A simple internet search about the vanishing middle class in America would yield literally thousands of articles about the topic. Not to mention Elizabeth Warren’s infamous book. Left-leaning Russia Today talk show host, Thom Hartmann has also chimed in by postulating that the middle class isn’t normal. He opines that society needs to make a choice whether we’ll even have a middle class. He contends that capitalism doesn’t mystically produce a middle class. To add fuel to the fire, he also says that Charles Dickens novels are a more accurate representation of what free market capitalism looks like in it’s purest form. Let’s get through the posturing, rhetoric and bias about what’s really going on with the middle class in America.

 

The Marriage of Business and Government

Hartmann is correct when he contends that the middle class is not normal. History demonstrates that, in Europe, “normal” was a few wealthy, well-connected aristocrats and a lot of dirt poor people. This was all made possible by a system known as mercantilism, where the monarch would grant letters of patent to his friends and family. These letters of patent set up government monopolies for the well-connected gentry. This also included the guild system where chosen craftsmen, artisans, and merchants were given exclusive right to conduct business while shutting out the masses. This created a government induced inequality of opportunity in the market. For the bulk of western European history, this was normal.

To continue with Hartmann, no one chose to have a middle class. The middle class arose because barriers to entry were being removed. The masses were allowed more and more freedom from the government due to efforts by such people as The Levellers, Richard Cobden, John Bright and others who lobbied for free trade, reformed patent law and removed onerous regulation from the market. Once given their freedom, the people began to produce goods, not just for the wealthy, but for each other. The division of labor began. By the turn of the 19th century, mechanization and better production methods gave rise to an early form of capitalism. Goods were being produced like never before. Free trade gave rise to the specialization of labor and capital investment took on an international flavor. Labor and capital began to circumscribe the globe like never before in human history. Standards of living rose and for the first time, common people began to experience leisure. Sorry Thom, society didn’t decide and there was no central plan. It was all spontaneous order.

Today, middle-class workers are finding themselves under pressure. They find it increasingly harder to make ends meet. The American Dream is slipping away, day after day. More working Americans are finding themselves working paycheck to paycheck and are unable to save for that rainy day. What happened? How did we get here?

Beginning in what we call the Progressive Era at the turn of the 20th century, wealthy industrialists found themselves the target of the populist movement in America. European academic thought had made it across the ocean to the American shores by way of Ph.D. programs in Europe. Until the 20th century, doctorate degrees were only a thing of European institutions of higher learning. American students who were pursuing a higher degree had to travel to Europe and study in one of their universities. It just so coincides that a school of thought, Marxism, was becoming quite popular in Europe. This dogma had spread throughout the popular writing, journalism and began to be taught in our own universities. Through muckraking journalism and popular novels, the citizenry was induced with notions of wealth envy and “exploitation” and began to make noise to Congress.

The wealthy industrialists decided it would be better to beat the public to the punch, sort to speak, by introducing their own brand of regulations. These regulations would take the form of helping the public, all the while, establishing oligopolies of control over specific sectors of the economy. They would eliminate the discipline of free-market competition and create what we call crony capitalism. The marriage of government and big business had its honeymoon in 1913 when the Federal Reserve Act was passed by Congress and signed into law by progressive President Woodrow Wilson. The Federal Reserve system gave monopolistic power to a banking cartel to create and control the nation’s money supply. More importantly, setting interest rates and controlling credit expansion. This is only made possible because people give governments power. Like any commodity, power is up for sale. The power to regulate being the highest valued among them. Because of regulatory capture, big business has been able to create a revolving door of their own people in the regulatory agencies. They have become nothing more than gateways to stymie competition and price competitors out of the market, all in the name of providing a public service. It’s through decades of this market manipulation that the middle class has found themselves in their current predicament. Every American, especially those furthest from the source of the new money, feels the impact when the Federal Reserve intervenes in the market with more liquidity or interest rate manipulation. Congress could only dream of such power and influence.

Each intervention in the market caused a kind of mutation. What was once spontaneous and fraught with market discipline had transfigured into a monster of cronyism, inflation, and imbalances. Where capitalism had distributed wealth according to one’s hard work and merit has now been substituted with favoritism in this current version of neo-mercantilism. Slowly, the economy is devolving into what life once was with a few very wealthy, well connected, cronies at the top and a lot of poor workers at the bottom.

Our Current Crisis

Business owners have to make the decision to employ either labor or capital. They are obligated to keep costs as low as possible in a world of very low-profit margins. Thanks to the Federal Reserve’s intervention by lowering interest rates to near zero, it is now cheaper to employ capital. Businesses are investing into more long term projects. Thus more and more middle-class jobs are vanishing as businesses automate.

Today, the labor market has taken the form of a dumbbell shaped curve. Most jobs are either at the low end or high end of the income scale. Those low-end jobs, such as janitors, stocking store shelves, customer service, etc. don’t lend themselves to be easily automated away. The same holds true for surgeons, lawyers, athletes and so on at the high end of the income scale. Those white collar office jobs, like bank tellers, accountants, tax preparers and so on are being replaced with computers. Moreover, blue collar factory jobs disappear as automation and robotics replace more of what was considered the easy way to the middle class.

The solution, in recent history, was for both spouses to work. But the Fed’s expansion of the money supply has only damaged the purchasing power of more and more households. It is increasingly harder for households to make ends meet when their dollar only purchases a fraction of goods and services that the same dollar had purchased for their parents and grandparents. Prices for highly demanded goods like food and energy are rising even faster, making the job of providing for a household that much more demanding. To make up the difference, households have relied heavily on credit. But spending tomorrow’s money today in hopes of that future raise or promotion hasn’t played out so well. Lower interest rates also mean little return on savings. Actually, too small to keep pace with inflation, so average workers are having to invest in the stock market in order to build any kind of nest egg. But the world of stocks and bonds should be left to the professional trader. It’s a casino and the game favors the house.

Conclusion

The vanishing middle class is the  inevitable result of trusting in government. Looking to government for the answers will only make matters worse. The elephant in the living room, pardon the cliché, has been the Federal Reserve all along. The solution is simple, end the Fed and the size of government will be reduced. What would this world without a central bank look like? Savings accounts that grow, businesses investing into sustainable projects and not bubbles and purchasing power returning to the consumers as prices drop in the normal economy of mild deflation. Imagine wages sustaining families once again with enough left over to invest in their children’s future and not in the “too big to fail” banks’ future. Above all, without the Fed, the government’s ability to wage endless wars would end. Without the Federal Reserve, the government will have to rely on taxation to fund its operations. The population will not stand being taxed at the outrages rate needed in order to sustain its current size and scope. When the government loses power it will invariably be less attractive for corporate lobbying. To put it in perspective, the world without the Federal Reserve would be like a body without a malignant tumor.

To understand what is happening to the middle class is to understand what is happening to capitalism. As real, laissez-faire capitalism becomes a fading memory, so too will the middle class. You can’t have the one without the other. They are mutually dependent on each other as they produced one another. To regulate capitalism is to regulate the exchange of individuals. Once that begins then the choices people make on how to employ their resources becomes more and more limited. Once freedom is removed from the market then so too in society. So, to ask if society should choose to have a middle class is to ask if individuals want the freedom to exchange with each other.

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