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How The Middle Class Lifestyle Became Unaffordable
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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Wallerstein's "World Systems Analysis" basically stated that Marx had it right in a round about way, just that we had to suffer through capitalism and it's muck to gain full realization. So when he mentions unrbanizatjon and healthcare et al he is saying more central control is needed not less. Dude is smart, but he's an academic. Navy and Serenity Now have it correct. This is the beginning of a Kondratieff Winter because the credit expansion has hit the cul de sac; there is no more growth. We need the next revolution. The last one was energy and that is sputtering(I call on the great and wise CrashisOptimistic) so a technological revolution or something of the sort needs to fuel the next expansion after the crash of course.
The next revolution will ultimately involve bullets and a lot of people dying. It won't be from some change, dynamic, or other soft social disease.
It will be from hard, cold, calculated killing on a mass scale.
I expect to be a victim and you read like one.
I read like a well read intelligent person. I have the necessary protective devices, a compound with much more and stored foods, horses and every neighbor is a friend for miles around way out in the sticks. I imagine my chances will be much greater than most. I am no victim....let's hope I do not end one. I do not expect another expansion, I was merely providing a backstory to one of the author's referenced and basic economic rhetoric to back up my post. I wish you and everyone else luck. I expect an Elysium type future and not a Mad Max one, but lets see what pans out in east Europe.
IridiumRebel,
This is a good post, and not just because you complimented me in it. Thank you, by the way. :)
But I respectfully disagree that there is going to be a technological revolution. I think things are going to unwind....slowly, I hope, but we're definitely going backwards.
I don't wish that on anyone, of course....it's just what I see.
Why does there have to be a "next expansion"?
I dislike an analysis that is dependent on government, industry and banks having "no conscience" and no responsibility for the consequences of their actions. It assumes that their natural inclination is to greed and self interest at the expense of all others.
It does not have to be this way. First we are taught and then we are tested. Because at the heart of every bank, every government and every industry are people, simply people. And if society fails, it is because people have failed. Those who the entire system depends on and trusts to NOT be selfish and greedy must not be selfish and greedy for the system to work.
How can a banker, industrialist or politician not be selfish and greedy when the temptation to take advantage of a nameless and faceless society is presented to them every day? We all make choices. Choice is not without consequence, some good and some bad.
The 4 causes are all bullshit. They are all consequences of the first cause and the unwillingness of people to look into the mirror. So, society will drive itself over the cliff and the weak in conscience will physically survive. Which makes me wonder a few things about our actual existence...
Did you sleep all through 2005 through 2014?
STFU, go do your homework, THEN come back and post your opinions.
Go read Zero Hedge articles from their start back around 2007...keep reading.
By the end of it you'll be just as pissed as the rest of us are.
And will have a minimum of three weapons, ammo for each in the 1000 round range, about $700 worth of silver, $6k in gold and two years of food on your shelf, and one hell of a shitty attitude.
I am a 31 year old african american father from the south side of chicago(not a thug.) I bought my house cash at the bottom of the real estate crash for 15000(nice block bad area.) I now live rent free (mortgage) no student loans(truck driver) and no car notes or credit cards (cash only.) Work, save your money and buy a fixer upper. Stop becomeing shadow agents of the bank!!
Wow, that is awesome! Keep up the good work, friend. I love America's truck drivers!
Brother...If I only had your spirit at 31. I was deep asleep and reeling on the politcal dope that was being passed around,
I had a similar debt adversion...and I survived through the devastatiing Great Depression 2.0 of 2008 til now because of it. You're doing things right and no one applauds you for it.
Well, I for one, DO. <Applause!!>
Keep your shit straight, your nose clean and don't put up with bullshit from anyone! Steer the course and you suddenly are a slave to no one, no bank, no institution, no fucking government, NO ONE.
Get your fucking freedom as the rest of us are trying to do.
middle class stagnated because there is no longer "social" competition from the former soviet union where social welfare was on high standard and the west had to catch up (by means of consumer credit system) in order to look better
No shit television prices have tanked (along with other consumer electronics). LG, Samsung, Dell, Apple, Intel etc. are de facto subsidized by taxpayer money the world over (Samsung in S Korea, Intel in Israel, Google/Facebook/Apple in Ussa etc.). So of course they can afford to slash rates on last season's models. They're not only not paying any taxes but receive cash incentives from governments (federal/state/local) to set up shop in their respective locales.
Televisions and similar consumer electronic goods got cheaper primarily because they are no longer manufactured to last or to be repairable/serviceable. They are cheap and disposible now, with much of the manufacturing methodolgy automated.
