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Saturday, January 19, 2008

1979 - a flashback

One thing LI loves about libertarians is their “never say die” attitude to reality. If reality blows up your ideology – why, then reality just needs a bigger dose of ideology! If we have a financial system which used the “magic of the market place” to take a financial sector that has the dull task of providing money for investment and turned it into the exciting task of betting on betting on betting on The Wheel of Fortune, the fault lies not in the financial market – but in the remaining structure of regulation. We never de-regulate enough, you see.

In fact, of course, we need a lot of re-regulation. We need re-regulation out the bungus. We need to regulate the financial markets to make it very, very difficult to maintain a hedge fund. We need to rein in derivatives, and we need to make sure that the excuse that is usually given for not regulating derivatives – that the market is played only by millionaires who can afford it – is roundly shown up as the lie that it is. In reality, the financial markets are tied in one with another – as how could they not be, since the whole point of deregulation was to make them interpenetrate each other and ‘speed up’ the transfer of capital – and so the millionaire’s misfortune quickly becomes everybody’s social misfortune.

We are really living in some kind of John Law virtual world. Surely, we are creatures in his dying dream. That brilliant little Scotsman’s vision is our reality. The American government – followed by the U.K. – chose to outsource countercyclical policies to the financial sector. This might actually be the only course open to a society that wants to preserve an increasing inequality of wealth – impoverishing the middle class from an absolute standpoint – while preserving the relative wealth of that stretch between the 80 percentile and the 30 percentile on the income scale.

The article people should be reading at the moment is THE SQUEEZE ON THE MIDDLE CLASS by William Kowinski in the New York Times Magazine. The New York Times Magazine, that is, of 13 July 1980. The pre-deluge days.

Kowinski starts out with the Newmans – a couple who are, for that time, doing very well:

“Now David and his wife, Bonnie, who works as a librarian in a suburban school, have a combined income of $60,000 a year. ''It's astounding that we have this much money,'' he says. ''And it's astounding that it doesn't buy anything.''

''Anything'' is, of course, an overstatement. The Newmans are not a family trying to stretch $15,000 and shocked to find no room for a daughter's prom dress or even, suddenly, next month's fuel bill. But that even they are concerned shows how pervasive the effects of inflation are. The inflated dollar's loss of buying power is only one change the Newmans have noticed in their everyday lives. There are other nagging reminders of inflation's effects - for example, quality seems to have declined as producers trim costs, while prices still go up. ''An item I might have bought a year ago for $30 would have been a quality item,'' Bonnie Newman says. ''Now it's inferior, and I won't buy it.''

''Whatever we're doing these days doesn't seem worth the money,'' David agrees. ''You spend $50 on dinner and it's not all that terrific.''

But economic expressions like loss of buying power or declining quality don't adequately convey the feelings of dismay and confusion that accumulate when inflation and recession change the value of money and all that money means, culturally and psychologically; when the assumptions of several generations about America's expertise and leadership and this country's pre-eminent place in the world are jumbled and wounded; when values are distorted and called into question by economic conditions that affect, in different ways, every class in society. Within the middle class in particular, there lurks the suspicion that their dream - the American dream - is endangered.”

Now, what is funny about the Newmans is that their complaints, that tiny addition to the collective roar in 1980 that brought Reagan into office, are based on economic conditions that were created for them by the mixed economic policies of the past. And those mixed economic policies were actually working pretty well for the Middle Class. That is, of course, one of the funnier ironies of the Reagan revolution. The Middle Class drove it, and thereby cut their own throats, systematically destroying the system that had favored them against the wealthy and the poor. A long quote here:

''Before, it seemed possible to look forward to a time when things would be O.K.,'' Bonnie said. ''Now I don't feel there will be an easy time when things are O.K. I feel it's always going to be like this. The whole situation is frightening and I don't know where it will end.'' At first glance, it might seem ridiculous that a young couple starting out with a $60,000 income should be worried about money, but the Newmans' worries aren't groundless. They live in Manhattan, for one thing, where costs and tastes make $60,000 less than the abundant income it might be in many other parts of the country, where taxes and the price of housing in particular are lower. And even with two paychecks (about half of the wage-earning families in America have at least two incomes), the fight against inflation is a losing one. Last year, median income for couples rose 8 percent, which was 5 percent less than the rate of inflation. From March 1979 to March 1980, despite a record increase in private, nonfarm wages, the real earnings of two-income households, adjusted for inflation, fell 4 percent. The only solace for them might be that single-income families did even worse.

