Poll after poll says the U.S. is headed in the wrong direction. The result of this seems to be a continuing trend of swinging from one party to the other for President and control of Congress. I would argue that this reflects less a confidence that the winning party will point the U.S. in the right direction than merely a punishment of the previous administration for not doing so. I contend that while part of this polling likely reflects cultural issues, for the most part it is economic in nature. I further contend that the dilemma for the Democrats in fixing this problem is that in reality, we have not yet found any real solution to the root problem, what I will call late stage capitalism.
Early Stage Capitalism
When a country is young or only recently adopts capitalism as was the case with China, there are two very favorable conditions for it. First, there is huge demand of industrial needs to be fulfilled. Secondly there is typically a large, primarily agrarian population to supply that industrialization. Land is cheap, labor is plentiful and cheap. The result is a rather amazing process in which everything is gradually transformed and enriched and the quality of life and standard of living rises for the majority of the population. This immature stage is what I would call the golden era of capitalism
Middle Stage Capitalism
Eventually though, capitalism starts to mature. With the greatly improved life expectancy and reduced concern about survival, people start having fewer children and thus eventually there are fewer laborers. The growth of income leads to a growth in demand for goods and services that exceeds supply which leads to their cost increasing. To counter this, companies must pay employees more and improve working conditions to keep their factories and businesses going.
Eventually other countries start adopting capitalism but at a much earlier starting point where again, land is cheap and labor is plentiful and cheap. Industry, asserting its own capitalistic philosophy of seeking the highest return on investment for its investors begins shifting its labor force to these immature capitalistic countries to lower costs. This leads to a catastrophic hollowing out of industry in the maturing country (think Detroit which lost 61% of its population between 1950 and 2010) but in some sense this is countered by the benefits of much cheaper goods coming from the immature capitalist countries which keeps the cost of living manageable.
The maturing country eventually attempts to soften the blow by a transition to a service economy. It is much harder to offshore services and the increased wealth of the population provides a source of consumption for these services. At this point you get what I will call the middle stage of capitalism between immature capitalism and mature capitalism. It is this era that lays the seeds for the problems of mature capitalism for the U.S. of which the principle culprits are the three H's: Housing, Health Care and Higher Education, three areas that not coincidentally cannot have their costs reduced or contained by offshoring.
Rising Cost of Housing
In this middle stage of capitalism in the U.S. while vacant land is still plentiful, much of it is either underutilized or utilized by agriculture. People over time have gravitated to cities and their outlying suburbs because that’s where the jobs are. Supply of "desirable" land (close to jobs) thus becomes scarce while the demand remains high. This demand is also pretty elastic. Having a roof over your head is a necessity, not a luxury. So the price of housing starts to rise. As it rises, the capitalistic instinct in the population is aroused and many ordinary citizens begin to see their houses (or more properly the land on which they sit) as investments rather than mere dwellings causing them, along with traditional investors, to hoard those properties, further limiting the supply and demanding greater and greater returns on investment. The growth of credit and 30 year mortgages exacerbates this problem by allowing demand which would otherwise fall off as prices rose, to keep rising in exchange for debt pushing prices to astronomical levels --what person over 40 today would have believed they would some day think paying $400,000 for a run of the mill house would be a bargain yet this is now the median house price in the U.S. People rationalize this debt by the idea that home prices will keep rising and thus they will not only eventually clear their debt but make a profit. This in fact becomes even more important as wage growth slows or even drops relative to inflation and pension plans disappear.
Rising Cost of Higher Education
The switch to a service economy also suddenly raises the importance of higher education. Parents no longer see this as a luxury but a necessity for their children to be successful in the future. However the supply of seats in higher education changes very slowly while the belief in the necessity of a higher education increases the elasticity of its demand. The result is ever increasing cost of higher education. Like housing the introduction of credit in the form of student loans allows that demand to keep growing well past people's incomes. Like housing, people become more and more willing to go into debt over education because they come to see it as an investment that will pay off in the long term.
Rising Cost of Health Care
Meanwhile, like higher education, the medical field moves very slowly at increasing supply. Initially the demand is kept under check by the mere fact that most people do not become seriously ill until later in life however the population of the U.S. is now aging rapidly changing that equation. The understandable move towards viewing health care as a human right doesn’t help. These factors result in much higher elastic demand and the resulting huge increases in the cost of health care. Unlike for housing and higher education, there is no long term benefit of racking up medical debt plus there is an increased likelihood you won't even be around to pay it off so health insurance became the relief valve to avoid what could become an economic catastrophe should one get seriously ill. This insurance cost has now risen so far and fast in the U.S. that in many places a family pays more for insurance premiums than for their mortgage and unlike the case with mortgages or student loans, there is no investment value in insurance premiums. It is pure loss of income.
The Government Responds
The U.S. started seriously trying to mitigate the maturing stage of capitalism by government relief but not intervention. It introduced housing vouchers, food stamps, medicaid and the ACA, government backed loans for housing and education in addition to pushing to increase the minimum wage. It also continued to decrease tax burdens on the lower end of the scale while increasing it on the higher end to compensate.
