Market Talk

The biggest story to come out of the so-called Great Recession, certainly not the most written or talked about by a long shot, but in my mind the most important, is the cracking of the middle class.

This is something that needs to be recognized for what it is. Certainly politicians don’t want to face up to it. Wall Street doesn’t want to. Corporate American doesn’t want to. Even most of the press doesn’t want to, which is curious especially when you consider that journalists aren’t particularly well paid, and the majority are smack-dab in that squeezed middle class.

This is what I was getting at in December when I wrote about the debate over whether $250,000 be considered rich. If you can honestly debate that, what does it say about the people who are nowhere near that level?

There are more of them than you might think. I’m looking at some demographics data about New York City, from 2007. Granted that’s before the recession started, but I bet the percentages haven’t changed much, if anything, they’re worse. In the city in 2007, 5.5% of the households made more than $200,000 in income and benefits.

But what’s truly interesting is this: 68.5% of the households in New York City made less than $75,000 in wages and benefits. Going further, 51.8% of the households made less than $50,000. If you live in or around the city, you can appreciate how hard it’s got to be to raise a family on $75,000 or less.

The dollar amounts might be different across the nation, but I bet the percentages aren’t very different, and it speaks to the serious deterioration in wages and the value of the dollar over the past generation.

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Remember the famous Mexican stand-off at the end of the Sergio Leone Spaghetti Western “The Good, The Bad and The Ugly”? Three cowboys stand in a graveyard, each waiting for one of the others to draw their gun, to make the first move, each trying to outsmart, and maybe kill, the other two and make off with the gold.

That’s kind of what we’ve got going on in the economy right now (excepting for the killing part,)  between consumers, businesses and the federal government. It’s a fight to see who’s going to blink first. But the blink in this metaphor represents who’s going to start spending money, and save the economy. Throw the Federal Reserve in there, too for good measure. They’re in this stand-off as well.

Don’t get me wrong. The United States is a $14.5 trillion economy. Money is being spent. But not the kind of money that will spark real economic expansion, which is what we need to start creating jobs for the 15 million unemployed Americans out there, and juice wage growth for the rest of us. Not just Wal-Mart greeter jobs, either; good jobs that pay good wages that create a stable and growing middle class. Nobody’s spending that kind of money.

Consumers aren’t spending money, because they are — justly so — worried about their jobs, their salaries, their futures. Businesses aren’t hiring because they are — justly so as well — worried about demand levels, their inventories and their cost structures. The feds and the Fed have both spent fantastic sums already, and while there is some urge to spend more, doing so may carry heavy political as well as credibility risks. So everybody’s waiting for somebody else to make the first move.

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Raymond, one of our regular readers, had a comment to a post about Friday’s jobs report that’s stuck in my head. “Welcome to the ‘New Normal’ – it’s repulsive,” he wrote. “The middle class of America is getting destroyed. If we do not see real policies that work from government and the private sector, America will be a very different place in a couple of decades.”

If only anybody had been thinking that way a couple of decades ago, we might not be where we are now. There are developments in the global economy that are frankly beyond our control, to be sure, but we could’ve done more to provide for the working classes, rather than just telling them to become “knowledge workers,” shipping their jobs to Asia and papering over the whole thing with borrowed money.

We have been hollowing out the working class for going on 30 years, and that is the great, unappreciated story of our times. Cities like Cleveland, Newark, Detroit have become shells of themselves, and it’s hard to see them coming back. How many Rock-n-Roll halls of fame can you have? The United States today does not create enough of the kinds of jobs that will provide a safe, secure living for the working class. We’ve carefully hidden this fact by replacing living wages with credit, and it worked for a while, but that game has exploded rather messily all over the globe.

Which brings me to Andy Grove’s piece in Bloomberg, as highlighted by Yves Smith over at naked capitalism. Grove, former CEO at Intel, explains why we don’t make jobs here in America anymore, the ramifications of that, and suggests some solutions that will make the Kudlows of the world recoil in horror.

The start-up companies that get all the venture capital, he notes quite plainly, and which the business and political classes lavish praise upon as the great creators of jobs, aren’t creating jobs. A mythology has risen around companies like Intel and Apple; but Apple employs ten times as many people in Asia as it does here. Well, that’s a problem:

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work — and much of the profits — remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?

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Two prominent liberals aren’t exactly fans of President Obama’s proposed three-year budget freeze.

Princeton economist Paul Krugman and Robert Reich, former labor secretary in the Clinton administration, ripped Obama’s plans for limiting government spending amid high unemployment and not doing enough for middle class America.

WSJ says Obama’s proposal is “a move meant to quell rising concern over the deficit but whose practical impact will be muted.” From the Journal:

To attack the $1.4 trillion deficit, the White House will propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.

The freeze would affect $447 billion in spending, or 17% of the total federal budget, and would likely be overtaken by growth in the untouched areas of discretionary spending. It’s designed to save $250 billion over the coming decade, compared with what would have been spent had this area been allowed to rise along with inflation.

The administration officials said the cap won’t be imposed across the board. Some areas would see cuts while others, including education and investments related to job creation, would realize increases.

Obama proposing a three-year spending freeze is “appalling on every level,” Krugman writes at Conscience of a Liberal. “It’s bad economics, depressing demand when the economy is still suffering from mass unemployment,” he says.

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