On the other hand, the Newmans aren't suffering like many members of the lower middle class who have seen inflation deplete savings and dangerously erode buying power, or like those forced by the combination of inflation and recession to join food-stamp and unemployment and welfare lines. Even inflation alone, which attacks more directly than recession the professional middle class's buying power, liquidity and sense of security, does not hit the Newmans harder than anyone else. In fact, the Brookings Institution's Joseph Minarik, who has studied the situation in detail, says flatly, ''On almost every account, the average middle-class family is in a very good position in regard to inflation. They are the winners in inflation, in relation to both those above and below.''

Many people would find this a startling statement. Much of the clamor to control inflation arose because the middle class felt that it was inflation's primary victim, that in the rush to assist the poor and provide loopholes for the rich, the Government had forgotten the middle-class majority. But, according to Minarik, the poor have lost ground because welfare and other aid programs have not kept up with the rate of inflation, and the rich have lost ground because the investments that make up the bulk of their income have generally done badly. Only the middle class, because salaries have climbed, has held its ground - especially if a mortgage is the major debt, because homes have increased in value faster than prices through the worst of inflation.

''But the middle class doesn't see it this way,'' Minarik admits. ''Their homes are appreciating in value, but they don't see it. It doesn't put cash in their hands. Instead, they see prices rising. They don't see that the raises they are getting are inflated. Usually a raise of 2 percent would be considered good, but, because of inflation, they have to get 8 percent. But the inflation rate is higher than that, so what they see is inflation robbing them of all that extra money.'' Minarik's analysis of the middle-class position may be right, but it brings little comfort to David and Bonnie Newman. And it does little to allay the fears of middle-class families that their expectations will not be met.

Despite the changes in these expectations during the last couple of generations, the key ingredient in the middle-class formula for upward mobility is still higher education. So it isn't surprising that one of the middle class's primary concerns is the high cost of education.

It begins with a feeling of injustice, expressed this way by a former teacher: ''The thing that got me,'' she said, ''was when a bright, interested middle-class student didn't get a scholarship to college, but another student did just because he was from a lowerincome family.'' It is a variation on a middle-class theme: The middle class is denied financial help, especially from the Federal Government. Thus the middle-class student is excluded from college and that crucial step on the ladder to success, while the rich can afford tuition and the poor are given a free ride. There are two interesting facts about this variation: first, that the middle class has done something about it; and second, that the premise doesn't seem to be true.

The middle class has done better than the lower class - and even the upper class - in keeping up with the price of higher education. College costs have indeed risen over the last decade or two, but not, according to the Congressional Budget Office, as fast as the incomes of middle-class families with college-age children. The after-taxes income of upper-middle-class households, for instance, rose 106 percent between between 1967 and 1978, while education expenses increased 67 percent at public universities and 77 percent at private colleges. Between 1967 and 1976, the percentage of income both lower- and upper-middle-class families spent on education actually declined.

Despite studies consistently showing that middle-class students reach college, graduate and go on to earn advanced degrees far more often than lower-income students, formidable political pressure has been exerted to increase scholarship aid for middle-class students. It resulted in the 1978 Middle Income Student Assistance Act, which provides grants for middle-class students. A Capitol Hill aide who worked on the legislative package said, ''There was a feeling here that this was something that the middle class really wanted, so why not give it to them?'' According to Senator Daniel Patrick Moynihan of New York, whether the middle class had in fact lost ground relative to the lower class was not as important as its perception that it had. ''It has to do with the transfer of their status onto their children,'' Moynihan said.

