How technology and too much free stuff is undermining the middle class. What can be done about it.
In this episode you’ll learn:
- How technology has made life better and created wealth.
- How technology has also led to stagnating middle class wages and increased income inequality.
- Why too much free stuff also undermines the middle class.
- How tax policy and personal decisions can help the middle class.
How Technology Undermines The Middle Class
When I was in high school in the early 1980s, a particularly enlightened teacher named Miss Weidner, who the student body disparagingly called swamp moose, hand selected ten students including me to join a semester long experimental class called “Futures.”
Our textbook was “The Third Wave,” a work of nonfiction by futurist Alvin Toffler.
The first wave was the shift from a hunter-gatherer society to one based primarily on agriculture. The second wave was the industrial revolution, and the third wave was the information age.
We spent most of the semester focusing on current and anticipated advances in technology and medicine and their impact on society. We also played many rounds of the word game Boggle.
Early Personal Tech
At the time, my primary exposure to personal technology was a handheld Coleco electronic football game that involved navigating a blinking red dot through a red dot defense.
We also had an Atari Pong game system that we played on our television screen where we hit a white dot back and forth with paddles made of white dashes.
I had little exposure to personal computers as my high school’s one computer, a Radio Shack TRS-80, was kept in a closet-sized, windowless room, and I preferred daylight.
Technology Makes Life Better
Three decades later, I marvel at the wave of technological advances from the Internet to iPhones to social media to personal computers and gaming systems with microprocessors and memory that are thousands of times more powerful than what existed in the early 80s.
Life is better. We are more connected with knowledge and entertainment available at the swipe of a finger.
There is more variety and more choices, both in terms of things and experiences.
For example, between 1975 and 2008, the number of products in the average supermarket increased from 9,000 to almost 47,000 according to the Food Marketing Institute.
Technology Increases Wealth
Thanks to technological advances, there is not only a greater variety of feature rich products and services, but those goods and services are produced more efficiently.
Productivity improvements along with population growth contribute to an expanding economy.
By economy, I mean the dollar value of goods and services produced during a given period. That measure of a nation’s output is known as gross domestic product or GDP.
Government statisticians estimate the value of a nation’s output by looking at what households, businesses and government spend during a given period as well as what they invest in projects to be able to produce more output in the future.
They can also estimate output produced by looking at the amount of income received by households, businesses and government.
Within an economy, the aggregate amount spent always equals aggregate income received. When I spend a dollar that dollar is someone else’s income.
In 1979, the value of U.S. output was $6.3 trillion on an inflation-adjusted basis. Today it is over $16 trillion.
Put another way, annual aggregate income received via employment, business earnings and investment earnings in the U.S. is 2.5 times today what it was in 1979 after adjusting for inflation.
Technology Leads To Income Equality
There is another persistent trend over the past thirty years that is an outgrowth of the Information Age.
Not only has wealth increased, but the distribution of that wealth has shifted.
A greater percentage of income now goes to the wealthiest while less goes to the lower and middle classes.
Last year, the Congressional Budget Office released a comprehensive report of how income in the U.S. is distributed.
Between 1979 and 2011, average annual pre-tax income before transfer payments (i.e. government assistance and tax credits) for those in the bottom quintile of income went from $6,800 to $7,900 after adjusting for inflation.
Pre-tax income before transfer payments is also known as market income.
For those in the middle quintile, average annual market income increased to $55,400 from $51,000 on an inflation-adjusted basis.
For those in the top quintile, average annual market income increased from $136,000 to $240,800 after adjusting for inflation.
Classified another way, annual inflation-adjusted market income growth for the middle three income quintiles (i.e. 21st to 80th percentiles) averaged about 0.5% per year.
For those in the 81st percentiles to 99th percentiles, inflation adjusted market income growth averaged approximately 1.8% per year.
For those in the top 1%, inflation adjusted market income growth averaged approximately 5.5% per year.
Annual market income growth over the past three decades was over ten times faster for the top 1% compared to the middle class.
Simply put, the middle class receives a smaller share of the incremental wealth generated by the information age even though they benefit from all the new products and services.
How Tech Fosters Inequality
Why is that?
Information technology fosters greater connectivity, more automation and winner-take-all outcomes.
The Internet makes it easier for businesses to coordinate and leverage lower cost sources of labor by shifting manufacturing to countries that pay significantly lower wages. This leads to middle class job losses in the U.S.
At the same time, as technology enables greater efficiency in producing goods and services in the U.S., which in turn leads to greater corporate profitability, businesses pass more of those profits to their shareholders rather than give employees higher wages.
A higher percentage of income comes through capital gains and dividends compared with thirty years ago, benefiting the wealthy who are more likely to own businesses and have larger investment portfolios.
Finally, greater connectivity makes it easier for consumers to discover and purchase goods at the lowest prices from anywhere.
This rewards bigger hyper-efficient global merchants and manufacturers at the expense of local operators.
The result is the biggest and most popular businesses get bigger and more popular.
The stagnating middle class is an aspect of the information age we never anticipated in high school futures class. The question is what to do about it.