A Cautionary Tale...

Chris Buskirk, "The Beggaring of the Middle Class"

The question for every policymaker should be how to restart a new period of national vitality. Narrowly focused gains in information technology won’t do it—neither will fiscal stimulus.

American politics are deeply polarized. In the last 20 years, a significant percentage of people on the losing side has disputed the legitimacy of three presidential elections. The increasing intensity of the conflict seems ready to rend the country into openly warring factions. Still, no one has a satisfactory answer as to why this destructive tendency is accelerating.

In fact, over-reliance on ideology obscures the real, material sources of the conflict that are right in front of us and keeps solutions permanently out of reach.

Ideological mystification has characterized and redirected the discussion around the stock market driven increase in the wealth of American billionaires since March. In just over eight months, this group of 650 Americans gained over $1 trillion in wealth. The response has been predictable. The left-liberal cut on this news has been to decry the greed of billionaires and the depredations of late-stage capitalism. The right-liberal cut, influenced heavily by libertarian fundamentalism about markets, has been something like, “Three cheers for a rising stock market, my 401(k) is doing great!”

Both miss the point. The problem isn’t that rich people are getting richer. It’s that almost everyone else is, at best, running to stand still.

Consider a few data points: real median wages have been flat for the past 50 years; Generation X has owned a much lower share of national wealth at every stage of their lives than the Baby Boomers who preceded them. And Millennials are substantially trailing Gen X. In other words, each generation is poorer than the one that preceded it.

The Left is too eager to vilify billionaires and offer facile answers like making billionaires illegal or implementing a wealth tax. The Right won’t grapple with the historical reality that extreme wealth concentration combined with a lack of social mobility is politically unsustainable. Neither side of the ideological divide is willing to address the fact that the rapid rise in the wealth of a handful of very wealthy people is, in part, a reflection of the accumulation of monopoly power among a small group of very large corporations and a tidal wave of newly created money driving up the prices of financial assets. Both of those things represent difficult structural problems that defy answers from the standard left-right political dialectic.

The Rise of Wall Street and the Decline of Main Street

Despite all of the tumult that has defined 2020, the stock market has marched steadily higher since the pandemic crash in February and Gross Domestic Product, already positive, is expected to resume its predictable climb next year as the threat from COVID-19 recedes. All of the big lines that chart the economic progress of our lives keep going up and to the right, just as they have been doing for decades. Yet, for most people, life hasn’t been getting better. In fact, for a lot of people, it’s been getting worse.

Since 1970, the Federal Reserve reports that the real GDP has risen by more than 370 percent from a bit under $5 trillion to about $18.6 trillion in the third quarter of 2020. The Dow Jones Industrial Average has done even better, rising about 575 percent over the same period. And the very richest Americans—the billionaires of Bernie Sanders’ and Elizabeth Warrens’ fever dreams—have gotten much, much richer.

The fact that wages flatlined during a half-century in which reported GDP grew consistently and the stock market reached the stratosphere should have been an indication that something was wrong. This disconnect is a time bomb. If two of the main measures of economic success can register long-term growth at the same time real wages are stagnant, and living standards are flat or even declining for the middle and working class, then we need better, or at least additional, metrics to measure national prosperity—metrics that take their interests into account.

Flatlining real income from the working class all the way into the professional managerial class combines to produce social and economic anxiety that manifests in political conflict and decay. This decay acts as fertilizer for instability that grows more powerful and more dangerous the longer the structural forces cultivating it continue unarrested. Even professionals like lawyers have seen median wages decline, which should be no surprise since there are roughly five times as many lawyers per capita in the country today versus 1970. But it remains that as more people sought security in a professional degree, those degrees became economically less valuable.

Neither Left nor Right has been able to develop solutions even attempting to change the structural forces responsible for this problem because they both operate on the false assumption that America has been experiencing real economic growth of the same type and at the same rate as that experienced before 1970, when our growth was related to technological innovation. Both mistakenly believe that the only question now is how to share the gains.

But there are compelling reasons to believe that the real problem is that we haven’t had the sort of growth we thought we had. Tyler Cowen wrote about this in The Great Stagnation nearly a decade ago. And Northwestern University economist Robert J. Gordon developed similar themes in his 2017 book The Rise and Fall of American Growth. But somehow, the truth and the importance of this thesis is still underappreciated.

The Stagnation of the American Economy 

Economic growth springs from two basic sources: population growth and productivity growth. Population growth just means throwing more bodies at a problem; it doesn’t raise living standards.

But productivity growth means doing more with less. A farmer driving a tractor can do more than a farmer working with a plow pulled by a horse. At the most basic level, population growth is limited by access to basic resources like food, water, and shelter. Productivity growth, driven by technological innovation, makes more of those things—and other things that make life better—available. This illustrates the basic truth that the purpose of technology is to reduce scarcity.

Over the long-term, living standards track productivity growth. So when productivity growth slowed in the early 1970s, wages and eventually living standards necessarily followed with a lag. It’s one of the reasons that debt levels have risen across the board. People didn’t realize what was happening and continued spending as though there was real growth occurring or that the pause was short term. But it wasn’t, and debt at every level from the consumer to the federal government filled the gap between actual and expected productivity growth.

This is how the innovation slowdown led to the process of financialization and our movement into what I have begun calling the “Cantillon Economy.” This comes from “the Cantillon Effect,” which posits that money creation redistributes wealth upwards. According to this theory, when new money is created, those who receive it first see their incomes rise while those who get the money last see their incomes eroded by inflation. In our economy, that means banks do very well. So does anyone who owns financial assets.

You can see this not just in the long-term rise in stock prices but in how much better stocks have performed than GDP. More return has gone to capital than to labor. And it creates a particularly vicious cycle in which money creation begets asset price bubbles. When those bubbles inevitably pop, the response, invariably, is to flood the system with more liquidity, which just enriches those at the top while everyone gets left further behind.

What began to impact the working class 50 years ago has crept up the income scale first to the middle class, then to the professional managerial class, and eventually to the merely rich who are being outpaced by the super-rich.

This is particularly insidious in a country like the United States, where people understand themselves in terms of growth, dynamism, and the ability of each generation to do better than their parents. When the growth stops or even slows down, we can’t meet our financial, political, or cultural obligations.

The result of this is what we see happening around us: professional and economic frustrations are sublimated into political rivalries—fights over a pie that isn’t growing fast enough to keep with the promises or expectations built into the system. Wages aren’t growing, making it harder or impossible for people to buy houses and start families, so energy is redirected into getting non-economic rewards like clout chasing on social media.

But that misdirection, which mystifies the underlying economic causes of conflict, is also a vector of social and political decay that is unsustainable and leads to factionalism, patrimonialism, and unsustainable rivalries. These are real threats to the American order and way of life.

The existing framework for dealing with this is stale. At best, it’s ineffective; at worst, it’s counterproductive. The question for every policymaker should be how to restart a new period of national vitality. A period of broadly shared prosperity requires faster growth based on innovation and the social mobility that comes with it. Narrowly focused gains in information technology won’t do it—neither will fiscal or monetary stimulus, which just paper over the real problem.

The solutions are neither obvious nor easy. They will necessarily require doing things differently than we’ve been doing them and breaking some cherished taboos. That’s a longer discussion. But for now, the first step is to name the problem and define our goals. If we were able to achieve the sort of gains in the living standard brought about by things like electricity, the automobile, and flight in the early 20th century, we’d find that there would be a place for everyone and that some of our most difficult political conflicts would go away.