How The Middle Class Lifestyle Became Unaffordable

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

There are four structural drivers behind the soaring costs of the middle class lifestyle.

Why have the costs of a middle class lifestyle soared while income has stagnated? Though it is tempting to finger one ideologically convenient cause or another, there are four structural causes to this long-term trend:

1. Baumol's Cost Disease
2. Systemic headwinds to the current version of capitalism
3. Dominance of global corporate capital
4. Financialization

The key take-away here is that the first two causes are structural and cannot be changed by passing a law or funding another state bureaucracy. Though many believe they can tax global corporate capital to eliminate wealth inequality, capital is mobile and will move to where it can expand. The dominance of money in politics also means that the political machinery is for sale to the highest bidder, which just so happens to be global capital.

Since financialization rewards both capital and the central state that depends on tax revenue, reversing financialization politically is a non-starter.

No wonder the middle class is evaporating. These trends are far more powerful than the proposed solutions.

Let's start with Baumol's cost disease, named after economist William J. Baumol, whose work with William G. Bowen I described in Productivity, Baumol's Disease and the Cliff Just Ahead (December 8, 2010).

Baumol examined the relationship between productivity and cost, and found that productivity in labor-intensive services (for example, nursing and teaching) had intrinsically lower rates of productivity increases than goods-producing industries.
The performing arts offers a striking example: it takes the same time to learn and play a Mozart concerto now as it did in 1790, so productivity gains will be modest.
This can be clearly seen in this chart of the consumer price index, 1977-2005:

Note how manufactured goods such as TVs, clothing and autos fell in price while education and healthcare soared. Baumol foresaw the crunch that his theory predicted: as healthcare and education took a larger share of the national income/GDP, taxes would have to rise substantially to pay for those services.
He described the social choices we faced in a seminal 1993 paper: Health care, education and the cost disease: A looming crisis for public choice.

Baumol under-estimated the power of the low-productivity sectors such as healthcare and higher education to exploit political capture to increase their share of the national income. In other words, the extraordinary rise in healthcare and higher education costs arise not just from the low productivity of these sectors, but from their cartel power to obscure the true costs of their bloat and push prices higher.

Baumol also failed to appreciate how the state (government) is the willing partner in this exploitation of low productivity. The state enforces the monopoly pricing power of these cartels. As a result, potential gains in productivity from technology are suppressed to protect the cartels from any real competition. (The same can be said of the military-industrial complex and other state-protected cartels.)

That's how we end up with college degrees and medical procedures that cost more than a house.

The second set of systemic cost drivers were identified by Immanuel Wallerstein, who views these forces as threats to capitalism's prime directive, which is to accumulate more capital:

1. Urbanization, which increases the cost of labor
2. Externalized costs (dumping private waste into the Commons, environmental damage and depletion, etc.) are finally having to be paid
3. Rising taxes as the Central State responds to unlimited demands by citizens for more services (education, healthcare, etc.) and economic security (pensions, welfare)

I covered these headwinds to capitalism in Is This the Terminal Phase of Global Capitalism 1.0? (February 8, 2013).

In brief, urbanization drives wages higher, regardless of the era or economic system, and external costs such as pollution and depletion must eventually be paid out of labor and capital alike. The demand for more state services is unquenchable, and the state responds by buying off key constituencies with more benefits.

Wallerstein is one of the few who clearly understands the State's role as enabler and enforcer of monopolies and cartels. High profit margins are most easily maintained by persuading politicians to create/regulate quasi-monopolies and cartels.

The State has two core mandates: enforce quasi-monopolies and cartels for private capital, and satisfy enough of the citizenry's demands for more benefits to maintain social stability.

If the State fails to maintain monopolistic cartels, profit margins plummet and capital is unable to maintain its spending on investment and labor. Simply put, the economy tanks as profits, investment and growth all stagnate.

If the State fails to satisfy enough of the citizenry's demands, it risks social instability.

That is the nation-state's quandary everywhere. With growth slowing and parasitic cartels increasingly difficult to maintain and justify, the State has less tax income to fund its ever-expanding social spending.

