After Thursday’s stock market crash, we find ourselves staring into the abyss of a potential double-dip recession. Republican’s, having ignored the history lesson of the business lobby 1937 Austerity Push, which managed to push America back into depression, seem to be clueless to the fate of most Americans. Of course, As the New York Times reports, their financial base is doing very well and luxury spending is reaching new highs. But America’s economy lives and dies on the confidence of the average consumer. In the go-go years of the late 1990’s the concept of “mass affluence” and “affordable luxury” dazzled marketers into believing that “aspirational marketing” was the path to the streets of gold in which the majority of citizens would have 60” inch flat screen TV’s running 500 channels of cable TV and 100 MBPS Broadband services, even if they had to hock their house to get it. But, as a new White Paper from Ad Age entitled, “The New Wave of Affluence” points out, “In 2011 however, in the wake of a massive reset, it appears that mass affluence may be a thing of the past.” Ad Age goes on to suggest that marketers concentrate their attention on the 3% of the American population earning more than $200,000 per year, “who account for almost 50% of consumer spending.” The esteemed Telecom analyst Craig Moffett, in a report titled “How the Other Half Lives” chose to look at the darker side of this picture. “After paying for food, shelter, and transportation, the average bottom-40% family is left with…. wait for it…. just $1,215 per year, or $100 a month, for everything else. That’s $100 per month for all discretionary purchases, telecom services, cable or satellite TV, movies… and everything else. Indeed, after Healthcare, the number drops below zero.” A recent report on consumer discretionary spending from the Federal Reserve Bank of New York shows “this time is different.” Going back decades, such spending had never fallen more than 3 percent per capita in a recession. In this slump, it is down almost 7 percent, and still has not really begun to recover.”
This set of circumstances should be a topic of great debate and begs the question of our political and economic future: democracy or oligarchy? It may very well be that the affluent can sustain brands like Apple, Lexus and Nike far into the future but it paints a worrisome picture of a world of gated communities and private police forces and certainly signals a break from the Horatio Alger myth of upward economic mobility. The New York Times recently reported that high quality guard dogs for executives were selling for $230,000. One of the sellers, Wayne Curry justified the price tag, “When you compare the costs of a full-time bodyguard versus a dog, the dog makes a lot of sense,” Mr. Curry said. “And the dog, unlike the bodyguard, can’t be bought off.”
What are these executives planning for with their $230,000 guard dog? Civil unrest. We may in fact be reaching a point where a majority of the country feels they have no stake in the general well being of the society—a New Anarchy. Imagine an explosion of technology aided Flash Robs. This amazing anomie has been exploited by a sort of uber-libertarian like Michelle Bachman, who clearly expressed a desire in the last three weeks to see the U.S. Government default. Lulz Sec and Anonymous’ desire to crash the computers running PBS, Sony, Citibank or the Defense Department is equally anarchic. As Bob Dylan once wrote, “When you ain’t got nothin’, you got nothin’ to lose.” The collective consciousness of a nation that brought us through a revolution, a Civil War and two world wars is being destroyed by the Ayn Rand fantasies of the uber-libertarians.
Whatever political will the country might have had for a WPA style program —putting millions of unemployed construction workers back on the job fixing America’s third world infrastructure—now seems to have evaporated. It was perhaps our last chance to avert the Coming Anarchy. With no government infrastructure programs to put people back to work, the private sector is left trying to create jobs for the 28 million people who are either officially unemployed, working part time but wanting full time work or “discouraged workers” who have stopped looking for a job. This of course is not going to happen—and so we are all facing the problem of a “new normal”, in which a large portion of the high school only population may never find work. Liberal pundits mourn the loss of good jobs for this cohort, but as Bernard Avishai warned in “Strategy and Business” way back in 1997, “Any job that is still simple and repetitive enough to employ a semi- or non-skilled person is going to be even more pressured by new software or by contractor-suppliers in China and Brazil.”
