The Withering and Shrinking Middle Class
It's Why Trump Has Traction, And Why Biden Wants to Crush Them
(the above shamelessly stolen from The Conservative Treehouse)
A friend sent me
article on the problems confronting the “White Working Class”. It’s super interesting and I appreciate what Taibbi has done over the past several years. He objectively reported how corrupt the Biden Administration was and how it used government power to attack Trump.I have a lot of respect for Taibbi even though I don’t always agree with him. Today is one of those times I don’t agree and think he is way off base.
I think the above photo illustrates where the sentiment of the Middle Class of America is today. The Democrats abandoned them for the siren song of Marxism. They see Trump as their last hope for a lot of reasons. They aren’t loyal to Republicans per se, but loyal to Trump as a Republican. They will vote down ballot for Republicans because they know Democrats will not work with Trump.
We know for a fact that there is a problem in America with the middle class, and the growth of it. The question is why? It’s a serious problem. When society is stratified into one wealthy class, and one poor class, it doesn’t make for a good society. Societies that are stratified like that have underlying problems that make it hard to move from one class to the next.
America has always prided itself on the merit-based ability to move up the wealth ladder. Go to school, work hard, earn a living, save, live within your means and your wealth grows. Your kids might have better opportunities than you did and get wealthier. Their kids might become fantastically wealthy. Or not. There are no guarantees, there is just opportunity.
Taibbi skewers a book that appeals to the confirmation biases of the American urban dweller who leans slightly or strongly to the left. Hey, our cities are messed up but the people that live there keep voting for the same crap. I don’t have a lot of empathy for them. Since I am a man of the right, I delighted in that rotisserie going round and round. I am being transparent with my own confirmation biases!
Mr. Taibbi then talks about a different book that takes on the same topic from a different perspective.
is a union activist who blames the problem on Wall Street and financial engineering. I don’t have a lot of things in common with a union activist. I am laying my cards on the table. But, I do like his version of why the middle class in America is being gutted over the other one.He’s still incorrect but the version is more palatable.
Mr. Leopold blames corporate stock buybacks and NAFTA for the gutting of the American middle class. Taibbi agrees. They couldn’t be more incorrect.
Buybacks are when a corporation goes into the stock market and purchases its own stock. This has the effect of reducing the companies “cash” and simultaneously taking stock out of circulation and decreasing the amount of outstanding shares. If there is demand for the stock, the price will rise higher than it would have previously.
“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices,” Buffett said. “Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”
Mr. Buffett is a man of the left.
For those who don’t have a handle on how corporate finance works, here is a simplified primer. I will do this in memory of my Corporate Finance Professor Kevin Rock may he rest in peace.
Company satisfies customers and sells goods or services. In return, it receives cash.
Cash is used to support existing operations. It pays the bills, pays employees, and keeps the lights on. If a company is growing, it will start to accumulate excess cash on its balance sheet.
Companies that keep too much cash on balance sheets become takeover targets. If I want to purchase another company for $2 billion dollars and that company has $1 billion on its balance sheet, I can use that cash to purchase that company lowering the actual cost by 50%! Hence, companies need to find an outlet for excess cash.
What do they do?
Company has some uses for excess cash. There are benefits and costs to each and sometimes they aren’t readily apparent. They are:
a) Issue a dividend to shareholders (these are heavily taxed by the government and what happens to share price if dividends become unpredictable)
b) Invest in property, plant, and equipment so they can expand operations (what if you can’t use the capacity or the market changes?)
c) If possible, expand existing operations by instituting a second or third shift. Or, pay current employees overtime and work a little more.
d) Increase all employee pay. Or, pay employees a one time cash bonus. (what happens if you don’t hit your sales targets)
e) Buy another company that competes with you (and deal with the US Govt looking at the transaction)
f) Let the cash accumulate, and become a buyout target
g) Buyback existing stock, decrease your float, and increase the value of the outstanding stock to shareholders.
How do any of those actions undercut and gut the middle class? Now you might understand what Warren Buffett was referring to. Obviously, corporate finance is more complex than that. There is a lot of math combined with statistics and forward expectations that go into making decisions about what to do with excess cash.
I’d also like to point out that my CME ($CME) board room lunch pal Professor Merton Miller was correct when he explained the relationship between a company’s capital asset structure and dividend policy and its market value and cost of capital. The theorem demonstrates that how a manufacturing company funds its activities is less important than the profitability of those activities.
That means buybacks are indifferent to the success or failure of a company. What matters is if a company sells its goods and services at a high enough margin to cover the costs of doing business.
Mr. Taibbi and Mr. Leopold are of the opinion that corporate executives make way too much money. They highlight executive pay as a factor in gutting the middle class because presumably if they paid themselves less, workers would make more.
This is also incorrect thinking.
Plenty of academic studies have shown that the C-level management team of a company has an outsized influence on the stock price of the company. They have far more influence than workers who are further down the corporate structure.
