

Third, housing used to be relatively cheap in the US due to more land and fewer people. The housing bubble began to build up in the 1990’s mainly due to irresponsible bank lending. With real estate, the nice thing is that you can borrow money using your house as collateral. When housing prices rise, you can borrow even more, never mind about paying back. As a consequence, the increased borrowing against real estate more than offsets the negative impacts on consumption caused by high gasoline prices and high health care costs. However, this could not sustain for long when the housing bubble finally burst in 2008, throwing millions of consumers into foreclosure and deeper debt.

Fourth, America is facing another looming debt crisis unheard of in other countries. It involves student loans, which amounted to near $1 trillion and already exceeded total credit card debts (CNBC report). A college education promising better job prospects is the dream of most young people. The top-tier private universities have been hiking tuition feverishly for many years now. This has caused the other private colleges (even public ones) to follow suit. How can the students afford it? No problem, the banks will come in with loans. The colleges can raise tuition as much as they want. They only need to act as middlemen to link the students to the banks. Student loan is a good business because the borrowers are in their prime willing to burden themselves with debts because they are full of hope for the future. The banks can force them to sign a contract, either using their parents’ assets as collaterals, or attaching a lien to their future earnings to be repaid with interests when they find a job after college. What happens if the economy turns out stagnant and the students cannot repay the loans? Well, we’ll just have another financial meltdown like the sub-prime mortgage disaster in 2008.

Fifth, as the baby boomers reach retirement age, their incomes rely partly on social security subsidy from the government. The subsidy is actually their own earnings deducted in earlier years from their paychecks as social security contribution. The problem is that the baby boomers represent a large segment of population that are living longer lives than their predecessors, thus causing tremendous stress on social security expenditure that will happen a decade from now. Some proposals are currently floating around involving payment cuts and delaying the retirement age.

Sixth, wages in America have not risen for many years. They are unlikely to rise given existing high unemployment. On the other hand, high wages are always available in new industries propelled by technological innovations. However, those highly paid jobs are reserved for people with new skills, not for the millions being laid off in traditional industries without sufficient re-training for a new kind of job.

All the above paints a dark picture for the American middle class. The only consolation is that two very adverse factors are still missing: inflation and high interest rates. When they arrive, the worst scenario will materialize. It is likely that inflation will come in the near future, followed naturally by high interest rates. Should inflation come, it would be a demand push because the emerging countries have consumed most of the materials available due to their big populations. Right now, inflation is already brewing in the emerging countries, especially for foodstuff and other necessities. The developed countries have yet to experience it.

From the above, we can see that the middle class agony in America is mostly inflicted by some private industries. We have observed the following: failure of the auto industry to compete; failure of the banks due to their unscrupulous lending; failure of the private health care industry to control costs; and failure of the private colleges to keep tuition affordable for the young. Regarding rising oil prices, political instability in the Middle East is the overriding factor. Being a superpower, the US has failed to honestly broker a lasting peace between Israel, the Palestinian Authority, and the Arab countries for over half a century.

Part Three: The Politics of Corruption

In Part One, I discussed the loss of jobs in the developed countries due to corporations’ outsourcing overseas. In Part Two, I described the woes of the US middle class facing increasing difficulties. In Part Three, I wish to talk about the political environment that perpetuates the present situation in the US.

The middle class woes can be traced to the single most important factor known as corruption. Corruption exists everywhere in the world. The question is how much, and whether or not it is getting worse. In truth, no nation is poor given its land and other resources. A nation is poor because no effort is made to develop its human capital except reckless exploitation. As a consequence, the whole country slides into poverty, which is seen in the concentration of wealth in the hands of a very small minority of the population, known as the top 1%. As long as this inequality continues, economic development is impaired, the middle class is either weakened or nonexistent, and the country will remain poor until major reform or revolution occurs.

A revolution does not guarantee wealth and equality. Many revolutions have taken place around the world, only to replace one kind of corruption with another where a new 1% group controls all the wealth. For example, the Chinese communist revolution of 1949 eliminated the entire middle class until major economic reforms began in the 1980’s. At present, the top 1% in China still possesses immense wealth and power. Corruption is rampant if not getting worse. However, the big difference this time is that more than 50% of the population is gainfully employed in economic production. The middle class has revived. They have a better future to look forward to. The Chinese middle class is hopeful and growing rapidly. In contrast, the American middle class is angry because they are being squeezed from all sides.

Besides material enjoyment and status, wealth carries all kinds of advantages in doing business, especially the ability to suffocate the competition. Thus business tends to get bigger, and wealth tends to concentrate. A person immersed in wealth can easily forget about the rules of fair play. He is corrupted by greed unless his conscience regains control.

Should the rest of the population rely on big business to police itself and to do good? Of course not! That’s why we have laws and regulations to forbid monopoly, foster competition, and ensure fair labor compensation. Who should enforce the laws and regulations then? The government by default. What if the government protects big business rather than the people? What if big business owns the government, just like the gangs own the police force in some cities? This will create a vicious cycle of corruption that is really sinister. It will continue to squeeze the people until a rebellion finally occurs.

The collusion between government and big business represents the worsening culture of corruption in America today. It is undermining the middle class and the nation’s valued democracy. The following are some glaring examples:

In January 2010, the US Supreme Court overturned a 20-year-old ruling that put a limit on monetary donations from corporations and labor organizations to politicians. The limit no longer exists now.

Political campaigns are increasingly expensive. Politicians rely on big business to fund election campaigns. Once elected to office, they have to pay back in the form of government contracts, subsidies, and relaxed regulations.

Politicians seldom do things for the public good because they owe too many favors to big business. When they grant favors to corporations such as tax cuts, subsidies or contracts, how do they explain their actions? Easy! They always say it’s for job creation purpose to misguide the public. Unfortunately, many people are brainwashed to believe what the politicians say.

The current political system is poisoned by hostile partisanship. One party proposes something and the other will shoot it down. The result is paralysis and nothing gets done.

There is no sensible national conversation regarding what the public really needs. When one party tries to reform health care, the other party alleges socialism taking over the country. When one party tries to reform the financial system, the other party accuses it of killing jobs. When one party tries to promote green energy, the other party tries to discredit the science of global warming. When a politician opposes a foreign unjust war, the pro-war faction accuses him of being unpatriotic. Can’t you see the disconnection, unreason, and stupidity in the national dialogue? If the people are not confused or brainwashed, they must think that the government is run by nuts and crooks.

Most government policies are made for the short term to grant favors or score political gains. During the current stagnation where private investment is lacking, the most sensible policy should direct government investment to long-term projects in infrastructure, health, education, and new technology. On the contrary, the current policy is to cut government spending, which further aggravates the employment situation. The country can only grow out of a job crisis through long-term investments to create more jobs. Belt-tightening is a shortsighted measure and can never achieve job growth.

The culture of corruption and disconnect as described above guarantees that the middle class in America will continue to be squeezed for some time to come. Sooner or later, the middle class will rebel.

One noisy group (the Tea Party) has already done so. Their main issue is against big government, rather than against bad government. As a result, they advocate cutting down the size of government regardless of what it does, even though it is for the public good. This appears simplistic and downright childish.

Another group (Occupy Wall Street) is now brewing all across the country. It is a more diverse group consisting of the unemployed, students, and lately the unionized workers. They want government to listen to their pleas rather than the wishes of big business.

The unemployed in the US number 14 million people right now. The middle class represents the silent majority who is getting more frustrated and angrier each day. Sooner or later they will say enough is enough. It remains to be seen how this will play out if the situation worsens. (October 2011)

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