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Build a Better Tomorrow

Things rarely go as planned.  I was hoping to move from my analysis explaining the current Depression (or potential Depression) into some solutions.  Along the way, I realized that most of my solutions were rather vague, which is to say a lot like FDR’s plan.  Since I don’t expect anyone to believe I have anything in common with FDR (other than being a terrier owner), it seemed like time to punt.  Beyond that, it became very clear to me that people do not understand why a heavy reliance on finance is such a bad thing.  So here we go.

I’d like to start with the following graph, which is at the heart of my argument.  It shows the share of Gross Domestic Product (GDP) taken up by just three sectors that have changed significantly over the last 60 years – Manufacturing, Services, and the catch-all Finance, Insurance, and Real Estate (FIRE).

gdpsector

Note that during the Glory Daze of Annette Funicello and Beaver Cleaver manufacturing was a much larger percentage of our economy.  Around 1968 or so it starts to turn downward, and is now less than half the share it once held.  FIRE and services both climbed to fill the difference.

The next graph is harder to explain.  It shows the net income disparity by looking at the definition of “Middle  Class” that is most commonly used – the middle 60%, or where you cut off the income limits to leave off the top 20% and the bottom 20%.  The ratio between them shows how the two ends of the Middle Class are doing.

income1

Note that about the same time Manufacturing started to slip as a share of our economy, the upper end of the Middle Class went from about three times the lower end’s income to more than four times as much.

These are closely related because the three sectors I am highlighting – again, the only ones that significantly changed as a share of GDP in this period – have very different employment profiles.  FIRE typically creates a small number of high paying jobs, while Services have a large number of lower paying jobs.  Manufacturing jobs were, at least before 1968, the backbone of lower-middle class America, providing a relatively large number of high skill, high wage jobs.

The relationship between these sectors is at the heart of why income disparity is growing in the USofA and why our economic security is being threatened.  How does this happen?

The high overhead cost per employee and the relatively high value of the dollar are the reasons why.  The dollar is strong for many reasons, including international agreements and our incredible economic power.  Foreign traders look to the USofA as a safe place to invest, and when we also became a place to make a lot of money the dollar only became stronger.  Our financial excesses are directly related to the sickening plunge that occurs at the end of both curves, bringing us to today.

In short, the great American Empire is the single biggest threat to America, or at least the nation we like to mythologize.

I realize that some people believe we can make an entire economy out of little more than intellectual property and finance.  They often see factories as dirty and outdated.  My message is not likely to be popular, at least among people at the upper end of that middle-class ratio I described.  My response to them is simple:

If you haven’t figured out that what we’ve been doing isn’t sustainable, please fasten your seatbelts.  Thank you.

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12 thoughts on “Build a Better Tomorrow

  1. eric, how refreshing to read the acronym FIRE reminds me of the days when I read of such things . I do remember reading a study/work that was commissioned that many americans at the time were turning away from manufacturing because it was dull and boring. Well we now know how exciting/dull personal computers are at work. Every employee has all kinds of metrics tracking them and their efforts.
    I remember my Dad one summer working in a slaughterhouse to supplement his teachers salary. He never wanted his two sons to have to work there. And we never did, though some of our friends did in the summer Now Worthington is one of the most diverse cities in Minnesota with hispanics and somalis doing the majority of the heavy work. My brother and I after college chose careers that involved working with our hands. One career died but the other lives on.
    And you’re right payroll taxes are too high. We should add back in a higher inheritance tax wealthy inheritors pay less than workers. Former mayor Larry Agran suggested this in presential debates some years ago and he was shut out by the media.
    I am currently reading a three volume set of life in Europe from 1500 to 1800. The first volume is almost entirely on peasant life. The second volume is much more about finance. I will try to share some tidbits in the future. Gruel that had an added egg or honey was a real treat.

