What's Killing The Middle Class? (Part 1)

Authored by Charles Hugh-Smith via OfTwoMinds blog,

The rising asymmetry of rewards within our economy has many drivers.

We all know the middle class that actually owns capital and wields political influence is shrinking. As I noted last week in Redefining the Middle Class: It Isn"t What You Earn and Owe, It"s What You Own That Generates Income, defining the middle class by household income alone is a misleading metric, as it leaves out the critical factors of debt and ownership of productive assets.

A household may have an income of $150,000 and appear well-off by that metric, but if they are mired in debt and own virtually no productive assets or wealth that can be passed on to future generations, they aren"t middle class--they"re well-paid proletariats.

So what"s killing the middle class? If you read the dozens of articles on the decline of the middle class in the mainstream (corporate) media, you soon discover there"s a short list of the usual suspects:

1. Globalization / outsourcing

2. Technological changes / automation

3. "Winner take all" asymmetry in rewards for specialized skills

Clearly, each of these has squeezed the incomes of all those between the jobless poor and the wealthy reaping the lion"s share of the rewards from globalization and technological change.

A worker at a steel mill who earned $28/hour plus benefits could, with frugality and long-term planning, eventually own a home free and clear and acquire a nest-egg of assets.

When that worker"s job was outsourced, and his next job paid $9.25/hour, the opportunities to amass capital fell precipitously.

A middle-skill worker replaced by automation had the same life-changing experience if he didn"t acquire much higher level skills and move to a stronger job market--both difficult tasks with highly uncertain outcomes. (No wonder secure government jobs from which jobholders can"t be fired are so sought after.)

As economist Michael Spence explained, a key dynamic in globalization"s asymmetric rewards in pay and career stability is the tradability / non-tradability of output and labor: a bushel of grapes can be grown in another country, but you can"t outsource a haircut.

Grapes, computer chips, tech support, etc., can be grown, made or done elsewhere (outsourced) as they are tradable; hair cuts, most government services, being served a beer at a brewpub, etc. are non-tradable.

The rising asymmetry of rewards within our economy has many drivers. Studies by physicists suggest that the highly networked complexity of our economy generates wealth / income inequality by its very nature: Physics can predict wealth inequality:

Bejan"s Constructal Law addresses the fundamental principle of physics that underlies the evolution of flow systems as they change in design over time to increase flow access. It reveals that "branching tree-shaped" flow patterns govern the structure of the entire universe--most clearly evident within rivers, neural networks, lightning bolts, electrical circuitry and trees.

"The Constructal Law extends the power of physics over all of the phenomena of evolutionary design and organization, from geophysics to biology, technology, and social organization," Bejan said.

"This unites economics and physics. The equivalence between wealth and movement is correct in the broadest sense: outliers exist and undoubtedly the equivalence is evolutionary because wealth and fuel use are increasing over time."

What did they discover in terms of wealth inequality? Bejan and Errera show that nonuniform distribution of movement (wealth) becomes more accentuated as an economy becomes more developed--its flow architecture becomes more complex for the purpose of covering smaller and smaller interstices of the overall territory. "Relatively modest complexity is required for the nonuniformity in the distribution of movement (wealth) to be evident," Bejan said.

In other words, only specific types of specialization garner most of the rewards. Specialization itself doesn"t necessarily lead to outsized gains; what matters is the tradability of the specialization and the supply and demand for that specialized set of skills.

As I repeatedly point out, just issuing 500,000 more graduate degrees in STEM (science, technology, engineering and math) doesn"t automatically create 500,000 new jobs; there has to be demand for those skills.

Skills that are non-tradable and scarce will command high compensation. Skills /credentials that are tradable and abundant are a dime a dozen--there is no pricing power to labor that"s abundant, tradable and interchangeable (i.e. a commodity).

In effect, outsourcing and automation are eating the soft center between the low/moderate-skilled workforce that can"t be outsourced (dog walkers, waiters, nannies, etc.) and the high-skilled technocrat class employed by the government, finance and corporations.