Look at the transformation of business in the communications sector that we study at the USC Annenberg Innovation Lab. Apple and Google have revenue per employee well over $1 million per year. Contrast WalMart’s $192,000 in revenue per employee to Amazon’s $1.8 million and you can see that the productivity of these new businesses are not going to employ a lot of Americans. Imagine a dozen giant Amazon warehouses manned by robots, “picking and packing”, compared to 5000 giant WalMart supercenters, manned by thousands of employees with health and welfare benefits. The workforce growth that will take place in the new economy is among a large talented group of undergraduate engineers. And unfortunately, as any one walking on a campus like mine can see, the Chinese and the Indians are making a lot more smart engineers than we are.
That’s why economists now believe we have a structural unemployment model. There is a profound mismatch between the talent growth companies need and the American workforce. The other irony is that these new communications giants are sitting on record hoards of cash: Apple-$41 Billion, Google-$41 Billion, Microsoft-$55 Billion, IBM-$41 Billion. More cheap money from the Fed would make no difference to their investment policy. Quite frankly, they see nothing of scale to invest in, so they are under pressure to return the cash to their investors in the form of a large dividend. They are loath to do this, but their margins are so high that they can’t possibly reinvest the profits. Apple’s gross margin is 41.7% , Google’s is 67%. These are businesses that never have to compete on price and so they do not adhere to nostrums of the perfect market beloved by conservative economists.
But of course the cynic would point out that the media industries have a major role to play in avoiding the kind of Civil Unrest in our cities that you are seeing in Damascus and Athens, in Cairo and Madrid. The two most important dystopian fables of the future were Orwell’s 1984 and Huxley’s Brave New World. It turned out Huxley was right. With right combination of anti-anxiety drugs (Soma to Huxley; Valium, Prozac,etc to us) and the right entertainment (Huxley’s “Feelies”; our 3D) you don’t need Big Brother to keep the proles in line. A recent report shows that “Antipsychotics remained the top-selling class of medications in the U.S., with 2009 prescription sales of $14.6 billion.” Of course the power of distraction and pacification has been well understood since the Roman poet Juvenal described the mood one hundred years after Christ’s birth, “everything, now restrains itself and anxiously hopes for just two things: bread and circuses.” Our current version is called reality TV and its explosive acceptance by the general public has been a boon to the bottom line of media companies across the world. Who needs to pay actors or writers when there is an endless stream of Snooki’s to fill up the 500-channel universe? But the real fable is the belief that bread and circuses can permanently pacify a developed economy, undergoing what can only be described as the opening shots of class warfare.
Of course Hollywood has always been partial to science fiction and the most eagerly awaited new film in the genre is Hunger Games, adapted from the tremendously successful young adult novel by Suzanne Collins. Set in a post apocalyptic North America where children fight on television to the death to secure food rations for their region, Collins noted that the idea “came to her one day when she was channel-surfing, and the lines between a reality show competition and war coverage began to blur in this very unsettling way.” Unlike Scholastic Press’ earlier smash hit, Harry Potter, there are no fantasy monsters in Hunger Games, just the crushing reality of a resource starved future with authoritarian rulers and a few mega rich capitalists. If Hunger Games is a cultural marker for the general view of the Millennials on their perceived future, it is as disturbing as the Ad Age White Paper that urges marketers to concentrate on the rich elites.
Why there isn’t some sense of panic in the political class, perceiving a future of what the Harvard Business Review called an “Apartheid Economy” with permanent real unemployment of 15%, is a mystery. We all understand that in America (as well as many second and third world countries) the top one percent controls 40% of the wealth. You can get into this Upper Class either by birth (the lucky sperm club) or by “earning” your way through education or a skill like singing or acting. But the problem with a society that has so few controlling so much, is that “security” becomes more important than freedom. This is perhaps the central theme of The Hunger Games. And perhaps it is weirdly, a left wing idea that appeals strongly to the Tea Party.
That our political system is so sclerotic at the very moment we need it to be inventive leads one back to a question posed by the Founders: Can a large republic govern itself? Jefferson and some of the anti-Federalists had their doubts and cited Montesquieu’s warning that in a large republic “men of large fortunes” could distort the governance of the republic. The Founder, George Clinton, writing under the pen name Cato saw “this unkindred legislature therefore, composed of interests opposite and dissimilar in their nature, will in its exercise, emphatically be, like a house divided against itself.”
