The End of the Middle Class

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This week’s news that Toyota would quit making cars in Australia by 2017 sparked a big debate in the office. The subject? Can you have a middle class without a manufacturing sector?

On the surface, Australia’s economy is already dominated by services, with 75% of jobs being in service related industries. The era of lifelong employment in skilled manufacturing has been over for many years.

But will that lead to lower standards of living for Australians? Or will the country be better off moving into lower-volume but higher-knowledge manufacturing jobs?

How you answer this question may come down to whether you believe countries have, or should have, such a thing as ‘national interest’ these days. From a consumer perspective, it certainly doesn’t matter if cars are made here. People can get what they want from just about anywhere.

But the current global system – a diversified global supply chain, ‘just in time’ logistics, cheap energy and large shipping containers – is still fairly new, and perhaps not all that robust when disagreements between countries escalate.

Put another way, do you want to be dependent for key technologies or items on open and free markets? After all, very few governments really believe in or practice free trade. Everyone protects their own, whether it’s for employment reasons or because they view key technologies as something that should not be trusted to foreigners.

Once Toyota goes, Australia will be the only G-20 country without a domestic auto making sector. But so what? In the 21st century, do you need an industrial base to have a healthy economy? Maybe not.

However, history shows that the manufacturing sector played a big role in getting a lot of people into the middle class. It was skilled labour that employed millions of people in Britain and the United States.

Per capita incomes grew. GDP grew. Wages grew in real terms. The tax base grew too. That was the golden age and the peak for the US in the 1950s and 1960s, when General Motors ruled the world.

The shift to a ‘service based’ economy is widely touted as both inevitable and beneficial. But is it? If you don’t have the accumulated knowledge and capital to manufacture things – and how can you make them competitively, in mass quantities, with globalised labour? – then there’s no doubt it changes the nature of your domestic job market.

In the US, the withering of manufacturing has meant more part time work, at lower real wages, for more people. And arguably, it’s also meant less satisfying work for people, less meaningful work they could be proud of and raise a family on.

After all, no one ever grew up wanting to stock women’s underwear at Walmart. You’ve also seen a structural decline in the labour force participation rate, with fewer people looking for work and more people dropping out of the workplace altogether and going on the dole.

With fake free trade, prices are lower for manufactured goods, but wages have to go down too. What do you think that means for quality of life? You have access to credit to buy cheaper goods and services. But your real wages decline and so too does the satisfaction you take from the work you do. Does that sound like a good deal? A fair trade?

Smaller city states (like Singapore) and nation states (like Switzerland) are in a much better position to de-industrialise or specialise in what they make (desalination technology in Singapore, watches in Switzerland, for example). But it doesn’t always work out for the best.

Look at how finance and the City dominates the economy of the UK. The middle class gets wiped out. Property prices in the big cities soar. You have very, very rich people…and then pretty much everyone else.

The same thing is going on in America, although it’s been somewhat tempered by the shale gas boom, where cheap energy has lured some kinds of manufacturing back to American shores. But as the economy shifts to services for the masses and finance for the elites, how many people can become bond traders and real estate agents in a country of 300 million people?

And what kind of economy is it when everyone makes money selling houses to each other that they purchase with increasingly large amounts of borrowed money?

This is why the micro-manufacturing or ‘makers’ revolution in 3D printing that Sam and Kris have researched is such an important idea. It’s a massive change in scale for the economy, from large and centralised to individual and decentralised.

Yet it’s still based on the idea that you have to produce something that someone else values to generate an income (whether it matters to you is only half the battle…if you can’t exchange it, there’s no transaction).

In the 20th century, mass-market manufacturing went hand-in-hand with the creation of a healthy middle class.

In the Western world, the middle class is under pressure from lower labour costs in the emerging markets and financial repression from Wall Street and Washington elites. The technology revolution can’t come soon enough because the war is already here…and it’s on you.

Regards,

Dan Denning+
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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9 Comments on "The End of the Middle Class"

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Ross
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The above is a question for the 1970’s. The contemporary question is: Can you have a middle class without a debt fueled asset bubbly services driven economy?

In a services economy – can you be a complete person? or must you sacrifice your independence? in other words with debt as your overlord – how far to the Odessa steps?

ram
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As a mineral resource exploration company that has worked on every continent over several decades, I think the question is:

Can you exterminate the middle class without having violent revolution and ongoing civil war?

Observation and experience suggests not.

Derek
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The horse has bolted, now we all stand around blaming each other.

slewie the pi-rat
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sorry to jump in here, but i’m getting my comment ‘moderated’ over on the Bitcoin article [note: TDR/Oz no longer publishes a ‘moderation policy’]. this comment [Paste}: 1) transactions failing ‘randomly’. 2) MtGox’s CEO blames Bitcoin. 3) Bitcoin Foundation fires back, says this is the long-known ‘transaction malleability’ and Mt. Gox SHOULD have prepared for it. 4) “This is something that cannot be corrected overnight,” the Bitcoin Foundation said. “This is a good reminder that Bitcoin is still young and experimental,” it said. (note a) 5) ex-peri|MENTAL? L0L!!! Q: is there a disclosure or three missing? 6) MtG & Bitstamp… Read more »
Ross
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When you get this sort of thing run by Reuters http://www.breakingviews.com/americas-dumb-elites-risk-fomenting-a-revolution/21132144.article … you may be reminded of the confused early to mid 19th century emancipation debates and political jockeys changing horses and dissolving alliances at a moments notice. I’m reading Thomas Mann’s Buddenbrooks concurrent with Jasper Ridley’s bio Lord Palmerston at the moment. I believe emancipation in the UK was driven by the middle but not so much universally – but then the middle were smaller but actually making things and had a firmer stake in productive commerce. Ordnung was up for grabs and all ends knew it by then… Read more »
Ross
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Slewie – comments go into moderation automatically if you have two URL links in the one comment. They reload them later unless you belong to a motorcycle club of one pistol and two feet. :)

garry
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“” On the surface, Australia’s economy is already dominated by services, with 75% of jobs being in service related industries.””

Yes, like the canteen services, window washers, and office cleaners who carry out their chores at the Auto plants.

Better revise that 75%, because plenty of them will have no work in the service sector.

Scott Bailey
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Middle Class is such an interesting concept! It is the place most of the lower than manager, within the Australian Public Service would sit! Lucky for them, most would be working in a full-time or equivalent work environment. Many more would not enjoy the many years of continuous self improvement, and “Improved Efficiencies” as specified by many of tbe different agency agreements, knowing that the chance of progressing through to the upper line management roles are becoming near impossible due to department raining in of total budgets, and government cut backs due too the unsustainable cost of maintaining at current… Read more »
Bikkhu
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Aside that free trade agreements are set to profit big companies, it is clear as day that if you connect two economies without barriers, the economies and level of life equalizes eventually. Sometimes it takes one generation like in Japan and in Korea if they are smart and not that greedy individually, usually more because of stupidity and greed. Australia is the best country in the world right now because it kept trade and production closer then other developed countries. It’s simple, if you export work and let different country to produce your consumption, you export your level of living… Read more »
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