I would argue, however, that today we are seeing the culmination of effectiveness of these measures. The price of the three H's has risen so far that attempts to mitigate them or to mitigate other factors like the cost of food have become purely palliative and there is also little room for further cutting taxes on the lower end and the populace knows it. Additionally, that lower end is increasing in size as the middle class feels the effects of maturing capitalism. The result is the unswerving opinion that the U.S. is heading in the wrong direction.
Government intervention would be the government nationalizing health care and capping the return on investment for housing (likely through massive increases in capital gains taxes on house sales including the removal of the homeowner’s exemption) and making higher education public but Democrats have with reason embraced capitalism and thus avoided any association with such ideas ironically ignoring the fact that democratic countries in Europe have somehow done these things without destroying capitalism. As a side note, this is why it is so ridiculous for Republicans to decry the far left. There is no real far left. A far left would favor government intervention against capitalism and there is currently no constituency and not even someone like Bernie Sanders is calling for such an extreme change.
Ultimately I would contend that it is the failure to mitigate the three H's especially housing and health care that has caused the great upheaval in politics we see today. Those costs have basically filled the glass so that any variations in the price of other goods. food or energy overflows the glass and leads to a feeling of quiet desperation and insecurity and such insecurity is the ultimate driving force that allows people to rationalize drastic solutions.
The Right Counters
Politicians on the right have cynically manipulated these feelings in an attempt to gain power. They have created false scapegoats of immigrants and government waste and regulation and the notion that the government only cares about the very poorest and minorities, not the bulk of the population. They have also taken aim at offshoring and globalism as the culprits even though their donor class has benefited greatly from them and, of course, touting capitalism as the solution, not the problem.
As I have contended above, getting rid of trade and turning inward is not likely to reverse the course of maturing capitalism. Much of what we perceive as de-globalization is actually just the result of capitalism maturing offshore in places like China. China has undergone a similar maturing process as the U.S. The birth rate is extremely low and has been so for a long time and unlike the U.S. there are no immigrants to replenish the labor force. Wages have risen as has the cost of living. Consequently, it is doing what all maturing capitalist countries do, offshoring its less profitable industries to elsewhere in South East Asia and moving more towards high end industries and services which can tolerate the higher wages, at least for a while. Eventually it will enter the mature stage of capitalism just like the U.S. Meanwhile it’s role in producing cheap goods will simply switch to elsewhere in Asia.
If I am correct, neither party really has a satisfactory solution to the fundamental problems of a maturing capitalism. The notion of re-shoring manufacturing is, I believe, a pipe dream because so much of the population’s income is tied up in the three H's that they will have little with which to pay the far more expensive U.S. versions of televisions, refrigerators or furniture and investors know this so you are unlikely to even see a serious attempt to re-shore except for areas considered vital to national security which can expect government bailouts if they are not economically successful.
While there will likely be a few more pendulum swings due to recrimination, long term this is an existential crisis and by long term I mean later this century perhaps as little as ten or twenty years. Unfortunately while the Democrats have no real answer to this crisis the Republicans do: authoritarianism. Countries like Russia have experienced this crisis as well but by eliminating democracy and creating a police state, they can keep on functioning at some level without being accountable to their citizens. This is the model I believe Donald Trump aspires to. It certainly is an easier way to “solve’ the problem than actually fixing it.
Potential Solutions
Are there any potential solutions to this problem ? The cost of housing could be brought down if we embraced remote workplaces, removing cities as the supply bottlenecks for housing. This would also serve to spread the wealth out across the country. Health care costs could come down if we greatly increased the supply of health practitioners but this seems unlikely. More likely they will only come down if we automate most of the process, creating fixed costs for the health care industry. More drastically the government could intervene to limit capitalism by nationalizing health care like Canada and capping return on investment for housing but it is unlikely Democrats would have the nerve to do so and it would be subject to the pendulum effect where the next Republican administration simply undoes whatever the Democrats do.
Both health care and education will likely need to become much more highly automated to bring costs down. Robots could also make re-shoring practical for currently labor intensive industries. Robots need not be paid an ever increasing amount as their life expenses increase. They have only small life expenses in the form of preventive maintenance. But it will take many decades before the benefits of these changes would outweigh the pain and expenses and you can expect resistance just like the oil industry has to renewables. Unfortunately automation is also a double edged sword, bringing prices for services or manufacturing down but also greatly reducing the need for humans. Humans having work for which they receive wages is central to capitalism. It cannot work without it.
Only time will tell how this will play out. The important thing for Democrats to do is to counter the easy solution of authoritarianism at every opportunity by making people aware that it is a Trojan horse, leading only to the suppression of their voices not a solution to their problems. We are for better or worse in an era where we must focus on the containment of authoritarianism and the education of a misinformed public rather than progress barring some unforeseen miracle.
