Monday, November 22, 2010

The Middle-Class Crisis

I've started reading noted economist Thomas Sowell's book, "Basic Economics." The book is designed to enrich the average person's understanding of economics, and it's loaded with useful information. I can't think of a better time for us average citizens to get a handle on this subject so people - experts - will stop talking around us and over our heads. We might not be able to afford to let that happen any more.

Dr. Sowell made a point early in the book about the "crisis" of middle-class living. He noted the fact that the media and other experts go on and on about "the economic woes and worries of middle-class Americans - one of the most affluent groups of human beings ever to inhabit this planet." He referred to a New York Times article in which a middle-class American family was actually photographed in their own swimming pool under a story headline that read, "The American Middle, Just Getting By."

He went on to refer to a Harvard sociologist who complained "how budget-constrained these people (the middle-class) really are." Sowell made the point that it is not the budget - it's reality - that constrains them because there has never been enough resources, goods, wealth - anything - to satisfy everyone completely. That is the truth and the reality that underlies the economic principle of scarcity.

In understanding economics and its relationship to our daily lives, I think it's important to anchor the correlation to this fact: that economics is economics wherever you find it. By definition, economics is "the study of the use of scarce resources which have alternative uses" (economist Lionel Robbins), and it applies to all economies great and small, as great as America and as small as the exchange that occurs between the small business and the middle-class family in America.

So, when nations, producers, and households make economic decisions, they act on the realization that resources are scarce - there is more demand for resources than there is availability of resources. In the marketplace, these resources are allocated by price - the price producers are willing to accept and the price households are willing to pay. Market economies infuse value into the marketplace through the principle of opportunity cost: the cost of the things we give up in order to purchase the things we obtain.

So, if I decide to purchase a box of Tide detergent rather than the same size box of Cheer detergent, the opportunity cost of having the box of Tide is the box of Cheer I didn't purchase. Let's say that I decided to purchase iPods and tennis shoes for my four children instead of getting high speed Internet access in my home so they can improve their education. The opportunity cost of the iPods and tennis shoes is the Internet access I can't get because I'm spending my money on iPods and tennis shoes.

These kinds of decisions are typical because all of these great and small economies in the world must confront the fact that resources are, in fact, scarce. Governments handle the reality of scarcity by budgeting their incomes and setting economic policy. Producers handle the reality of scarcity by budgeting their incomes and making production decisions. Households handle the reality of scarcity by budgeting their incomes and making spending decisions.

The marketplace reflects these realities of scarcity and opportunity cost in the supply and demand curve. The producer will not accept a dollar less than the market bears and the consumer will not pay one dollar more than the market demands. If a producer can't sell certain goods for what he needs to sell them for, he will sell something else. If a consumer can't buy certain goods at his price, he will spend his money on something else.

Where the producer's price meets the consumer's price in the marketplace we find the point of balance - equilibrium - for goods and services. At equilibrium, there are no surpluses or shortages. It is a manifestation of a perfectly disciplined market economy. It is thus at this point that tens of thousands of perfectly disciplined producers supply goods and services, and it is where hundreds of thousands of perfectly disciplined households demand goods and services.

One might argue, then, that when rational and responsible families don't budget in some fashion, they simply don't feel the pressure of scarcity or the call to discipline their spending - they have a surplus of expendable wealth that they can spend with little regard for opportunity cost or the cost of things they must surrender in order to have the things they want. Thus, households that budget are households that demonstrate that they realize the cost of the things they're purchasing and the fact that their wants must be balanced with the availability of resources.

By necessity then, the effect of thousands of middle-class producer/household "economies" confronting this reality is reflected over time in the marketplace in the broader American economy. When the Harvard sociologist complains about how budget-constrained the middle-class is today we have to wonder just how little household discipline these experts believe our economy can support. After all, don't we really expect our middle-class households to constrain or balance their spending with a budget or with their opportunity costs in mind?

The whole idea of a crisis that is unique to the middle-class that owes its hardships to the fact that it faces the onerous need to budget its expenditures thus appears to me to be contrived and the logic behind it seems flawed. If the call to action behind middle-class reform is thus flawed, what are we to think about the corrective action it inspires?