Friday, May 24, 2013

A negative feedback loop

As our economy becomes more and more automated, the economic benefits from that automation fail more often than not, to reach the middle class. In addition to that, over the years, we've seen enormous efforts to protect the upper classes from real competition from everyone else.

According to the most recent report from the American Customer Satisfaction Index, 
"Cash flow remains strong for corporations, but weak for households. Since the latter accounts for about 70% of the economy, it is difficult to envision a strong economic recovery until wages and employment begin to move in the same direction as customer satisfaction."
Household spending is 70% of the economy. Yet, most of the gains in our economy are being funneled into corporate profits. That means stockholders, board directors and CEOs are getting access to that capital, diverting it from the people would spend it to keep the economy moving. If they were creating jobs, we'd know about it now, wouldn't we?

Most of the gains from automation are quickly recouped by the corporations that buy the equipment or software giving rise to automation. They are not passed on to the employees who design, build and maintain the equipment used to automate business processes. In fact, 96% of the increase in GDP has gone to the top 10% earners in the country over the last 30 years (think Ronald Reagan, Republican Revolution). Even conservative newspapers are reporting on inequality in America. According to the CIA, inequality in America is greater than in Pakistan or the Ivory Coast. We're worse than a Third World country and we risk becoming one if the current trend continues.

The cycle seems to work like this:

  • Cut taxes on the highest earners.
  • Allow the highest earners to buy laws that protect them from competition.
  • The highest earners make decisions that affect everyone negatively except themselves.
  • When the decisions are shown to fail for everyone else, then they blame everyone else.
  • Use available capital to lobby for more protection and concentrate more capital.

As incomes rise for executives, very strong downward pressure is placed on wages for everyone else. This is what has been going on for at least the last 30 years. No matter how much more the middle class manages to produce, the gains from the increases in production will be quickly vacuumed up by the upper class. Whether we're writing software, creating robots, or finding some novel way to get more work done, the middle class is often not rewarded for the increase in efficiency.

The reward? Jobs are sent overseas and upper class jobs are provided with more protection. For example, doctors are quite often protected from "free trade" agreements. They can use their considerable clout to preserve their average $178,000 a year earnings. 80% of orthopedic surgeons earn more than $400,000 a year. Why are they protected when the middle class is left to fend for itself against the rest of the world?

This is a negative feedback loop. As wages stagnate, purchasing power declines against inflation. This increases demand for lower prices, so then our wonderful MBAs look for ways to cut costs by sending more jobs overseas. This reduces or eliminates the infrastructure available to manufacture goods here. It also removes our opportunity for innovation to reduce costs here.

This cycle erodes the middle class and fosters a certain attitude among the upper class: "Oh, you want to be paid more? We don't need you, we can make our product in China or Thailand. Oh, you want to pay less for our product? That's ok. There's plenty of demand overseas. By the way, we're cutting you off from social welfare benefits because they're too expensive. Call us when you're ready to work for $9 an hour." But what they won't tell you is how much assistance they're getting from the government through subsidies, patents and copyrights.

I believe in the free market. But I don't believe in promoting a system that allows only the wealthy to have influence in government. Larry Lessig has researched the problem of influence and found that only 0.05% of the American population are financing 60% of our election campaigns across all levels of government. 60%! That is a tremendous influence on government policy from a teeny tiny minority.

I don't know what the answer to the problem of inequality is. All I do know is that the current set of conditions in our economy are not sustainable. Unless we change course, we are becoming the banana republic that we mock in popular culture.
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