In response, the State raises taxes and borrows the difference between its spending and its revenues. This further squeezes spending as the cost of servicing debt rises along with the debt. The rising cost of debt service is an ever-tightening noose that cannot be escaped.

Here are two charts: the first is productivity, the second is corporate profits. Note that while wages have stagnated, the cost of benefits (healthcare and pensions) has absorbed much of the increase in productivity. The rest has gone to corporate profits:


And this leads us straight to financialization, the parasitic extraction of profits from the real economy by finance and the state. Remember Wallerstein's key insight: the state depends on cartel pricing to sustain high labor costs, investment and the taxes that flow from high wages and profits. As the real economy stagnated, the state (which includes the Federal Reserve) incentivized financialization and speculative credit bubbles to keep the money flowing to feed its own spending.

In other words, the state isn't just a passive patsy in financialization--it is a willing partner, because financialization funds the state. Just look at the enormous expansion of property taxes and income taxes that flowed from the housing and stock market bubbles.

Asking the state to limit financialization is like asking the fox guarding the henhouse to stop eating plump hens. If the fox stops consuming the plump hens, it dies. If the state stops financialization, the state's enormously expensive programs and its debt machine all die, too.

In essence, the state has no choice: to save itself, the middle class must be sacrificed. From the point of view of global capital, the ideal partner is a powerful central state that imposes cartel pricing on the economy: $200 million a piece F-35 fighter jets, $100,000 college diplomas, $200,000 medical procedures, $1,000 a pill medications, etc.

From the point of view of the state, it's more important to protect corporate profits and preserve the ability to borrow another trillion dollars at near-zero interest rates than it is to restore a vibrant middle class.

Debt-serfdom works just fine for the financial sector and the central state that enforces the serfdom. Food stamps (bread) and distracting entertainment (circuses) are cheap. What's not to like about debt-serfdom to those in power? Not only is it an ideal arrangement, it's the only one left to the state and its partner, global capital.

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Wed, 05/07/2014 - 17:27 | 4737371 nope-1004
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5) CREDIT.

6) CREDIT.

7) CREDIT.

Pulling future demand foward by systematically reducing lending standards and issuing easy credit is the only reason.

Wed, 05/07/2014 - 17:49 | 4737433 ACP
ACP's picture

+

8) CENTRAL BANKS

9) CENTRAL BANKS

10) CENTRAL BANKS

For saving sovereign ass when the credit markets fail miserably.

Wed, 05/07/2014 - 17:56 | 4737447 TruthInSunshine
TruthInSunshine's picture

Only Reason Why/How The Middle Class Lifestyle Became Unaffordable:

1) Private banks literally purchased your government, lock stock & barrel, bro (from the CONgress to the ,TOTUS to the SCOTUS, and every regulator and administrator in between), and with it, the power to control the volume of the money supply (they care not who writes the laws).

Wed, 05/07/2014 - 17:56 | 4737456 CH1
CH1's picture

Reason Why/How The Middle Class Lifestyle Became Unaffordable...

Because people obey rulers.

Wed, 05/07/2014 - 18:14 | 4737503 max2205
max2205's picture

Is the $1,000 pill a red one or the blue one?

Wed, 05/07/2014 - 19:36 | 4737787 The Alarmist
The Alarmist's picture

The problem is that all those fancy measures of productivity do not capture where the real productivity has gone over the past few decades ... to places like F*c*book and Tw*tter and their ilk, where such productivity is rewarded in intangible, non-spendable currencies like Likes.  If we could just march those useless twits out to the rice paddies to teach them to feed themselves, we would be golden.  Where is Pol Pot when you need him?

Wed, 05/07/2014 - 20:57 | 4738110 ILLILLILLI
ILLILLILLI's picture

I believe he is still dead...

Wed, 05/07/2014 - 22:48 | 4738454 NoDebt
NoDebt's picture

People always choose free shit over freedom.  It's just that simple.  Here's an article about a bear that became dependent on humans, despite all efforts to return him to the wild:

http://news.yahoo.com/ski-resort-bear-released-wild-returns-tahoe-232223...