Is this not a grand description of the situation we find ourselves in? The Republican majority in the House was elected with the financial support of Wall Street in the belief that their taxes would never be raised. This devil’s bargain with the Tea Party was made without regard to the possibility that once in office the ideologues might bring about a default that could crash the market. The irony of Sarah Palin and the Club for Growth threatening to run primary challenges from the right against compromising Tea Party Congress members would not have been lost on James Madison who worried about the power of “factions” in Federalist No. 10. Madison defined them as, a minority “who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens, or to the permanent and aggregate interests of the community.” That the Republican’s moved forward even when it was clear from polls that the majority of Americans supported a more balanced approach to deficit reduction proves that well financed factions can essentially ignore the will of the people.
Given a Republican primary process so dominated by the right, one would think that Democrats could re-form the Center Left coalition that gave Barack Obama a 10 million vote advantage over John McCain in 2008. But as pollster Stanley Greenberg pointed out, the current economic malaise brings the whole legitimacy of the Federal Government into question and thus harms Democrats.
This distrust of government and politicians is unfolding as a full-blown crisis of legitimacy sidelines Democrats and liberalism. Just a quarter of the country is optimistic about our system of government — the lowest since polls by ABC and others began asking this question in 1974. But a crisis of government legitimacy is a crisis of liberalism. It doesn’t hurt Republicans. If government is seen as useless, what is the point of electing Democrats who aim to use government to advance some public end?
Greenberg’s conclusion is that the public believes that Democrats are just as willing to bailout irresponsible elites as the Republicans. To create a true alternative to the Republican’s Wall Street driven no tax orthodoxy, Greenberg suggests four planks to a Democratic platform.
- Campaign Finance Transparency, including free broadcast time near elections on both broadcast and cable outlets and requirements for all donations to be immediately revealed and put on line.
- Tax Transparency, including a radical simplification of the tax code removing all loopholes and special interest deductions and a simplified financial transaction tax.
- Comprehensive Immigration Reform, including “strong enforcement at the border and in the workplace, and the expulsion of troublesome undocumented immigrants. While favoring toughness, they also want to find ways to put undocumented workers on a path to citizenship.”
- Responsible Deficit Reduction, including major cutbacks on defense spending while preserving Medicare and Social Security for future generations.
I think these are good ideas, but my belief is the core change that needs to come from Democrats is a fifth principle should govern their strategy for the next decade—a return to Jeffersonian principles about Federalism and a return to championing the city. I have been writing about this idea of the New Federalism since 2007 and I am convinced that the experimentation that is needed to find our way out of this crisis will only be found at the local level. In my first essay I cited Justice Brandeis who said, “It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Where are the governable progressive polities in America? In cities like Los Angeles, New York, Boston, Austin, San Francisco, Seattle, Chicago, Miami and Portland. Yes they have revenue issues, but they also have a solid tax base from sales and property taxes that probably can be raised to pay for essential services like education, public safety and infrastructure. In addition the municipal bond market with it’s 5.5% tax free yields looks remarkably stable compared to much lower yielding paper. As Parag Khanna has written “In this century, it will be the city—not the state—that becomes the nexus of economic and political power. Already, the world’s most important cities generate their own wealth and shape national politics as much as the reverse.” Democrats need to stop defending the Federal government as the solution to all of the nation’s problems. If it shrinks in the next decade (which it surely will) there will be less money to fight senseless wars in the Middle East and perhaps more money that local cities and towns can raise to fund the things that really matter in our lives.
The present political cultural trajectory is unsustainable. Republics cannot function as Oligarchies or Corporatocracies. The only way we are going to rebuild this country is at the City Level, where the broken down schools, bridges, airports, train stations and highway’s are supposedly maintained. There is a whole new Locavesting movement that is trying to help make it easy for people to invest in their own communities. Most Republicans (and much of the media) will take issue with my dystopian view of our immediate future if we are left with the current Republican economic austerity plan that eliminates any public investment. Their belief is in the media’s power to induce what William Gibson called a “mass consensual hallucination” to keep civil unrest at bay. They have more belief in the passivity of the young, the colored and the disposed than I do. Let us hope that the country comes to it’s senses before the coming anarchy really takes hold.