oftwominds-Charles Hugh Smith

Survival+ 9: Squeezing the Middle Class
April 7, 2009

As noted above, the Roman Empire's decline can be traced to a variety of causes. But we can summarize them collectively as the middle class being squeezed to death by the over-reach of the state and its Plutocracy/Elites rulers.

Stated another way: as the Elites' interests diverge from those of the society as a whole, the middle class is caught in an economic and political vice between the state and its "powers behind the throne" Plutocracy and the large (and politically dangerous) underclass dependent on the largesse of the state. As each class (the Plutocracy and the class of less productive citizenry) become ever more dependent on the state's power and revenues for their privileges and entitlements, they demand the state's share of national income expand at the expense of the middle class.

Since the Plutocracy and the underclass both need the state's power (to exclude the Elites from service or taxes) and revenues (to fund "rights to entitlements"), they will fight ferociously and ceaselessly for their share of the dwindling national income. The middle class, distracted by the pressures to remain productive in a declining economy, have neither the time, will, capital or organization to match the upper and lower classes' desperate squeezing.

As a result, the middle class loses the political battle and either opts out (what I call "Voluntary Poverty" ) or simply collapses into penury/poverty, joining the underclass.

It is important to refute one of the state's primary emotional points of leverage in demanding an ever-larger proportion of national income: we need this to help the poor. A close examination of the roughly $3 trillion Federal budget and the $1.5 trillion budgets of local government reveals that programs which directly alleviate the direct consequences of poverty such as hunger and lack of shelter (food stamps, now called SNAP and Section 8 housing vouchers, for example) are essentially trivial percentages of all government outlays.

For instance, the entire food stamp program (SNAP) serves approximately 30 million people at a cost of just over $30 billion—a mere 1% of Federal outlays. Section 8 Housing Vouchers costs about $16 billion—less than one-half percent of Federal outlays. The entire Housing and Urban Development department which also serves the homeless is about 1% of Federal outlays.

Add in programs with successful track records like Head Start and at most perhaps 5% of all tax revenues and government borrowing actually directly aid the poverty-stricken. So where does the rest of it go? To behemoth programs like Medicare $700 billion and rising at double-digit rates year after year), of which private analysis suggest 50% is waste and fraud, and a huge percentage of the balance either harms or does not improve patient health.

It is, however, very profitable for pharmaceutical companies and other vendors. Consider that approximately 1% of the citizenry control 2/3 of the productive assets of the U.S., and the question cui bono—to whose benefit are $4.5 trillion in taxes levied? Is quickly answered: not the poor. Sadly, the poverty-stricken are the "moral justification" marketed by various Elites to justify their own stupendous take of ever-rising state revenues and debt issues.

The Artifice of Political Ideologies

From this long-range cyclical perspective, the artificial nature of political ideology is starkly revealed. The Right focuses all its attention and ire on the insatiable appetite of the state for more power and revenue, while the Left focuses all its attention and ire on the insatiable appetite of the Plutocracy for increased privilege and wealth. Unknown to the ideological adherents, each is one side of a single coin.

While the Left focuses on the plight of an underclass distracted by the "bread" provided by the state and the "circuses" provided by the Mainstream Corporate Media, the Right focuses on the diminishment of rights and income which results from the state's ever-increasing taxes and regulatory powers.

Neither side sees that the insatiable appetite of the state and Plutocracy are one in the same. As both are blind to the causal structures, each seeks to defend its chosen champion (the Left, the state, the Right, the Plutocracy) from the slings and arrows cast by the ideological "opponents".

A handful of Revolutionaries fantasize about the underclass grabbing power from both the state and the Plutocracy, but since the underclass is by definition not productive enough to tax, there is little to entice the middle class to join their revolution. For they foresee they will have to pay for the costs of the "revolution" just as they carried most of the weight of the old state/Plutocracy. This is the classic "meet the new boss, same as the old boss" situation in which a new Plutocracy simply replaces the old one.

Libertarians, in their haste to focus on the rights of the individual to unfettered political and economic liberties, fail to notice that the Plutocracy is delighted to encourage their focus. For a nation of subservient debt-serfs can exist quite peaceably in a low-tax state dominated and controlled by a Plutocracy.

Indeed, a semi-feudal state founded on debt-serfdom has the luxury of offering generous political and economic liberties to its indentured citizenry—as long as they don't join together to challenge the perquisites, privileges and wealth of the Plutocracy.

In this analysis, the Plutocracy is well-served by a politics of experience which neatly dices the political ideological spectrum into various non-threatening and mutually distracting slices of rancor and illusion.

Democracy, Empire, Socialism, Self-Regulating Markets

Since the middle class is the foundation of the state (by paying the taxes and providing political support for regulations and infrastructure), then questions of democracy, markets and empire directly affect the squeezing of the middle class.

