Paycheck to paycheck America

There is no longer denying that the rich are getting richer and the poor are getting poorer. The once iconic American middle class has all but disappeared. There is, however, plenty of denying contributing events – and therefore solutions – for such a pickle.

There were plenty of events. Here are some, certainly not all:

The 1970s saw an economic watershed.

From the end of WWII until the 1970s, incomes of the rich, not so rich, and poor rose around the same pace. Household savings rates were around 7 to 10%, a healthy percentage that allowed people to build capital and improve their lot.

The 1970s saw the start of a widening income, savings, and wealth gap. Today’s average household savings rate is 4.5%. Incomes of the less-than-rich tend to cover household expenses and not much else. Moving up the economic ladder under such circumstances is a nearly impossible feat.

The 1970s also saw a cultural watershed.

Lyndon Johnson’s Great Society was a herculean effort to deal with poverty through social welfare. Congress passed legislation enshrining President Johnson’s agenda between 1964 and 1968. By the 1970s public assistance was culturally accepted as the way to improve the lot of the poor.

That is still the case today. Legions of government programs, non-profits, and billionaires’ tax-advantaged foundations exist today to end poverty.

1971 saw the birth of fiat money.

The Great Society social programs that started in 1964, the Vietnam War (1955 – 1975), and a Federal Reserve that did not respond forcefully enough to unbridled government spending and rising prices, all contributed to inflation that reached 5.89% in 1969.

Such level of inflation decimated the value of the U.S. dollar, and a run on U.S. gold appeared probable. So, President Richard Nixon ended the country’s gold standard in 1971 – releasing the fiat money genie out of the bottle!

Without the market restraints inherent in a gold standard, government folks became free to borrow and spend. And free to keep interest rates down to facilitate payment in the ever increasing national debt.

Sharp-eyed folks in the general population figured windows of low interest rates and cheap money allowed them to borrow, invest, and grow rich.

Technology helped.

In the olden days, stocks were considered risky business not suitable for average respectable people. However, as technology gave average respectable people the Internet, access to on-line accounts, apps, social media, and a dizzying array of asset classes, investment in intangibles was democratized.

Then came financialization.

An old working paper dated December 2007, by Thomas Palley, in conjunction with The Levy Economics Institute of Bard College, has a very good description of financialization. In Financialization: What is it and Why it Matters, Dr. Palley wrote:

“Financialization is a process whereby financial markets, financial institutions, and financial elites gain greater influence over economic policy and economic outcomes. Financialization transforms the functioning of economic systems at both the macro and micro levels.

Its principal impacts are to (1) elevate the significance of the financial sector relative to the real sector (2) transfer income from the real sector to the financial sector, and (3) increase income inequality and contribute to wage stagnation. Additionally, there are reasons to believe that financialization may put the economy at risk of debt deflation and prolonged recession.

Financialization operates through three different conduits: changes in the structure and operation of financial markets, changes in the behavior of nonfinancial corporations, and changes in economic policy.”

Basically, financialization says, why should a company bother with working to create better widgets or bother with managing a productive labor force. So much easier to make money from financial transactions like acquisitions facilitated by fiat money, stock buybacks to inflate value of outstanding shares, or speculation with today’s equivalent of puka shells– cryptocurrencies. What companies save on labor, goes to CEOs and shareholders.

On the other side, much of workers’ consumption changed from that based on wages to that based on debt. And looks like powers that be in the marketplace and in government are fine with that.

The rise of institutional investors followed.

Around the late 1970s, institutions like Vanguard, Fidelity Investors, and other fund managers popularized a variety of financial products, including mutual funds and 401-k management. This attracted investors, contributed to fund managers’ growth, and eventually resulted in institutional investors today accounting for about 80% of the volume of trades on the New York Stock Exchange.

Note that these institutions do not own the stocks and other instruments they manage. It is America’s wealthiest 1% that own 50% of stocks, while the 10% wealthiest own nearly 90% of stocks.

This level of shareholder power is bound to divert profits from labor to dividends and/or CEO compensation. Note that a large portion of CEO compensation today is in stock and tied to how well the CEO enriches the company’s shareholders.

Meanwhile, wars on poverty focus on social welfare.

Since the 1960s rivers of money have gone into social welfare. Most improvement, if any, in the lot of the poor has come from handouts. Lower-income earners have remained stuck in survival mode, rather than rise to thriving mode.

Certainly, there have been the relatively few that rose from very modest beginnings to wealth. But here we are talking about the average worker in the fast-food, home-health care, hospitality, and other lower-paying industries.

Included in handouts are government mandates such as minimum wage increases and rent control. These two mandates especially reveal the cynicism inherent in legislatures. Politicians surely have a modicum of knowledge of the realities of the marketplace, which they purposefully to ignore.

Surely, they must realize that when you increase people’s power to spend without an equal or greater increase in output, you end up with inflation. A 3% increase in the price of hamburger is not a big deal for the well to do, but very unfortunate for the poor.

Politicians must also realize that investors, like landlords, want a certain profit, and when you mess with that profit through rent control, they stop being landlords and go invest in something else. Fewer landlords mean fewer housing, and potentially more poor families living in their car or worse.

Awareness is the first step to cure

We cannot go back in time, but we can stop pretending handouts work.

Schools that teach not indoctrinate or coddle work, discipline works (in school and at home, for kids and for adults), work ethics work.

Cottage industries (stuff you make at home and sell) work. Fiscal responsibility at home and in government works (especially reducing the national debt before interest eats up all of GDP!). Politicians that promise wider opportunities for people to earn a living, not freebies and AI, work.

America is still the land people of over the world want to come to. But many American families must be wondering, “What happened to the Middle Class.”