Globalization, Free Markets and the Plight of the US Middle Class

Over the last three decade, though the average earning of the US population has been going up the middle class has at best stayed stagnant. There have been more trinkets to buy, more pressure to buy them and less money to buy them with. I don’t know to what extent the growth in credit is attributable to this but I can’t help think that at least to some extent it has. The promise of a better future for the middle class has been shattered. This stagnation has been aggravated by the fact that, the already wealthy have been getting wealthier and since material well-being is relative, the middle class in that sense has been moving backward. In the 50s, at the height of prosperity for the middle class in America, a family with the man of the house working in a “blue collar” job could live comfortably, send their kids to college and, if really frugal, have a small cottage on a lake. To do the same today it takes both the man and woman working and to get the cottage on a lake, it takes two professional incomes. Though politicians have been assigning the blame to each other and reciting talking points, I believe the real cause is a structural and natural consequence of the Free Market at work.

The size of the middle class in the industrialized west, if not shrinking has at best stagnated. Worldwide, however, there has been a significant growth of the middle class along with its buying power. So on a global scale the Free Market has been working for the benefit of society. To reiterate the basic concept behind Free Market Capitalism, the quest for self-interest on the part of individuals, collectively leads to benefit for society. In this case that is what is happening on a global scale. In their quest for maximum gains, businesses have been drawn to regions of lowest cost labor. Support services are moving to India and manufacturing to China. We also see this in this Country. New automobile plants, to avoid wages and benefits derived through union activities in the North, are appearing in the South where, though wages are lower than in the North, they are still better than other wages in the South. The South gains the North looses. When the Free Market works uninterrupted, as discussed in a previous posting, it knows no borders, communities, religions, ethnicities, religions or races. With the exception of the near total meltdown of the financial system, the free market is working well from a global perspective, the middle class is growing, commodity prices are going down and global buying power up and the corporations and their owners in the West as well as the East are growing in size and wealth.

The problem, however, is that from a local, regional and national perspective of the West’s middle class, things are getting worse and the question comes down to whether, how and when do we get back to growing it. Now that the financial system’s bleeding has stopped, the Liaises-fair Free Marketers are content to let the markets sort things out. Riches derived from the East are of no less than value than riches derived from the West. So as long as there are riches there is no need to change. The Market will sort things out. The question is how long will it take, what will be the local effect and the resulting collateral damage.

Is globalization a zero-sum game? For someone to win will someone else have to lose? In other words, will the market increase the wealth of the poor nations at the expense of the rich? Believing prosperity to be a zero-sum game, governments historically have interfered with the market forces through tariffs or other trade restrictions trying to force the use of local resources at either the cost of higher prices to the consumers or profits to the enterprises or both and thus starting trade wars often leading to shooting wars.

Free marketers claim that this migration of jobs is a natural consequence of a free economy and it does not have to be a zero-sum game. I believe the current administration agrees. We have gone through such cycles in the past. An industry starts, faces growing demand and creates opportunities for others to enter. Competition increases, prices drop and there begins a drive to lower costs. The textile industry started in England then moved to New England, then the South and now to all parts of Asia. When computers were invented in Silicon Valley and expanded to the East Coast, some of the old textile mills having stood empty for decades began housing the likes of Digital and Wang and now stand empty again as the manufacturing has moved to Asia.

The world is changing rapidly. Technologies advance faster every year. Financial centers move. Balance of power shifts, all this at an accelerating pace. During these dynamic times it is increasingly important that the markets, guided toward the benefit of our society as a whole, remain free. We need better government that understands the global issues and ensures that the paths to our success as a country and in particular our middle class thrives. In the meantime our electorate is becoming increasingly conservative, wanting to protect what it has if not go back to a time when it felt it had more. The danger is that politicians, in their quest for reelection will succumb to the parochial populist movements and steer a course for “instant gratification” and negate the possibility for maintaining our leadership in the world.

The cycle of innovation starting in the West and in particular in the US, maturity and then migration has worked but can it continue? Will the markets alone support this cycle or is there a role for government to play and if so what is this role. The conservative on the extreme right, represent the “small business” and are working to get legislation to advantage small business while the liberal left pushes for legislation supporting labor. The innovation unfortunately does not come from the small business represented by the Chamber of Commerce; the restaurant owner, beautician shop the plumbing contractor, insurance and real estate broker or the family farmer, nor does it come from the labor unions, banker or broker on Wall Street. It comes from an area that is not represented by either party; the universities and research laboratories in large corporations.

The conservative right is suspicious of the “elite”, the intelligent, the educated the newly rich and particularly the government while the left is leery of the wealthy. But, like it or not, our ability to get our middle class growing again and restoring the American dream depends on these. Government has a very important role to play. There is a difference between the Free Market on aggregate and the individual participants in the market. They are at odds. Whereas the market is pushing to lower profits, the participants look to maximize profits and in so doing try to get around the market wherever possible. An important role of government is to block their paths around the markets thus keeping markets indeed free. The markets by their very nature are global and another key role of the government is to make sure that in all the moving and shaking created by the markets, their constituencies are not disadvantaged. This applies to the national, regional as well as local governments.