While this discussion may seem far afield from practical responses to the intersecting crises we face, it is actually of paramount importance. For if the American state/Empire over-reaches globally, and the Plutocracy over-reaches domestically, then the middle class must either respond in its own defense or collapse beneath rising taxes.

The state and its Elites will defend the status quo very robustly and perseverently, overriding or simply ignoring middle class attempts to limit its power.

We should pause here to remind ourselves that the politics of experience, the "obvious" incentives and assumptions which we do not even notice, such is their "naturalness," masks the actual mechanics of this destruction of the middle class.

Thus the state will argue that regulation protects everyone (even if it doesn't, and is riddled with profitable loopholes that served Elites' interests behind a sham transparency), the "underprivileged" "need" various services and benefits (even if the supposedly "necessary" benefits like bilingual classes fail in their stated objective) and an ever-increasing public payroll is needed to "serve the public."

The question of who pays for all this is left uneasily unsaid; the Elites will pay a much smaller percentage of their income than the middle class, and as a result their share of the national income continues to rise as the middle class founders.

The Elites will quietly voice their needs in the hushed halls of power, confident that media transparency (recall that they own or control the mainstream media) will be a simulacrum of transparency, a sham to satisfy the easily distracted public.

Thus it is not at all clear that democracy and Empire, that is, geopolitical hegemony, are compatible. Nor is it clear that centralized state planning (socialism) and democracy are entirely compatible, either (please see The Road to Serfdom by F. A. Hayek).

Why? Socialism always contains the potential for "the tyranny of the many" which concerned many of our Founding Fathers. If 51% of the citizenry is receiving benefits or free services from the government, they can essentially dominate the oppressed productive class via the ballot box.

Put another way: the percentage of people who will gladly accept free money or services is virtually 100%, while the percentage of those willing to risk their time and capital for productive enterprise is considerably less than 100%. Thus the less-productive benefactors of government largess (socialism) can extract ever-higher taxes from the remaining productive members of the society, until the productive members either collapse into penury as in the late Roman Empire, or they opt out of supporting the unsustainable burdens imposed on them by the tyranny of the state's more numerous benefactors.

Why should we care about what sounds like an academic debate?

The answer is that the compatibility of democracy, socialism and Empire are vital issues for all of us seeking liberty, security and prosperity for a variety of reasons.

Democracy offers the middle-class some modicum of power. If democracy is undermined, the middle class has essentially no power. The fall of Rome provides an excellent template.
Empire costs a great deal of money that must be raised by taxes, mostly on the middle class. Thus Imperial overreach in the form of costly wars with little to no payoff (a classic example of marginal returns) ends up overburdening the middle class. This is precisely what occurred in the decline and fall of Rome.

Central planning/government control of assets and revenues favors the politically influential Plutocracy over the middle class, as government ends up serving the Plutocracy's interests under the cover of expanding benefits to the less productive.

Government regulations intended to rein in global corporations end up strangling middle-class entrepreneurs as the Plutocracy arranges for loopholes and exclusions which the middle-class cannot exploit.

Government overreach insures that multiple government agencies and regulatory bodies create conflicting, overlapping layers of authority and decision-making, crippling middle-class entrepreneurship with bureaucratic sclerosis.

One example of too many governmental stakeholders resulting in bureaucratic sclerosis is the astonishingly time-consuming and arduous process of adding a new railway station in California. Everyone agreed that "smart growth" and common-sense transportation planning required an additional railway stop to serve commuters living in a new medium-density community on an existing rail line. Despite the obvious need and the will of the people as expressed by a general plan voted into law, the process is now in Year Nine with no resolution in sight due to the staggering number of governmental and private "stakeholders" /agencies with some say over the rail lines and station.

It is amazing that anything at all gets accomplished in the U.S. when situations such as this are examined in detail. As always, the proper context is the high cost to the middle class when political approval by various overlapping governmental stakeholders and Elites is required. Democracy has in effect been undermined by an ever-expanding government of overlapping authorities and ever-higher fees and taxes and a Plutocracy that gains exclusions and loopholes via political influence.

The Fantasy of Self-Regulated Markets

The fantasy that markets can be effectively self-regulated is encouraged by the self-serving Plutocracy and its "free market" enthusiasts in the MSM, as unregulated markets enable the fullest expression of greed, fraud, legerdemain and chicanery. No better proof of this can be found than the insiders' exploitation of the mortgage/housing/credit bubble's excesses of lies and leverage. Please read Fiasco: The Inside Story of a Wall Street Trader and Greed, Fraud & Ignorance: A Subprime Insider's Look at the Mortgage Collapse for more on these topics.

