Tuesday, December 18, 2012

The Decline of the Middle Class

The Middle Class built the West.  They are the reason why the G7 nations were able to get to the top of the economic pecking order and stay there.

Certainly after the end of the Second World War the Western World had to spend like crazy to rebuild.  It was almost inevitable that there would be an economic boom following the war while the rebuilding took place.  However, that building boom pretty much petered out by the end of the 1940s but instead of the Western economies sinking back to pre-war levels they continued to boom for decades afterwards and eventually the West amassed wealth that has been unprecedented in history.

This happened because in the 30 years following the end of the war the West did not only rebuild the infrastructure shattered by the war they also built the middle class.  Western governments went on a spending binge to assist ordinary citizens in their countries to take full personal advantage of the growing Western economies and corporations, either by necessity or by choice, compensated ordinary workers very well.  Indeed, for most of the middle of the last century a single income families was the norm and the economy grew at a healthy rate despite it.

The reason is simple of course.  With so many people making good wages and receiving assistance from their governments they had extra money to spend, on new homes, new cars, new consumer products, and that fueled the manufactuing boom that followed the immediate post war building boom, which further fueled the economic boom in a 30 year virtuous circle. 

All of this happened because governments were willing to spend money to support the middle class and corporations were willing to pay ordinary people sufficient wages for them to be able to buy their products.

All of that began to change in the 1980s.  With the backing of corporations Western political leaders began to rethink the idea of assisting ordinary people to navigate through the western economies and corporations began to be less generous with their compensation to ordinary people.  The reason why the corporations did this is because of the opening of markets overseas which reduced the need to them to depend on domestic markets to generate wealth.  The politicians did it largely because of ideology.

Fast forward to today and we see a middle class that is in sharp decline.  Most of those who can still claim to be part of that class are only able to do so because they are two income households that are maxed out on credit.  Most of them are one economic crisis, whether it be local, national or internations, away from economic disaster and a "demotion" out of the middle class.  Indeed, the US experience has demonstrated that one international economic crisis was enough to boot a significant portion of people out of the middle class, with very few prospects of climbing back up to that level.  That trend shows no sign of abating in the western economies.

The impacts of this should not be lost on us.  It is no accident that the Western economies are largely in decline.  It is no accident that what is left of the manufacturing base in the West needs to exploit the emerging markets in Asia in order to stay afloat.  Business decisions of Western corporations and political decisions of Western governments have greatly reduced the ability of domestic consumption to sustain Western corporations.

This is not sustainable for the Western economies in its own right but the emergence of China, India and Brazil as key economic players in the international economy could very well have a very profound impact on Western economies and on the West's status as the preeminate economic powers in the world.

I will discuss that in a later post.

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