of the Middle Class
by Gary North: Gold:
A Valuable Thing to Store
than one quarter of 2011 gone, we have seen the spread of three
revolutions. The first is literal. It is happening in North Africa.
The second is intellectual: the acceptance by large numbers of voters
of a shutdown of the United States government, which is deemed to
be out of control. The third is political: the willingness of state
legislatures in the rust belt to remove the 70-year government subsidies
to public employees' unions.
revolution is getting very little publicity. A brief reference to
it appeared at the end of a report on the Senate's extension of
Federal spending this week for two more weeks in order to avoid
a shutdown of the Federal government, which really means a shutdown
of a few minor services, such as getting a passport. A
Reuters story closed with this:
Quinnipiac University poll found that 46 percent of voters believed
a government shutdown would be a good thing, while 44 percent thought
it would be bad. Most Democratic voters opposed a shutdown and most
Republicans favor it, the poll found.
full poll is here.
reference deserves an extended analysis. If the poll is accurate,
then about half the voters say they are willing to accept a spreading
paralysis of government services. Somehow, I doubt that, if push
ever comes to shove, half the voters would accept anything like
a shutdown. They want their monthly checks. But I think it is safe
to say that they would willingly accept a 25% or 30% pay cut for
employees of the U.S. government as an emergency cost-cutting measure.
This is a major reversal of public opinion. The Establishment has
not seen this blip on the radar screen of public opinion.
Yet we also
read that 60% of voters favor collective bargaining by trade unions
representing government employees.
What we have
here is a failure to communicate. The right brains of the voters
are not fully in touch with their left brains. They want to be tough,
but nice. They want to cut the deficit, but increase spending. They
want to save money in taxes in order to let the government pay a
living wage to government employees. This is cognitive dissonance.
Voters do not
understand basic economics. This should come as no surprise. Neither
do Keynesian economists, who really do believe that money spent
by government taxed, borrowed, and printed strengthens
the economy, while money saved by private citizens and corporations
causes systemic unemployment and economic decline.
is a Harvard Law School professor and a highly visible government
bureaucrat. Here is Wikipedia's description of her present career.
serves as Assistant to the President and Special Advisor to the
Secretary of the Treasury on the Consumer Financial Protection Bureau.
She is also the Leo Gottlieb Professor of Law at Harvard Law School,
where she has taught contract law, bankruptcy, and commercial law.
In the wake of the 2008-9 financial crisis, she became the chair
of the Congressional Oversight Panel created to investigate the
U.S. banking bailout (formally known as the Troubled Assets Relief
We can safely
conclude that she is a representative figure within America's elite.
In a recent interview, she was asked if she thought that the decision
of Midwestern politicians mainly, the battle in Wisconsin
to challenge the legal authority of unions representing state
employees is valid. She did not answer directly a wise decision
for a political appointee. Instead, she defended trade unions in
general as defenders of the middle class. The video is posted on-line.
is a Yahoo summary of her position.
are one of the few institutions trying to strengthen America's middle
class by fighting for fair wages, she says. "We should be in a world
in which we all are a little better off when this country produces
more, not that the part left over for those who work for a living
keeps shrinking, while those who manage investments get an ever
She was even
more emphatic in the actual interview.
She said that
blaming unions in general for the problem of the middle class does
not correspond with the facts. She is correct. What she failed to
mention is this: union membership in the United States is under
7% of the labor force. In
a recent article, I quoted from the Bureau of Labor Statistics.
