Our Age of Decay Was Ushered in by Financialization, Beginning in 1970

Our Age of Decay Was Ushered in by Financialization, Beginning in 1970. By Chris Buskirk. A long read in the original, but it’s well written and correctly traces the path from the current unfortunate trends back to one of their root causes.

What is a good life?

The expectation of constant progress is deeply ingrained in our understanding of the world, and of America in particular. Some metrics do generally keep rising: gross domestic product mostly goes up, and so does the stock market. According to those barometers, things must be headed mostly in the right direction. … [But] during a half-century in which reported GDP grew consistently and the stock market reached the stratosphere, real wages have crept up very slowly, and living standards have flatlined or even declined for the middle and working classes.

Many Americans have a feeling that things aren’t going in the right direction or that the country has lost its societal health and vigor, but aren’t sure how to describe or measure the problem. We need broader metrics of national prosperity and vitality, including measures of non-economic values like family stability or social trust.

There are many different criteria for national vitality. First, is the country guarded against foreign aggression and at peace with itself? Are people secure in their homes, free from government harassment, and safe from violent crime? Is prosperity broadly shared? Can the average person get a good job, buy a house, and support a family without doing anything extraordinary? Are families growing? Are people generally healthy, and is life span increasing or at least not decreasing? Is social trust high? Do people have a sense of unity in a common destiny and purpose? Is there a high capacity for collective action? Are people happy? …

From the founding period in America until about 1830, those factors were generally improving. Life expectancy and median height were increasing, both indicating a society that was mostly at peace and had plentiful food. Real wages roughly tripled during this period as labor supply growth was slow. There was some political violence. But for decades after independence, the country was largely at peace and citizens were secure in their homes. There was an overarching sense of shared purpose in building a new nation.

Those indicators of vitality are no longer trending upward.

Life expectancy has gone backwards in the last 150 years:

In mid-Victorian England, life expectancy at age five was 75 for men and 73 for women. In 2016, according to the Social Security Administration, the American male life expectancy at age five was 71.53 (which means living to age 76.53). Once you’ve made it to five years, your life expectancy is not much different from your great-grandfather’s. …

A study of 298 famous men born before 100 B.C. who were not murdered, killed in battle, or died by suicide found that their average age at death was 71.

More striking is that people who live completely outside of modern civilization without Western medicine today have life expectancies roughly comparable to our own. Daniel Lieberman, a biological anthropologist at Harvard, notes that “foragers who survive the precarious first few years of infancy are most likely to live to be 68 to 78 years old.” In some ways, they are healthier in old age than the average American, with lower incidences of inflammatory diseases like diabetes and atherosclerosis. It should be no surprise that an active life spent outside in the sun, eating wild game and foraged plants, produces good health.

Health today isn’t too flash:

Recent research shows that not only are we not living longer, we are less healthy and less mobile during the last decades of our lives than our great-grandfathers were. This points to a decline in overall health.

We have new drugs to treat Type I diabetes, but there is more Type I diabetes than in the past. We have new treatments for cancer, but there is more cancer. Something has gone very wrong. What’s more, between 2014 and 2017, median American life expectancy declined every year. In 2017 it was 78.6 years, then it decreased again between 2018 and 2020 to 76.87. The figure for 2020 includes COVID deaths, of course, but the trend was already heading downward for several years, mostly from deaths of despair: diseases associated with chronic alcoholism, drug overdoses, and suicide. …

Most are losing ground economically:

The last several decades have been a story of losing ground for much of middle America, away from a handful of wealthy cities on the coasts. The optimistic story that’s been told is that both income and wealth have been rising. That’s true in the aggregate, but when those numbers are broken down the picture is one of a rising gap between a small group of winners and a larger group of losers. Real wages have remained essentially flat over the past 50 years, and the growth in national wealth has been heavily concentrated at the top. …

Wealth is relative: if your wealth grew by 4 percent while that of another group increased by 17 percent, then you are poorer. What’s more crucial, however, is purchasing power. If the costs of middle-class staples like healthcare, housing, and college tuition are climbing sharply while wages stagnate, then living standards will decline.

More problematic than growing wealth disparity in itself is diminishing economic mobility. A big part of the American story from the beginning has been that children tend to end up better off than their parents were. By most measures, that hasn’t been true for decades. …

Over time, declining economic mobility becomes an intergenerational problem, as younger people fall behind the preceding generation in wealth accumulation. …

At a median age of 45, for example, the Boomers owned approximately 40 percent of the national wealth. At the same median age, Generation X (1965–1980) owned about 15 percent. The Boomer generation was 15–18 percent larger than Gen X and it had 2.67 times as much of the national wealth. The Millennial generation (1981–1996) … owned about half of what Gen X did at the same median age. …

In 1971 the last physical constraints on money manufacture were removed around the world. Since 1971, banks and governments have been free to print money out of thin air, and they have slightly but consistently abused that power… and it’s accelerating:

A key reason for stagnant wages, declining mobility, and growing disparities of wealth is that economic growth overall has been sluggish since around 1970. …

The development of productivity-enhancing new technologies has been slower over the past few decades than in any comparable span of time since the beginning of the Industrial Revolution in the early 18th century. The obvious advances in a few specific areas, particularly digital technology, are exceptions that prove the rule. … As a result, growth in total factor productivity has been slow for a long time. According to a report from Rabobank, “TFP growth deteriorated from an average annual growth of 1.1% over the period 1969–2010 to 0.4% in 2010 to 2018.” …

Over the long term, when productivity growth slows or stalls, overall economic growth is sluggish. Median real wage growth is slow. For most people, living standards don’t just stagnate but decline. …

As productivity growth has slowed, the economy has become more financialized, which means that resources are increasingly channeled into means of extracting wealth from the productive economy instead of producing goods and services.