Replace "bear" with "people" (or corporations, which are also people) and you got the core of the problem.  Once they're hooked on free shit, there ain't no going back.  Game over.

 

Wed, 05/07/2014 - 23:20 | 4738552 Shocker
Shocker's picture

The Price of everything you need to survive has went up. Ex. Food, Rent, Housing, Insurance....

Also Job Situation: http://www.dailyjobcuts.com

-

Thu, 05/08/2014 - 00:18 | 4738671 Anusocracy
Anusocracy's picture

Government exists because of free shit.

Stolen from the producers.

Thu, 05/08/2014 - 00:01 | 4738611 Ignatius
Ignatius's picture

"Is the $1,000 pill a red one or the blue one?" --  max2205

The blue one. 

The red one is cheap, but you have to make new friends.  Ask Neo.

Thu, 05/08/2014 - 02:17 | 4738802 OldPhart
OldPhart's picture

Has to be the blue one.

The red one costs $17.5 trillion.

Wed, 05/07/2014 - 18:14 | 4737505 Timmay
Timmay's picture

How ironic is it that the boob tube that delivers the messages of "don't pay attention sheeple" is the one thing getting "cheaper"?

Wed, 05/07/2014 - 19:00 | 4737650 Handful of Dust
Handful of Dust's picture

Just got back from the grocers.... a 16oz Pound does not exist anymore. Almost nothing is 10 oz...it's all downsized [for the same price] to 12oz or 8oz.

They need to abandon the 10 oz "Pound" and start using weights called,  the "Greenspan" at 12 oz and the "Bernanke" at 8 oz for meats, etc.

 

So ... "I'll have two Bernankes of roast beef and how about one Greenspan of that cheese, por favor."

Wed, 05/07/2014 - 19:31 | 4737770 acetinker
acetinker's picture

+1.  The closing por favor sealed it.

Wed, 05/07/2014 - 19:39 | 4737805 The Alarmist
The Alarmist's picture

Wait til you have to spend $1.99 to buy 100 grams of ground beef ... Be glad the US hasn't gone metric. 

Wed, 05/07/2014 - 23:10 | 4738523 RaceToTheBottom
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I prefer the following use of the word Greenspam and or Bernanke:

Wow, I just took a huge Greenspam.

Wed, 05/07/2014 - 19:12 | 4737689 JR
JR's picture

Too bad it is the vested interests who rule in Washington and use the politicians in Congress to protect, defend and legalize their acquired rights to plunder the people.

Frederic Bastiat explains how justice is annihilated when law as a collective force is placed "at the disposal of the unscrupulous who wish, without risk, to exploit the person, liberty, and property of others." Bastiat in The Law outlines how this happens:

“The nature of law is to maintain justice. This is so much the case that, in the minds of the people, law and justice are one and the same. There is in all of us a strong disposition to believe that anything lawful is also legitimate. This belief is so widespread that many persons have erroneously held that things are ‘just’ because law makes them so. Thus, in order to make plunder appear just and sacred to many consciences, it is only necessary for the law to decree and sanction it. Slavery, restrictions, and monopoly find defenders not only among those who profit from them but also among those who suffer from them.”   

To make this clearer, one need only remember: Harry Reid, John Boehner and Obama with his executive “orders” are the law. Eric Holder, wielding his room-size race card as a weapon, is the enforcer.

To which I add this caveat from Bastiat:

Rather than state that the purpose of the law is to cause justice to reign: “It ought to be stated that the purpose of the law is to prevent injustice from reigning. In fact, it is injustice, instead of justice, that has an existence of its own. Justice is achieved only when injustice is absent.”

Injustice is very present in Washington, DC, today. The law has been totally perverted.

Wed, 05/07/2014 - 22:37 | 4738418 Milestones
Milestones's picture

JR-Excellent post! Tip of the hat to bastiat,                       Milestones

Thu, 05/08/2014 - 00:05 | 4738555 HardAssets
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The money junkies/ money changers/ midas types hire intellectuals to confuse and win over the warriors (military, police, and high skilled labor). By using intellectuals to control the thinking of the warrior class (those with the capacity and disposition to physically establish & maintain order, but with less mental skill than the intellectuals), they control the rest of the society.

