Political statements come in all shapes and form. Tuesday it arrived with the election of Republican Scott Brown of Massachusetts to the United States Senate. Pundits conjured instantaneous rationales for this upset: the proposed health care bill, bailout of the banks, high unemployment rate, rise in the price of gasoline, declining home prices among others.
We can attribute Brown’s victory to any or all of these rationales; however, we are describing the symptom and not the disease. The disease is the “barbell economy.” On one side of the barbell we have the rich who have been rewarded with bailouts, large bonuses, hedge fund profits, at the expense of taxpayers. These people appear to be insulated from the recession. On the other side of the barbell are the growing numbers of poor people who utilize our many social safety nets: welfare, food stamps, loan modification programs, Medicaid and others. The dwindling middle class, the fulcrum of American society and the bar that holds up the barbell, is being disenfranchised and economically destroyed.
The Destruction of the Middle Class
We have witnessed the slow destruction of the middle class over the last 30 years. Two wage earners were needed to maintain a middle class life style. Then middle class wealth was destroyed in the stock market crashes of 2000 and 2008. Easy credit and low interest rates mired the middle class in a cycle of debt. Good paying jobs were outsourced to low wage foreign countries. Unemployment soared and wage growth was eliminated. Inflation in necessary commodities such as gasoline siphoned off more income. The coup de grace was the implosion in house prices.
Albert Edwards, Global Strategist for Societe Generale, opines that the Federal Reserve has destroyed the middle class:
Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people’s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below). And now the bubbles have burst, along with central banks? credibility, what now?
He cites the Census Bureau analysis that median income failed to rise in real terms for the entire decade, the first time that median income did not rise in all US history. See Scandal Edwards Alleges Central Banks were Complicit in Robbing the Middle Classes.
The middle class is now left with 10% percent unemployment (effectively 17% or more), decimated retirement income, skyrocketing health insurance premiums, rising state and local taxes, a high debt load and a house with zero or negative equity. Further, middle class tax payers are not stupid. They know that taxes will soar to pay for these deficits and expansion of entitlement programs. Promised a new political regime of hope, change and transparency, the middle class has endured a year of betrayal.
The Politics of Anger
Both Democrats and Republicans misread the current situation. Middle class voters feel abandoned by both parties. Backroom deals on health care legislation are only symptomatic of a deeply flawed and corrupt political system where the rich and connected obtain special favors and ignore the middle class.
The middle class is the bedrock of America. Paraphrasing George Bailey’s defense of his father’s character in It’s a Wonderful Life, the middle class “does most of the working and paying and living and dying” in America. The middle class needs real hope, not false promises of hope. The two parties need to pay immediate attention to the middle of this economic barbell. If they do not, more of this current group of elected officials might just be added to the unemployment rolls.
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