"We have entered into a period of long-term secular stagnation, 
characterized by little or no free-market economic growth and productivity."

Former Federal Reserve Chairman
Alan Greenspan
July 29, 2015



"If the combination of globalization and automation undermine the capacity of the 
ordinary worker to be able to support themselves, then we're going to have problems."

 President of the United States
Barack Obama
October 8, 2015



"Globalism doesn't seem to be working 
for the middle class, for ordinary people" 

Prime Minister of Canada
Justin Trudeau
December 15, 2016






Introduction

This article has been updated. Please read addendum at the conclusion.

The middle class* in the United States is shrinking. The causes of this are frequently misunderstood and often deliberately obscured. Opportunistic politicians and some in the media are trumpeting a widespread conviction that the primary cause of this loss is "capitalism run amok" or "the rich living large off the backs of the working class." They are using this moment to hoist their political agendas for self-serving reasons.

 The actual truth is far simpler and less devious than that. The truth behind the evaporation of the middle class lies in elemental global economic mechanisms. The truth is that the economic power and standard of living of the United States is merely being spread throughout the world by globalization.  


The Physics Of Economics ... And How It Affects Jobs

Economics and physics are remarkably similar. Both follow a basic set of principles that help us understand fundamental mechanisms, which then enable us to make absolute theoretical suppositions and projections.  One of the earliest and most well known laws of physics is that of hydrostatics. Under the earth's gravitational and atmospheric conditions, water will seek its own level such that it evenly disperses itself within a given container. This is an immutable fact of physics.

Just like water, the physics of global economics is ruled by certain absolutes. For example, supply and demand seek equilibrium, just as water does. Similarly, the price of labor is constantly seeking equilibrium and, absent external influences, long run wages and subsequent standard of living will ultimately disperse themselves equally throughout the world.  


How We Got Here ... The Emergence Of The U.S. As Dominant Economic Power

For many decades now, basically since the end of World War II, the economy of the United States has been the driving force of the world. This was primarily because the European, Russian, and Japanese infrastructures were destroyed as a result of the carnage of that war. By default, this put the U.S. at a distinct advantage for an extended period of time as our industrial/economic dominance lifted our standard of living far beyond that of every other country on the globe. 


London 1945

General Motors - Lordstown
Largest Automotive Assembly Plant In the World (1970)

Even though the competitive industrial complex of the rest of the world has grown substantially in recent years, the American economy has thus-far remained strong. The mere fact that so much of the world's wealth is concentrated here gives our economy some longevity and ongoing inertia. There are other factors, such as continuous technology advancements, for example. By staying on the cutting edge of scientific research and productivity developments, the U.S. has been able to protect its vanguard position to a large degree. 

 Labor, however, is different. It is an easily-tranferrable and replaceable asset, particularly when viewed from the global perspective. It is the lowest-hanging fruit. 


Globalization: The Pendulum Swings As Economic Power Shifts

The 'shrinking' of the world is taking a detrimental toll on the United States. A 2010 study by the McKinsey Global Institute measured the historical shift of the world's economic 'center of gravity' from the ice age to today. One of their exhibits was a map of the world that showed a line arching from EurAsia westward, representing a slow shift of economic power toward the United States over two thousand years. Then the line reaches an apex in 1950, and turns back toward Asia at an increasingly accelerated rate. The largest movement occurring between 2000 and 2010. Projections show that the economic center of gravity will be nearly to China by 2025. This clearly shows the shifting equilibrium, just like the ebb and flow of water.


And just as water seeks its own equilibrium, so it is also true for certain economic fundamentals, such as worker compensation. For example, in the United States, the average auto worker 'putting a nut on a bolt' in Detroit makes nearly $38 in total hourly compensation, while the same worker (doing the exact same job) in Mexico makes $6.70 an hour. Compensation is also much lower in South Korea and China. The emergence of a competitive worldwide labor force means that jobs are are being shifted to these lower-cost economies. The benefit of this is that the price of goods remains low. The detriment of this (for Americans) is the inevitable downward pressure on worker compensation and subsequent deterioration of the standard of living in the United States. In theory, this trend will continue until worker compensation reaches equilibrium throughout the world ... and the standard of living for all people around the world reaches equilibrium as well. For globalists, this may be viewed as a positive result. For those living in the United States, and accustomed to living as they have for the last fifty years, this is a deleterious specter. 


