A few thoughts on restoring the middle class
Original post made by Tom Cushing on Oct 26, 2011
So, step into my revival tent for a threesome of issues that need to be addressed to resuscitate the middle class. The first two are intended to provide direct, immediate assistance to a specific sectors of the economy (manufacturing and construction), whereas the third addresses concerns about where America puts its emphasis for the future. We will return to the tent for more of these fixes, over time.
1 Trade/Currency Adjustment: China, with its mammoth internal market potential and burgeoning export sector has, I believe, artificially undervalued its currency on the world markets. This policy has had the twin effects of making their exports 20-30% cheaper and thus more competitive than they "should" be, and retarding the development of those internal consumption markets that might be targets for American and other manufactured goods. The US should find ways to revalue its currency to counteract the Chinese strategy, as by countervailing duties on Chinese goods, or a general devaluation of the greenback.
I am aware that we risk Hawley-Smoot 2 in slightly more modern clothes, but instead of a general protectionism, this move would be designed to discipline pre-existing currency manipulations by Beijing. Consumers would also pay more for those now-underpriced goods; so be it.
2 Construction and Housing: I am among those who believe that the economy will not recover until housing starts do there are both construction jobs and all those manufactured goods that go into a new house. The spending power of the middle class has also been truncated by the fact that many, many mortgage holders are continuing to pay pre bubble-burst rates on their real estate that is under water. Strategic default remains an unacceptable option to many, for fear of FICO or eternal damnation. I would force the mortgage holders to value their investments at current market prices, and absorb the losses they should incur in free market conditions it was, after all, BOTH borrower and lender who "made bad choices." Currently, only one party to those unfortunate transactions is bearing the brunt.
Revaluing would tend to break the log jams currently inflicting the real estate market and let the losses fall where they belong. Near as I can figure, the banks are currently dribbling houses into the market to suit their own inscrutable purposes but clearly having nothing whatever to do with the public's interest. Once the market has concluded its bottoming-out, builders can begin to adjust to the new reality in ways that will provide steady jobs and fuel consumer spending.
3 Education: as I wrote last week, America achieved its current pre-eminent position as a nation of builders and doers, not staffers and money changers. I fear we have collectively become too focused on fields like law and finance, and not nearly enough on research (value-builders) and engineering (doers). For example, we've developed a ridiculously sophisticated industry of accountants and lawyers to figure out how to surf a ridiculously complex tax system. As finance has become the master, rather than the servant of industry, it has devised ways to re-pile existing boxes and extract value from them, rather than making more boxes. We need more boxes. As those "staff" functions have drawn-off an increasing number of the future Best-and-Brightest, America's universities have increasingly trained technical folk to work in other parts of the world.
So in addition to a vastly simplified tax structure to free-up all that churning talent (I like Fareed Zakaria's version best), I want to create public scholarship and loan incentives that are targeted to underwrite the study of engineering and science. If "shirt-sleeves to shirt-sleeves in three generations" is still true, as I hope, then many able and ambitious up-and-comers need assistance every year. If that government help serves to direct them into value-adding pursuits (rather than value-counting or value- keeping fields), then the effects will be felt domestically, and off into the future.
on Oct 26, 2011 at 2:20 pm
If there are no middle class in America then America is Actually Africa. No health care, no jobs, people still live with parents .. Ohh come on America needs a renaissance befor it became just a name we respect.
on Oct 26, 2011 at 5:40 pm
Dear Tom and Editor,
It was a joy to share your (Tom's) commentary with CDSI members in Asia, Europe and North America today to gain the importance of the USAmerican Middle Class to global economies. Imagine please that our global neighbors who do business with our country fully understand the economic power of our middle class and the absence of economic influence at each end of our economic scale in the United States.
It is the middle class technologists that design and market the results product important to global economic production. It is not the very wealthy of our nation that has purpose in such supply chains or any major corporation that is run by exceptionally-paid CEOs.
Tom, take another look along economic-class boundaries and illustrate the origins and consumption by such classes that create our nation's role in global economics and foster growth in our gross domestic economy.
I truly enjoy your inviting analysis and provocation of thought in our corridor. We so need that consideration.
Thank you both,
on Oct 26, 2011 at 7:19 pm
The only way to save the middle class is to revive manufacturing. But America is becoming less attractive to manufacturers due to costs associated with environmental laws, labor laws, civil rights, etc. We don't have jobs anymore, but we have the higher moral ground!
You want to force banks to take a haircut on their loans? Where are we, Venezuela? You can't just override contracts without consequence. People invest here because they know their money is safe. I wouldn't tinker with that if I were you.
You want to get rid of all tax loopholes? How quaint. Wasn't that the idea behind the 1986 Tax Act? How'd that work out for you? Meanwhile, back here on planet earth, politicians enjoy the power of granting tax favors to the politically connected. You think politicians will give up that power? Good luck with that.
When politicians need money, they tinker in areas of the tax code that no one understands, like LIFO layers and Subpart F income. Keeping the code complicated allows politicians to raise taxes at will without the public understanding it. That's a powerful tool.
Your thoughts on education are not without merit, though likely costly. Where would you come up with the money to pay for it? Don't tell me: "Tax the rich?" Sorry, that money is already earmarked to pay for healthcare reform and the $77 trillion we owe seniors so that Medicare and Social Security don't go bankrupt. There's just not enough private money to confiscate in order to pay for all the goodies Washington dreams up.
To counteract China's manufacturing dominance, you suggest devaluing the dollar. Won't that make most Americans poorer? You obviously aren't a pensioner on a fixed income. Pity the poor suckers foolish enough to have savings accounts. And trade wars are financial suicide. You know that. So why even bring it up?
I thought the plan is the Federal Reserve Bank and Federal government create trillions of dollars out of thin air through quantitative easing, artificially low interest rates, and $1.5 trillion per year of government borrowing. This leads to inflation, causing housing prices to rise so that the majority of U.S. homes are no longer underwater. As prices rise, homes start selling again, construction rebounds, people go back to work in the housing industry--our last bastion of middle class jobs. Isn't that what is happening right now?