How about usury as a causal factor? Compound interest works great in the up phase but is a bitch in the down phase. Financialization is just usury in fancy dress. Eventually, e^kt--whatever positive value you assign to k--overwhelms all economic growth. Then you get the predation and parasitism we are currently seeing, as the host expires and rots. How much economic activity is represented by interest in all its forms? Who are the carrion-eating scavengers in the current stage of civilizational collapse?
Take a look at Dmitri Orlov's "Five Stages of Collapse" for an alternative to CHS's systems-theory approach guide to the universe. You can order a Kindle version to read immediately.
The middle class is dead, long live the middle class!
re How The Middle Class Lifestyle Became Unaffordable
Chronic Parasitic Infestation
Isn't this just shorthand for "Lots of people need to be gassed"?
Starvation is cheaper and doesn't require manufacturing, storage or transportation.
Angelo Mozillo, Henry Paulson and Jon Corzone are not in jail.
Reason enough to drop out of the system as much as possible, go solar, get guns and ammo, buy gold and silver, stop voting, grow a garden, avoid taxation like the plague it is and pretty much say FU to anyone and anything that resembles regulation of anything.
Let the pols and the rich continue along their merry paths to the complete destruction of society. When the guns come out, they will run for the hills and expect their useful idiots to protect them, but, there will be nowhere to hide. Hopefully, they will have to leave the country. Watch what happens in east Ukraine, where the soldiers and police are beginning to surrender their posts and side with the people. It's coming here, slowly, but ever so surely.
The lessons of Thoreau and Emerson are of extreme value today to lovers of freedom. Self-determination and reasoned civil disobedience are the starting points of revolutionary change. It's taken some time, but, my penchant for doing things my own way, in my own time on my own terms is beginning to have positive benefits. I've successfully fought the bank over the rights to my property, lowered my assessment and now have people beginning to believe that I have been on the right path (I'd say, "the path of righteousness," but that sounds a bit stultified) all along. My actions over the past five years are being noticed by friends and family. One close friend is about to pull her 401k (at age 53) and has taken action against her local taxing authorities and is looking into alternatives to "work." Another friend recently called me a "hero." I was honored and humbled because I'm only doing what makes most sense: adhering to sound principles of how to live and valuing my labor and money instead of blindly wasting it by working for careless bosses and buying useless crap.
Every day, I come to ZH and read and learn and I also read, watch and listen to a great deal of alternative media. I am at a point where I almost know too much. I've come to the realization that many, many more than myself are disgusted with the system of debt and the lies of the political class, though few know how to make changes in their own lives, but they will come around, lest they be squandered and left behind as carrion for the banking wolves.
The ones who don't get it are those employed in the system, such as teachers, public workers, etc., and those who only take the welfare. When the productive, like myself and many others in the private sector, get to the point where they defy the system, deprive it of tax money and play hard ball against they tyranny of the state, the effect is to starve the leviathan. And starve it we must.
Freedom lovers, working quietly, individually, is a force greater than all of the armies of the state. Individuals must make their own stand against oppression and tell others, show others. People aren't so stupid that they won't understand, and eventually, we will stand together.
The struggle has been going on for a long time, but it is coming to a head. Collapse of the system is not only inevitable, it is inescapable and desirable. Once it is revealed that the status quo is only out for their own good, the rest of society must rise up and smite it, lest we all become slaves, without honor, dignity nor the means to survive.
#5: the oppresive and repressive economic policies of the 0bamao regime.
The insight into Baumol's productivity thesis is fascinating, and a key structural issue that probably is worthy of a lot more investigation.
The rest of the post, unfortunately, is anti-government drivel. The key quote is as follows:
"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."
I haven't read Wallerstein, but this quote on the surface makes no sense, and is contradicted by reality.
- The chart (and a host of other data) shows that real wages have been fairly flat for decades. So the state isn't benefitting from tax receipts on "higher" wages.
- Peak US tax receipts were in the year 2000 until 2013, and fluctuated quite a bit during that period (see here: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200). Yet corporate profits have continued to reach consistent record highs and margins. In reality, tax receipts are much more correlated with overall GDP growth than "corporate profits" (or the capture of GDP by the FIRE sector).
- Basic economics shows that growth is higher in more competitive (i.e. non "cartel"-pricing) markets. Thus, if the state's selfish goal is to maximize its funding (tax receipts) by growing the economy as large as possible, the state should be actively fighting corporate capture and cartel pricing, not aiding and abetting it.
None of this suggests that there is a state corporatist conspiracy from an economic perspective. Now, the decision-making process of the state may very well have been captured by corporate special interests, and that is an argument with ample evidence to support it. But the suggestion that gov't is doing this out of some sort of selfish economic self-interest doesn't really hold up.
Dont like the cost of medicine or college degrees ?
Dont use them.
"Problem"solved.
Hint ..poor people and illegals get FREE medical care.
Its working saps ,who pay for insurance and taxpayers that pay for them.