Mary Barra, the CEO of General Motors ($GM) makes $29MM per year. Her cash is a salary of $2MM, and a bonus of $6MM. The rest of it is equity. Does she have an incentive to improve the value of the company by increasing the value of stock or not? Remember, the decisions she makes and the people she hires will have the largest effect on the stock price.
You might think it is obscene to make that kind of money. GM is a $50 Billion dollar company. Why is paying someone $29MM obscene? Doesn’t the market decide what the pay rate is? If the board of GM told Ms. Barra they were only going to pay her $5MM a year, do you think she would do it? Do you think you would get anyone qualified to do that job?
I guarantee you the person that you could find who could do that job and would do that job for $5MM wouldn’t increase the share price of GM. As a matter of fact, I would short the stock and make bank when it went under.
In the Q+A portion of the blog post, Mr. Taibbi asks Mr. Leopold about why he wrote the book. His answer was that Oberlin College laid off 105 former UAW workers who were working in the cafeteria. The workers relayed crushing stories to Mr. Leopold and I don’t doubt that they were in fact crushing.
But, didn’t Oberlin College have a legal issue that it brought upon itself? Oberlin College isn’t the best example of why the middle class is being hollowed out. The “liberal arts” education system that Mr. Leopold cites doesn’t exist anymore. There are no classical liberals anymore. Classical education has been corrupted by social justice.
The answer to the problems confronting the middle class is not more regulation, more labor unionization, and ending stock buybacks. That’s what Mr. Leopold is advocating for and Mr. Taibbi endorses.
The answers are very complex, and there is no way I could take them on in this blog post. Believe me when I tell you I am not some Ivory Tower elite with a graduate degree who doesn’t understand the plight of the middle class, even though I fit the demographic.
I grew up middle class. A lot of the people I knew were contractors or are contractors. They worked in factories. They owned small businesses. 50% of my high school didn’t attend college. Many that did attended community college. Most went to state schools if they went to a four-year school.
They are pissed off.
But why?
It’s because they see a two-tier system and they have no chance to access it. They see a guy like George Conway dropping the max ($929k) to the Biden campaign. They see what he does for a living (lobbyist) and wonder what the hell he is contributing to society. Hillary gets off and their guy Trump gets to spend millions on legal bills fighting ideological Democratic attorneys for hire using lawfare to try and stop him.
They see the media shill for one side. They know virtually every word coming out of the anchor’s mouth is false. Fortunately, there is the internet and they are able to wade through the bullshit. They aren’t stupid. “Fuck Joe Biden” becomes “Let’s Go Brandon”, even though it is really Fuck Joe Biden. And really, FJB.
They’re told by experts like Paul Krugman and the talking heads that inflation is down but when they go to buy groceries or gas they know the truth. When they try to go to a ballgame they know. When they try to go on vacation, they know.
They see their taxes go up, and then services go down. They see corruption in government that goes either unprosecuted or ignored.
That has nothing to do with NAFTA or corporate buybacks. It also has nothing to do with private equity. Professor Stephen Kaplan has done plenty of research on private equity-backed companies to prove that PE is actually pretty good for business and job creation.
It has everything to do with an overarching huge government installing itself as the arbiter of what is right and what is wrong in every single decision you make in your life.
Are they scared of things like AI taking their jobs? They might be. They might be scared of robots more. Do they have hope for the future? They used to. But corrupt governments across the country sap that hope. When they send their kids to public school, the Marxist teachers’ union doesn’t teach them, they indoctrinate them.
They listen to union bosses who make more dough on a percentage basis than the corporate CEO’s they demonize. Unions actually increase unemployment because they create artificial floors and ceilings which disrupt all the market forces.
They see illegal immigration that is out of control and know their taxes have to pay for it. They know their kids will get less attention in the classroom. They know that these people will work for anything undercutting what they get paid for a living.
When they go to worship, they are told they suck. They are told they are oppressors. When they turn the television on, they are force-fed things they don’t believe in, and if they say something they are automatically a racist.
They might be pro-choice, but they know that it’s wrong to kill a baby. They know that in the second trimester and beyond, that bump in a woman’s belly is fully human. They also know the difference between boys and girls.
An aside, The pro-life movement cannot exist as a business model for financial gain without abortion existing. We on the right always tell people to follow the money to expose corruption on the left. That's why the pro-life movement keeps shifting their demands. They need something to oppose in order to raise money and keep their grift alive.
They are told to go to college and when they apply to elite colleges they get rejected even though they have the grades. Stanford’s incoming class is only 21% white, and of that percentage, only 9% are white males. That’s far below the actual population percentage of white people in America. The cards they are dealt are marked.
Even if they go, they are discriminated against by professors. They are told that white people are oppressors simply by being born white. The Social Justice Industrial Complex has taken over all of education but post-high school why should they pay for it?