Put another way: "free" markets require transparency of inputs, competitors, pricing, value, ingredients, etc. Without transparency, then customers/participants' decisions cannot be sound. Yet transparency offers no competitive advantage, while secrecy and obfuscation offer tremendous competitive advantages. For example, an arcane and duplicitous property appraisal is a simulacrum of transparency, manipulating data to support a bogus valuation in order to qualify for a mortgage. A transparently false appraisal would not support the fraudulent mortgage or the immense profit it generated for everyone involved.

The mortgage itself is written in such a fashion that its true costs are obscured—the very opposite of transparency. Thus, the mortgage/leverage/derivative/ratings bubble of fraud and greed depended on obscurity and obfuscation, and indeed, market participants lost competitive advantage in terms of profit if they dared choose transparency.

This is why it is specious to claim an unregulated finance-based economy will regulate itself. Though the government is by nature attempting to expand at the expense of the citizenry, that doesn't mean there is no need for governmental regulation. It simply means the regulations must be strong yet simple: transparency in all matters, no exceptions.

The classic examination of how self-regulating markets turn everything and everyone into commodities ripe for exploitation is The Great Transformation by Karl Polanyi.

The big losers in the fantasy of self-regulating markets are the middle class; the Plutocracy buys itself exclusions. The costs of dysfunctional markets eventually end up on the backs of the middle class while the outsized profits end up in the pockets of the Elites. Profits are privatized and losses are socialized, i.e. borne by the middle class taxpayers. Like the Roman citizens granted free bread and endless public entertainments, the less productive citizens are pleased to support the status quo (simply by remaining passive) as the status quo has effectively bought them off with "bread and circuses."

Markets, The Commons and Lifecycle Costs

Just as we must be careful of government because of its inherent self-interest and vulnerability to influence/control by the Plutocracy, we must be careful not to assume that markets are effective at setting prices in all settings just because they work in limited, short-term contexts.

The reason for our caution: markets are incapable of pricing the full social, medical and environmental costs of a product's entire lifecycle. Thus coal is priced by its demand as fuel and the cost to extract it from the earth. But if coal is burned in great quantities, as in China, then the air quality becomes adverse to human health.

People breathing such particulate-polluted air are far more likely to die from respiratory diseases than those who don't breathe such toxin-laden air. So shouldn't the cost of treating millions of people and the loss of millions of man-years of productive labor be priced into the cost of mining and burning coal?

And suppose the cost of restoring strip-mined areas to some semblance of its pre-mined natural state was built into the cost of mining surface coal. What would the price per ton be then?

Markets will never price in the full lifecycle and social/environmental costs on their own; self-regulated markets are about reaping maximum short-term profits, not seeking out long-term costs which competitors might be able to shirk. The full lifecycle costs of any product are often ambiguous; how do we price in the cost of restoring a landscape when we don't yet know the cost of doing so?

In both socialist/Communist nations like China and "free market" capitalist nations like the U.S., the market effectively shunts all these "common area" costs of doing business onto private individuals who had no choice in the matter (of the air they breathe or the power source they purchase electricity from) or onto the government which must then shoulder the healthcare and environmental costs via taxes on productive citizens.

Following our precept that all markets require transparency above all else, we find that the Plutocracy engineers obscure tax credits and subsidies for its industries, masking the true cost behind these government tax breaks. Thus the citizenry will find the task of sorting out the real benefits of transparent solar subsidies and obscure nuclear power/gas-oil subsidies quite difficult. This is of course quite purposeful; transparency may create a well-oiled marketplace but obscurity and obfuscation generate much larger profits.

The analog to this is monopoly. If one enterprise (or a handful in collusion) gains near-total control of a market, then the profits to be gained are immensely greater than those earned in a highly competitive market. This is why Marx posited that the drive to monopoly is inherent to capitalism. And of course a monopoly on information also generates far more handsome profits than transparency. This is why we find both government and its hidden masters, the Plutocracy, are constantly seeking to bury the truth at every turn, and why each fights transparency so fiercely.

To expect the state not to seek expansion as its self-interest, to expect wealthy citizens not to seek to influence the state to align policy with their own interests, to expect capitalism not to trend to monopoly, to expect markets not to shun transparency in favor of obfuscation and secrecy—these are all akin to expecting gravity to cease pulling us to earth. These are what we might call ontological forces, forces which are built into the very nature of the state, capitalism, markets and thus into human nature itself.

This is why we have to be careful not to fall for the seductive artifice of ideology as we choose responses to the multiple challenges ahead. Neither the market nor the state is an answer; each is as much a part of the problem as it is a part of the solution.

Political Disunity Squeezes the Middle Class

In Collapse of Complex Systems: Incremental Change and Collapse I address how political disunity ends up crushing the middle class's wealth and political influence (reprinted here).
In The Fall of the Roman Empire , author Michael Grant identified political disunity as one the one key causes of the fall of the Western Roman Empire (Rome).

