Everyone knows there are winners and losers when capitalism is functioning without government interference. A good example is the top 1% of U.S. households’ share of total wealth, which grew to 7% in 1975 to 24% in 2016. During the same time, almost everybody else’s income stagnated or declined.
The middle class knows there has been a tremendous shift in wealth, and they wonder why they have to sacrifice and learn to live on less, while the wealthy accumulate more gold then they can carry.
Typical of what happened to manufacturing workers in the last two decades is what happened to those working at the Carrier plants in Indiana. The 2,400 highly skilled workers had built high quality air conditioners for many years in Indiana, and the plant produced a 10% profit for its parent company, United Technologies Corp. However, when UTC held its annual meeting with stock analysts in New York, the investors demanded a higher return (around 18%). UTC management decided they had to reach this new goal. To do so, it decided to close the Carrier plant and send the production to Mexico. There was no consideration for the loyal families who had given their best years to Carrier. In one decision, they had been declared losers of free market capitalism.
In the case of Carrier, President-Elect Donald J. Trump intervened, convincing the company to keep around 800 jobs in the U.S. But the problem is so widespread that most economists agree that such a company-by-company approach is not viable on a larger scale.
However, Trump also has made numerous promises to adopt policies that will, among other things, stop U.S. manufacturers from moving production jobs offshore.
What to do?
I am trying to make the argument that it is in the interest of the wealthy and corporations to find ways to reverse this decline and allow working people to share in the prosperity and successes of the economy. The Free-Market Absolutists will never go along with this idea because they simply believe that capitalism creates winners and losers, and that is how it should be.
Free Market Absolutists also believe that neither capitalism nor the government is responsible to help the losers. In their free market economy, everybody has a chance to participate in getting a piece of the market pie, but if you can’t, it is your responsibility. The free market view is that if you cannot make enough money to live on, the market has determined that you aren’t worth enough. If others make millions of dollars they must be worth it and deserve it.
But I think this view is shortsighted and strategically naïve.
There is a tipping point in society where the problems of the losers simply cost too much and are politically unacceptable--they become a threat to both the country and capitalism. In addition to the social problems created, lower consumption means lower GDP growth and less wealth.
It is in the interest of all parties to find ways to reverse this decline.
The Devastation of the Middle-Class
To get a sense of the scale of the problem, here are a few excerpts from the book Nothing But Blue Skies. In it is the is the story of Nadine, a secretary who wanted to get the income of a blue collar auto worker. She was hired at the General Motors Lordstown, Ohio, plant as a temporary worker and at 70% of the full time rate of $28 per hour. After six months, the union representative called her in to announce that she would be a permanent employee, but she would have to take a temporary pay cut. This was the new two-tier wage program at 50% of the $28 fulltime rate. If she didn’t sign the contract, she would be fired and could not apply for unemployment. She had no choice, and signed the agreement.
Nadine was a single woman who had nobody to share expenses with her. In the book, Nadine is quoted: “I am struggling to make my mortgage payments and am losing five to seven hundred dollars per week. After I put gas in my car, pay late bills and late fees, I have twenty dollars left to eat for a week and a half.“
She had gone from a job which paid a decent wage of $48,000 per year to a job paying $26,880 per year (below the poverty level).
The two-tier wage system happened everywhere in the auto industry forcing thousands of workers into poverty level wages.
Another example from the same book was the A. E. Staley plant in Decatur, Illinois. The company had been a family-owned for three generations, but the fourth generation sold it to a British multinational corporation called Tate and Lyle. The new company wanted to get rid of the union, so it offered a new agreement that would force employees to work more hours for less money and on rotating shifts. Ultimately, Tate and Lyle locked out the union and hired replacement workers for the 800 union jobs.
One of the union workers, Dan Lane, is quoted as having said: “Why are they doing this to me, I have a family they don’t give a crap about. They don’t give a crap about me. How can this be happening? Why would you treat somebody like this?”
What Dan didn’t know was that the problems at A. E. Staley were happening all across America. Since the 1980s, multinational corporations have employed strategies to get rid of unions and lower their labor costs. It has been a flashpoint for the new economic globalization that discarded family and community values in the name of profit.
