While this week the media paid rapt attention to Deflate-gate---the apparent lack of ball pressure in the Patriots-Colts football game---another little news event got short shrift. That would be the State of the Union address. And yes, maybe it was a laundry list of wishes that will never come true given a Democrat in the White House and a Republican-controlled Congress. But it touched on another issue of deflation that is even more important than Super Bowl XLIX.
The deflation of middle class wages is that issue, and pretty much everything in our economy boils down to it. Full disclosure: I'm a member of the middle class. But the fact is our economy is consumer-based, and depends largely on spending by the middle class. About 70% of our GDP is based on consumer spending.
Other facts: The top 20% of households by wealth now account for more consumer spending than the middle class, according to a PricewaterhouseCoopers study. The same study found that 90% of all increase in consumption between 2009 and 2012 came from that top 20% of households.
And it's not just the case of the rich getting richer and spending at a greater rate than the middle class. Middle class wages are deflating. On an inflation-adjusted basis, middle class household income has dropped from $56,895 in 1999 to $51,939 in 2013.
And if that doesn't get your attention, after-tax, middle class incomes in Canada now exceed those in the U.S., according to a New York Times study. Oh, Canada, how could that have happened?
This isn't just sad news for our middle class and our economy. In a recent post, economist Ed Yardeni put a fine point on this, when he said that "the U.S. consumer has been the world economy's Samson." He points out that our buying is more important than ever given the Eurozone and Japan are "mired" in stagnation and China's growth is dropping. "So it's all up to the U.S. consumer to keep the U.S. and global economies growing," Yardeni wrote.
Back to Obama
So in the State of the Union President Obama addressed the plight of the middle class, in part by proposing higher taxes on the wealth and tax breaks for the middle class.
Talking about such policy proposals is a touchy business because America is so polarized. So I'm sure I'll step on some sensibilities in what follows, but my goal is just to discuss what can be done to raise middle class incomes.
Another full disclosure: I love ticking off both my liberal and conservative friends by challenging their economic assumptions, so I consider myself a staunch independent and an equal-opportunity agitator.
First, transferring wealth from one class to another doesn't fix the problem. Nor will it someone how kick start a reformation of the economy and start the middle class earning more. I can pour as much starter fluid as I like into my car's carburetor, but the engine's never going to do more than sputter if a couple cylinders are blown.
And because of rising productivity and international competition, our middle class wages are slipping with no end in sight. Yet another full disclosure: I love capitalism, but together with Adam Smith and other philosophers and pundits, I know capitalism has its limits. So unleashing more capitalism through tax reform or cutting back regulations isn't going to fix this.
So what are the fixes? The Center for American Progress released a report last week that addressed the problem with some analysis and proposed solutions.
Interestingly for Investing Daily readers, the report drew comparisons between the U.S., and Australia and Canada, two countries similar to ours that have seen rising middle class wages while ours have fallen. And by interesting, I mean we have newsletters devoted to investing in each country, Canadian Edge and Australian Edge giving you another reason to subscribe to each, if you haven't already.
The Center for American Progress is a left-of-center institution, but I think some weight should be given to its research and conclusions. One is that Australia and Canada do a better job at educating their populaces.
Preschool has been proven to be the great equalizer in education, and both countries guarantee free preschool to almost all their kids. If you can get a child off to a good start, they'll do much better in school, which of course translates into a better job. They also pay pick up the tab for low-income students to get through college much better than we do.
Obama has proposed two-free years of community college, and with the proper screens and caveats (you must do well in high school, and you must be truly needy), I think that's a good idea.
Those countries transfer wealth more from the rich to the poor and middle class. No comment there.
So education is key, and I buy that. I also believe investing in infrastructure is not only necessary but is a good investment to increasing incomes on a permanent basis---I'll talk about this more and cite studies in another column. But for now, here's a current column from our Global Income Edge newsletter that discusses infrastructure as a great investment.
A hopeful sign is many of the presidential candidates from both parties are discussing what can be done to help the middle class. We all should be watching these proposals with a keen eye, because our personal prosperity, the prosperity of our country and to some degree the stability of the world economy depends on it.
Final full disclosure: I'm going to vote for the candidate with the best, most practical plan to engineer a sustained improvement of middle class income. My concern about deflation isn't PSI as in pounds per square inch, it's PSI as in prosperity per surging income.
This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email.
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