  2. Erik, I read a few of your former blogs. The five challenges, and american empire. I think there is a danger of romanticizing the great depression as it has been filtered in different ways. My Dad told me of having to beat thistles for livestock feed. Or the time a horse was shot because income was short. Or reading mrs. roosevelts seeing kids in the dakotas in extremely cold packed rooms eating raw sugar. Some things like that still happen.
    It seems like right now (which is too early) there is little or no effort to to curtail American military power. Stockpiles will be rebuilt and probably supported as every state is involved and it is one source of internal stability. Many young people join the guard after having a baby cuz its a source of additional income and benefits. Also the manufacturing is one of the few “good” jobs.
    I’m not necessarily defending that but travel in rural minnesota and you get a different vibe.
    Parts of our country are so atomized right now as we have lost some common basis. A drift from small towns, a drift from families, a drift from social groups including churches. I read a book a few years ago written by an east coast professor who was befriended by a small church. One statement he said that encapsulated his view that whenever he was near the parish he never had to worry about his car breaking down cuz he knew he had 3 friends who would help him in a split second. Later he was hosted at a NPR event it was evident that many had not read the book. All 3 moderators were liberal to moderate. When one audience member voiced something to the effect how do we deal with people like this who we disagree a conservative immigrant pastor jumped up and said he is right here. And that he disagreed with the overall makeup of the crowd. It was quite electric.
    You have a good blog. Enjoy visual aids when you discuss economics. Your comment screen could be wider as it writes like a news column. The sky is almost always with mixed clouds.

  3. Thank you both, too much good stuff to comment on point by point – too much that doesn’t need me to add anything to, either.

    I would like to point out my series on “A More Perfect Union”, which has a link on the right. I’m not going to tell you I have all the answers, but I think it’s a very important topic. We don’t have the kind of common culture it takes to survive hard times – or really call ourselves one nation. The fragmentation of our culture is very chilling and, to my mind, the biggest long term threat we face.

    I know I have a city boy’s view on this. I don’t get out in rural Minnesota much, at least not since I stopped working with the Amish near Harmony, MN. I learned a lot down there, and I really should get back out there. What I do know is that values are one thing and people are another – you don’t have to agree with your neighbor to be helpful. If the Amish and Anglischers (their name for us) can do it, anyone can.

    What I’m getting at here with manufacturing is really just a sub-set of an earlier post on what it takes to create jobs. I proposed that the overhead cost per employee needs to be looked at seriously – which includes payroll taxes, health care, and many other things. The loss of manufacturing is tied to that problem, along with the Imperial Dollar that rules the world and has provided us with a lot of cheap stuff from other nations.

    What are my solutions? I think Monday’s post will be on why I don’t have a lot of solutions yet. The main problem, to me, is that we’re not talking about real issues that make a real difference. I’m not smart enough to come up with everything on my own. Without hearing from rural people and older people and a lot of other people I can’t say just what will work.

    What I do know is that a lot of voices aren’t heard, and a lot of topics haven’t been seriously hashed out. I’m not jumping to any conclusions – I’m only sure which way this has to go if it’s gonna get real. But I really thank you both for diving in and helping that along.

    I’d like a lot more comments, long and juicy comments, if you would be so kind to recommend this humble blog to a few friends. I hope we’re talking this towards a new understanding. Thanks!

  4. Erik, very gratifying to hear and read from you my one name was a typo error. I hope you didn’t see me as a barking dog (which was a part of one of your many great essays) And I apologize a bit for some of my disorganization and haste in writing but one has to juggle work, family, friends, reading (and more reading). I really do like your writing thus far and some of your non partisanship I see that biting a lot in comment threads in other sites strib and mnspeak. Also you are very intelligent much more so than others but seemingly modest. I did comment on one of your earlier essays today about the urban core a slightly “older” take. You have had 2 very good series urban core and fringe living.

  5. my apologies consult the wheels of commerce by Fernand Braudel. I will quote ” braudel argues that monied men did not specialize and did not use free markets..he thus diverged from both liberal (Adam Smith) and Marxian analysis…the state served as a guarantor of monopolists (or oligarchies or duopoly my addition) rather than as a protector of competition usually portrayed. he said monied men have power and cunning on their side, and they have been arrayed against the majority of the population. few historians have followed up on this lead.

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