As software improves, automation can move higher up the employment food chain, turning non-tradable (i.e. can"t be outsourced) employment into commodity labor that can be augmented (partly replaced) by software/automation tools.

Self-driving vehicles are an example of this dynamic.

This displaces middle-skilled workers who find there is an abundance of other middle-skilled workers seeking high-paying jobs. This over-supply of middle-skilled workers creates a glut that pushes wages down. It"s just supply and demand.

All these factors are consequential, but they conveniently leave out the politically explosive dynamics that are enriching the political and financial elites (the few) at the expense of the middle class (the many). All these factors are politically neutral abstractions--they have been stripped of exploitive, parasitic, predatory political and financial dynamics.

For example, consider how we"ve substituted debt for income. Savings have crashed while consumer debt has soared. This is the core dynamic of debt-serfdom.

Was this substitution the result of automation and outsourcing? In Part 2, we"ll look at the politically explosive dynamics that are killing the middle class.

Servitude In America's Plantation Economy

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

The only possible output of low social capital is rising inequality.

One of the themes I"ve been addressing since 2008 is the neocolonial-plantation structure of the U.S. economy. The old models of colonial exploitation that optimized plantations worked by cheap imported labor (or situated in peripheral nations with plenty of cheap labor) have, beneath the surface, been adapted to advanced capitalist democracies.

The adaptations have been so successful that not only do we not even recognize the Plantation structure--we love our servitude within it.

As noted yesterday, the current mode of production optimizes the commoditization of everything: computer chips, fish and chips, labor, expertise, everything.

This commoditization optimizes the Plantation Model of integrated production, global supply chains and distribution to global marketplaces, a hierarchical management focused on maximizing profits to send back to the owners, a ruthless focus on lowering costs via labor arbitrage (commoditize the work so it can be performed anywhere labor is cheaper/more desperate) and a fanatical desire to eliminate competition or fix prices via cartels to ensure high profits.

Global capital has optimized the Plantation Model in the form of global corporations. Wal-Mart is the quintessential example. Like a classic agricultural plantation, Wal-Mart enters a region with a diverse, employment-rich ecology of small businesses and supply chains of local and regional manufacturers and distributors, and it bulldozes the entire "forest" of businesses, suppliers and distributors with the irresistible blade of integrated global supply chains and "lower prices, always."

Wal-Mart replaces the localized economy with a low-pay, highly efficient plantation economy in which the townpeople"s only choice is to work for Wal-Mart or scrape out a living feeding the Wal-Mart workers, doing their laundry, etc.--exactly as on a classic plantation.

On a classic plantation, the wages are low and the "company store" offers easy credit, binding the workers to the corporation not just for wages but for credit.

Those few who manage to save up enough capital to start small service businesses-- laundry, cafes, etc.--must do so in the shadow of the Company, which can always drive them out of business should they speak against their corporate overlords.

A once-diverse landscape is reduced to a monoculture wasteland dependent on subsidies, either implicit or explicit. Wal-Mart"s low wages leave many of its workers" families on state aid or food stamps to survive, and so it prospers on the backs of taxpayers who subsidize its low wages.

The alternative is not some fantasy of "old-time America"--this model still exists where citizens refuse to submit to the mono-tyranny of "low prices."

Isn"t it odd how this statement--the nation does not exist to benefit corporations, corporations exist to benefit the nation and its citizenry --sounds breathtakingly revolutionary in today"s politics of experience?

One of the key concepts in the Survival+ critique is the politics of experience. This is an elusive concept because what we take for granted is invisible to us, and we have to go back in time, so to speak, to rediscover a history in which the experience of daily life was quite different from the present.

Today, we accept it as "normal" that marketing worms into every once-private area of our lives. Not that long ago, adverts and marketing were limited to print media (newspapers and magazines) and TV--fundamentally passive media.

The key concept in all marketing now is supremely pernicious: any advert or campaign which reaches deep into the last refuges of privacy is considered highly valuable.