Factors That Affect The Shift Of Economic Power

There are a number of factors, social and political, that affect the rate of economic change globally.  One factor that prevents this equilibrium from occurring as quickly as it might is political instability in several key areas of the world. When Argentinian President Kirchner and Venezuelan dictator Hugo Chavez nationalize large international corporations, the effect upon further investment in their countries is greatly suppressed. Russia and China are still considered political risks, to some extent ... but they are risks worth taking for many corporations. To our benefit, the United States of America is still considered the great bastion of open-market capitalism in the world and continues to be a haven for foreign investment. However, recent domestic political trends are beginning to erode this perception. 
Other important factors that impact the shift of economic power are protective tariffs, duties, and regulations between nations. For decades, competing nations used these barriers to protect their domestic economies. The globalization of commerce, expedited by the rise of information technology and improved logistics, has opened the floodgates in all directions, creating new opportunities and challenges. U.S. corporations speculated that the development of free trade agreements would open foreign markets to our products, and demonstrably increase sales and profits. American consumers would also benefit by open trade, by having access to imported products at lower prices. 
The Devastating Effects Of NAFTA And Other Free Trade Agreements

Democrat candidate Bill Clinton was a supporter of the North American Free Trade Agreement (NAFTA) and, as President, signed the agreement into law on December 8, 1993. Then followed it with several similar agreements ... SAFTA, DR-CAFTA, and dozens of others. 

For American workers, however, there is a dark side to free trade. During the 1992 U.S. Presidential campaign, independent candidate H. Ross Perot, Jr. expressed his opposition to NAFTA based on a belief that by completely opening free trade channels, the results would be disastrous to the domestic economy ... with the net result being an enormous loss of jobs and businesses from the U.S. His warning was simple, by implementing NAFTA, there would be "a giant sucking sound of jobs being sucked out of this country".
Ross Perot Addresses NAFTA
1992 Presidential Debates
Perot was completely correct in his assessment. That is exactly what happened. Nonresidential investment in the United States almost immediately began to decline with the implementation of free-trade agreements in the late 1990s.

What Perot understood and many people failed (or refused) to comprehend was that these agreements would also open up our manufacturing infrastructure to foreign labor. Thus, these free trade agreements have all served to accelerate the shift of the labor force overseas and exacerbate our economic woes. 


Our participation in the World Trade Organization is particularly damaging, because among the organization's specifically articulated objectives is the transfer of financial power from established economies to developing and third-world countries. This is acknowledged by the WTO report Making Globalization Socially Sustainable (2011), where a plethora of researchers have concurred that accelerated globalization in recent decades has significantly cannibalized employment in the United States.

U.S. politicians need to understand that as long as we continue along a 'globalist' path in our trade dealings while competing countries remain 'nationalist' in their actions, we will linger in a strategically weak position, and further expose ourselves to economic damage. The TPP (Trans Pacific Partnership) that President Obama strongly supports would very likely accelerate the economic drift away from the United States.

(PBS Newshour)

No, The TPP Won't Be Good For The Middle Class 
(Economic Policy Institute)
Ross Perot is spot-on when he cautions, "We need to make sure its a two-way street." 


Domestic Business Pressures And Government Intervention. 

In light of these trends, many Americans have advanced the notion that it should be the altruistic responsibility of domestic businesses to act in the best interests of the citizens; remain at home, hire local labor, and thus protect our local economy.    

Yet at the same time, the ability of U.S. businesses to stay at home and compete globally has been hampered by burgeoning costs related to the implementation of government regulations, hiring and pay quotas, health care requirements, pollution thresholds and safety constraints, increasing corporate taxes, and other restrictions. Overlaying all of this is an escalation of anti-capitalist and anti-business political rhetoric in government and throughout the country in general.  

 All of these factors make the soil for developing and maintaining domestic business less fertile, and many American enterprises are saddled with difficult ethical and economic choices. Ultimately, they realize that if they are to survive in a globally-competitive world, they must also use lower-cost global resources, starting with the lowest common denominator, labor. 


The resulting evaporation of industrialization and productive capacity within the U.S. has left our manufacturing capacity vulnerable, and other less beneficial enterprises are filling the void. For example, in 1977, manufacturing represented 22 percent of our national payroll while the banking and financial sector (including insurance) represented 10 percent. Today, less than 9 percent of payrolls in this country are in manufacturing, while financial/banking is approaching 40 percent. This loss of industrial infrastructure is a serious threat for the United States.  People making money from other people's money is not a solid foundation on which to maintain a nation. The country needs to be building things and creating wealth, not just shifting it around.


