Saturday, October 10, 2015

Politicians and their idea free focus on the middle class

In an article about Reid Hoffman in the October 12th New Yorker, an article that goes in many directions, there is an excerpt from an interview with John Lilly, a Silicon Valley investor and partner of Hoffman, about the concentration of wealth in the country and more specifically about the concentration enabled by the technology network.  Saying that he suspects that the twentieth century was an anomaly, he goes on to say, "There was no middle class, then there was a middle class, now we're back where we started - it's hollowed out.  I don't see where the middle class is going to come from."

All of the presidential candidates in this primary talk about their concern for the middle class and how they will focus on it.  What will they do?  Wait a minute, that must come later.  It will be their focus.  We do know that.

Many talk about education, and that surely is important but not new stuff and not something that will create change within any presidential term.  There is talk about stepping up infrastructure spending, often mentioned in this blog, but the real benefit of infrastructure spending will be the benefit of the infrastructure once it is built.  It is necessary, but the jobs associated with infrastructure spending today will not be as plentiful as in the past or as relatively high paying as in the past. The higher minimum wage debate is always on the table, but implementation for other than attention getting publicity is not yet simple.  A meaningful but gradual rise in the minimum wage would be beneficial, but it is not an immediate game changer.

There is of course talk of structural change.  Technology, globalization, and centralization have all diminished the middle class stability that once prevailed.  Change is much quicker, and innovation is much faster.  Politicians don't have an answer to this, and in fact must be on the bandwagon of innovation and entrepreneurship, no matter how disruptive those characteristics may be in practice. Some politicians embrace economic nationalism.  Retreating into this country will hurt the U.S. more than help it.  It would restrain global growth as well which would unwind a century or more of progress.  This kind of talk is compelling to some, but not practical.

The middle class as we know it began in the early 1900's and was truly built out in the aftermath of World War II.  The United States was the only powerful country left standing, with industry intact and a population ready to sacrifice to just get back to normalcy.  That was the goal for most and aspiring to great wealth was far from of the minds of many, even many business leaders.  The safety net of social programs was in place from the Great Depression era.  The interstate highways began to be built, more rail lines were added, cities expanded public transportation, and the automobile industry was becoming an important employer and end product user.  The world needed U.S. products, investment, and expertise.

With the out of control inflation of the late 1970's, oil shortages, and the earliest beginnings of the corporate raider mentality, ever so slowly the outlook for the middle class began to fray. In the beginning of the 21st century the results began to show up clearly.  The concentration of wealth had begun to widen considerably, and there was a fast growing category of what may be called lower middle class, defined here as those people who view themselves culturally completely as middle class but who live paycheck to paycheck and now job to job, patching together their lifestyle with multiple family wage earners.

The most talked about aspect of this wealth issue is of course the concentration at the top.  That is a fact now.  The technology titans, the financial industry leaders and quants, and the cult of the CEO and their top minions have led to this top heavy structure.  Broadly the public and the politicians lay low on technology, are open to the CEO cult for all who are deemed to perform, but resent the financial industry intensely.  It's an easy target, but no more a part of what has happened than the other components.  Creating more laws to penalize finance without addressing other issues does little except make capital markets less liquid and credit less available to small businesses.

What is missing from the politicians are any real answers.  One starter is tax code change, but not the things the pols always mention like a flat tax that are non starters from a legislative point of view. First, the Alternative Minimum Tax must be scrapped, must be.  Designed years ago to capture tax from the extremely wealthy who managed to pay little, it was not inflation adjusted and now does not touch the real wealth in the least.  It is a painful and inexplicable tax on the middle and upper middle class, capping out their aspirations to do more.  Secondly, there must be cost of living adjustments to tax rates.  We have the technology to do this.  A family that has an income of $80,000 in a prosperous urban center is in an entirely different situation from one with the same income in many parts of the south, midwest, and southwest.  Why do those people who live in the most job productive urban centers get taxed down to the point of heading down toward lower middle class?  It makes no sense. Third, as a few candidates are advocating, managers of investment funds should pay regular income taxes on the earnings from their business, not capital gains rates.  The guff about them losing motivation to invest if they don't get preferential treatment is a bluff that should be called.  How can they turn the backs on the amount of money they make, and if they do so be it.  Others will step in. This would not be a huge addition to aggregate tax revenue, but it would be a huge help in having a perception of fairness in this country.

Entrepreneurship, investment spending, education, innovation, and accepting the world for what it is now are part of the solution.  While more transfer payments may be necessary in carefully thought through cases, done more broadly they could lead to a permanent and huge lower middle class, getting by but resentful.  That would not be an attractive political situation.

All of this will not create significant GDP growth in the near term, which is the other element of creating jobs.  Most of the candidates see that as a goal, some see it as something their programs, whatever they are, can achieve.  As long as much of the world is laboring on with little or no growth, there is contraction in emerging markets, and China's growth is moderating, meaning going down steadily, the U.S. will not break out into much above 2% near term.  Growth would be a panacea for greater job growth and even wage growth, but it is unlikely to happen near term.

We await the next wave of innovation and creativity.  That cannot be predicted with any precision, it will likely mean significant disruption, but it will happen at some point and growth will step up. Whether more good jobs with good wages are created that are spread across the wealth spectrum is the question, or will they be concentrated in those areas that are big winners already.

Wow, did this get tedious, and have a less than optimistic tone.  The politicians need to take some risks and step up their game to give the country real hope.


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