Where the only public adverts were once billboards, now there are adverts on the shopping carts in the supermarket--another violation of what could be considered temporary private space--and on the floor of the supermarket. Even the rubber dividers used to separate one"s own purchases from the next customers now display an advert.

The colonization of the plantation of the mind is now complete. It is not coincidental that those citizens who "consume" the most media are also the biggest buyers of junk food and its accompanying junk worldview based on consumption, faux novelty ("get the new chicken-bacon-cheese-double-burger today!") and a passive disengagement from the real world: we endlessly watch cooking shows rather than actually cook real food in our own kitchens.

The plantation of the mind optimizes consumption, impulse buying and short-term thinking: just buy the junk we"re pushing, and what happens to you afterward is your problem.

Experience itself has become so derealized that we don"t even recognize our perceptions and experiences have been organized into neatly internalized plantations.

It doesn"t have to be this way. As I explain in the Survival+ / Survival+ The Primer chapter entitled The Crisis of Neoliberal (Predatory) Global Capitalism, global capitalism has reached the limit of the plantation model in terms of exploiting new colonies around the globe and exploiting new sources of cheap, abundant energy.

The only possible output of a hyper-financialized Plantation Economy is rapidly increasing wealth and income inequality--precisely what we see now.

What we need is a social economy, an economy that recognizes purposes and values beyond maximizing private gains by any means necessary, which is the sole goal of hyper-financialized Plantation economies.

Given the dominance of profit-maximizing corporations and the state, we naturally assume these are the economy. But there is a third sector, the community economy, which is comprised of everything that isn’t directly controlled by profit-maximizing companies or the state.

What differentiates the community economy from the profit-maximizing market and the state?

1. The community economy allows for priorities and goals other than maximizing profit. Making a profit is necessary to sustain the enterprise, but it is not the sole goal of the enterprise.

2. The community economy is not funded by the state.

3. The community economy is locally owned and operated; it is not controlled by distant corporate hierarchies. The money circulating in the community stays in the community.

4. The community economy is not dominated by moral hazard; the community must live with the consequences of the actions of its residents, organizations and enterprises.

The community economy includes small-scale enterprises, local farmer’s markets, community organizations, social enterprises and faith-based institutions. Its structure is decentralized and self-organizing; it is not a formal hierarchy, though leaders naturally emerge within civic and business groups.

The Plantation Economy institutionalizes poverty, parasitic finance, externalized costs, moral hazard (since the corporate/state overseers do not live in the community being cannibalized) and centralized wealth and political power. These are the only possible outputs of the hyper-financialized Plantation Economy.

Once the Plantation Economy has displaced the community economy, opportunities for work and starting small enterprises shrivel, and residents become dependent on state social welfare for their survival. By eliminating the need to be a productive member of the community, the welfare state destroys positive social roles and the inter-connected layers of the community economy between the state and the individual.

When the individual receives social welfare from the state, that individual has no compelling need to contribute to the community or participate in any way other than as a consumer of corporate goods and services. State social welfare guts the community economy by removing financial incentives to participate or contribute.

Why is the community economy so important? The community economy is first and foremost the engine of social capital, which is the source of opportunity and widely distributed wealth.

Corporations cannot replace communities for the simple reason each organization has different purposes and goals. The sole purpose and goal of a corporation is to expand capital and profits, for if it fails to do so, it falters and expires.

The purpose of a community is to preserve and protect a specific locale by nurturing social solidarity: the sense of sharing a purpose with others, of belonging to a community that is capable of concerted, collective action on the behalf of its members and its locale.

It is not accidental that the current system of corporations, banks and the state increases inequality and erodes the community economy: the only possible output of low social capital is rising inequality.

(I discuss community economies in my book A Radically Beneficial World: Automation, Technology and Creating Jobs for All.)

We have a choice. We can continue loving our servitude in our Plantation Economy, or we can choose another model and another mode of production.