Like a glacier melting, the American economy is slowly and inevitably shrinking, and structural unemployment is rising. Unions are fighting to maintain worker wages, but like trying to row upstream, the effort will ultimately be fruitless. By artificially holding wages high, unions may win a few short-term battles, but they will lose the long-term war as businesses will either close (because they cannot remain cost-competitive) or they will move to more advantageous labor markets. There are ongoing efforts to use political pressure to force companies to keep their workforces in America under these uncompetitive conditions. These measures are proving to be pointless, as the more political force is used to pressure and coerce the private sector, the faster it escapes to friendlier climates. 

Treating The Symptoms ... Instead Of The Disease

 An inevitable response to this ongoing economic decay are calls from many bureaucrats to expand subsidies for the growing number of poor, and demands that the government 'safety net' be enlarged to cover more aspects of peoples lives. Jumping on the bandwagon, Keynesian economists are insisting that the government should step into the free-market vacuum by spending whatever is necessary to artificially sustain economic growth (i.e. government stimulus). 

Political opportunists, including the current administration, blame what they interpret are the negative effects of runaway free-market capitalism, and urge state redistribution of personal wealth of the executive/professional class to offset 'income inequality', even when it is empirically clear that the shrinking of the middle class is a natural symptom of the shift of economic power overseas that has been occurring for decades. 

 The surge in income inequality in this country is not a consequence of capitalism, but very clearly a symptom of globalization. The wealthy are not the cause of the loss of the middle class ... the developing income inequality gap is just one of the initial manifestations of a comprehensive and long-term deterioration of U.S. industrial infrastructure and economic power. The middle class is merely the first domino to fall. Those in the upper income brackets, who benefitted from investment growth while the middle class suffered, are only now beginning to feel the pain as government debt-fueled liquidity and low interest rate bubbles are threatening to burst, stock markets are becoming unstable, and the economy grinds to a crawl.

Ultimately, the medicine of government intervention, expansion, and control becomes the poison to economic growth. Political wealth redistribution will only serve to hasten the demise of the United States economy as financial assets are absorbed from the private sector economy to the federal government, to be reallocated as short-term stimuli such as "Cash For Clunkers", or for long-entrenched and expanding entitlement programs. This process of self-consumption further accelerates the decay of the free-market economy as the nation slowly sinks into a quasi-socialist state, with both economic and political power resting in the hands of the government.

"The economy is extraordinarily sluggish ... 
zero productivity growth in the American economy, 
private capital investment is being crowded out 
by excessive government entitlement spending"
 (Alan Greenspan)  




 Direct government financial aid, such as welfare subsidies, are only stop-gap measures and represent only half-solutions. They may temporarily put some money in the pockets of those in need, but they will not give them jobs. Nor will they rebuild the infrastructure we have lost. What is truly needed from government is a policy and regulatory framework that promotes domestic productivity growth and enables American private commerce to compete globally.  

 Fundamentally, it is only through economic growth, driven by private free-market commerce ... entrepreneurial capitalism ... that will enable sustained employment and income for the middle class.
Musician Bono speaks to Georgetown University 
on how capitalism is the solution to the
elimination of poverty and growth 
of the middle class.


The Consequences

 We are witnessing some of the initial fallout of these long-term globalization trends and our counter-productive, government-centered responses to them. Real (U6*) unemployment, including those who have given up looking for work, lingers between 13 and 15 percent.
* U6 Unemployment includes marginally-attached workers and part-time workers who want full-time work




Fifty percent of Americans now receive some form of subsidy provided by the Federal government. Forty seven percent of Americans pay no income tax.


Government regulation and control of business is soaring.



Private industrial investment within the United States is at its lowest level in fifty years, while U.S. government spending is the highest it has ever been in history, relative to private market GDP.  




... and nearly forty percent of adult children are now living with their parents, the largest percentage since the Great Depression.  


Percentage of Young Americans Living With Parents Rises to 75-Year High
(Wall Street Journal)






Recommendations

 As Americans, we are in an untenable position, as the effects of globalization slowly corrode our economic infrastructure. 

 Our best and most viable response is to create a domestic environment that supports free-market economic growth and productivity. And that means supporting and nurturing entrepreneurial capitalism, not hampering, controlling or threatening it. 

