The Next War on the Middle Class

The New Class Conflict
by Joel Kotkin
Telos Press, 2014, 215 pages, $29.95

In case you suffer from the delusion that America’s Democratic Party is the party of equality, Joel Kotkin, in The New Class Conflict, is here to tell you otherwise. Kotkin is a master of revealing statistics, and his book is a short, sharp, inspired diagnosis of what ails America today. It is a damning portrait of a society in awe of smug sanctimonious self-serving Left-liberal elites. These elites use reformist rhetoric and guilt tactics to engineer upward mobility for themselves and downward mobility for the American middle class. Kotkin observes that 95 per cent of the income gains during President Obama’s first term went to 1 per cent of the population. In the 2012 elections, Obama triumphed in eight of the country’s ten wealthiest counties, sometimes by margins of two-to-one. In the first term of his presidency, average annual US household income dropped by $2600 and the number in poverty grew by six million.

Over time America’s middle class has been hollowed out, and the ranks of the low-income service and welfare classes have swelled. Kotkin notes that by 2020 almost 30 per cent of American employees are expected to hold low-wage jobs with earnings at or below the poverty line. The old Democrat New Deal coalition that united well-paid industrial workers with farmers and minorities is long gone. Democrat power today pivots on a coalition of the urban poor and the high-tech rich. The wealthy fund the party’s political campaigns; the poor trade votes for transfer payments; the forgotten middle class pays for these income redistributions through taxes and regulation.

The Democrat coalition is cemented together by what Kotkin amusingly calls the clerisy: the mainly postgraduate-educated leaders of America’s large symbolic industries. These industries make up the media-entertainment-government-foundation-university (MEGFU) sector that churns out an endless diet of progressive ideology. One of its many functions is to retail redistribution schemes like Obamacare, designed to hike middle-class health insurance payments to pay for the insurance of low-income Americans. The shrinking size of the middle class today makes these transfer schemes punitive. Fewer taxpayers pay more.

The clerisy turns a blind eye to this reality. Its business is fairy-tales. It tells its tales in all sorts of ways. It produces everything from schlock blockbusters to unreadable academic tracts. Among its most potent tales is the one that says that progressives represent “equality”. In reality Left-liberals are in awe of America’s high-tech oligarchy—and it of them. This oligarchy grew out of the once innovative information technology industries. Today the oligarchs have replaced innovation with government lobbying, a sure sign of decline.

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America’s Silicon Valley used to be a stronghold of libertarian politics. Big-government liberalism now dominates. Kotkin points out that Facebook’s lobbying budget grew from $351,000 in 2010 to $2.45 million for the first quarter of 2014 alone. High tech has joined the rest of America’s crony capitalists. The clerisy loves this. It believes that the salvation of society lies in bureaucratic regulation. The clerisy moralises; the oligarchs lobby; the state regulates. The clerisy’s vocation is to instruct us how to live our lives. Its members are secular priests. They offer a fake religion (environmentalism), a pulpit (the media) and lashings of pseudo-theology (impene­trable academic theories). Tech specialists assisted Barack Obama’s electioneering with voter-turnout data mining. The same knowhow though was notably absent when the Obama administration launched its dismal health insurance site. This reflects the horns of a dilemma. Technology is efficient. Bureaucratic government is anything but.

The Silicon Valley titans made their fortunes in technology. Yet the art of oligarchy is to grow wealth through government regulation. That is where the action is today. Kotkin observes that in 2012 Washington DC replaced New York as the wealthiest region in the United States. The high-tech oligarchs make money from data mining. They want privacy rules designed to facilitate that. They also make their money from intellectual property. Understandably then they want government to extend intellectual property rights interminably. None of Thomas Jefferson’s fourteen years of intellectual ownership, please. Patent trolling is one of the malicious effects of this. The oligarchs have shifted from free-market apostles to postmodern mercantilists. What was once a pioneering class has increasingly become a parasitic class dependent on state favour. Its vast wealth belies how little it has contributed to general economic productivity. Its devices have transformed consumer and office habits. Yet only in the late 1990s did it contribute measurably to an increase in economic productivity. Mostly its office software has fuelled the growth of bureaucracy.

The contradictions of the Obama-era high-tech-big-government alliance are increasingly evident. Facebook billionaire Chris Hughes bought the ageing Left-liberal New Republic only to see it self-destruct. Its contributors left in a huff at the thought of a technology make-over. The tech elite constantly talks as if information is knowledge, and knowledge is imagination. This is quite untrue. Books today are freely available on the internet to a remarkable extent. Yet book reading has declined precipitously in the past twenty years. As numeracy declines as well, the clerisy responds with the cry of “national standards”. In America the latest of these bureaucratic fads is Common Core. Unsurprisingly a major financier of Common Core has been the Bill & Melinda Gates Foundation to the tune of $2.3 billion. This is now big business—with IT companies, publishers, state administrators and the curriculum industry all jumping on the band wagon. But neither tech nor bureaucracy, nor its offspring technocracy, can fix the problems of persistently declining knowledge and evaporating creativity in the age of big data.