In the past, these hired intellectuals were often priests. Today they are economists, some agenda pushing scientists, and lawyers.

The money changers have bought the lawyers, judges, and politicians. So now, the 'law' and the courts ultimately serve them. And, the legislatures also serve them. Ultimately, the greed of the money changers leads them to completely exploit everyone else in society and it collapses in chaos.

Following that comes a new age dominated by the warrior/adventurer class and completely different than the world considered 'normal' when the money changers ruled society. The early phase of a warrior age is often a Golden Age, a time of exploration.

Note:  these ideas were expressed in the writings of Indian philosopher Sarkar. Right or wrong, they do encourage a fresh look at how our world may work.

Thu, 05/08/2014 - 06:36 | 4738972 Serenity Now
Serenity Now's picture

Yes, that was great!  I need to read Bastiat.

Thu, 05/08/2014 - 09:01 | 4739306 Canoe Driver
Canoe Driver's picture

More brilliance from CHS. The fox will die if he stops eating the plump hens! 

Thu, 05/08/2014 - 09:57 | 4739513 newdoobie
newdoobie's picture

Great post; just cut and paste and add to the top of my collection!

Thu, 05/08/2014 - 01:30 | 4738760 GernB
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The reason is because rulers are adept at convincing people the deck is stacked against them and they need to invest greater power in the state to fix it.

Thu, 05/08/2014 - 11:51 | 4739995 Weisshaupt
Weisshaupt's picture

I am not sure why tis is not obvious to everyone: You can't purchase a govt offical.  You can only rent one. The govt offical is the one with the power, not the corporation. The govt can force a legitmate business out of business if they refuse to pay ball.  The Regulations passed are to ensure the cronies stay in line, and keep paying thier extorted money into the politicans coffers so they can continue to run thier businesses.  Of course once you are paying into the politicans'  coffers,  you start asking for additional favors - and this  eventually becomes largely symbiotic.  But you shouldn't be confised about who is paying who. It is the politican that is running the show, and forcing the croporations to tow his ideological line, not the other way around.  This can be seen in the GM Bailouts where Bondholders got stiffed so Unions could be paid, and dealerships were closed based on the polictal orittation of the owner.  It can be seen in the Bank Bailouts  by which CEOs were replaced with a more reliable stooge. It can be seen in the propaganda and shakedowns of media organizations - via spying and overt threats to deny access to the halls of government.   The Private banks are not in charge, and even if they were, they would be far more interested in enrinching themselves than they would be in a pushing an ideological agenda.  Big Government is what gives the politicans (or any ideological stripe)  the power  to do this, and that ius the reason that neither party in the US is anti-big government or anti-big-corporation.  Who wants to deal with 1000s of small business stooges when they can deal with five big ones? 

So make no mistake,  the politican and the business elite are in bed with each other, and are ideoligcally aligned,  but it is the political class that holds all of the cards. 

Wed, 05/07/2014 - 21:09 | 4738141 HardAssets
HardAssets's picture

Ya beat me to it but I woulda numbered it:

1 - bankster criminals at central banks

2 - bankster criminals at central banks

3 - bankster criminals at central banks

4 - bankster criminals at central banks

 

They are the heart of it all, and the problems we experience today are only a logical consequence of that.

They own the government. They go to war against those tired of taking & losing on their devalued fiat 'money'.

Wed, 05/07/2014 - 18:19 | 4737488 Stuck on Zero
Stuck on Zero's picture

Governments are incredibly good at stimulating demand and at the same time curbing supply. 

 

Thu, 05/08/2014 - 04:19 | 4738882 Goldenballs
Goldenballs's picture

DEBT

DEBT

DEBT

INFLATION

INFLATION

HYPERINFLATION

HYPERDEBT

SYSTEM COLLAPSE.

Thu, 05/08/2014 - 09:24 | 4739398 sizzler944
sizzler944's picture

All effective states are founded on law and opportunity.  Complex civilisations which adopt corporatist policies that fail to apply the law to the powerful and regulate  away innovation and entrepreneurship kill the hope for a dull life and lose legitimacy.  Populations walk away.  Western Roman Empire in 408AD, Hittites and Eastern Med in 1200BC.