Peter Thiel said that a simple way to understand financialization is that it represents the increasing influence of companies whose main business or source of value is producing little pieces of paper that essentially say, you owe me money. Wall Street and the companies that make up the financial sector have never been larger or more powerful. …

The main result of financialization is best explained by the “Cantillon effect,” which means that money creation, over a long period of time, redistributes wealth upward to the already rich.

This effect was first described in the 18th century by Richard Cantillon after he observed the results of introducing a paper money system. He noted that the first people to receive the new money saw their incomes rise, while the last to receive it saw a decline in their purchasing power because of consumer price inflation. The first to receive newly created money are banks and other financial institutions. They are called “Cantillon insiders,” a term coined by Nick Szabo, and they get the most benefit. But all owners of assets—including stocks, real estate, even a home — are enriched to some extent by the Cantillon effect. Those who own a lot of assets benefit the most, and financial assets tend to increase in value faster than other types, but all gain value. …

Meanwhile, the people without assets fall behind as asset prices rise faster than incomes. Inflation hawks have long worried that America’s decades-long policy of running large government deficits combined with easy money from the Fed will lead to runaway inflation that beggars average Americans. This was seen clearly in 2022 after the massive increase in dollars created by the Fed in 2020 and 2021.  …

The Cantillon effect has been one of the main vectors of increased wealth concentration over the last 40 years. One way that the large banks use their insider status is by getting short-term loans from the Federal Reserve and lending the money back to the government by buying longer-term treasuries at a slightly higher interest rate and locking in a profit.

Their position in the economy essentially guarantees them profits, and their size and political influence protect them from losses. …

Financialization wastes scarce talent:

The Cantillon effect distorts resource allocation, incentivizing rent-seeking in the financial industry and rewarding nonfinancial companies for becoming stealth financial firms. Profits are quicker and easier in finance than in other industries.

As a result, many smart, ambitious people go to Wall Street instead of trying to invent useful products or seeking a new source of abundant power — endeavors that don’t have as much assurance of a payoff. How different might America be if the incentives were structured to reward the people who put their brain power and energy into those sorts of projects rather than into quantitative trading algorithms and financial derivatives of home mortgages. …

Yes, it does affect you:

The Cantillon effect generates big gains for those closest to the money spigot, and especially those at the top of the financial industry, while the people furthest away fall behind. Average families find it more difficult to buy a home and maintain a middle-class life. In 90 percent of U.S. counties today, the median-priced single-family home is unaffordable on the median wage. …

In 2018, over 60 percent of families were two-income households, up from about 30 percent in 1970. …

The reason is that it now takes two incomes to support the needs of a middle-class family, whereas 50 years ago, it required only one. As more people entered the labor market, the value of labor declined, setting up a vicious cycle in which a second income came to be more necessary. China’s entry into the World Trade Organization in 2001 put more downward pressure on the value of labor.

When people laud the fact that we have so many more two-income families — generally meaning more women working outside the home — as evidence that there are so many great opportunities, what they’re really doing is retconning something usually done out of economic necessity. Needing twice as much labor to get the same result is the opposite of what happens when productivity growth is robust. It also means that the raising of children is increasingly outsourced. That’s not an improvement.

Fewer kids, especially among the middle class:

Another response to stagnant wages is to delay family formation and have fewer children. In 1960, the median age of a first marriage was about 20.5 years. In 2010, it was approximately 27, and in 2020 it was an all-time high of over 29.18 At the same time, the total fertility rate of American women was dropping: from 3.65 in 1960 down to 2.1, a little below replacement level, in the early 1970s. Currently, it hovers around 1.8. …

When people choose to have few or no children, it is usually not a political choice. …

Surely it’s no coincidence that the shrinking of families has happened at the same time that real wages have stagnated or grown very slowly, while the costs of housing, health care, and higher education have soared.

The fact that American living standards have broadly stagnated, and for some segments of the population have declined, should be cause for real concern to the ruling class. …

Woke makes it worse:

If stagnation or decline in the United States is not addressed effectively, it will threaten the legitimacy of the governing institutions. But instead of meeting the challenge head-on, America’s political and business leaders have pursued policies and strategies that exacerbate the problem. Woke policies in academia, government, and big business have created a stultifying environment that is openly hostile to heterodox views. …

The system no longer benefits most people. Now what?

One source of national unity has been the understanding that every individual has an equal right to pursue happiness, that a dignified life is well within reach of the average person, and that the possibility of rising higher is open to all.

When too many people feel they cannot rise, and when even the basics of a middle-class life are difficult to secure, disappointment can breed a sense of injustice that leads to social and political conflict.

At first, that conflict acts as a drag on what American society can accomplish. Left unchecked, it will consume energy and resources that could otherwise be put into more productive activities. Thwarted personal aspirations are often channeled into politics and zero-sum factional conflict. The rise of identity politics represents a redirection of the frustrations born of broken dreams. But identity politics further divides us into hostile camps.

In retrospect, it’s becoming clearer and clearer that our civilization peaked in about 1971. Financialization and the gradually falling average IQ are remorselessly dragging down our societies, yet few step back to see the obvious. The media has been trained not to go there.