The Top 10% Is Doing Just Fine, The Middle Class Is Dying on the Vine

The Top 10% Is Doing Just Fine, The Middle Class Is Dying on the Vine. By Charles Hugh Smith.

In modern social-capitalist systems, the core stabilizer of the system is the wage-earning middle class, which provides the stable workforce driving production and the stable pool of consumers needed to borrow money and consume enough to soak up the production of goods and services at a profit to producers. …

The process of middle class decline is best explained as decapitalization because the middle class is fundamentally a means of transforming labor into capital via savings and investment. The traditional ladder of social mobility from the working class to the middle class is one of capitalizing work: time and savings are invested in higher education, in effect capitalizing future labor by increasing productivity.

Capital isn’t limited to cash, land or tools; in an information economy, knowledge and skills are also capital, as is the social capital of social networking and relationships formed with mentors, suppliers, lenders, colleagues, investors, etc.

The second way to capitalize work is to save earnings and invest the savings in assets that produce income or gain value: a house, land, rental property, small business and income-producing financial assets such as bonds or dividend-paying stocks.

Thrift, investing, long-term planning and deferred consumption are all essential to capitalizing work by turning that labor into income-producing assets. As the household’s ownership of these assets that yield unearned income rises, so does their income and wealth. These increase the financial security of the household and build a nestegg which can be passed down to the next generation, improving their security via inheritance of income-producing assets. …

Why the middle class has struggled since 1971:

For the bottom 90%, which of course includes the middle class however you define it, it’s increasingly difficult to capitalize labor into capital. There are a number of factors driving this decapitalization:

1. Wages’ share of the national income has continued a five-decade downtrend. National income since 1973 has shifted from labor (wages) to capital and more specifically, to debt and speculative gaming of the system, a.k.a. financialization. …

As this RAND report documents, $50 trillion has been siphoned from labor (the lower 90% of the workforce) to the Financial Aristocracy and their technocrat lackeys (the top 10%) who own the vast majority of the capital…

2. Within the workforce, wages have shifted to the top 10% who now earn 50% of all taxable income. .. In a fully globalized economy, every worker producing tradable goods/services is competing with the entire global workforce, a reality that reduces wages in high-cost developed nations such as the U.S.

Financialization has heavily rewarded workers with specialized gaming the financial system skills and devalued every other skill as only the skills of financialization are highly profitable in a globalized, financialized economy.

3. As the high-wage jobs and capital shifted to coastal urban centers, middle class owners of homes and capital elsewhere saw the value of their assets decline. If a home valued at $100,000 in the late 1990s is now worth $150,000, the owners lost ground even with “official” inflation. In terms of real-world purchasing power, their home actually lost significant value in the past 23 years.

Meanwhile, middle class owners who bought their home in a coastal hot-spot for $100,000 23 years ago are now enjoying home valuations close to $1 million. Homes, along with every other asset, have been shifted into a casino where almost everyone is sorted into winners and losers, less often by skill and more often by luck.

For those who were too young to buy in 1997, sorry — the opportunity to buy a home for three times average middle class income is gone. …

4. Those who already owned income-producing assets reaped both income and asset appreciation gains as yields on savings collapsed to near-zero as the Federal Reserve and other central banks dropped yields to near-zero in 2009 and kept them low for the following 13 years. …

Since the Fed destroyed low-risk yields, anyone seeking any real yield (i.e. above inflation) would have to enter the casino and compete with hedge funds, insiders and the Financial Aristocracy. Very few middle class workers have the skills and experience to beat the pros in the casino, and so income and wealth accrued to those who already owned capital.

This is a key reason why the rich got richer and the poor got poorer. Those with capital accrued the majority of gains in income and wealth, leaving the bottom 90% in the dust. …

A recent Foreign Affairs essay Monopoly Versus Democracy included these stunning statistics:

  • Ten percent of Americans now control 97 percent of all capital income in the country.
  • The 3% of income from capital collected by the bottom 90% — which includes the middle class — is basically signal noise: the middle class collects inconsequential crumbs of income from capital.

Prior to the Fed’s ZIRP and financialization of the economy, the middle class could both collect income from capital they owned and they could afford to acquire assets that yielded low-risk solid returns. Now they can do neither. Even worse, the purchasing power of their labor continues to decline, leaving them less able to save and buy assets.

Yet no politicians are talking about this, let alone talking about why it is happening. Who benefits from that?