Over the longer term and hence easily over looked, fecundity rates tell all.  Developed populations are shrinking.  First time mums getting older and older.

The trigger.  Mass white collar and transport unemployment driven by cheap every business cloud hosted software automation is a done deal.  It's not an assembley line revolution that creates new jobs and new industries to soak up the unemployed.  Re-set politics with academic backing aka Solon, is already gaining traction.  It's clear the electorate want something different and inherent in mobile tech is a new socio-economic compact.

Wed, 05/07/2014 - 17:29 | 4737376 ebworthen
ebworthen's picture

Bread and Circuses in the New Rome.

Mordor on the Potomac has made it very clear it is happy to sacrifice the Citizenry for the Corporatocracy.

The 2008 bailouts and subsequent QE and pilfering the public treasury to benefit Wall Street are the exclamation mark.

The militarization of police forces and raping of The Constitution are the follow-on "Fuck You!" to We The People.

Sociofascistkleptoligarchy wrapped in the flag and served with beer and pizza and gladiatorial distractions.

Wed, 05/07/2014 - 17:48 | 4737430 McMolotov
McMolotov's picture

Yes, the last decade or so has made it clear that all of this is by design and not by accident. This is all part of The Plan™.

And once enough people come to that realization, you're pretty much left with two unpleasant choices: drop out of the system or pick up a weapon.

Wed, 05/07/2014 - 17:52 | 4737441 plane jain
plane jain's picture

Seems to me that more pennies are dropping all the time re:our corrupt system and the phony Team Red/Team Blue puppet show.

http://www.dailykos.com/story/2014/05/07/1297476/-Obama-Fatigue-Why-Two-...

Check out some comments.

Wed, 05/07/2014 - 17:59 | 4737464 NotApplicable
NotApplicable's picture

Nothing new with anything in that article or comments. The only difference is you're watching individuals age and grow slightly less clueless.

Thing is, there's always another generation still wet behind the ears, waiting to be fleeced for another shot of Hopium.

Wed, 05/07/2014 - 18:11 | 4737496 NOTaREALmerican
NOTaREALmerican's picture

Re:  Thing is, there's always another generation still wet behind the ears, waiting to be fleeced for another shot of Hopium.

+100

Wed, 05/07/2014 - 18:21 | 4737525 McMolotov
McMolotov's picture

Some of the people leaving comments 'get it.' But being Kos, there are plenty who are positively hypnotized by Obama, and it reminds me exactly of how so many on the Right defended Bush at all costs while he was in office.

(Funny how every single Republican now claims to have always hated W. Five years from now, you won't find a single person who voted for Obama.)

Useful idiots are useful because they're too stupid to realize they're being played, and both parties have no shortage of the morons. Every time I think maybe people are waking up, something happens that destroys that thought. Recently it's been the Ukraine thing, and it's been nothing short of hilarious to listen to Republicans and Democrats grapple with whether they should be pacifists or bloodthirsty warhawks.

They're confused, you see, because now that Obama is revealed to be the same as his predecessor, they can't decide whether they have an actual core political philosophy or whether they're just rabid fans of a particular team.

Small minds are the fertilizer of tyranny.

Wed, 05/07/2014 - 18:49 | 4737625 Addibrux
Addibrux's picture

 Anyone arguing right/left is a moron. Anyone still playing by the "rules" is a fool. Those guilty of both are poor.

Thu, 05/08/2014 - 02:37 | 4738821 OldPhart
OldPhart's picture

Call me an idiot.

I was a Bush supporter, arguing for his policies, "it was good fer 'merika"!  Shut the fuck up you liberal goodfernothing hippie piece of shit.

Then he did the banking bail outs...and I woke up.

48 fucking years of being asleep and being woke up by an icy drench of cold water down my back.

I'm still fuckin' pissed to the point that I have changed my entire lifestyle...and even though I was a Marine I never had a gun,,,now I have multiple, with a shitload of ammo, my silver and gold, and about two years worth of food in the room I used to use as an office.

