Last night’s big win for the Republicans is being attributed largely to the state of the US economy. And rightfully so. While the US economy looks strong at the aggregate level (5.9% unemployment, record high industrial production, 14 year lows in jobless claims, recent GDP of 3.5%, etc) the economy looks very different at the median household level.
The Federal Reserve’s Consumer Finances Survey highlights the problems here. First, real median household income is barely budging:
And even though there’s been a huge stock market boom and some rebound in housing the median household net worth is still at levels last seen in the early 90s:
It’s no wonder the Democrats got crushed last night. As I said over 4 years ago, President Obama never should have wasted so much energy on his health care act during the greatest economic decline of our era. He should have done more to help the average middle class American. Even though this economy looks okay at the aggregate level, most Americans aren’t feeling it. The problem is, neither party is going to fix the issue any time soon because they’re so far apart on these issues that a realistic resolution simply isn’t in the cards.
First, I think it’s important to recognize what’s really going on here. Capitalism is succeeding in all the ways one should expect. That is, capitalists are winning and the labor class is losing. That’s been the trend over the last 30 years. This doesn’t mean capitalism is “good” or “bad”. It just means that capitalism is doing what it does best by enriching the capitalist class. Most importantly, the cause of this growing stagnancy at the median household level has little to do with policy and more to do with macro trends.
Globalization and technology have altered the landscape in phenomenal ways. Technology is making the labor class increasingly replaceable. Massive increases in technological efficiency mean that the capitalist class can keep more and rely less on the labor class. In addition, access to cheap foreign labor means that domestic labor has less negotiating power. So, if you perform a task for $15/hour that can be done in Vietnam for $1/hour then your job is in trouble.
Again, this isn’t a sign that capitalism is either “good” or “bad”. This is precisely what we should expect capitalism to do. In fact, the last 30 years are a clear sign that capitalism “works”. Capitalists should maximize profits by finding increasingly efficient ways to do so. This allows them to increasingly innovate and produce all the junk that Americans love to consume. It’s not a “fair” system. It’s not intended to be a fair system. It’s called “capitalism” because it’s an intentionally unfair system that rewards those who own the means of production most. Of course, capitalism can be both “good” while also being “unfair”. It can also be “bad” and “unfair”. I’d argue that the last 30 years have potentially taken us closer towards the side of “bad” and “unfair” as the labor class has fallen substantially behind in real terms.
From a political perspective, these trends are a bit alarming because neither part is set to change the direction of these trends. That is, no one is willing to stand up for the labor class because we have two political parties who are incapable of finding ways to do so. And ironically, the average American still thinks the US government is bankrupt (which is a colossally naive myth) or that we’ve become this great big socialist nightmare (another huge myth). Well, news flash people – the capitalists aren’t going to solve the problem of the declining middle class because a good capitalist will ensure that they’re taking advantage of the precise trends that are leading to middle class stagnancy.
So, if the capitalists aren’t going to fix the problem, well, then we’re relying on the US government to do something substantive about it. But given that we just voted the more capitalist party in it wouldn’t surprise me if these trends actually worsen in the coming years. So next time you read an article about the stagnancy of the US middle class remember that that’s largely the result of capitalism doing precisely what we should expect it to do. But if you’re relying on capitalists like me to fix it, well, I am sorry to inform you, but we’re not the ones you should be asking for help.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.