''And, by God, they want it.''

Such perceptions, and their economic consequences, may be rooted in changes in attitudes brought on by the quick prosperity experienced by the middle class in the last couple of generations. Some families are pressed, for example, because they are trying to send two or three children through college simultaneously, whereas their own parents might have attempted to send only one at a time. With their standard of living based more on credit these days, families also may not have the savings in the bank that traditionally financed a college education.”

Ah, the factors are all there for the inversion – the middle class was on the brink of much easier credit, and much worse salary increases; it was on the brink of seeing social goods –education and health – skyrocket; it was on the brink of seeing the wealthy gain, first, an enormous tax advantage, and second, due to the de-regulatory impulse that has gone through thirty years, now, of governance, the advantage that comes from offloading costs of production onto third parties; and of course the breaking of what Moynihan called ‘middle class altruism’ – the willingness to spend taxes on helping the lowest income group. Because the latter factor outraged the narcissism of the middle class, it had to be accompanied by a myth that the lowest income group was, magically, so in charge of the State that it was directing all kinds of advantages its way. Why, the poor, in contradiction to every social law known to man, were living like kings! Getting that affirmative action; all those welfare payments; and all that terrible anti-discrimination law – it was so good bein’ poor in America that it was a wonder the middle class didn’t migrate en masse to the lower reaches. But, being virtuous and hard workin’ folks, they didn’t. That, of course, is the sour, reeking hypocritical attitude that colors one’s genuine affection for the poor old middle class. It is hard not to think at least sometimes: fuck em! Let the rich skin their fat asses! After all, they have voted all too often to get themselves into situations in which only aggressive fantasies – such as those feeding into the GWOT – offer them any escape. And that has been hard on the rest of the world. So far, no counter view has achieved any mass in the U.S. since 1979. We’ll see how much worse things have to get before such a view emerges again. Interestingly, the Middle Class has definitely become aware, since 1979, of the appreciation in the value of their houses. They seemed dimly aware that this was inflation, but since inflation was seemingly to their advantage, it drowned out the noise from other inflations. Now that this is not happening, it will be interesting to see how sensitive people get to the currents in the price system. They might just get very sensitive, indeed.


northanger said...



Roger Gathmann said...

North, you are scarin' me with that name. I DON'T WANT TO LIVE IN AN ALLEY! I myself derive the name from gato, as in cat, as in Cool Cat man!As the dancers here.

Anonymous said...

Proceeding in order of points in the post:-

Not all Libertarians are like that. Those are the sort Kevin Carson calls "Vulgar Libertarians". But he managed to get some of his material covered by the Journal of Libertarian Studies, with the help of editor Roderick Long.

Was John Law actually little, or is this description the artist at work?

The US middle class of the 1980s wouldn't have been comparing their lot with that of their equivalents a decade earlier, but with that of their parents - not necessarily middle class - a generation earlier. There may well have been an uneven increase of difficulties over those years (I don't know). Notional increases in their wealth weren't relevant; they couldn't cash in on those (then). To the extent that those raised their mortgage service costs, they even hurt. It was all jam tomorrow; what counted was their accessible resources. Those notional increases are spurious in another way too: you get those by multiplying the size of the middle class in households by the marginal gain when one household liquidates. That's not the same as the absolute increase in value of the total housing stock but probably far greater.

"‘middle class altruism’ – the willingness to spend taxes on helping the lowest income group" is inherently self destructive, because of the lack of nexus in taxation. It's always at someone else's expense without any point of purchase for altruism. Contrariwise, the taxpayer is never the decider. Fellow feeling erodes. This does not require any envious feeling that the poor were gaining on the middle class, rather a feeling that the middle class was being dragged under. That applies whether it was being dragged under as well as or instead of the poor.