Destroy the middle-class, and you will destroy democracy

David Madland describes the middle-class in the following way: Being middle class in a middle-class society—where most people have adequate financial resources and stability, but not enough to allow for a life of leisure—fosters attitudes and behaviors that are essential to building a healthy capitalist system. Middle-class parents raise their children to value work and education because they understand their children will be dependent upon work, not capital, for most of their income. They convey to their children the principle that if you work hard within the system and follow the rules, you will get ahead. They pass down the patience necessary for children to pursue an education, career, or entrepreneurial activity, and they have the economic means to sustain that patience and plan for the long term.” (David Madland, Issue #20, Spring 2011, www.democracyjournal.org)

Well, the faith in the virtues of hard work and belief in the system appears to be eroding all around the World these days. The ultimate price of this erosion may not be the fall of capitalism but of democracy. The status of the middle-class is an indicator of society’s socio-cultural support for the principles of democracy. For years now, the middle class has been shrinking in the West. In fact, the financial rescue packages in the US, launched in the wake of the financial crisis of 2008, has been middle-class destructive, with the poor people paying the price in two specific ways, according to Mike Shedlock: (1) Excessively low interest rates on deposits, which makes saving unattractive, and (2) the Federal Reserve’s actions to drive up inflation at a time when real wages do not rise correspondingly. (http://globaleconomicanalysis.blogspot.com)

The American historian Francis Fukuyama explains how “Marxists didn’t get their communist utopia because mature capitalism generated middle-class societies, not working-class ones.“ However, Fukuyama now raises the uncomfortable question – what happens to the middle-class if the rapid development of technologies and globalization “makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status.” In the words of sociologist Barrington Moore, “No bourgeois, no democracy.”Fukuyama points to statistics showing that the “median incomes in the United States have been stagnating in real terms since the 1970s.” (Francis Fukuyama in Foreign Affairs, January/February 2012 issue)

Over the last 40 years, a very large number of manufacturing jobs in the West have been outsourced to countries with lower wages (costs), jobs that have not been universally replaced, pushing large groups of society into unemployment, benefit dependencies and relative poverty. Recent statistics from the US Bureau of Labor Statistics shows that the top 10 occupations in the US, measured in number of workers, are retail salespersons, cashiers, cooks and waiters, office clerks, nurses, customer service representatives, logistics personnel, secretaries, janitors and cleaners. Most of these service jobs are paid almost 50% of the US median income. To keep up with raising prices, many people with low paid jobs will have to hold two jobs to make ends meet. This is not the base of a new emerging middle-class. This is cementing the existence of a lower class, and one that is just barely keeping its head above water.

In the euro-zone countries (17 European countries using the euro currency) the situation is even worse. There is a constant loss of mid-pay jobs, mainly as a result of companies closing down, cutbacks in government spending (slimming the state bureaucracy) and globalization (outsourcing work). In total, 7.6 million mid-pay jobs have been lost since 2008, while 4.3 million low-pay jobs were created during approximately the same time period. Maarten Goos, an economist at the University of Leuven in Belgium, warns that Europe could double its middle-class job losses. The ‘emptying’ of the middle-class is far from over.

“Both America and Europe have shrinking middles. The real-terms incomes of many people on low and middle incomes have barely risen over the past 30 years. It is perhaps easier to see the downward spiral of the American middle classes as we gaze on the ‘ruin porn’ of Detroit. Simply put, their share of the income pie has dropped, while that of the top 7% grows.” (Suzanne Moore, The Guardian, 28 August 2013) While the middle-class is shrinking the inequalities in society are growing, even in traditionally egalitarian countries, such as Germany and Sweden. According an OECD report from 2011, “the highest 10% of earners have been leaving the middle earners behind more rapidly than the lowest earners have been drifting away from the middle”. Furthermore, “capital income, or income derived from wealth not work, has been a particularly notable source of rising inequality”. (http://www.huffingtonpost.com/2011/05/03/income-inequality-oecd-report-rising_n_857057.html)

The health, strength and size of the middle-class is closely linked to two of the pillars of a well-performing nations state – economic growth and good governance. If there is no middle-class to consume the supplied products and services, the entire economy will suffer. Until now, the accumulated purchasing power and habits of the very small elites in Western societies and the growing lower classes are not enough to compensate for the dwindling middle-class. David Madland highlights a number of additional societal benefits of a confident middle-class, such as it being “a prerequisite for robust entrepreneurship and innovation, a source of trust that makes business transactions more efficient, a bulwark against credit booms and busts, and a progenitor of virtuous, forward-looking behaviors, such as valuing education.” (David Madland, December 7, 2011 on www.americanprogress.org)

