The Phaserl


What’s Killing the Middle Class? (Part 1)

by Charles Hugh Smith, Of Two Minds:

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.

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