One engine of such disunity and squabbling, of course, is a deep-denial complacency: if a large percentage of the ruling class/citizenry sees nothing wrong, or counts on feeble "reforms" to resolve mounting global challenges, then they will hobble those seeking systemic, sweeping changes required to survive the challenges.

Another key reason for this crippling disunity is the resistance of the plutocracy/underclass recipients to any change in the status quo. It may strike some as ironic that the two ends of the political spectrum are united in one goal: fiercely resisting any shifting of largesse/benefits. At the top, the "fortunate 400" in Roman society paid less and less tax as the crises mounted, while 300,000 fortunates at the bottom rung continued to draw free bread and 170 days of free public entertainment in Rome as the Empire collapsed inward on Rome.

We see plentiful evidence of both trends around us. The number of recent political appointees who felt paying taxes was for plebeians is not just embarrassing, it's indicative of a broad cultural trend; and it seems many of the riots we read about in western Europe stem from proposed cuts in what are essentially "bread and circuses" welfare benefits which the Empire can no longer afford to shower on its less-productive (non-tax paying) residents.

As the plutocracy contributes less and less to the finances of a heavily burdened central government, wealth disparity rises. This trend has been firmly in place for years. For 'Fortunate 400,' a Tumbling Tax Rate (Wall Street Journal)

As in fast-declining Rome, the plutocracy is pleased to wield its wealth and influence to insure it pays 17% tax rate (much, much less when tax-free municipal bonds are counted as income) while the productive elements of the economy are saddled with 40%-50% tax burdens.
Also as in headed-to-oblivion Rome, the plutocracy no longer contributes its sons and daughters to military service; that is left to the poor.

Lastly, rigid ideological camps are creating disunity as the middle (and the middle class) are eroded. Thus we have a Congress which united under pressure to give $700 billion in borrowed money to the banks under a Republican administration, and now under a Democratic administration the Republicans in Congress have belatedly discovered a deep desire for fiscal prudence--a desire which they mysteriously lacked for the 8 years of the borrow-and-spend Bush administration.

Though it is impossible to summarize the wealth of information in Jared Diamond's monumental Collapse: How Societies Choose to Fail or Succeed , it seems that the inability to see the underlying fragility of the environmental base of the economy was a key factor in the collapse of the cultures Diamond examines.

In an eerily similar way, the Plutocracy in the U.S. is essentially blind to the extreme fragility of the global energy complex, global fresh water supply, global soil reserves and the global public health system. As many authors have detailed, a global economy without abundant cheap fossil fuels will be unable to feed and maintain 6.5 billion humans.

Though neither Grant nor Diamond mentions this specifically, I note that the Roman plutocracy/ central leadership obviously hoped that additional regulations and edicts would somehow turn the tide. I see the same over-reliance on legal mechanisms, edicts and policy tweaks in the U.S. today. A Congress of attorneys rather unsurprisingly is enamored of legalisms and policy tweaks, and a plutocracy and welfare class wary of any reduction in benefits and tax breaks is pleased to hope tweaks and tucks will somehow maintain a crumbling status quo.

But as Donella Meadows outlined in her seminal paper, Leverage Points: Places to Intervene in a System (Sustainability Institute), adjusting the perameters of a system has limited effects. What this means is that fiddling around with "reforms" like increasing the fee paid by Medicare recipients by $10 will never make Medicare financially sustainable.

Ditto tweaking the gas mileage of the U.S. fleet by a mile or two, and 99.9% of all the other "reforms" proposed and fought over.

What we have in essence is an over-regulated, overly complex, cost-heavy structure which we attempt to "fix" by adding further layers of complexity and overhead costs. The idea that these incremental approaches can change the fundamental structural flaws is simply false; their net effect will be to hasten the collapse of the systems they seek to repair. This is what I call The Seductive Illusion of Incremental Change (May 13, 2008).

As noted before, Tainter's The Collapse of Complex Societies suggests that at some point the citizenry of failing societies more or less choose to let their unsustainable systems topple rather than continue the draining attempt to support the burden.

Disunity, complacency, growing wealth disparity, rising military and taxation burdens, fragile environmental foundations—all these need only a sustained drought or energy shortage to tumble like dominoes.

Other essays on this topic:
What Won't Change
The Middle Class Is Crumbling
Complacency and The Will To Radical Reform
Complacency and Scalability Traps

If you'd like to see how inarticulate I am 'live,' then you may be amused by My interview with Richard Metzger on BoingBoing.net. Richard was kind enough to interview me via video-Skype and edit the results into four 6-7-minute segments.

NOTE: My computer/web time continues to be extremely limited; my apologies for the inability to respond to emails for the next week.