The Middle Class & Affluent Deprivation (Q&A Friday #108)

Question: One issue the OWS people are talking about that actually makes a lot of normal folks turn their head and listen is the growing wealth inequality in America. I don’t blame Wall Street for this phenomenon, but it is a real issue, and mostly due to the fact that people in other nations can build things and do service work much cheaper than is possible in America. Here is the question: can America sustain a strong middle class in a global economy? If so, what does it take for that to happen. If not, what are the long term consequences? — President Friedman

Answer: That’s a complex question that requires a lot of speculation. Still, let me take a short and sweet crack at it.

#1) The talk about increasing income inequality in this country is wildly overblown. Sure, it exists, but it hasn’t actually been dramatically increasing.

#2) There was a time in this country when an uneducated man with minimal skills could make enough money at a manufacturing job to support a wife and a couple of kids. Most of those jobs have either been replaced with automation or they’ve gone to India, China, or other places where people will still work like dogs for $2.00 an hour.

#3) When it comes to high end manufacturing jobs, that require skilled labor to use expensive equipment, Americans can still compete — and we do.

#4) Because of #3#, getting better at retraining, improving our education system, and reworking our immigration laws to favor smarter, more capable immigrants all would help. It also means that bringing in millions of strawberry pickers and nannies is an even worse idea than most people realize.

#5) The short and mid-term trends in the global economy look bad and that’s not good for us in a world that’s ever more interconnected. That doesn’t mean there still won’t be ups and downs, but Europe’s economic future over the next 20-30 years looks grim because of terrible demographics, low growth rates, reckless spending, and overly generous entitlement plans.

#6) Our economic future over that same time period doesn’t look so hot either. Tax rates look likely to go up across the board, our debt has gotten big enough to start impacting growth, and we are going to have to cut back on what we’re spending per person on Social Security and Medicare. Higher taxes, slower growth, and smaller payouts to retirees are all baked into the cake EVEN IF WE DON’T ultimately default. That’s not encouraging for the middle class.

So, can America maintain a strong middle class? Although I hope I’m wrong, I expect the middle class to be squeezed hard over the next few decades. That doesn’t mean they’ll disappear. In fact, America’s middle class will probably have it better than much of the rest of the western world (IF — and this is a huge “if” — the government pulls it together and gets spending under control.)

If you want to know what I think it’s going to be like for the middle class over the next few decades, there’s a term that I picked up from Robert Samuelson that I think fits really well: Affluent Deprivation.

The bad news is that recovery, though boosting employment, may prove unsatisfying. Our new economic era may lapse into a state of “affluent deprivation.” That’s an unfamiliar term. It doesn’t mean poverty. The United States will remain a wealthy society. Rather, “affluent deprivation” signifies a state of mind. People feel poorer, because their sluggish income gains get siphoned off into higher taxes, energy costs and health spending. Though these all involve benefits, they don’t pay everyday bills or cover people’s routine pleasures. There’s an approaching collision between private and public wants–government spending for everything from retirement benefits to defense to the repair of roads and bridges.

To some observers, we are so materialistic that we can easily make sacrifices. Do we really need fancier grills or more flat-screen TVs? Of course, there’s waste and personal extravagance. But what this argument ignores is psychology. “Luxuries” quickly become “necessities”–cell phones being a recent example. “Getting ahead” feeds people’s optimism, and an upbeat society shows more “tolerance of diversity, social mobility [and a greater] commitment to fairness,” as Harvard economist Benjamin Friedman argued in a recent book. Economic growth has anchored our national self-esteem; slower growth suggests a grumpier and more contentious America.

Unfortunately, slower growth seems probable. What the new president, and everyone else, needs to understand is that the present crisis marks the end of an economic era. For roughly a quarter century, the U.S. economy benefited from the expansionary side effects of falling inflation–lower interest rates, greater debt, higher personal wealth–to the point now that we have now overdosed on its pleasures and are suffering the hangover. In our zeal to identify the villains of the present economic debacle, we ought to recognize that the larger causes lie in this prolonged prosperity and the permissive attitudes and practices it inspired.

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