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Last week’s Fed Review has confirmed the US economy to be in rude health. Employment creation, economic growth, corporate profitability are all continuing the strong patterns of the last 5 years. But we may be skating on thinning ice. The Chairman commented several times on one puzzling feature – the persistent flatness of middle class earnings. Here’s the theory: as we approach full employment so the ready supply of labour tends to dry up. Anecdotally the US is already experiencing skill shortages “everywhere” from plumbers, roofers and electricians to engineers and software writers. The greater the shortages the more the tendency for pay to rise. Hence the Fed’s much stated concern about the prospect of rising inflation. Increasing pay is a large component of increasing inflation. 

But this neat pattern of trends is not happening as expected – pay for the middle classes is remaining stubbornly flat. 

This by the way is prompting an increasingly embarrassing issue. There has been major growth in largely self-apportioned pay increases given to themselves by senior executives, leadership teams and corporate shareholders. The top 1% of earners now control a larger and growing % of total US wealth than at any time since 1928 and the Great Crash!

The Fed did not probe why the middle class pay levels are remaining flat or the concomitant risks associated with such a skewed social distribution of wealth. I suggest several possible answers and none of them are pretty.

  1. Fear. Few people are adequately funded for retirement, many are struggling with too much debt, still more have inadequate health cover or funds for education. Most are paid so little that getting through each day, week or month is a challenge – one pay packet to the next. In such a condition our much vaunted middle class may in reality be acting as you would expect from the vulnerable poor – they are keeping their heads down, plodding from one day to the next and certainly with no mojo to challenge the job they do have no matter how inadequate it may be. They are cowed by their circumstances. They are desperate poor. The very term “middle class” is a distracting euphemism.
  2. Inefficiency. The secret to economic growth is a combination of more, better trained, young people and of increasing investment in new technology and innovation. Our infrastructure and much of our manufacturing is woefully undercapitalised. We have a government that lacks scientific knowledge and is hamstrung by volatile and luddite thinking – so we are walking away from core investment that could transform out levels of performance. It is alarming to see the ease with which this year’s repatriated overseas earnings have been frittered away on more pay for the top 1% and on the window dressing of stock buybacks, rather than being channelled into a one off shot in the arm for corporate capex in R&D, innovation, new plant, systems and training. Without such investment margins are likely to remain low, competitive growth is hamstrung and there is not enough cash available to reward the workforce or to recruit and train new people.
  3. Mistrust. No recent administration has been wholeheartedly committed to modern competitive business. The current one is wholly untrustworthy. It has no long term strategic thinking of stamina or understanding and seems blind to the stupendous value of our industries and to the realities of competition they face every day. In such a context it will be a visionary CEO indeed who stakes more on the long term trend rather than the immediate gratification of next quarter’s results.

Flat Pay may be in fact a symptom of covered up poverty. It may also reflect our lack of a competitive industrial policy, and our turning away from thought leadership and cutting edge technology at precisely the moment when we are threatened with China, the new super power on the bloc. The 20th century belonged to the US. Our challenge today is to hold our place alongside China in the 21st Century. We need to adapt or fail. See “China, the US and World War 3” in the link above. 

Have a good day.