The Colonization Of Local-Business Main Street By Corporate America

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

This is what our mode of production optimizes: ugliness, debt-serfdom, and servitude to politically dominant corporations.

An insightful correspondent recently remarked on the striking transition of American neighborhoods from commercial districts dominated by locally owned businesses to streets lined with look-alike outlets of Corporate America. This transition is so obvious that few even comment on it, much less ask if this wholesale replacement is in the best interests of residents and consumers.

I have long suggested starting any inquiry with a simple question: cui bono-- to whose benefit? Let"s add a second essential question: what does the system optimize?

By this I mean: what is optimized by the infrastructure, regulations, political structure, etc.--what we call the mode of production.

I think it"s abundantly clear that our mode of production optimizes large-scale global corporations, which have access to the capital and expertise needed to optimize production, management, employee training and discipline, supply chains and the purchase of political influence.

The net result of nearly-free credit for corporations is a Corporatocracy that constantly expands its financial and political power. Governments come and go, candidates come and go, and political movements come and go, but the Corporatocracy remains at the top of the power pyramid because it can always afford to "buy" as much democracy as it needs for the state to protect its power and profits.

Our mode of production optimizes the commoditization of everything: computer chips, fish and chips, labor, expertise, everything. It"s very convenient if you have a reliable vehicle; if not, tough luck--convenience is for those with cars.

If you want a burger that"s essentially identical everywhere in the nation--i.e. a burger that has been ruthlessly commoditized--then Corporate America"s fast food chains are the place to go.

If you want a hotel room that"s identical to hundreds of other rooms, a store that has identical items and nearly identical layout no matter which outlet you enter-- Corporate America"s chains are the place to go.

That this commoditization / homogenization has consequences other than low prices and convenience is not advertised. One consequence is every town and street in the country looks alike: a garish row of one corporate outpost after another.

The ugliness of this commoditized wasteland is so obvious that it"s assumed to be unavoidable.

Another consequence is entry-level commoditized jobs don"t teach new workers the wide spectrum of skills that once came with working for small businesses. Workers in Corporate America are taught the company"s system and trained to respond with genteel customer service in every interaction with customers.

How often do we hear something like "thank you for visiting Engulf and Devour" repeated semi-robotically?

Here"s another often-overlooked consequence: money flows out of the community to distant corporate headquarters, where it is distributed to obscenely wealthy managers and owners of the company"s stock.

When businesses were locally owned, all the profit and overhead generated by sales stayed in the community. What characterizes economically depressed ghettos isn"t just a lack of money--it"s the channeling of all the money in the community to distant Corporate HQs and predatory corporate chains such as payday lenders and credit card issuers (you"re going to love paying 25% interest!).

The low cost and convenience of commoditized Corporate America has high costs that we simply don"t measure: the ugliness of our shared spaces, the boring sameness of every commercial strip, the dearth of entry-level jobs outside a commoditizing corporate hierarchy, and the low property tax rates Corporate America "buys" with its immense lobbying machinery.

The low cost and convenience are presumed to make this colonization of locally owned businesses irresistible. Commoditizing everything certainly optimizes the efficient production and management of services and goods.

But how much has been lost to this wholesale colonization by globally optimized corporations? What price do we put on a diversity of locally owned businesses? What price do we put on the relative charm of a walkable street? How much property tax flows into the local government from a shuttered mall that lost its Corporate America anchor retailers?

Colonization introduces an amazing array of bargain-priced goods and services. The "natives" are happy to have access to all the goodies, but a short time later, the colonizers own the land, the markets, the politicians, the media and the labor force, and everyone who once had an independent livelihood and independent political voice is impoverished or is now an employee of the plantation, taking orders from the Big Boss.

This is what our mode of production optimizes: ugliness, debt-serfdom, and servitude to politically dominant corporations that have commoditized supply chains, marketing, the construction of outlets, the labor to operate them and the extraction of profits.

That"s how we"ve come to love our servitude--oops, I mean "low prices and convenience."