 While these are difficult and potentially irreversible trends, there are actions that we can take to improve our circumstances, slow their rate of decline, and reduce their negative effects. These steps are primarily based upon maximizing business growth, empowering private enterprise to flourish, protecting ourselves from opportunistic and unethical international influences, and reducing the burden of government influence and control over the private economy: 

1. Reduce federal government spending relative to national GNP and reduce total debt as much as feasible. This includes a complete re-assessment of entitlements (particularly medicare, health care, and social security). Seriously evaluate the role of our military in the world, including a withdrawal from all current active military conflict. Immediately eliminate Obamacare, and start again. Use Bowles / Simpson Debt Commission recommendations as a starting point. 

2. Establish policies that support investment and growth in the United States, starting with taxes: No federal personal income taxes should exceed 33 percent ... and capital gains taxes should not exceed 25 percent. Eliminate most, if not all, deductions. Streamline the tax code so that ordinary people can file without assistance. Every adult American should pay some tax, even if it is a very small amount ... it is important to have skin in the game. Taxes on domestic businesses should be completely eliminated, since they are uncompetitive and are nearly always passed on to consumers in the form of higher prices for goods. 

3. Reduce government regulations, (particularly those associated with Obamacare) that have forced businesses to create part-time jobs, instead of full-time jobs. Balance ecological and economic priorities by considering the adverse effects of environmental regulations on business before adopting them.

 4. Be more aggressive in protecting our national interests abroad. Take action against Chinese/Russian currency manipulation and other misconduct by establishing import tariffs and other measures, if necessary.  Carefully evaluate future free trade agreements, before signing on to such programs as the TPP (Trans Pacific Partnership). 

5. Reduce or eliminate all foreign nation subsidies until our own debts are paid down. That especially includes China, to whom we are trillions of dollars in debt yet still give billions in subsidies every year. 

6. Improve our energy position. Take an 'all of the above' approach. Drill for oil. Drill for gas. Build all pipelines. Frack if necessary. Give tax abatements for the development of alternative energy sources (but do not give direct subsidies). Reduce our reliance upon foreign oil to 25 percent of annual consumption or less. Allow the private market to determine the efficacy of alternative energy products (i.e. rather than force people to use LED light bulbs or electric cars by legislation). 

 7. Illegal immigration must be addressed ... while the U.S. is exporting high-paying jobs, the nation is importing an underclass across open borders, exerting additional pressure on wages and benefits in lower-paying jobs. The border must be tightened and immigration limits must be established and enforced. A 'visitor-worker' program should be established, giving non-citizens the opportunity to earn a legal living here (and pay taxes), but not giving them full citizenship rights. Those interested in full citizenship can apply ... everyone is welcome ... but they must use the proper immigration rules and wait in line with everybody else.  

 8. Implement improved technical training for U.S. workers. Despite significant increases in government spending for worker training, our results have been poor. A better approach may be the German vocational model, where companies take on full-time apprentices as young as 16 and provide both theoretical and hands-on training in technical skills the companies need. These programs usually last two years and result in a certification that is recognized across the country.

9. Politicians must recognize that there is no villain here, and that the focus should be placed on growing the economic pie, not re-cutting a shrinking one. Class warfare is corrosive and inhibits necessary cooperation at a time when it is sorely needed.   

10. Elect a President and Congress who are willing and able to make hard decisions, promote free-market growth and employment, shun special interests and corporatocracy, and support a smaller ... less intrusive ... government. 

 * Definitions of the middle class vary widely, depending on the model used. In general terms, and for purposes of this article, the middle class represents the middle two quartiles of Americans as measured by income. 
CNN/Money Definition of the Middle Class

ADDENDUM (November 2018):
Many of the above recommendations were implemented with the election of a new President in 2016.

 Taxes. In 2017, the Trump administration implemented both corporate and personal tax cuts. Corporate taxes were cut from thirty-five to twenty-one percent. Small businesses, such as partnerships and LLCs received specific tax breaks. Individual tax payers gained additional child care tax credits, standard deductions were doubled, top marginal rates were reduced, and the estate tax ceiling was raised. Middle class Americans were provided with a net gain in average of $2,000 per year. 

Furthermore, Trump significantly simplified the tax code, with more 'married-filing jointly' deductions and elimination of the AMT.




Regulations. Trump slashed the number of anti-business regulations substantially. His predecessor, Barack Obama, was the most aggressive regulator in American presidential history, adding regulations costing in excess of $1.9 trillion, and costing individual households more than $15,000 annually. For each law Obama passed, he implemented thirty-four new regulations, which caused Trump to initiate a policy requiring that "for every regulation added, two must be eliminated." 





Investor's Business Daily estimated that in Trump's first year, the first forty-seven regulatory rollbacks had already saved the economy billions of dollars. Perhaps equally important, the perception of a more favorable business climate sparked significant domestic business investment.