After five years of protests, the union lost all 800 jobs, and the workers in Decatur had to find other forms of employment.
Today millions of working people have fallen into the “loser” category and are faced with downward mobility. Did you know the following?:
- The U.S. Census data on poverty in 2012 shows that 46.2 million people live below the poverty line, which is the highest figure in 52 years.
- It also shows that 16.4 million children also live in poverty, the highest number since 1962.
- Its data also shows that 55.3 million households make less than $50,000 per year.
- The average household income has fallen by over 10% in the past 10 years.
- More than 25 million middle-class families are living paycheck to paycheck, with a median income of $41,000 and median assets of $41,000.
- A recent poll by the Washington Post found that 45% of the middle class said “they worry a lot about having money for retirement, and 57% said they worry about meeting their bills.”
Since 2008, many Americans have lost their houses, jobs, and retirement savings. In the Economic Malaise, Charles A.Kupchan says, “Never before has the median household income dropped during an economic recovery.” These setbacks came on the heels of back-to-back decades of stagnation in middle-class wages.
The middle class lives in a world of Social Darwinism where there is a permanent threat of unemployment and insecurity. The decline of the middle class does not appear to be ending or even slowing down. And more losers will be created by our freewheeling free market approach to capitalism.
Robert Reich in his article "The Myth of the Fee Market," writes: “As ever larger numbers of Americans conclude the game is rigged against them, the social fabric will start to unravel.” He described this as a political threat where, “Widening inequality, coupled with a growing perception that big business and Wall Street are in cahoots with big government for the purpose of making the rich even richer, gives fodder to demagogues on the extreme right and the extreme left.”
The Trump Phenomenon
So the losers of free market capitalism have been the victims of globalization and the question is, do they have any power to do anything about it? Those on the losing side represent a large group of citizens with, cumulatively, a lot of political power. If a charismatic politician comes along who can show them how they are all in the same boat, big changes are probable. And along came Donald Trump to win the presidency by appealing to the problems of millions of losers.
We are now at an inflection point in our history. President-elect Trump has promised the following:
- "We will make America the best place in the world to start a business, hire workers, and open a factory."
- In his acceptance speech, “Trump promised 25 million jobs over 10 years and 4% GDP growth.”
- “The Trump administration will rewrite the entire regulatory code to ensure that we keep jobs and wealth in America.”
- The Trump transition team indicates the Trump administration would consider renegotiating NAFTA or even withdrawing from it.
- He will invest a trillion dollars to repair or replace our infrastructure.
- Trump said, he would take the side of American workers against the economic elite.
- Trump’s biggest promise was to confront China. He said many times that he would stop China from manipulating itscurrency, by taxing their imports. The Economic Policy Institute study concludes that stopping currency manipulation could create between 2.3 and 5.8 million jobs (40% in manufacturing).1
- While campaigning in Pittsburgh, he said he would bring back the steel industry, and he promised the autoworkers in Michigan that he would bring their jobs back.
The losers seem to have been literally invisible to most citizens until the surprise win by Donald Trump. The middle class has more than 100 million workers who are also voters and millions of these workers are blue collar workers. It is very dangerous for politicians to ignore this fact (as Hillary Clinton found out).
If we are to avoid government solutions, then it is time to think of new ways to govern and ways to share some of the prosperity with working people. This possibility should create genuine concern in the hearts of Free Market Absolutists--because the middle class and the “losers" now have the votes.
There is nothing more dangerous in society then someone who has nothing left to lose.
Conservatives will not want to subsidize this underclass. So, the alternative, quite simply, is to find ways to create an economy where there is more shared prosperity, but it won’t be simple.
Just like in the depression, millions of people have been suffering from the free market strategy. These people saw their chance for change and voted for Donald Trump. They are still out there suffering, and will be patiently waiting for Trump to keep his promises (with fixed bayonets).
If Mr. Trump cannot keep his promises, a second uprising is inevitable--and the "losers" have proved they are a political force to be reckoned with.
Michael Collins is president of consulting company MPC Management.