class structure

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Class Warfare Addendum

Some of you tell me I have gone too far with my recent binge of talking about the hollowing out of the middle class. But it’s not just me. This is now the hot topic as we sift through the debris of the Reagan illusion and the great trashing of our economy by the banks. It seems as if everyone is arriving at a similar, if not the same, point. The last thirty years have seen the unravelling of the great social contract that was the undergirding of the rise of the American middle class. The story is simple, easy to spell out, and has a nasty ending. We are witness to the betrayal of the achievement of the postwar years. That is no small matter and is thus worth talking about.

That it took thirty years of hard work to undermine the middle class is testimony to the strength of the structures put in place to support it. I have to admire the tenacity of those committed to such destruction and tip my hat to their success. As I have said here before, my big argument is not with those who sought to drive the middle back down to the bottom, I can understand their motives: they gained inordinately. No, the big mystery is why the middle was so supine and complicit in its own downfall.

Hence the interest and the vast amount of work now being written about the subject.

Timothy Noah argues that it was the loss of the unions and globalization as key amongst a plethora of factors. His argument holds together well. Many of the other explanations stand up less well simply because the experience of other countries is different. They provide a counter factual explanation.

Basically the Noah thesis boils down to a familiar story: coming out of World War II the western world was concerned about the potential disruption that could be caused by the arrival home of an unprecedented number of de-mobbed military personnel. The fear was that this arrival would spark a massive surge in unemployment along with civil unrest. These folks had to be put to work. Not just that, but they had to be sold on their ability to improve their lot in life. No one wanted to sell them notion that all that sacrifice merely bought them a ticket to slide back to a prewar lifestyle of marginal affluence and constant threat of unemployment and poverty.

Truman led the way by forcing the American auto industry into a five year labor deal that provided health insurance, and contractual annual wage increases. Big business, fresh from the labor disputes and violence of the 1930’s saw its self interest in building a quiescent workforce that had a stake in the nation’s affluence. Other industries, unaffected by the coercion from Truman, went along with the same model for the same reasons.

So a social contract was born. Its features were strong union voices in industry; reliable wage increases; sharing of productivity gains; corporate forbearance on profits; a clutter of government programs to assist workforce re-entry; the near deification of military service; a refusal to demilitarize to reduce the flood of workers to be accommodated; the protection of the New Deal; the constant lifting of the minimum wage; government interference in, and protection of, markets; a commitment to keep inflation low; and the encouragement of home ownership via government subsidy and limitation of the mortgage industry.

The essential thread running throughout the entire edifice was the acceptance of the government as a key player in insuring its survival. As a result of the sequence of a great depression being followed by a world war, it was generally assumed that middle class affluence rested on a variety of government initiatives. Those initiatives were either direct, as in the subsidy of mortgages and the provision of education to veterans; or indirect, as in the shaping of industrial labor practices through coercion or legislation. Either way the social contract recognized government as a major partner in the construction of wealth.

Naturally there were opponents of this structure. But they were few and for three decades both political parties espoused versions of the same contract..

But as the memory of the depression faded and as affluence engendered complacency the agenda shifted. The opposition grew, such that when the 1970’s saw the apparent failure of the postwar model, it was ready to pile in with its alternative vision. The confluence of high inflation and stubbornly high unemployment during the 1970’s opened the door for the right wing counter-attack that culminated in the ascendancy of Reagan to the White House and the anti-government rhetoric we have listened to since.

The fragility of the middle class – and it is always fragile – bred sufficient fear that politicians could persuade the voters to turn on the very programs that provided safety. Enough people thought that they had found solid ground and no longer needed that safety to provide the votes for the elimination of the postwar contract. The fear to be exploited was not of a destitution caused by depression or war, but of the intrusion of government and its seemingly endless need for tax support. Especially when those taxes seemed always to end up helping some form of “other”, whether it be the undeserving and idle poor, indolent single mothers, or the variety of minority groups who had learned to “feed from the government trough”. Fear was thus transmuted into a divisive turning inwards of the middle class – particularly its poorer white element – against what were perceived as a host of freeloaders. It is no coincidence that the Reagan democrats were those who most benefitted from the programs they now opposed: they were taught that the only end of government was to support the undeserving. So government had to be eradicated from the economy. It was brilliant and simple use of the timeless divide and conquer strategy authorities throughout the ages have employed to keep themselves in power.