The middle-class expects transparency and professionalism from the public sector. As taxpayers, the middle class advocates ‘good governance’ by the state. Better governance is a pre-requisite to economic growth. It is no surprise that the Nordic countries, famous for relatively high taxes, yet well performing state structures, are also among the most competitive economies in the world. An increasingly unequal society, where a small political-business elite dominates the formation of public action, mainly to serve their own short-term interests, is destroying the middle-class. The elite shows little understanding of the linkages between an affluent middle-class and democracy. Or perhaps they do understand, but while they are not willing to sacrifice their selfish notion of capitalism, they are all too happy to let democracy go, as long as they find themselves on top of whatever political system that emerges.

Along these lines, David Madland highlights that while the British economist John Maynard Keynes is famous for his work on stimulating demand to pull an economy out of recession, he is less known for his vigorous support of the middle class. In fact, Keynes “recognized the importance of the middle class in creating sufficient demand to stimulate growth. He argued that extremely unequal distributions of income depress demand and thus reduce growth.” This goes some way of explaining why the world’s many financial rescue packages since 2008 have failed, the funds were absorbed by banks and stock markets, and never really filtered down to the people.

Madland continues, in defense of the middle-class, by stressing that a “strong middle class leads to higher levels of trust. When a society is largely middle class, strangers are more willing to try to work with one another in business and in life, and people are more likely to be optimistic and believe that they can control their circumstances. In addition, people feel they share a similar fate and form stronger social bonds.” In transition countries, the lack of trust and social capital in society is a major constraint on development. Even private companies are incapable of growing in size due mainly to lack of trust among owners, managers and staff.

Furthermore, according to Madland, a “strong middle class…fosters better governance by helping ensure government is well-run, increasing citizen participation, minimizing factional fighting, and promoting policies for the benefit of all of society rather than special interests. In contrast, economic inequality and a weak middle class make the political system imbalanced and depress the political participation of the non-wealthy, reducing voting, discussion, and interest in public policy.” In which category of governance does your country belong?

However, the values of trust, good governance and respect for hard work are currently under threat from what David Callahan calls the “Cheating Culture”. The middle-class environment, characterised by certain behaviors, achievements, and attitudes, which in turn promote economic growth, can be “undone by extreme levels of economic inequality.” The rise in “white-collar crime and ethical misconduct among employees…in the business world has been fueled by rising economic inequality, which has broken down social norms and made cheating more rewarding. (David Madland, Issue #20, Spring 2011, www.democracyjournal.org)

Was this the message of Martin Scorcese’s “The Wolf of Wall Street”, that ‘cheating’ is to be perceived as the modern, socially acceptable path to riches, and that riches is the new nirvana, full stop. But the ‘cheating culture’ goes beyond the financial world. What about the Greek and Italian voters, have they not been ‘cheated’ out of their democratic right to select their political leaders in recent years?

Francis Fukuyama presents a gloomy picture for the future of the middle-class in the West, when stating that “ the bursting of the housing bubble in 2008–9 was nothing more than a cruel reversion to the mean. Americans may today benefit from cheap cell phones, inexpensive clothing, and Facebook, but they increasingly cannot afford their own homes, or health insurance, or comfortable pensions when they retire. (Francis Fukuyama in Foreign Affairs, January/February 2012 issue)

So, with unemployment, poverty and social exclusion on the rise across Europe and the US, and with a political system seemingly incapable of responding to the crisis and the demands for change among the citizens, is there a future for democracy? Or are we on a slippery slope towards more authoritarian political systems, which may be better equipped for crisis management and making the necessary ‘tough decisions’, than the democratic system’s endless checks and balances, review processes and public dialogue, and where the key actors are worried about being re-elected?

Looking ahead, the challenge for ‘Old Europe’ and the US (the West) is to re-build the middle-class, as a means of saving the democratic principles upholding our societies that made us wealthy in the first place. The challenge among transitional countries is stop the ‘brain-drain’ and to create a middle-class, that is confident, financially independent and active enough to fight off the authoritarian political culture and oligarchical business models, which currently suffocate all efforts of collective and systemic development.

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About Jakob Modéer

22 years of corporate and international investor experience as well as private sector development project management, consultancy in private sector policy and business advisory services, and direct consultancy to companies in South East Europe (and now a blogger on socio-economic issues)
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