2010, 7.6 million public sector employees belonged to a union, compared
with 7.1 million union workers in the private sector. The union
membership rate for public sector workers (36.2 percent) was substantially
higher than the rate for private sector workers (6.9 percent). Within
the public sector, local government workers had the highest union
membership rate, 42.3 percent. This group includes workers in heavily
unionized occupations, such as teachers, police officers, and fire
Over the last
four decades, unions have steadily disappeared from the private
sector in the United States. They are a factor only in the government
sector. So, Prof. Warren is correct: no one should blame unions
in general for much of anything. They are a relic of the Eisenhower
era. When you think "private sector union," think "Hudson."
to be implying that this decline of union power was bad for the
middle class. But was it? The customers who purchased the goods
and services offered to them sought lower prices. Wal-Mart did not
come onto the scene by selling at higher prices. Indeed, its recent
decline in domestic profitability seems to be the result of its
attempt to sell some goods at somewhat higher prices.
better deals. They benefit from better deals. Holding down retail
prices was possible because the largest factor of production, labor,
could be purchased at free market prices only after the government's
subsidies to labor unions were reduced by law by the so-called right
to work laws. These were really "right to offer to work" laws. These
laws spread rapidly after 1960. The southern states had them, so
labor and employment moved south. When right-to-work laws met air
conditioning, the Old South was finished. So was the more heavily
unionized Old North. But that process did not start in 1973.
WAGES ARE SET
workers compete against workers. "I'll work for less," says a worker.
Individual employers compete against employers. "I'll pay more,"
says an employer. Out of this competition arises an array of wages.
is simple, but it is not widely understood. That is because high
school and college textbooks in economics and history, written mainly
for tax-funded institutions, do not present an economic analysis
of wage formation that begins with individual decision-making. They
do not begin with the decisions of individuals. They begin with
aggregates. This is the Keynesian model. Collectives determine the
economy; individuals do not not where it counts, anyway,
which is at the margin.
of government-licensed coercion by trade unions, which includes
all members of textbook-authorization committees, paint the free
market as a place where collectives called employers compete against
collectives called workers. Economic analysis does not support this
theory of wage formation, but the proponents of legalized trade
union coercion have always ignored economic analysis. They accept
the position of the unions' public relations departments.
employers as trying to drive down wages. They never present employers
as acting on behalf of customers. The employers are presented as
exploiters of labor in general. But how do they exploit labor in
general? By offering jobs to specific workers at specific wages.
Some worker says, "I'll work for less." Some employer says, "You've
got a deal."
do not mention the worker who is willing to work for less, but who
is prevented from doing so by a union contract. They mention only
the exploiting employer who somehow forces workers to accept low
wages when there is no union. But he can do this only because there
are takers of his offer. When one worker fills the job slot, another
worker must look elsewhere. This is competition. It is basic to
every area of life, beginning with marriage.
But the process
also works the other way. When an employer offers too little, another
employer can lure away workers by offering more. In the history
textbooks, this is always presented as the result of the successful
bargaining of a union. The textbook does not discuss what happens
to the non-union members who are not permitted by law to make competitive
has no clue as to how the labor market works. She also has no clue
about how the debt markets work. She blames the bankers for the
extension of credit to consumers. Oh, woe! The poor, exploited consumers!
MYTH OF THE CONSUMER DEBT BURDEN
people never refer to is the Federal Reserve's published statistics
on the household debt burden. It is titled, "Household Debt Service
and Financial Obligations Ratios." This information is updated every
quarter. What it shows is this: since 1980, there have been only
marginal shifts in the percentage of monthly after-tax income allocated
to debt repayment. Let the Federal Reserve describe the statistic.
debt service ratio (DSR) is an estimate of the ratio of debt payments
to disposable personal income. Debt payments consist of the estimated
required payments on outstanding mortgage and consumer debt.
Let us look
at the numbers. In the first quarter of 1980, a recession year,
the DSR for a home owner was 16.04%. For a renter, it was 24.74%.
In the third quarter of 2010, the respective figures were 16.78%
and 23.99%. So, for home owners, it was up by a fraction of a percentage
point, and for renters, it was down a fraction of a percentage point.
Big deal. Or, as the Mogambo Guru would put it, BD. (Actually, he
would put it BFD.)
You can see
why all of the professional hand-wringers regarding the "enormous"
increase in Americans' debt burden refuse to mention this
Web page. Keep it in mind.
There is a
threat from this debt: the threat of monetary stabilization by the
Federal Reserve System. This would produce a recession. If the FED
still refused to pump in new money, there would be a depression.