Unfettered, businesses began to seek maximum profits at the expense of American workers. Jobs were eliminated more freely. Profits bulged even as wages stagnated. Unions were driven out and their privileges taken away. Regulations were reduced to a minimum. Markets were freed to follow self rather than community interests. Jobs were shifted abroad to take advantage of cheaper labor costs to the benefit of the rentiers – those who earn their living off of capital – rather than the domestic labor pool. Union free white collar jobs were created in droves, but they lacked the old security of their blue collar predecessors. The story is now too familiar. It culminated in the imbalance and inequality of today. It ended with the surrender of the middle class value of ensuring a better future for the next generation. For the first time we began to question where the dream went.

As if we didn’t know.

Our problem is that we want to hide from the responsibility. We did it to ourselves. We were lured by the illusion that we, too, could share in the great wealth being accumulated by the elite. It was always a falsehood for the vast majority. What progress the middle class made was never to become part of the elite. Fabled stories such as those of Buffett, Soros, and Gates are fabled exactly because they are aberrations. The rest of us live firmly in the mushy middle. Vulnerable to the ups and downs of the economy we scrimp and save where we can. We hope for a break. We feel the downdraft far to easily. We seek to retire with dignity and with our health. That is our land of opportunity. The safe, sensible, and cautious middle. We are mostly proud to have made it through life to end up on those shores.

And not on the rocks where so many of us are now.

The great achievement of the postwar social contract is that two generations have made it to the safety of those shores. Yet it those same two generations that have kicked away the necessary props. We sank the boats so fewer of the next generation will make it.

From my point of view it is to our enduring shame that we betrayed the contract that protected us. We have a choice: to reconstruct it so future generations can have the same benefit we did. Or we can abandon them to become a mirror of the world our forefathers fought to escape.

This recent crisis has thrown that choice into stark relief. It has brought to the surface the extent of the illusion and the consequences of the fateful choice we made back in 1980.

It is a cliche to say that we have to recognize ourselves as sick before we will seek a cure. I fear that far too many Americans still refuse to acknowledge the disease. Hence the great divisions that opened up in our society and our apparent inability to reach compromise on what to do next. These are dangerous days of political extremism and discord. The elite is aware of the threat to its ability to prosper at our expense. We need to take the future back, not for ourselves, but for our children. Given the extent of the problems we all need to enter the contest and express our opposition to the inequality that now dominates our economy. It is un-American, at least in the postwar incarnation of what that means. We need to stop driveling on about patriotism and the silly faux myths that prevent us from seeing clearly the reality in which we live. And we need to start the hard work of building something that actually resembles the aspirations and dreams that we all too frequently substitute those myths for.

At least that is my motivation.

What’s yours?

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Class Conflict?

It is taboo in America to talk of “class” as if it doesn’t exist. Of course it does, we just don’t like to admit it. I say this because so much of the current crisis seems to have class-like connotations, and more commentators are arguing in ways that indicate they agree.

A case in point is the recent article in The Nation by Joshua Clover – thanks to Phil Cunningham for pointing it out to me. James Kwak at The Baseline Scenario posts a parallel article. Finally Tony Judt, the historian, devoted almost his entire book “Ill Fares The Land” to the increased separation within American society.

The common theme that all three of these writers is their focus on the enormous shift in wealth that the last three decades have wrought. This shift was no accident. It was deliberate, and orchestrated by those who benefitted most. That they were enabled and assisted with enthusiasm by middle class Americans who have been left much worse off remains a mystery in need of thorough explanation.

The facts are clear and well known: wealth has been systematically concentrated by the very upper tier of wage earners, and by corporations whose policies and activities are, in general, dictated by that tier. The professional elite took full advantage of the tax regime put in place by Reagan and then modified by Clinton and the two Bush’s to secure their income stream. They also were the best positioned to exploit the deregulatory environment that has been the predominant governance structure since Reagan also. Pay scales were twisted towards the upper echelons, and those infamous bonuses in banking poured riches into the hands of a very few. A new privileged generation was created, and they are defending their privilege fiercely and astutely. Any talk of class warfare is squelched immediately as “un-American”. The only folks who benefit from dismissal of such talk are those who have the wealth. The rest are left to their anger and increasing sense of disconnection from the old “American Dream”.

I have hammered this issue recently, so I won’t repeat myself except to say that I think that the imbalance in wealth that now is so pronounced within American society is a major, if not the major, contributory factor in our crisis.