Kotkin points out that most of the world’s twenty-five richest people come from the information, fashion and media industries. The MEGFU sector is very self-conscious—and very thin-skinned. Its sworn enemies are the energy and manufacturing industries. It has a deep distaste for fossil fuels. Yet the most important economic innovation of the past twenty years has been the fracking of shale oils in the United States. The MEGFU sector funds green policy initiatives to ban coal-powered power stations in order to punish traditional industry sectors with higher electricity costs. All the while it is mesmerised by the environmentally-suspect electric car.

The difference between self-image and reality is striking. The MEGFU economy sees itself as creative, yet its wealth increasingly depends on recycling old hits. The 1998 US Copyright Term Extension Act (also known as the “Mickey Mouse Protection Act”) added two decades to corporate and individual intellectual property protection. This was an uncomfortable reminder that the best of America’s great cultural industries resides in the past—in Mickey’s case, as far back as his first appearance in Steamboat Willie in 1928. Microsoft’s ubiquitous Word software has offered users few updates of interest since the early 1990s. While Facebook may dominate today, Geocities hosting service provided free personal web pages from 1994; when its US service closed down in 2009 it hosted 38 million user-built pages. Online social networking goes back to the Usenet web forum in 1980. Yet the MEGFU industry relentlessly insists that it employs a creative class.

For years Kotkin has sparred with the social scientist Richard Florida. Florida coined the term “the creative class” a decade ago. The term took off. But increasingly it has become apparent that the contemporary economic drivers in the USA are not the Democrat-leaning blue states with big MEGFU sectors, such as New York or California, but rather Republican-leaning red states built on agriculture, energy and manufacturing.

Writing in the New York Times this year on January 3, Florida acknowledged that real living standards are better in red states than blue states. The blue states are weighed down with high taxes and expensive housing. Kotkin has persistently made this point. Unfashionable places, the “fly-over states” derided by the MEGFU elites, offer the best standard of living for middle-class Americans.

The consequences of America’s gilded liberal ideology are often perverse. The blue-state gentry love a certain stylised bohemia. But that same bohemia is now priced out of big city neighbourhoods. Kotkin quotes Patti Smith: “New York has closed itself off to the young and the struggling.” Even pilots avoid New York postings, Kotkin notes, due to the high cost of living. The result is social deformation. The middle class is squeezed out, leaving the Obama coalition of the rich and the poor behind.

Florida admits the insidious consequences of this. In 1979 three blue states made the top twenty most unequal American states. Today, nine of the top twenty are blue states. The most unequal are Democrat-dominated New York and Connecticut. The social regime that has emerged in these states, as in Silicon Valley and the San Francisco Bay Area, combines the postmodern plutocrats and the postgraduated gentry with low-income service and welfare classes. Democrat-leaning states now systemically produce the kind of inequality that Democrat Party acolytes feign to deplore. Even the credentialled gentry struggle with the cost of living.

Florida is a scrupulously honest social scientist. He allows now that blue-state knowledge economies are very expensive to operate. Their innovative edge, he concedes, is based on a high-cost research infrastructure that is supported by public subsidies. Almost everything in that statement is true bar the innovative edge. It is increasingly clear that ever-larger public investments in research and innovation have yielded ever-fewer ingenious outcomes. This applies not least of all to the sacred cow of bio-medicine.

Kotkin and Florida are both urbanists. Both think that cities are crucial to innovation and growth. But there the agreement ends. Kotkin believes that the sprawling suburbs are the key to America’s prosperity; Florida advocates high-density cities. In the latter, Kotkin notes, inequality gaps are big. Working-class and minority groups do poorly.

Both authors have a point. Most Americans prefer the suburbs. Red states provide low-cost suburban living, with housing costs per square foot around half of comparable blue-state costs. On the other hand, creativity concentrates in dense cities. On that score Florida was right. Centre-right intellectuals live in Washington DC and New York, not in Albuquerque. What Florida misunderstands is that the creative class is tiny. He confuses it with the 11 per cent of the US population who today have some kind of graduate degree. The latter are a self-aware voting and social bloc. They lean heavily to the Democrats. They see themselves as creative. What they actually are is a credentialled class dependent on the growth of government and corporate bureaucracies. Like the character “Julia” in the Obama election ad, they see themselves as the entitled recipients of womb-to-tomb government largesse. The graduate class not only receives public largesse, it also distributes it. In a neat circle, class members dole out grants and tax dollars to other class members to engage in a cornucopia of specious projects. This is the higher-educated version of neo-patrimonialism. It is distribution from the credentialled to the credentialled. The invariable justification for this self-serving merry-go-round is the poor or the disadvantaged or else the promised miracles of creation and innovation which, while much lauded, are never actually delivered. Funny, that.