Our federal government has contributed greatly to the aforementioned cycle. It has supported research at both the universities and in industry through various programs. It has provided for the education of our young. Much of the innovation, such as the semiconductor and the Internet, has come from development funded for defense. When I was running our Company, in applying for federal funds for development projects supporting defense or space, a key question asked was potential commercialization and without a strong argument for commercialization the probability of funding was greatly diminished. (Recent advances in diapers have come from the NASA space program where much engineering went into developing better urine disposal systems for female astronauts.) Its immigration policies have encouraged migration to the United States from all over the world. The father of our space program was a German Scientist. The government has passed antitrust legislation to prevent the formation of monopolies, which would eliminate competition that drives the need for innovation. It has intervened on behalf of local industries when other governments have tried to circumvent the Free Market through currency manipulation or tariffs. As the world, along with all its technologies, changes so does the role of government, its size and cost. The job of government and its associated cost is minimal in a primitive society. The larger and more advanced a society, the greater the complexity of interactions and thus the greater the benefit from and cost of government.

I hear a lot of rhetoric about “too much government” but none about the proper role of government. I believe that the Free Market does indeed work and coincidently does benefit society as a whole but it does so given that the forces that keep the various self interests from circumventing the market are kept in check. I heard someone say the other day that the Republicans are on the side of business and the Democrats on the side of government. I don’t believe that’s a valid categorization. A cynical way to look at this may be that the Republicans want a government that helps business avoid a Free Market while the Democrats want a government that facilitates labor’s quest to find a way around it. Our society, however, needs a government that keeps the markets free and puts roadblocks in the way of everyone who wants to circumvent them. Whoever promises to “keep jobs from going overseas” essentially is offering some path around a free market. My fear is that an irrational quest to minimize the size of the government without understanding its proper role, will diminish, if not destroy our participation in free markets. We will have stronger paths created for business around the markets during the Republican reigns and greater paths around the market for labor during the Democrats reign. These paths will continue to grow. I also fear that during the diminution of the government’s role funding of development through the military, industry and academia will be reduced. There is talk on the far right of eliminating the Department of Education and either privatizing or turning education over to regional politicians. There is a real danger that we will wind up with not only over 50% of the population in one state not realizing that Hawaii is a State and the President a citizen but 50% of the country. Not only will we not have the manpower to support the required technologies with the ability to innovate but one that will be open to misinformation and manipulation through the mass media by whoever is vying for power.

The hallmark of a third world country is the relative small size of the middle class and the very large gap between the small number of very rich and the large number of very poor. Can we stem the tide pushing us in this direction and what are the obstacles we must overcome? “Patriots” shouting about America’s exceptionallism overlook an area where we have been truly outstanding, our ability to attract and integrate foreigners and their cultures into our society. If innovation is one of the keys to our continued success, and I believe that it is, then we need to continue, if not accelerate, this integration. Frans Johansson in his book the Medici Effect points out that creativity leading to innovation comes when a situation is viewed from different perspectives, disciplines and experiences. Innovation often comes from either an individual schooled in a variety of discipline, exposed to different cultures and having worked in different fields or from teams of individuals with the same variety of experiences. The continuous influx of new points of views has contributed to our innovation and our success. The danger we now face is that, with the xenophobia on the extreme right manifest in the Islamophobia and all the anti immigrant rhetoric, we will strongly discourage if not prevent emigration. We will become a homogeneous society likes of India and China and lose our only long-term advantage, our ability to differentiate through innovation.

Another danger, though I believe or at least hope it is a remote one, is that as the wealth of an ever-shrinking group of individuals grows disproportionately, so does their power and their ability to influence policies that then allow them to gain even more power and wealth. If this is allowed to happen we will slip from a true democracy into an oligarchic regime and become a nation not to dissimilar to many South American Countries where a handful of families essentially rule the nation. Part of the government’s responsibility is keeping markets free and in doing this it had to prevent the situation where a small minority has all the wealth and power and uses this to control the government. The way it has achieved this is by imposing taxes on the transfer of wealth from generation to generation and thus hopefully weakening what would otherwise become powerful dynasties. The threat to the reestablishment of the middle class comes from the right’s assertion that the wealthy are the “job creators” and builders of the nation and heavy tax burdens on them will endanger us all. (If I were a descendent of the Chinese and Irish who died building our railroads or Mohawks building our skyscrapers or slaves working the plantations and all others who not only have toiled but died in the process of building this great nation, not to mention lost their lives defending it, I would not so readily concede the credit for our success to the providers of capitol, though I might be persuaded to share it.) The current mood in the country is fiscal conservatism, which I believe translates into less spending on the needy and lower taxes for the wealthy. The theory is that as the rich get richer everyone benefits because there are jobs created in the process. This has not been born out in the decade sine the last tax cut. The poor got poorer, the rich richer and the middle class still stagnated. I believe if the Right’s goal is uncompromisingly realized, it will accelerate the widening of the gap between the very poor and very wealthy, stifle free markets and accelerate our slide into oligarchy.

Globalization does not have to be a zero-sum game but it needs intervention from a strong, well functioning government driven, not by ideology nor populism, but by the recognition that our country’s true success depends on the state of our middle class and drives to restore it.