That no one on the left in politics has roared against the injustice being done is testimony to how thorough the ideas of the right have taken hold: even our media and academic elites are entrapped by the illusion. Further, politicians of all stripes have succumbed to the money that the power brokers can throw into elections. We have so many elections that the ability of a politician to resist the cash is reduced to zero. Members of Congress are now devoted to fundraising rather than governing. Senatorial races are so expensive that even the six year cycle is not long enough to allow for sufficient fundraising. Our Senate is fast becoming – if it is not already – a rich person’s club. It is no wonder that the banks and big corporations have disproportionate influence. They are the ones with the deepest pockets.

This theme will only loom larger as the wealthy attempt to stave off a return to the better balance of the 1950’s and 1960’s. They stand to lose a great deal, they will not go down without a fight.

But that’s no news.

My point today is to illustrate the gulf that now has opened up in our society.

I was fortunate enough to spend much of the summer this year in Dorset Vermont, a town characterized both by its physical beauty and its comparative wealth. Home prices in Dorset are established by the flood of money from New York City and Boston. True Vermonters cannot afford to live there. The locals are reduced to living on the periphery and providing the services needed by the largely absentee property owners: they mow lawns, clean homes, and shovel snow. They run gift shops and take care of the golf courses. In other words they ensure that the property owners can enjoy their privileges with ease.

This arrangement is two edged. The locals certainly benefit from the jobs generated by the influx of cash. But they are priced out of the community. The town is beyond them. Discontent lurks very close to the surface, and can easily be detected in conversation. While New Englanders are not exactly known for their warm embrace of outsiders, the situation has become more acute as more and more of the town is devoted to large and expensive homes that are occupied only occasionally. My own observation is that most of the homes on one prestigious street are used by their owners once or twice a summer. One at least seems to be simply a Labor Day retreat. The luxury implied by the ability of an owner to use a very expensive home a few days a year is the point to be driven home.

Inequality has always existed. And it always will. But not for decades has the distortion been so great that we have enough families to own enough towns like Dorset that they can reduce so many others to a support function. In the old days the folks providing the services were tied to a family. They were servants. That they are somewhat less closely tied nowadays simply means we can avoid calling them servants. They are now the service economy. But they are just as dependent. They are just as incapable of experiencing the life of luxury as the servants of yore. It is no accident that the majority of jobs generated in the recent past have been in these low wage service functions. The middle income layer has been stripped away either through global shifts to low wage nations, or through the destabilization of “flattened corporate hierarchies”. We have no middle management anymore, so we should not be surprised to have fewer middle income wage earners. In each case – globalization and lean management – the benefits flowed to profits and those with professional skills. Those left at the top of the now narrower pyramid received a disproportionate share of the increase on social wealth created. They used their advanced educations to “rent seek”. Which they did with a vengeance.

That this is now America and is not worthy of commentary is my issue. The division exists and is opening up. Eventually, as it always has in the past, it will breed a backlash. I believe the Tea Party challenge to the Republicans is part of that backlash. Anger is rising. It needs to be well understood and not dismissed.

One last thing: both Joshua Clover and Tony Judt point the finger at Hayek. I would add von Mises, Berlin, and Popper as well. As Judt articulates there were a number of Austrian born theorists back in the 1930’s who devoted their analysis towards a justification, and spirited defense, of a liberal worldview. That they overcompensated in their zeal is easily understood: they were embroiled in a passionate defense of capitalism and democracy in the face of the apparent success of communism – in the Soviet Union – and fascism – in Germany and Italy. During the 1930’s the depression and the manifest failure of capitalism represented a true existential threat to the liberal conception of society. Hence the works of Hayek and von Mises in economics and Popper and Berlin in philosophy. Most postwar neo-liberal economics can be traced back to Hayek or von Mises as reinterpreted by Milton Friedman and Robert Lucas and their cohorts at the University of Chicago.

I can excuse Hayek and von Mises for their mistakes. They were made in a good cause as they fought to save the liberal worldview from the extremism threatening the West back then. I cannot excuse Friedman et al since they were under no similar existential threat, and had the opportunity to see the benefits that the greater income equality of the immediate postwar years had brought to America.