Helping-money often makes individuals helpless. It reduces the kind of do-it-yourself ambition and drive that make a society great. Kotkin observes that expanding the regulatory scope of government threatens the American sense of autonomy and self-help. In doing so, it kills ingenuity and economic growth. Real income in the United States has been stagnant for forty years; future growth prospects look sluggish.

Many in the clerisy delight at this; they are anti-growth. They revile manufacturing and extraction industries. Coal is a demon, one of many. Their dreams are neo-medieval. They are the intellectual children of Lewis Mumford. In their heads are neo-pastoral fantasies of windmills and hand power. All around them are the demons of modernity. Yet they want all the benefits of modernity. They rack up frequent-flyer points and pay an indulgence to offset their generation of carbon dioxide: poor old carbon dioxide, yet another modern demon that haunts their fervid medieval imaginations. The clerisy work in offices; thus office industries are fine. If your office has a green waste bin, you are noble. The neo-medieval fantasy is that office industries don’t need energy and manufacturing industries. The real industry is regulation. Work that takes extra bureaucratic steps is good. Its rationale is morality. All things, from power generation to education, are justified by regulation. Regulation is the sanctification of modern life. If something is accredited it is good. If it requires accreditation then it needs auditors, assessors and inspectors.

Kotkin’s story of the new class conflict focuses on the rising oligarchs and the dissipating middle class. That is part of the story. Another part, less remarked by Kotkin, is the office class. It is the sinews of the clerical economy. This class has expanded markedly over the last century. The oligarchs who pursue sweetheart deals with the state are not the direct sponsors of this class. Nonetheless the revolving-door regulation of bureaucratic capitalism swells the size and scope of the office class. This class processes the time-consuming steps in the elaborate procedures that policies and regulations create. All that the oligarchs want to know is that if they do A, B and C, then by regulatory definition they have protected users’ privacy; some of those steps they can automate; the rest they employ office workers to process. The media-university-entertainment industry generates moral alarms; commissions, consultants and congresses devise laws authorising regulation; government bureaucracies write the rules; corporate bureaucracies then comply with the rules by generating their own procedures.

This is the production of nothing. It is one bureaucracy talking to another bureaucracy. Silicon Valley in its inventive decade of the 1980s was the opposite of this. It embraced free-market conservatism, libertarian social morality and technological utopianism, Kotkin reminds us. That is all gone—and so is Silicon Valley’s inventiveness. Social media is a concertinaing of online communities (which began in the 1980s) with blogs, personal home pages and digital data-mining techniques (all of which began in the 1990s).

For all of their headline status, social media companies employ a handful of staff. Kotkin points out that as of 2013, the leading social media firms directly employ fewer than 60,000 people in the United States; in comparison, even a shrunken General Motors employs 200,000. Since 2001, the US book, periodical and newspaper publishing industry has lost 250,000 jobs while internet publishing and portals generated 70,000 new jobs. If you think that social media is a model of a buoyant economic future, think again. If you think that literacy, reading and writing are helped by this, think again.

The tech industry is highly centralised. Google accounts for two-thirds of internet searches; half of North American computer users are signed up to Facebook. This is a degree of concentration that eludes traditional manufacturing to this day. No car manufacturer, Kotkin explains, controls more than a fifth of the US market. The promise of the internet was decentralisation; the reality has been high degrees of concentration. The oligarchs lobby to avoid anti-trust legislation.

The libertarian investor Peter Thiel argues that competition is no match for originality. He has a point. Companies compete over what exists. They invent what does not exist. The implication is that it is better to be an inventive monopolist than a competitive oligopoly. There is some truth in this. But what then are the intellectual fruits created by informal agreements between big oligopoly firms not to compete for staff?

The great periods of automobile and IT invention were characterised by many firms both competing and inventing. Facebook’s semi-monopoly today is a sign less of industry pioneering than of industry maturity. There came a day also when Crosley, Duryea, Hudson, Jeffery, Winton, Nash-Kelvinator, Oldsmobile, Packard, Studebaker and innumerable other US car manufacturers had all folded, leaving the terrain dominated by the Big Three—General Motors, Chrysler and Ford—whose penchant for bureaucratic capitalism would leave them all in strife in the long run. Notably one of Barack Obama’s first acts in office was to provide a $51 billion taxpayer bailout for the ailing GM. The tacit understanding was that GM would push high-cost electric-powered cars. These cars are an ideological gimmick. They are environmentally worse than internal combustion vehicles when the full life-cycle of power generation, manufacturing and disposal is properly accounted for. This is in an age when expensive electricity supply networks struggle to meet demand.