If the FED refused to buy any new government debt, the FDIC would
go bust, bank runs would begin, and then there would be monetary
deflation. The level of today's debt would be unsustainable. We
would get Great Depression 2. But this is a problem created by the
FED. The source of this threat is never mentioned by the hand-wringers.
They blame the squeeze on the middle class on the banks: the extension
of credit to the middle class.
whenever the banks get in trouble and stop lending to consumers,
these same hand-wringers call for the FED to intervene and create
new money. They call for Congress or the FED to do something to
get banks lending again.
debt is bad when privately profitable to bankers. Consumer debt
is good when promoted by the government whenever bankers find credit
extension unprofitable. This is the logic behind Fannie Mae and
Freddie Mac. This is Keynesianism. It is the dominant position on
these people are paid well by the government and by Establishment
universities to wring their hands about the lack of government action.
So, there is a constant supply of hand-wringing. The free market
mention what should be obvious about the extension of credit, 19732011:
the creditors extended credit because they expected the borrowers
to be able to meet their monthly payments. This has proven to be
an accurate forecast, with one exception: mortgage debt. Mortgage
debt was extended by means of the policies of Fannie Mae and Freddie
Mac, two agencies promoted by the Federal government and eventually
nationalized by it in September 2008. In short, the Federal government
was the culprit in the ruin of millions of middle-class families'
balance sheets. The hand-wringers nevertheless blame the banks,
as if the banks were not extensions of the Federal Reserve System.
never mentions any of this. Neither do her hand-wringing peers.
anyone who blames the FED for all this as a crackpot. Anyone who
wants the government to audit the FED is a nut case, someone intent
on undermining the independence of the FED. Then they call for more
regulation of commercial banking.
is not an affliction only of the voters.
MAKES ECONOMIES GROW?
to this question has been clear since the days of the little-known
School of Salamanca in the sixteenth century. It was popularized
by Adam Smith in 1776. This was made even more clear by Austrian
School economists, beginning in the 1870s.
economies grow is this: (1) private ownership, (2) future-orientation,
(3) capital formation through thrift, (4) technological innovation,
(5) a system of profits and losses, (6) low taxation, (7) free trade
at every level, (8) the enforcement of contracts, (9) honest money,
(10) the reduction of envy. This list can be boiled down into three
phrases, all of which have been dominant in the history of the United
Live and let live.
2. Let's make a deal.
3. Mind your own business.
middle class has seen its progress blunted ever since 1973. There
are reasons for this. (1) present-orientation, (2) capital consumption
through reduced thrift, (3) government-capped profits and government-subsidized
losses, (4) rising taxation (Social Security), and (5) dishonest
money (no gold exchange standard after 1971).
What has saved
the middle class from ruination is this: (1) private ownership,
(2) technological innovation, (3) free trade, (4) the enforcement
of contracts, (5) the reduction of envy.
is still alive and well in the United States. It is very easy to
start a company. The USA remains the richest free trade zone on
earth. Generally, "live and let live" overcomes the politics of
envy. "Mind your own business" is honored in the breach, although
the extension of Homeland Security is undermining this relentlessly.
So, there is
a war on. It's an ideological war. The Keynesians want to reduce
the extent of the second list of five. The libertarians want to
increase this list and then reduce the government's restrictions
on the first five.
of the economic future of the United States and the West should
focus on the list of ten virtues of the free society. There are
large segments of the elite that do not see them as virtues except
when overseen by government-empowered, academically certified experts.
is happening in the Middle East indicates that millions of people
have had enough. The attitude of Americans toward a government shutdown
indicates that they have also had enough . . . before any pain from
a shutdown actually sets in, anyway. The fact that legislatures
are ready to confront the public employee unions indicates that
the last remaining stronghold of union power is about to end.
Where we are
clearly losing is in monetary policy. Dishonest money is still undermining
the middle class. Until that battle has ended in favor of the enforcement
of contracts, the abolition of legal tender laws, and the abolition
of central banking, the middle class will be on the defensive.
end the FED.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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