Daddy, where does a middle class come from?

Income distribution is starting to crop up everywhere now (shout out to OWS folks.....thanks!!!).  All the big boys are talking about it.... Krugman, DeLong, Stiglitz, Shipman.  It is an important topic. One of the ways you can tell its an important topic is that TPTB  dont want to talk about it.  They want to simply dismiss it as whining by the losers in our current system.

What the talk is really about, it seems to me,  is how do we get back a true middle class? I'm sure there are different ways to define middle class and certainly many of us who are truly upper class by income division would self identify as middle class. They (we) see middle class as a value system as much as an income division. So first off I shall define what I am calling middle class.

Middle class folks are those who need to work for their primary source of income ( and WISH to..... this is the "values" part) but their work does not NEED  to be over 60 hours a week to make ends meet and have some left over for retirement.  If you are living off interest payments, daddys work, 20 hours of work a week or your 60 hours pays you enough that you can pay cash for your house in one year with your savings..... you are NOT middle class.  This is not an exhaustive list I gave.  There are additional ways to not qualify for middle class. Ultimately middle class is the group of people who are not one financial setback away from poverty.  They have a significant cushion that doesnt involve counting on family to completely change what they were doing to get you back on your feet.

To step back a little though, the idea of classes is not even universally accepted. On the assumption that classes are a useful way of understanding our society and its economic stratification, it must be said that the whole notion of classes points out that a relative station in life is something we think about.  Im working from the idea that absolute wealth is less important than relative wealth.  This is why taxation is not really of importance to wealth because as long as everyone who makes what you do is taxed as you are no one will climb up or fall down a position because of tax levels.  If Im the richest guy after taxes, it makes no difference whether thats a 1000$ a year or a million a year. As the richest guy I will have access to most in a market based monetary economy.  This should start to demonstrate, in addition,  why distribution matters. If I have 1000$ and no one else has more than 100$ I have way more access than anyone else to dollar priced goods. So station in life matters, in fact I would argue, it's ALL that matters.

It seems that in America we dont like comparing ourselves to other Americans financially.  Its sort of a taboo here.  Dont talk about what you make or anyone else.  And when you do, dont sound like you begrudge any one else their due share. We like to think we are all the same here.That we dont suffer from class envy here like other places.  Its the class envy that leads to socialism/communism.  Thats why I think these distribution arguments tend to be dismissed.  In America, it seems its just the size of the American Pie that matters, not who gets to eat how much.

 What has become obvious to me is the idea that middle classes dont just occur in market based monetary economies.   They must be created by some force bigger than the biggest market participants. Left to their own, monetary economies would eventually all come to resemble the banana republics, where great wealth is held by a few and everyone is basically a servant. It is not inherent in the nature of capitalist economies for a large middle class to exist without govt intervention. You cant find a country with a strong middle class and not find one where the govt has interceded to "make" that middle class possible.  Minimum wage laws, labor unions, paid time off, sick leave..... all these things are middle class creating ideas. And none of these have happened anywhere in the history of our planet without a govt, acting on behalf of people who do not own the means of production, insisting on  and enforcing said ideas. Without them bosses would take more and more away in wages and benefits to support their bottom profit line.   The natural trend is for a few large players to end up  with huge numbers of little players toiling away for them.  This arises because power usually works this way, and money is power in a capitalist economy.  Power never willingly gives up anything, it is only forced to.  Once a capitalist gains market share, the power it creates tends to multiply not recede.

Unless you think a middle class is not something to be concerned about, then income distribution should be a focus of policy.  Im not as concerned about the over saving of the 1% as distribution skews upwards, Im concerned about the increased costs to everyone else as their income share shrinks and their need for credit increases.  Credit is expensive.  More expensive than cash.  The extreme in distribution is making life way more expensive for far too many people.  It has to change.  Only we, through our collective will of govt can do that.  The market sees no point in it.

Why Income Inequality Matters; The Toxicity of Debt

Paul Krugman and Joseph Stiglitz are having a bit of a disagreement.  Joseph is citing income inequalities as holding back our recovery. Paul disagrees. He wants to agree and thinks he makes some good points but cant jump on board totally.  Paul cites some graphs of savings rates in his NYT column  and suggests that there is little evidence that the rich are underconsuming.

I dont think the underconsumption is from the rich. Its from the non rich who are losing incomes TO the rich.  I think Paul is making the wrong assumption about where the underconsumption is coming from. He seems to think that distribution doesnt matter much. As long as total income to the economy is the same demand will be the same. I think he's mistaken. I think he's mistaken because he dismisses the toxicity of debt

Let me offer an analogy to our economy using something I understand well, our cardiovascular system.

Lets think of the flow of money like the flow of blood through our body. Acid, a normal byproduct of cellular function is like debt. Healthy cells are getting the blood they need and are able to get their waste products, acid, removed.  But a cell that is either demanding too much or is in an area that is under perfused, runs the risk of accumulating acids to the point of toxicity and cellular death.

We have about 6 liters of blood in our body and it gets pumped around at  anywhere between 3 liters minute to 15 liters a minute.  There is a natural hierarchy of perfusion within the body.  The brain, and kidneys alone receive over half of our cardiac output in normal conditions. So while at any given time over half the blood in our bodies is going through brain and kidneys, the rest of the bodies needs must be maintained or their debt (acid) will build up and not just kill that tissue but the whole body.  In times when the heart is either incapable to meet the needs (failure) or the needs of the tissue are just too great (infection or vigorous exercise) acids build up.  As long as inflows are met, acid wont reach toxic levels but if not sickness or death is imminent.

Incomes are what keeps consumers healthy. Debts are a normal part of our modern capitalist system as well and as long as the flow of incomes meets debt service their is no problem.  But we want growth, and our banks encourage growth by taking on more debt. They want more people taking on more debt. These debts must be cleared or they will reach toxic levels and freeze the system.  They freeze it in two ways 1) They stop getting paid or 2) They are the ONLY thing getting paid.  As I said earlier, incomes are what keep consumers healthy and even if total incomes stay close to the same, if that total is only being distributed between 30% less of the consumer force, their debts become toxic and affect the whole system. Banks fail and businesses lose customers.

When 30%, I imagine its even more than this now, of your potential consumer base is only getting enough income to barely service old debts, these debts hurt everyone. They become a systemic problem not just a personal problem. The rest of the people cannot nor will not increase their debt levels enough to offset this reduction.

Distribution of flows matter.  There are healthy distributions and un healthy distributions

Balanced Budgets are Un American

There can only be one way that a government can run balanced budgets in perpetuity, and that is to have  complete control of its income.  Without that a government can only set tax rates but not the amount of taxes it takes in.  As long as the private sector is determining the level of income everyone is collecting expecting a government to balance its books is a fools errand.  So how does a government have complete control of its income? It gets complete control of everyones salaries. IOW it employs everyone.  So, in fact, those who are clamoring for balanced budgets are asking us to move closer and closer to a command economy where the government has control of your income, sets tax rates and then controls what it receives in revenues.  Does that sound like the American dream?

Lets stop this balanced budgets nonsense.