Two Tier America

            The disappearance of the middle class is a commonly cited and discussed phenomena. It is almost banal and commonplace in today’s society. Many of the previous posts discuss this and similarly many economists discuss the end of America with the loss of the middle class. It would be almost redundant to discuss the typical topics that appear in the classroom—the increasing returns to capital, the decreasing returns to typical service jobs, the correlations between both capital and technologically advanced workers, the perpetuation of wealth, etc. One topic, however, that I have not seen discussed at length is the possibility of a feedback mechanism in the economy causing a self-reinforcing cycle (in our case a negative one). This may explain why the process may become both accelerating and destructive.

 

            What I mean by a self reinforcing cycle is one in which wealth diverges and due to changes in the income profiles of many Americans, wealth diverges some more. For instance, in our current economic downturn, the biggest losers will be the middle-class retailers whether that be retail, housing, consumables, etc. To see how this might occur, it is important to analyze the specifics of recession in the economy. In the current downturn the most worrisome sign has been the inability of business to borrow debt in the open market while having their current debt become more and more expensive. This loss in income and financing causes companies to have to find places to free up costs, which given the ease at which labor is fired and hired, is primarily found in cutting jobs. Even if physical capital is being liquidated, most of the time that physical capital will have individuals assigned to it who will lose their jobs as well. It is hard to think of ways in which a company frees up finances that does not involve cutting jobs.

 

            This is the beginning of our downturn, not much to be worried about, however, if the markets rebounds and demand is high companies will have every incentive in the long term to hire back and perhaps expand. The larger problem is consumer demand which has now been reduced by the amount of jobs lost. This would not be worrisome unless the problem is systemic and continued pull backs further weaken the market. Often times, there is also multiplier effects that further exacerbate the problem. The pull back in debt markets may feed into consumer markets which lead to contraction in purchases. Productivity gains may help a company to still produce a large amount of products despite the loss of labor, which substitutes labor (a purchaser) with capital (a purchase). These factors can continue to motivate the cycle of further cuts leading to further loss of demand.

 

            The interesting thing is that it could very well develop a completely new trend in society—a two tier society. Similar to an aristocracy, this new society would feature a few large capital owners and many poorer individuals. This is an extreme and laughable analogy, but it may prove to be not too exaggerated. What may be different about this new two-tier society is the ease by which we can accept it. As the middle class dissolves, the standards of the lower class begin to raise as individuals find themselves not destitute, but certainly not having much purchasing power. Large, low cost retailers will benefit immensely as disposable incomes drop. These retailers will continue to cut costs in order to compete for an increasing market which trades a larger portion of wealth away for consumables. Individuals find themselves worse off each year, but due to their basic needs being met, they are far from a serf class. Minimal ownership does not phase the individual and surviving paycheck to paycheck becomes a normal affair. The richer individuals continue to purchase conspicuously further increasing asset ownership and then loaning assets, land, and money out to the rest of society in search of as high a return as possible.

 

            The winners in this society are the small but still sizable percentage of society in which own large proportions of capital. The services they request become higher and higher priced, the goods they buy become unthinkably expensive, and they purchase their progeny the rights to a successful future. They diminish their political risk through cheap and available funds to anyone looking for them (at a price). At the same time, their mentality on “fair and equitable” treatment begins to justify their point of view towards society. Earning a living as they have becomes virtuous, and sharing it becomes wasteful. As they seek to maximize returns on margin, each seeks to squeeze out every extra available fund from society and each other, causing further consolidation of the winners and incredible losses for the loser.

 

            This certainly is hyperbole, and almost seems ludicrous and paranoid. Society affords many programs for the poor, progression taxation, estate taxes, state subsidized education, medication and other services. Certainly before we ever got to the point where it was truly a two-tiered society we’d make the appropriate changes to help stability and create opportunity for everyone. Those who were poor would have their voice heard and legislatures would never allow any such system to become that out of control. Besides, free markets benefit everyone increasing the size of the pie and allowing for decreasing costs for everyone.

 

            The problem is not that we’d condone this type of society, but that we’d conditional ourselves to condone it. Many of the points commented on above are not too far from how we conduct ourselves currently. It is problematic given that after a century of explosive development we could move backwards as a race. While for the first time being physically able to support a majority of the population of the Earth in basic needs, we fail to do so due to a system that we created. Instead of providing the food that’s available, we ask individuals what they did to deserve it. Instead of supporting others to develop themselves and their economies, we move towards cheaper and cheaper labor in order to improve margins for the owners of companies but not for the purchasers of goods. One thing is certain, it will be interesting to see how far it goes before a breaking point is reached.