In corporate America, if you are a white male beginning your career, you have a harder time getting ahead. They took the playbook from Jim Crow and turned it loose on you. Promotions are made by skin color and gender, not merit.
You see commercials on television that have no basis in reality. They have been put through the DEI wringer. The movies you see that are being made in Hollywood are the same and so are mainstream television shows.
Sure, you can go on welfare. But, you don’t feel good about it. You hear about businesses starting up but if you are after the age of 35 or 40, it’s awfully hard to retrain yourself to get in them, especially if they are tech. Welfare keeps them in place and not mobile. Instead of moving for opportunity like Americans have done since the beginning of the country, they are told they deserve something and stay. They try to become a victim class in a country that doesn’t recognize them as a victim class.
Many learn how to work the system. They are satisfied with whatever they can milk out of Uncle Sam. They turn to drugs and drinking to escape. Their humanity becomes hollowed out. They learn firsthand why “We are from the government and we are here to help.” are the worst words you can ever hear in the world.
The government never helps. It’s never solved a problem. But many people can make a lot of money by acting like they are trying to solve the problem.
They don’t go to urban areas much anymore. They are crime-infested and unsafe. If they protest, they are told that they are the problem. If they call the police, they are lucky if they show up. If the police show up and arrest someone that person is turned loose by a George Soros backed attorney.
Whenever a business starts that seemingly might give them hope the cronies and grifters in government regulate it out of business. Or they regulate it so much that it can’t make a profit so working for it just passes time and doesn’t make you any money.
Or, the business is so regulated it is hard even to build anything. There are environmental studies, panel discussions, permit discussions, more meetings, and more meetings of special bureaucratic people and experts and then nothing happens. Or, if it does it happens in a pre-ordained sequence and the middle class is left out anyway.
Governments build trains to nowhere that don’t run. They promise equity and we get further and further apart.
They see that some people want reparations. Reparations for what? They know if there are reparations, they will pay for them.
They also see that some people want universal basic income. They were raised that you had to work to get income. Otherwise it was welfare and welfare is a dirty word.
They hear a lot of blather about global warming. But, they know they will have to pay the cost to “solve” it and even if it gets solved in the US they know full well it won’t be solved because of other countries. Besides the people running the global warming cult don’t act like it is an emergency. They can afford $5 gas. The middle class has to fill up their contractor van or pickup truck and go to work. Of course, the elite preachers running the global warming cult want to outlaw those too.
Meanwhile, the government regulates and taxes more and more. It spends and spends with no end in sight. As a middle-class person, you know full well that “money creation” means your future income is going to be taxed. You also know that the dollar you have in your pocket doesn’t buy what it used to, and it was deliberate by the people rich men in Washington who are above it all.
They know the rich can game the tax system to avoid them. They can’t. The only solution is a fair, flat, consumption tax and to scrap the existing system.
They see people go work for the government and then return to the private sector getting cushy jobs interfacing with the job they just had in the government. They know they can’t get that job. They see Congresspeople trading in the market making millions on inside information. They can’t do that.
The government regulations decrease competition in the name of safety and that decrease in business competition puts more of a stranglehold on the middle class. It decreases opportunity as well. Lack of competition centralizes business. When a business moves, the structure that is left behind crumbles. No one can pick up the pieces.
However, the above doesn’t just apply to white males. It applies to anyone who is in the middle class. The things illustrated above are color blind, even the college admission and corporate policies. People who don’t deserve to be there will fail when they might have succeeded somewhere else, or quit. Even if they get passed through, they will eventually be found out. Thomas Sowell showed that in his most recent book on social justice.
So, yes, they are pissed. They aren’t racist. They are pissed. Do you blame them?
After Taibbi's work at Rolling Stone, I personally am stunned that I'm reading him, and Jeff, I wonder if you are stunned you're reading him, too. Strange times make for strange bedfellows. (Though Taibbi is a great writer, has a slashing wit, and calls out idiocy when he sees it.)
However, I too thought his article's focus on stock buybacks made little sense in relation to the hollowing out of the middle class (and let's be frank, we're talking about the hollowing out of lower middle management and skilled industrial - not trade - workers). Offshoring makes more logical sense as the key factor.
Not sure if your UofC profs mentioned this as another reason for stock buybacks: to get excess cash out of the hands of management, who otherwise would be tempted to make poor investments/acquisitions/"empire build." Forgot who taught me that at GSB (dating myself with that), but it was the sort of cynically realistic viewpoint of agency issues that make a lot of sense.
Kind of funny that they complain about CEO salaries but not a peep when it comes to athletes and hollywood salaries. Be interesting to see what effect Mary Barra's salary has on the cost of a vehicle that you will own for a number of years. Then compare that to the cost of a night out at the movies or a sporting event and see how the salaries of the athlete or actress affect the cost of that.