What's Eroding the Middle Class?

January , 2016

This erosion of a self-employed, independent middle class was an important pre-condition for the collapse of Rome and the French Revolution.

I have devoted many blog posts to the erosion of the middle class, for the specific reason that when the middle class--the layers of the economy between the Power Elites and landless laborers/state dependents--erodes away, the nation/empire is destabilized and descends into crisis.

A society without a functioning middle layer of economic and social activity is not stable, though repression can mask this for a time.

As historian Peter Turchin explained in his book War and Peace and War: The Rise and Fall of Empires, societies that lose the cohesion needed for concerted, collective action collapse, either by failing to meet an external threat or from internal conflicts.

Economies constructed of a supremely wealthy elite, a thin layer of independent artisans and small farmers, and a great mass of laborers with no assets has no shared sense of identity or purpose; those at the bottom have little in common with those at the top, and the thin middle that is scraping by has little affinity with either the elite above or the poverty-stricken below.

This erosion of a self-employed, independent middle class was an important pre-condition for the collapse of Rome and the French Revolution.

As I have outlined in some detail, the middle class in the U.S. is eroding: the lifestyle that was widely accessible to a broad swath of households in the 1960s is now only available to the top 10% below the wealthy (the top 5%). This includes not just possessions like a home or vehicle but productive assets that can be handed down to the next generation.

As it stands now, many households that consider themselves "middle class" have few if any productive assets, and even fewer will have any assets to pass on to the next generation as their retirement and other expenses may well consume much of whatever assets they currently own.

There are five primary drivers of this erosion in my view:

1. The shifting of pension and healthcare costs/risks from the state and employers to employees

2. The decline of scarcity value to labor in general and specifically in college degrees that were once the guaranteed ticket to middle class security

3. The inexorable rise in big-ticket costs: higher education, healthcare and housing. Even as wages stagnate, these costs continue rising. claiming an ever-larger share of household incomes, leaving less to save/invest.

4. The transition from an economy with stable returns to a financialized boom-and-bust economy that wipes out middle class wealth in the busts but doe not rebuild it in the booms.

5. The regulatory and administrative barriers to self-employment in a globalized economy.

There is zero evidence that any of these drivers is going to reverse, for the reason that they are reflections of deep forces that cannot be reversed: demographics, the exhaustion of financialization, the 3rd Industrial Revolution (i.e. the digital/automation revolution) and the loss of scarcity value in the foundations of the middle class: labor and financial capital.

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