Trade. The new President understood that trade agreements had been slanted against the United States for decades, creating deep and deleterious trade deficits. Taking a nationalist (versus globalist) tack, trade agreements were re-negotiated in ways that protect our national interests, both economically and politically. Although Trump's methods have been brash and often off-putting, his goals of achieving trade reciprocity were necessary to protect our domestic economy. 


Trump replaced several disadvantageous trade deals with new ones (i.e. USAMCA replacing NAFTA). He withdrew from the TPP and TTIP in favor of initiating individual bi-lateral agreements, such as KORUS with South Korea and current negotiations with China. In addition, he has not been afraid to use tariffs to protect domestic industry and keep trade deficits low.

With the goal of defending our domestic infrastructure, and thus middle-class jobs in America, he has incentivized business relocation and expansion in the United States. In return for creating this favorable economic environment, he has asked for mutuality by challenging American companies not to send jobs overseas.  



By pursuing 'smart trade' reciprocity, Trump has kept the United States competitive globally, while protecting our domestic manufacturing infrastructure and their associated middle class jobs.


Energy. Energy independence is critical to the U.S., both economically and geopolitically. The nation had been held hostage by green energy and climate change initiatives that strangled domestic economic development and hamstrung the country vis-a-vis the rest of the world. 

 Trump recognized that the economic trade-offs of existing climate/energy policy were too great. Thus, by developing a nationally-focused program of self-sufficiency, the United States reinvested in all forms of energy, including oil, gas, coal ... in addition to new technologies, in order to protect our strategic national interests. 
Immigration. A recent study by Yale University and MIT revealed that the number of illegal immigrants in this country is actually double that of previous estimates, twenty-two million people versus the previously-believed eleven million.   


Immigration impacts the middle class in the United States significantly, in large part because illegal immigrants create a large source of cheap labor that competes for jobs and undercuts pay across the board. In addition, illegal immigrants have been given endless attention and political support by sympathetic and politically-minded politicians. As a result, illegal immigrants receive federal assistance, benefits, and even priority access to higher education ... resources which could (and should) be directed toward helping our own middle class citizens.

 In this video, Senator Bernie Sanders concurs with this assessment, that uncontrolled immigration negatively impacts the middle class ...

The constant flow of millions of illegal immigrants is infusing our nation with third-world poverty that impacts the standard of living for all Americans, but it is impacting the middle class more directly. By implementing an aggressive border policy, Trump is attempting to stem the tide of illegal immigration, tighten the domestic labor force, and preserve the economic standard of living for the nation and its citizens.
Conclusion. President Trump implemented most of the policies recommended by this article (first published in 2016) and the impact was dramatic:








By prioritizing our national economic interests, the domestic infrastructure has been revived, the need for government intervention has been lessened, and virtually every American has directly benefitted. Domestic manufacturing, industrial output, and GDP growth are at their highest levels in decades. International trade deficits are beginning to level off and many businesses are bringing jobs back to the United States.

 How has it affected the middle class in America? Unemployment is at it its lowest level in forty years. Job openings and consumer confidence are at all-time highs. Black, hispanic, and female employment are also at all-time highs. Real wages for the middle class recently increased for the first time in nearly twenty years.

And for the first time since the turn of the millennium, the middle class is taking forward strides economically.


Regarding the universal benefits of a strong domestic economy, President John F. Kennedy once quipped, "A high tide floats all boats." And so it has.

The past two years have confirmed, with empirically indisputable results, that while globalist policy is perniciously dilutive to the economy of the United States, domestically-focused policy benefits all Americans, including our middle class. 






Additional Sources (2016):

 Why The American Middle Class Is Dying 
(National Interest)

 Globalism's Victory, America's Loss 
(Post and Courier)

 A Superpower In Decline: America's Middle Class Has Become Globalization's Loser 
(Spiegel Online)

 Stuck In The Tunnel: Is Globalization Muddling The Middle Class? 
(Brookings Institution)

 The Middle Class Is Being "Hollowed Out" 
(CNN.com)

 Globalisation Is Killing The US Middle Class: Fukuyama 
(Australian Financial Review)

 Economic Globalization Boosts Asia, Bogs Down Middle Class 
(Washington Times)

 Globalism Destroys America's Middle Class (Global Research)

 Winners And Losers Of Globalization: Finding A Path To Shared Prosperity 
(The World Bank)

 On The Wrong Side Of Globalization 
(New York Times)

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