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Creative Destruction the Middle Class, Part 1

Fri, 05/18/2012 - 12:11pm
MICHAEL P. COLLINS, Author, Saving American Manufacturing

By MICHAEL P. COLLINS, Author, Saving American Manufacturing

Mike Collins ImageJoseph Schumpeter, in his classic book Capitalism, Socialism and Democracy, called eras of great change in a capitalist system creative destruction. He made the term famous when he used it as a process in which the old ways of doing things are destroyed and replaced by new ways.

We appear to be going through one of the periods of great change and creative destruction now, as witnessed by what is happening to the middle class and living standards.

Changes that Led to the Crisis

Everyone likes to blame Wal-Mart, the Chinese or the recent financial collapse as the reasons for economic changes, but the forces that led to this creative destruction and great change are not new. These changes actually began more than 25 years ago, and the results were actually predicted in a 1987 report, dubbed “Technology and the American Economic Transition” from the Office of Technology Assessment.

Here’s what this report predicted:

“During the next two decades, new technologies, rapid increases in foreign trade, and the tastes and values of a new generation of Americans are likely to reshape virtually every product, every service and every job in the U.S. These forces will shake the foundations of the most secure American businesses.”

This was the very first report in my research that predicted the potential problems associated with the decline of manufacturing and the changes that would lead to a post-industrial economy.

The report went on to say, “Certainly, it is now possible that the U.S. will find its living standards in decline with respect to its competitors, and discover its role as an economic and military leader of the free world called into question in the next two decades.”

It has now been 23 years since that report, and all evidence seems to support the conclusions. The report made four fundamental predictions that are worthy of review.

1. “Change can lead to wrenching dislocation and pain for workers with obsolete skills, for management unable to recognize opportunity, and for communities where traditional businesses have failed.”

Clearly, the answer to this prediction was correct. It is particularly true when you examine the losses in manufacturing and related industries. More than 2.3 million manufacturing jobs have been lost since 2000, and 6 million manufacturing jobs have been lost since 1979. The wrenching pain of job loss is not just the pain of manufacturing blue-collar workers. Between 1980 and 1993, the top 500 industrial corporations cut 4.5 million jobs — both blue collar and white collar.

In addition, the information jobs that were supposed to be the answer in the post-industrial society — jobs such as financial services, software and customer service — are moving to lower cost countries.

Furthermore, the prediction that the transformation could affect every product, service and job is proving correct; and the dislocation and pain seems to be spread over a wide range of industries and jobs. But wrenching dislocation and pain is turning out to be more than just loss of jobs.

The “Index of Social Health and Gross Domestic Product” (GDP) is an index created by Fordham Institute of Innovation on Social Policy to measure nine social indicators in relation to economic growth.

Since the 1970s, the Index of Social Health has shown a disturbing downtrend in measurements like child poverty, healthcare coverage, youth homicide, food assistance, housing assistance, employee benefits, as well as other key measures of social health. This index also shows that the long-term trend line for social problems is getting worse compared to GDP growth. This trend is closely associated to the decline of working-class and middle-class incomes.

History shows that we eventually pay for social problems one way or another, and usually it is the government that must step in, and offer the programs and answers. One part of the answer to arresting this long-term slide is to provide the family-wage jobs that help support families and keep them together.

2. “Change can create an America in graceless decline — its living standards falling behind those of other world powers.”  

Even with the unarguable growth of wealth in the top 10 percent of the population, U.S. living standards have fallen for most of the middle and working class. Since 1977, the after-tax income of 60 percent of American households has been declining, and another 20 percent has made a small gain. The data in this report clearly show that the shift to the post-industrial economy are now lowering the living standards of the majority of Americans.

Whether our living standards will fall behind the other world powers is still in question, but an “America in graceless decline” is still an appropriate prediction.

A middle-class study published in Parade Magazine in 2006 revealed the following responses:

  1. Nearly 57 percent say that they believe the middle class in America is decreasing.
  2. 66 percent say that they tend to live from paycheck to paycheck.
  3. Nearly 83 percent say that there is not much money left to save after they have paid their bills.
  4. 89 percent of the respondents believe that businesses have a social responsibility to their employees and to the community, but …

Elizabeth Warren, the Leo Gottlieb Professor of Law at Harvard and the chairperson of the congressional oversight panel on the Troubled Asset Relief Program (TARP), is convinced the middle class is disappearing.

She says, “one in five Americans is unemployed, underemployed or just plain out of work. One in eight mortgages is in default or foreclosure, and one in nine families can’t make the minimum payment on their credit cards. One in eight Americans is on food stamps. More then 120,000 families are filing for bankruptcy every month. The economic crisis has wiped out more then $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put 10 million homeowners out on the street.”

What’s your take? Please feel free to leave a comment below! Tune into the Chemical Equipment Daily for part two of this two-part series. Michael P. Collins is the author of the book Saving American Manufacturing. You can find more related articles on his website via www.mpcmgt.com.

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