At its core, business is pretty simple. An individual or group identifies an issue or a need in the market and produces a product or service to meet that need. That same individual or group will charge a price for that product or service that covers the costs of production and includes some element of ‘profit’ to make the cycle worthwhile. This principal is as true for Apple as it was for a carpenter making bookshelves in the 1850s; the only difference at this stage being complexity.
Understanding this elementary business principal is important context when looking at the present day American Middle Class. Every day, it seems, there is another article detailing the ills of this large group of Americans none of which are so highly socialized as ‘wage stagnation.’ While it is impossible to argue against real wage growth of the class (or lack thereof), it is still worth analyzing the root cause of the issues besetting the silent majority.
First is the worst, second is the best
Remember that saying? Not only was it a great way to save face after losing a relay race in third grade, it is also a great way to look at the impact that ‘being first’ has had on the American Middle Class. America was one of the first countries to pour its heart and soul into the industrial revolution, big infrastructure, and major education. Other countries were literally blown away by how fast the American machine could run. Massive production and massive demand lifted the American Middle Class off of an agrarian economy and placed them onto the path of industrial might. Industry gave rise to services which gave rise to the media/marketing produced image of the ‘American Dream.’ That is, to own a detached home with a white picket fence, a dog and a cat, two kids, a wife that stays home and cooks, and a career of steady, gainful employment.
Golly shucks, that sounds swell!
For a long time this ideal fueled the entire nation. There was, however, a force lurking in the shadows that sought to derail this whole plan. That force?
Keeping up with the Joneses
Now maybe this is a new phrase to you so to keep the playing field even, this is what it means: one sets the standard for the nature of ‘stuff’ that one ought to have and then everyone else plays catch-up. This force is so strong that even the Bible has a specific commandment against it! (Exodus 20:17 for those of you fact checking).
I point this force out because of its importance in the overall ‘what happened to the middle class’ picture. It is widely believed that this commandment serves as a warning that wanting everything that your neighbor has could lead to a lot of issues. Some of those issues are very direct (credit card debt) while others are more indirect (demand for cheaper goods). Being that credit card debt is an individual issue, I’m not as concerned about that. What I am concerned with is the American Middle Class’ desire to keep up with that Jones family.
If a country has a class of citizens that really want something, eventually they will get it. Now most of the time we would equate that with freedom or social programs, but in this case we have an entire class that really, really wants to have the same TV that the Jones family has in their living room and the same furniture they have in their dining room. They want to eat at restaurants and drive hot looking cars. They want to wear the same dress and shoes as Mrs. Jones and they want the same tools as Mr. Jones.
The issue? All that ‘stuff’ costs money. A lot of money. The solution? Either get more money or drive down the cost of the goods.
Keeping in line with human nature, the road easiest traveled is likely to be taken when faced with an issue that has multiple solutions. This is both a sad reflection on society and an incredible display of survival tactics. In this case, the solution was to look for comparable goods/services that cost less than the real version, but that could also be a justifiable substitute for the original. And who was there waiting to solve this issue?
The classic American business. The most adept organizations in the world at creating solutions to problems.
American businesses started to notice the desires of the American Middle Class and these businesses moved to accommodate. The businesses invested huge sums of money into training programs and research & development labs to author original operational excellence procedures. These programs were designed around one part Cost Accounting, on part Operations Management, one part Technology, and one part Globalization. The programs were a knock-your-socks off success.
American companies figured out how to drive efficiency and out-source or off-shore expensive, non-core elements of their businesses in an effort to gut costs. When costs dropped, so did prices and Middle Class Americans flocked to Wal-Mart, Target, and Ikea to fill their houses with ‘stuff’ that the Joneses might also have purchased.
Everything is Awesome!
A bit more recent, but this line from the Lego movie illustrates the image that nig industry wanted all Americans to believe. Keep buying your cheap stuff and you will feel great! That Jones family and their high-quality durable goods and consumer items can eat it! We got our bookshelf from Target and it barely cost us anything! That’s precisely the issue though. Demand for low prices means that businesses need to have low costs, which means they need to find cheap labor and materials. It may sound unfair when a CEO ships 5,000 jobs to India and then is awarded a bonus of $50 Million dollars, but what really bakes my biscuit is how American consumers are using their hard earned dollars to authorize that behavior.
Remember the business principal? A good or a service needs to be sold at a price that covers costs and includes profit. If that CEO was able to ship jobs, manufacturing, etc. to India, ship the completed goods back to Wal-Mart and then sell them to Americans at a discount and still make money for the organization to the extent that he/she can be awarded a significant bonus, what chance does a business based in America have? Why should any business employ Americans? Why should any Americans get raises for work that could easily be moved to a lower cost bucket?
And you see our problem. There is limited upward movement in the wages of Middle Class Americans, because we have demanded that there be downward pressure on prices. For every take there is a give. An equal force in the opposite direction to bring balance to the universe. The American Middle Class’ purchasing habits may in fact be its own wort enemy.
What came first, the Chicken or the Egg?
We have seen that demand for cheaper goods has contributed to downward pressure on prices. We have seen layoffs in the news and jobs shipped oversees. We have seen the vast majority of goods that we purchase include a little gold sticker on the bottom that says “made in China.” We have seen the subsequent rise of the Chinese and Indian middle classes as they benefit from being “second” to America’s “first.” And we have seen the outrage that American citizens harbor over the widening gap between the rich and the poor.
What we haven’t seen is a change in our approach to solving the problem. In fact, we have demanded even cheaper goods to offset the worry that our money wont go as far in the long run. We continue to spend like there is no tomorrow on credit and student debt despite knowing – full well – that there will be a tomorrow. We have not listened to those that warned us against this behavior and, most frustratingly, we have voted the same band of know-nothing politicians into office time and time again in the hopes that one of them will have a magical “ah hah” moment and cure us from all this misery.
If the chicken is legislation against corporations and the rich, then the egg is a fundamental shift in the American Middle Class’ approach to living. This is less about who or what came first and more about what will work first. The American Middle Class cannot rely on businesses to solve all of their problems. They must do that on their own and to do so, they must go against all they know and take the road less traveled.
Raise taxes on corporations and the rich? You get inversion and pass-through tax shelters in countries with favorable trade pacts. You get armies of consultants and tax strategists that are hell bent at beating the system. You are pitting the US House of Representatives and the Senate (two groups of people that everyone universally believes are morons) against some of the smartest people in the country. Who do you think is going to win nine times out of ten? This solution is anything but one. It may feel great to protest and it may have the best slogans, but it is not going to work in the long run.
A mind shift in the American Middle Class to spend more money on fewer goods/services while demanding that those goods be made (at least in part) from sustainable American businesses is what this class needs to drive wage growth. Will this road be easily navigated? Of course not. The group previously mentioned has an insane amount of brain power and an even higher access to resources. They will not go down lightly. They will bring technology and robots. They will try to game immigration laws. They will do everything they can to get American consumers to blindly purchase their goods.
You, the American consumer, need to do your homework. Shift your spending habits. Vote with your dollars. You need to drive the change from the bottom up because the one thing that the American Middle Class has over the richest in this country is scale. There are way more of you and if you all start buying high quality, American made goods, those jobs will start to come back. When they come back, the competition for talent increases. When that competition increases, wages follow.
The solution is simple, it is execution that is complicated. Just like if you want a low percentage body fat, taking a pill isn’t going to get you there. 6 months in the gym with revamped eating habits on the other hand will get you there. You just need to choose what approach you are going to take and then accept the result when it comes.
In this case, the answer to the question is ‘the egg,’ but how many people will choose correctly?