I'm looked at as the mild mannered corporate controller of 43 entities in mining, retail steel and steel fabrication...but I am vocal.  In today's daily meeting that I host I recognized that we had Obama, Pelosi and Reid in Los Angeles...AND that we had Russian bombers cruising the coast...let all of us Pray that one of the bombers drop something more than leaflets.

My eye/hand coordination has gone to hell with some nerve damage but I can still scare the life out of you from 50 yards with a pistol and clean your skull with a rifle from 300 yards without a scope (too damned cheap to buy one.)

I''m over 50, have got a shitty attitude: I'm locked, loaded and packing...and I want the facists off my fuckin' lawn.

Thu, 05/08/2014 - 07:40 | 4739091 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

The charts are great but imagine what it would look like if we had sound money. We'd be living the lifestyle of the Jetsons. Economists in the 1940's thought it would be all leisure time by now.

Thu, 05/08/2014 - 12:24 | 4740092 LFMayor
LFMayor's picture

It is leisure time, for the upper and lower caste fucking parasites.  We're the dumb mutherfuckers who are still working.

Thu, 05/08/2014 - 14:46 | 4740637 daveO
daveO's picture

The Voting Rights act of 1965 put BHO in office.

Wed, 05/07/2014 - 18:21 | 4737521 ebworthen
ebworthen's picture

"Politics is the distraction" should be the Smiley Face T-Shirt for the new generations.

Wed, 05/07/2014 - 22:43 | 4738436 Milestones
Milestones's picture

Dropping out is not possible now. Best pick up your onle choise and take off the safty.          Milestones

Thu, 05/08/2014 - 02:34 | 4738819 John_Coltrane
John_Coltrane's picture

I think you meant to write "drop out of the system and pick up a weapon".  So, only one choice really.  But your sentiment is quite fine.

Wed, 05/07/2014 - 18:40 | 4737581 davidalan1
davidalan1's picture

yOU LOVE MY BALD HEAD....JUST IGNORE THE

Wed, 05/07/2014 - 20:04 | 4737904 acetinker
acetinker's picture

Yes but- the (semi) oligarchs are also shitting in their own beds by shedding personnel who suddenly find they have nothing better to do than try and find out exactly why they are suddenly 'redundant'.

You've been free of the magical spell of 'wise leadership' for some time now, I gather.  You, as I, have had some time to digest all this as what I think of as early adopters.

We're not really early-just the early ripples of this iteration-as evidenced by the likes of Bastiat and Boetie, but (hopefully) simply the early signs of a coming tsunami of awareness of things.

Anyway, what I started out to say- Can you imagine the outrage of a 40-something accountant (or similar), unemployed, who ran across ZH (or similar) in his/her browsings?

Each wave adds to the power of the tsunami.  When it reaches critical mass is when things get interesting.

Thu, 05/08/2014 - 02:40 | 4738825 OldPhart
Wed, 05/14/2014 - 21:49 | 4761375 acetinker
acetinker's picture

Maybe I'll meet you on the battle field, maybe not.  Alex Jones is right about one thing- there is a war on, for your mind.  You can't fight this juggernaut with firepower, OldPhart.  You can only withdraw support.  By this, I mean you can ignore your "elected leaders" and point and laugh at every opportunity at them.  It drives them batshit crazy- witness the ads they're running.

Stop fighting 'them', and start advancing you.

Wed, 05/07/2014 - 17:30 | 4737386 NoDebt
NoDebt's picture

"In other words, the state isn't just a passive patsy in financialization--it is a willing partner, because financialization funds the state. "

It's all about government and your relationship to it, now.

Something about being doomed once people realize they can grant themselves money from the public coffers.  Of course, by "people" I mean corporations, too, since they are people.

Wed, 05/07/2014 - 18:06 | 4737479 MisterMousePotato
MisterMousePotato's picture

de Tocqueville (sp?).

Wed, 05/07/2014 - 20:55 | 4738100 countryboy42
countryboy42's picture

In this case, I'm thinking

Torquemada
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