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John Mauldin has published a piece by George Friedman,
entitled “The Crisis of the Middle Class and American Power.” George Friedman is the Chief Executive
Officer of Stratfor, providing analysis in the field of global geo-political intelligence.
In Freidman’s article, he outlines the case of the Middle
Class in America (emphasis added):
The median household income of
Americans in 2011 was $49,103. Adjusted for inflation, the median income is
just below what it was in 1989 and is $4,000 less than it was in 2000…. It is also vital to consider
not the difference between 1990 and 2011, but the difference between the 1950s
and 1960s and the 21st century. This is where the difference in the
meaning of middle class becomes most apparent.
Freidman notes that it is vital to consider the time since
the 1960s and the 20th century.
Economically and politically, there was one significant event directly
at the point in time Freidman suggests was vital.
The government was fully unbound from any economic
discipline by Nixon’s default as evidenced by his abandonment of backing the
dollar internationally with gold. This occurred
in 1971. This gave the federal
government free-reign on spending. It made
ineffective the naturally balancing aspects of international gold flows. Most importantly, it un-leashed the Federal
Reserve from any discipline when it came to the dollar.
This doesn’t appear to be where Freidman will look. Instead, Freidman uses as a theme the idea of
the possibility of upward mobility that is part of the American dream. He believes the reason for the real estate
bubble and subsequent defaults were because of this belief in upward mobility –
that incomes would catch up with debt – and when the dream didn’t pan out, the
bubble burst.
This seems a rather shallow explanation. No central banking? No booms and busts? No housing policies by the government? No Fannie Mae and Freddie Mac? No money-center banks creating artificial
demand for credit instruments due to the unlimited backstop by the Fed?
No lack of discipline brought on because of the abandonment
of the (admittedly feeble) gold standard of Bretton Woods?
No. Just that the
dream failed. Somehow. All at once, and everywhere.
Freidman goes on to describe the median household income from
the 1950s and lifestyle that this brought, with a single-earner in the family. He contrasts this with today, where even with
two income-earners in the household, the same lifestyle is difficult to
achieve. He does this without mentioning
the single greatest invention ever discovered to strip the middle class of
wealth – the central bank.
He then goes into standard Keynesian explanations of
American economic history, implying that World War Two helped to cure the Great
Depression:
The Great Depression was a shock to
the system, and it wasn't solved by the New Deal, nor even by World War II alone.
Many seemingly intelligent people continue in this
fairy-tale belief that World War Two provided relief to the American
economy. Bombing, destroying,
conscripting, killing, all on levels never before seen on earth…events so completely
devastating to the micro-economy are believed to somehow be beneficial to the
macro-economy.
He cites as a cause for the post-war upturn a list of
various government programs, enabling and supporting a growing middle-class:
The next drive for upward mobility
came from post-war programs for veterans, of whom there were more than 10
million. These programs were instrumental in creating post-industrial America,
by creating a class of suburban professionals. There were three programs that
were critical:
1. The GI Bill, which allowed
veterans to go to college after the war, becoming professionals frequently
several notches above their parents.
2. The part of the GI Bill that
provided federally guaranteed mortgages to veterans, allowing low and no down
payment mortgages and low interest rates to graduates of publicly funded universities.
3. The federally funded Interstate
Highway System, which made access to land close to but outside of cities
easier, enabling both the dispersal of populations on inexpensive land (which made
single-family houses possible) and, later, the dispersal of business to the
suburbs.
Freidman doesn’t cite government spending and deficit data
from this same time period. He ignores
it, as do all economists who do not want facts to get in the way of the
approved narrative. It doesn’t take much
work to find this data – I would think a man who makes his living in
intelligence could find it easily enough if he wanted to look. From the Office of Management and Budget, the
following are the spending and deficit amounts for the years 1945 and 1948:
1945: $92.7 billion spending, $47.6
billion deficit
1948: $29.8 billion spending,
$$11.8 billion surplus
Following standard Keynesian orthodoxy, the economy should
have cratered following the war, what with spending cut by two-thirds and a $60
billion swing (representing two times the annual budget) from deficit to
surplus. Is it possible that the roots
of the post-war boom might at least be partially explainable by this drastic
decrease in government control over the economy? Maybe a little? Not in the world according to Freidman.
Instead, Freidman focuses on government action as the cause
for the economic upturn following the war: spending for college, funding for
mortgages, highways for commuting to and from the new suburbs. These three programs helped fuel the belief
in upward mobility that had its roots in America from the beginning. The American dream apparently required
turbo-charging by the government.
