In early June, the ad agency Digitas released a white paper declaring an end to an era of "mass affluence" in America. By this, the researchers meant not that the middle class has no money to make purchases, but rather that a powerful wealthy minority now accounts for a significant segment of what consumers contribute to the gross national product. This observation, new to Madison Avenue, is old hat on Wall Street. Citigroup's infamous "plutonomy" research report told investors the same thing back in 2005.
Add to this the observations of Robert C. Doll — vice chairman of financial behemoth BlackRock, which manages $3.65 trillion in assets — who is bullish on the stocks of U.S. companies, even while his assessment of the financial condition of the U.S. consumer is, to say the least, unenthusiastic.
In other words, Digitas and Citigroup see companies making money from the very richest (and a little extra from those middle-class consumers who can scrape or borrow to ape their purchases), while Doll sees these companies making their money overseas. Could it be that both are right and that companies will increasingly focus on high-net-worth consumers in the United States and abroad and on emerging middle-class consumers worldwide?
The once-quasi-symbiotic relationship between U.S. businesses and middle-class consumers is breaking down. Of course, it won't disintegrate entirely. We're at the point now where the richest 10 percent of Americans account for half of the consumer spending. That's a lot. But this is a big pie, so the other 90 percent is still spending $4 trillion or more a year (this figure includes the government's share of health care spending). No company is going to leave that money on the table.
But companies are backing away from middle class U.S. consumers. That will have major implications for the American economy and, ultimately, for our democracy. It's hard to see how this does anything good for private sector wages in the United States. The old Henry Ford model of paying U.S. workers enough that they can become your customers is gone.
We're at 9.1 percent unemployment and, according to the Federal Reserve's most recent survey of senior loan officers, there is only soft demand for consumer credit despite a recent loosening of standards for issuing credit card and consumer loans. And yet U.S. businesses are reporting boffo results. Profits for the S&P 500 are expected to rise 16 percent year over year, and margins, a measure of profitability, are at an 18-year high.
Still, Ford's insight does have relevance in a globalized world. A supplier of goods has to foster a base of customers. Were Ford alive today, he might well follow the same strategy, except with the aim of building a middle class of consumers in Brazil or Vietnam or China rather than Detroit. In the '90s, the moral issue of globalization was about U.S. companies exploiting the lack of labor protections in the developing world. Exploitation is no longer the whole story. The strategy of using foreign labor to sell cheap consumer goods to Americans is evolving into "make it there, sell it there." GM's recent (and taxpayer-funded) expansion into China is a good example.
At some level, these U.S. companies are developing new loyalties. In a competitive global economy, the interests of a family in Des Moines do not necessarily align with the interests of a family in Sao Paulo, and we can no longer say with any certainty that U.S. companies are focused first on American needs.
Certainly, the development of emerging markets is a good thing, and ending poverty is the supreme moral justification of economics. But there are still hard, practical questions to ask, especially by people in the United States, where the economy is only minimally planned or directed by the government.
A lack of central planning has served the United States well and is one reason that, while iPads might be manufactured in China, they were conceived and designed in California. But the lack of planning also means that the type of country we have is largely dependent on what projects America's corporations choose to undertake. When those corporations are choosing largely within America, you get pretty good results for middle-class Americans. But if companies have to decide between projects here and projects abroad, the United States might well lose out.
Doll believes that over the next five years, 70 percent of the earnings growth reported by S&P 500 companies will come from overseas. The managers of these companies are rewarded for achieving growth. They must direct their efforts where the growth is and U.S. consumers are not where the growth is.
The traditional relationship between business and America's middle class is the linchpin of anything that resembles a self-regulating economy. If that bond has been weakened, the government must act to make sure that the growth of America's corporations benefits its citizens.
Add to this the observations of Robert C. Doll — vice chairman of financial behemoth BlackRock, which manages $3.65 trillion in assets — who is bullish on the stocks of U.S. companies, even while his assessment of the financial condition of the U.S. consumer is, to say the least, unenthusiastic.
In other words, Digitas and Citigroup see companies making money from the very richest (and a little extra from those middle-class consumers who can scrape or borrow to ape their purchases), while Doll sees these companies making their money overseas. Could it be that both are right and that companies will increasingly focus on high-net-worth consumers in the United States and abroad and on emerging middle-class consumers worldwide?
The once-quasi-symbiotic relationship between U.S. businesses and middle-class consumers is breaking down. Of course, it won't disintegrate entirely. We're at the point now where the richest 10 percent of Americans account for half of the consumer spending. That's a lot. But this is a big pie, so the other 90 percent is still spending $4 trillion or more a year (this figure includes the government's share of health care spending). No company is going to leave that money on the table.
But companies are backing away from middle class U.S. consumers. That will have major implications for the American economy and, ultimately, for our democracy. It's hard to see how this does anything good for private sector wages in the United States. The old Henry Ford model of paying U.S. workers enough that they can become your customers is gone.
We're at 9.1 percent unemployment and, according to the Federal Reserve's most recent survey of senior loan officers, there is only soft demand for consumer credit despite a recent loosening of standards for issuing credit card and consumer loans. And yet U.S. businesses are reporting boffo results. Profits for the S&P 500 are expected to rise 16 percent year over year, and margins, a measure of profitability, are at an 18-year high.
Still, Ford's insight does have relevance in a globalized world. A supplier of goods has to foster a base of customers. Were Ford alive today, he might well follow the same strategy, except with the aim of building a middle class of consumers in Brazil or Vietnam or China rather than Detroit. In the '90s, the moral issue of globalization was about U.S. companies exploiting the lack of labor protections in the developing world. Exploitation is no longer the whole story. The strategy of using foreign labor to sell cheap consumer goods to Americans is evolving into "make it there, sell it there." GM's recent (and taxpayer-funded) expansion into China is a good example.
At some level, these U.S. companies are developing new loyalties. In a competitive global economy, the interests of a family in Des Moines do not necessarily align with the interests of a family in Sao Paulo, and we can no longer say with any certainty that U.S. companies are focused first on American needs.
Certainly, the development of emerging markets is a good thing, and ending poverty is the supreme moral justification of economics. But there are still hard, practical questions to ask, especially by people in the United States, where the economy is only minimally planned or directed by the government.
A lack of central planning has served the United States well and is one reason that, while iPads might be manufactured in China, they were conceived and designed in California. But the lack of planning also means that the type of country we have is largely dependent on what projects America's corporations choose to undertake. When those corporations are choosing largely within America, you get pretty good results for middle-class Americans. But if companies have to decide between projects here and projects abroad, the United States might well lose out.
Doll believes that over the next five years, 70 percent of the earnings growth reported by S&P 500 companies will come from overseas. The managers of these companies are rewarded for achieving growth. They must direct their efforts where the growth is and U.S. consumers are not where the growth is.
The traditional relationship between business and America's middle class is the linchpin of anything that resembles a self-regulating economy. If that bond has been weakened, the government must act to make sure that the growth of America's corporations benefits its citizens.