Silicon Valley today remains the home of venture capital. What the venture capitalists invest in is instructive. MEGFU favourites dominate: electric cars, bioscience or alternative energy and fuels, social networks, communications and messaging, data management and analytics. Many of these ventures seem far from venturesome and distinctly tired. Crucially they offer little in the way of sector invention that might off-set the approaching people-less robot factory and driverless-car future that is going to have a deep transformative impact on labour markets. Many of these markets will be eliminated. This applies not only to blue-collar sectors but to white-collar, service and professional segments as well. Low-level medical diagnoses, preparation of tax returns, para-legal document searches and university essay marking will be automated. The same is happening to the work of travel agents, bookkeepers, marketers and meter readers. Self-service is taking over airline check-in and supermarket checkouts. Any formula task can be automated. A lot of professional operations are just that. Others can’t match the power of big data processing. Pattern-recognition software will replace much of radiology diagnostics.

A sign of the seriousness of this is that Japan plans to take on China industrially with a massive program of robot factories. Meanwhile Foxconn, the giant Taiwan-based iPhone manufacturer, projects its own program of automation. How many commercial truck drivers or taxi drivers or fork-lift drivers will there be in thirty years’ time? Likely, not many. Farm robots will weed, prune, monitor produce, check on herds and harvest crops. Globalisation exported traditional manufacturing jobs from developed to developing countries. Skilled jobs were replaced with service jobs. Now service jobs are being automated. Lowe’s, the US hardware retailer, is trialling humanoid robot shop assistants. Japan plans robot nursing home assistants to cope with its aged population. Health assistants are one of the prime projected employment growth areas in the next twenty years. What if these jobs are gradually replaced by machines? There are lots of long-term scenarios for wealth creation but few for job creation.

The problem is not automation as such. Automation is built into industrial societies. The first factory machine was the start of industrial automation. Software today is expanding an old process. This is less industry innovation and more industry maturation. Robotics has been in the pipeline for fifty years. The first industrial robot was installed in 1961. Any repeating task, be it glamorous or grimy, can be turned into an algorithm and mechanised or automated. The ultimate protection against automation is creative tasks. These cannot be reduced to a set of rules that precisely define a sequence of repeatable operations. Creative work flourishes in new industries. Today’s problem is that there are no new industry sectors visible on the horizon. Mass manufacturing, transport and health services are mature industries. The MEGFU economy is rapidly ageing. Like all such sectors, it began in a crucible of ingenuity. It then expanded through an entrepreneurial phase of proliferating businesses, organisations and professional practices. Finally it consolidated into large institutions and oligopolies. The entrepreneurial phase created jobs; the institutional phase eliminated them. That cycle is almost a law of nature. This is not an issue as long as the cycle begins again, with new sectors. This is what the current era lacks.

As the MEGFU sector decelerates and the lower-level professions are automated, the hunt for new industries begins. Kotkin suggests that these will be generated out of the pool of sole proprietors. He observes that while unemployment in America surged after 2007, self-employment also grew. A lot of people dropped out of the traditional labour market. Many exited into welfare but others stepped into work-at-home businesses. Sole trading is part of any future economic matrix. It is a plausible model of economic self-reliance. But it can be easily romanticised. Some yeoman enterprises succeed; a lot do not. Moreover, the current increase in the number of non-employer businesses belies a disturbing decline of business start-ups in the United States, which are at their lowest number in thirty years. Garage businesses are only a small part of the story of business creation. For every case of a MITS, the designer of the pioneering Altair personal computer, there is a well-funded start-up like Intel. Initiative scales—from the tiny to the titanic.

More than anything, what makes self-starting possible is culture. Culture can stimulate it or smother it. Contemporary clerisy culture smothers it. The clerisy is hostile to high-energy enterprise. Its public policy preferences invariably belittle initiative and risk-taking. This sometimes leads to comic consequences. Among the worst affected by Obamacare were sole traders, which include freelance writers. This group is part of the self-reliant enterprising middle class. Because of their trade, freelancers also happen to be perennial Democrat voters. So naturally most of them extolled Obama’s affordable care legislation—until they realised just how unaffordable the scheme actually was. Oh irony.

No one can tell exactly what shape the next industrial revolution will take. But unless the pernicious pall of clerisy culture is removed, it is not going to arrive in the near future. Kotkin’s great service is to confront this problem head-on and not flinch.