He then transitions to the corporation, with very broad
generalizations about losing focus, no more lifetime employment, and the
like. Somehow, all of this mysteriously
came to a head in the 1980s, with restructuring and re-engineering becoming the
norm, throwing the middle class into disarray:
As the permanent corporate jobs
declined, more people were starting over. Some of them were starting over every
few years as the agile corporation grew more efficient and needed fewer employees.
That meant that if they got new jobs it would not be at the munificent
corporate pay rate but at near entry-level rates in the small companies that
were now the growth engine. As these companies failed, were bought or shifted
direction, they would lose their jobs and start over again.
No mention about why this suddenly came to a head in the
1980s. Perhaps it was triggered by the
events in the 1970s that Freidman also ignored?
In the post-gold-window world, price inflation soared. This was eventually tamed by Volker’s
Fed. Beginning in the early 1980s, the
American economy was blessed with a great moderation – ever decreasing interest
rates, credit subsidized by the Federal Reserve. Cheap credit destroyed the value of capital
in place and made it affordable to invest new capital. The new capital would be invested in the most
efficient locations – these being found less and less to be in the United
States.
No. Freidman has
another answer:
What we are facing now is a
structural shift, in which the middle class' center, not because of laziness or
stupidity, is shifting downward in terms of standard of living. It is a
structural shift that is rooted in social change (the breakdown
of the conventional family) and economic
change (the decline of traditional corporations and the creation of corporate
agility that places individual workers at a massive disadvantage).
I guess stuff just happens.
The breakdown of the conventional family is a random event, causes
unknown and unknowable. It would have
nothing to do with government policies that subsidize non-conventional family
arrangements. The economic change is
because corporations (with a mind of their own) decided to restructure, all at
the same time – with no underlying cause that might explain why all corporations
had to act in the same way at the same time.
And of course, an efficient economy is a terrible economy –
just ask Mr. Freidman:
The
inherent crisis rests in an increasingly efficient economy and
a population that can't consume what is produced because it can't afford the
products.
This would be laughable, except too many people swallow this
nonsense. If he would spend a few
minutes understanding the manner in which prices are discovered, he would never
write such a sentence again.
One thing Freidman knows for sure. The government had nothing to do with
creating any of this mess, and can do even less to get out of it:
Obviously, this is a massive
political debate, save that political debates identify problems without clarifying
them. In political debates, someone must be blamed. In reality, these processes are beyond even the
government's ability to control.
This just isn’t so. 1)
Take a page from the spending and deficits post World War Two. 2) Allow for free-market money and credit,
instead of the centrally-planned system of central banking. Individuals who work in government could
easily control these two tasks if they chose to do so.
He then goes on to outline the long-term threat: the increasing pie is not available to all,
with the rich getting richer and the poor staying poor.
The greatest danger is one that
will not be faced for decades but that is lurking out there. The United States
was built on the assumption that a rising tide lifts all ships.
If we move to a system where half
of the country is either stagnant or losing ground while the other half is
surging, the social fabric of the United States is at risk, and with it the
massive global power the United States has accumulated.
He then goes on to frame the debate in acceptable – and misleading
– terms:
The left would argue that the
solution is for laws to transfer wealth from the rich to the middle class.
The right will argue that allowing
the free market to function will
fix the problem.
He is correct as far as the prescription from the left. He is wrong about the prescription from the
right. The right (as it exists) does not
want free-markets. Where is the call
from the right for a free market in money and credit – the single most
important building block in a free market economy? The only person on the national stage to
mention this is the
now-former-Congressman-from-Texas-who-shall-be-ingored-whenever-possible.
But it serves to pretend that this is the debate.
It
is unclear how the private sector can deal with the problem of pressure on the
middle class. Government
programs frequently fail to fulfill even minimal intentions while squandering
scarce resources. The United States has been a fortunate country, with
solutions frequently emerging in unexpected ways.
The private sector cannot deal with it – not the truly
private sector, anyway. These are
problems caused by actors in government.
He then suggests that “luck” is the only way out of the
mess, a mess with geo-political risks for US power:
It would seem to me that unless the United States gets lucky
again, its global dominance is in jeopardy.
There is the answer. Luck. (It worked for Indianapolis, maybe it will
work for the rest of the country.)
He closes by looking for others to find the solution:
People who are smarter and luckier than I am will have to
craft the solution.
Of course, no solution will be found if the problem is
framed as Freidman has done here.
I am simply pointing out the
potential consequences of the problem and the
inadequacy of all the ideas I have seen so far.
I will suggest, for a man who makes his living in the field
of intelligence, he hasn’t done much work to find the easily identifiable
answers.
Maybe he can look here.
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