The Disappearing Middle Class

Because our educational system is such a worthless piece of crap, most Americans cling to the ignorant belief that if something is good for business, then it is automatically good for the economy. By failing to educate people on the fundamental differences between business and economics, we have created a system in which the middle class necessarily becomes hollowed out.

Since the early 1980s, most people have succumbed to the naïve idea that business leaders should solely focus on maximizing the value of their firm. In general, this has been taken to mean that they should try and maximize the profitability of their firm. In order to do so, business leaders will necessarily try and maximize their income while minimizing their expenses.

Since the early 1980s, business leaders have been extremely successful in their efforts to grow their profits. Corporate profits as a % of GDP went from around 6% in 1980 to around 11% today. The number of corporations filing for bankruptcy each year went from an all-time high in 1987 to near an all-time low today. The Dow Jones stock average went from about 2,000 in the early 1980s to around 17,000 today.

Despite the amazing success of businesses, the economy has grown weaker and weaker and the middle class has been gradually eroded. Why?  Because the idea of maximizing profits makes perfect business sense, but it makes ZERO ECONOMIC SENSE!

In economic terms, one person’s income is another person’s expense. If I buy a cupcake from you for $3.00, your income is my expense. So telling businesses to maximize their income while minimizing their expenses, is the same thing as telling them to maximize other people’s expenses while minimizing other people’s income!

Not surprisingly, with every business in our economy trying to maximize their own income while minimizing the income of others, that is exactly what has happened. Some people have seen their income rise (i.e. they have moved up from the middle class), while many others have seen their income fall (i.e. they have been squeezed down out of the middle class).

Those people who can exert the most leverage (business owners, highly skilled workers) have seen their incomes rise. While those with the least leverage (non-union, low-skill workers) have seen their incomes fall.

It is important to note that this process really has nothing to do with global trade or changing technology as many people ignorantly claim; those issues have merely added fuel to the fire. The middle class would have eroded even if we never traded with any other country or adopted any new technologies.

The fundamental problem with our economy is the complete lack of understanding of economics. If we continually make decisions that make ZERO ECONOMIC SENSE (i.e. always look for the lowest price, always try and maximize profits, believe that saving is always good for the economy), then bad things will naturally happen to our economy.

As always, please share with friends so that we can try and restore some sanity to our discussions about the economy.