That greater equality was a result of one major idea: that the government can, and should, play a positive role in society by ensuring all its layers of income earners prosper and derive benefit from the productivity increases brought about by technological advance. This idea was best articulated by Keynes whose work both Hayek and von Mises attacked with vigor. They failed to appreciate that capitalism requires limits if it is to not to be antithetical to democracy. Untrammeled capitalism runs headlong into the democratic ideal. Why? Because capitalism is essentially elitist. It inevitably concentrates wealth. Not just in the hands of the successful, but in their offspring. It creates class structure through time. Democracy, in direct contrast, is egalitarian. It presumes a degree of equality. It degrades class, and presumes opportunity is available to all. By involving everyone it inevitably ends up redistributing wealth through social programs and entitlements.

So democracy and capitalism collide in their extreme forms.

It is only when both are modified that they provide mutual support. Capitalism only survives when the middle class benefit from it. Democracy only survives as long as inequality remains within bounds and there is some engine for the provision of greater wealth.

It was Keynes who saved capitalism from its failures in the 1930’s. He insisted on it being limited. Hayek, von Mises, and their later followers reviled and ignored Keynes by insisting on its purity. Their’s was an idealism born of zealotry. It was decoupled from history and reality. It was easily co-opted by the elites for their own ends. It provided an easy story to tell. And it fitted nicely with the pre-existing American mythology of the rugged individual. The Keynesian message was too pragmatic and failed to resonate with voters during the sharply defined Cold War era. Americans sought, and then fell for, an ideal that could not produce its promise in the uncertain and flawed environment of the real world.

Just as the rugged individual was never real, nor was the free market and its supposed cure all qualities.

But by choosing the myth Americans have undone the great leveling that created the wellbeing that characterized the postwar years. The middle class was complicit in its own downfall.

So now we have rampant capitalism and weakened democracy just as Keynes would have predicted. That the two great liberal ideas are now in conflict does not augur well. They need reconciliation. We need to throw out the rotten purities advocated by Hayek, von Mises, Friedman and Lucas. They were an illusion that generated a class conflict.

Which is something we can do without.

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California Bashing

I haven’t taken a swipe at the third world nation known as California for a while. So here goes.

It pains me to read that the state’s college system is contemplating raising undergraduate fees by as much as 32%. Even with this increase the in-state tuition bill will only hit $10,000 which is not outrageous in this day and age of egregious education expenses.

The harm this will do to the state’s businesses I can only imagine. The flow of college graduates from what was once one of the world’s top college systems will surely be severely reduced. The cost is staggering: there are currently over 1,500 academic jobs unfilled due top lack of money. Classes are being cut. Professors laid off. Building plans and research eliminated. The system may never recover.

Importantly the people hit most hard will be the kids from poor households, many of whom are finding the current low level of tuition hard to pay. So at some point in the future California, because it cannot get its head around a sane property tax system, will be faced with having to import talent to keep its vaunted high technology sector alive. That may not be a problem: a steady flow of graduates will always be attracted to California’s climate and beaches. But it makes the state dependent on other parts of the country and, possibly, even more dependent upon a flow of foreign graduates.

The damage being done is insidious and may be hidden from the average taxpayer view. Many may not even care. Eventually though the state’s standard of living will fail to keep up: a weak education system is a sure indicator of a nation, or state, in decline.

We have just witnessed Obama being treated with a certain contempt in Asia – not just China – because American decline is now becoming evident. Our rapacious borrowing and complete disdain for investment in infrastructure – physical and intellectual – will assuredly accelerate the pace at which Asian economies overtake ours. It is not possible to imagine the Chinese slashing education investment. The Chinese seem to understand that cause and effect of investment in knowledge. It is the very bedrock of prosperity.

We evidently don’t get that.

We persist in the beggar thy neighbor attitude towards taxation that has produced the debacle in California. Unwilling to pay for anything long term we seem to expect others to supply an endless stream of stuff to fill the gaps we don’t want to pay for ourselves.

We already rely on imported talent. The gap is only going to get worse.

That gap will be compounded by the social stratification we are building in: most Americans have no clue that social mobility – here we call it the American Dream – is greater in most other industrial countries than it is here. A child born into a poor American family has less chance of reaching middle class status than a similar child most anywhere in Asia or Europe – even in those horrible neo-socialist Nordic countries like Sweden. By making education harder to come by California is reinforcing the stasis here. Poor kids will find it harder to get ahead. America will build a class structure based upon access to education. It will become rigid and riddled with divisive social and political issues. It will become old.

We have trashed the American Dream in the space of two generations. Greed and a total lack of community are the cause.

That’s shortsighted and dangerous.

It’s also a damn shame.