End Times, Once Again

Our economic system clearly isn’t working for everyone.

Reading Peter Turchin’s End Times has shaken me, though not for all the reasons that Turchin might have hoped.

Turchin’s quest to treat history as science and to develop databases of history is one that I’m sympathetic to, as one might expect given that I run the Foundation for the Study of Cycles and I studied at the Santa Fe Institute, where Turchin does much of his research today.

Ironically though, there’s not a single chart in End Times, which seems surprising given Turchin’s aspiration to study history as science. That’s ok, however, because Turchin’s underlying thesis of what’s happening in America today is compelling, and frankly obvious once you understand it. And it doesn’t require a lot of data and charts to be credible.

Turchin’s basic thesis is:

1.     For the past 40+ years, most of our economic gains have been going to the managerial class at the expense of the working class.

2.     The ticket out of the increasingly deprived working class and into the increasingly affluent managerial class has been a college education.

3.     That has resulted in too many college-educated “elites” who are now competing for a limited number of managerial opportunities.

4.     The social strife we’re experiencing today isn’t about what it claims to be about. It’s mostly driven by the managerial aspirants fighting each other for the limited number of managerial positions. (Ouch.)

Turchin uses the term “elites” rather than “managers.” He defines “elites” as “those who have more social power.” Since he’s talking about America, he equates social power with wealth. America’s elites are basically the top 10% of wealth holders. By his definition, I’m an “elite” and, if you’re reading this, you probably are too.

There is only one chart that is needed to back up Turchin’s point #1 above. You can see it for yourself here at the Federal Reserve’s FRED site (hat tip to John Mauldin).

The blue line at the bottom of the chart is the “median usual weekly real earnings of wage and salary workers 16 years and over.” The red line is “gross domestic product per capita.” GDP per capita has increased by 102% since 1980 while “median real earnings” have only increased by 14%.

Just because GDP per capita increased over six times more than the median real earnings doesn’t necessarily mean that median earners didn’t enjoy some of those additional gains beyond their modest wage gains. Let’s face it though, unless you owned a home or other financial assets, you likely missed out on most of those extra gains.

If we look at the distribution of total wealth in the United States, we can see quite clearly that the middle class and the poor are not winning the asset game either. If, like me, you find that you can’t really believe your eyes on this next chart, you can play around with it here.

The darkest green bar at the top of the chart shows the percent of wealth controlled by the top 0.1% of the population. At the end of Q1 2023, the top 0.1% of the population controlled 12.8% of wealth in the United States. The top 1% of the population controls 31.3% of the wealth. The top 10% of the population controls 69% of the wealth.

Meanwhile, the thin yellow bar at the bottom of the chart (you may have to squint to see it) shows the wealth controlled by the bottom 50% of the population. At the end of Q1 2023, it was 2.4%.

That’s right, as of the latest data, for every 1,000 people in the United States, there is 1 person that controls 4.3 times more wealth than the bottom 500 people combined, and there are 10 people who control more wealth than the bottom 900 people combined.

And look at how those lines are trending. The two green swaths of the top 1% are expanding dramatically. The light blue 90% to 99% are holding steady. The dark blue middle class (50% to 90%) is getting squeezed. The yellow poor (bottom 50%) continue to get crushed.

I am embarrassed to say that I just wasn’t aware of how unequal wealth distribution is in the U.S. – and how persistent. Sure, I had heard the rumors, but the facts are truly devastating.

Given that I work in finance, that seems like an unpardonable offense – and it is. Many people reading this, however, may be as shocked as I was. It’s a testament to the smoke and mirrors show that is life in the U.S. today that this basic information is not common knowledge.

Most people in the U.S. are getting squeezed – hard. I live in a more rural part of the country now and I see it every day. Just last month I visited with a 70-year-old friend who recently lost the home he’d been renting for 20 years.

He told me, with tears in his eyes, how he tried to buy the home himself multiple times, but eventually a financial speculator made the landlord an offer that the landlord couldn’t refuse. My friend was given 90 days to get out of the house he had lived in for 20 years. Now he lives in the guest house of an old friend from high school.

Another thing I hear a lot in flyover country is, “Trump is the only one that is calling out the corruption in Washington, and he’s the only one who actually cares about people like me.”

Whether I agree with that assessment or not, it’s not hard to understand why the middle class and the poor feel like they have nowhere else to turn. Our economic system clearly isn’t working for everyone. It’s fantastic for the 0.1%. It’s working well for the 1%. It’s holding steady for the 10%. It’s in decline for 90% of Americans – and has been for decades.

Should we just accept this as the “cost of capitalism”? Do we really believe that it’s only 1 out of every 1,000 Americans who are doing the lion’s share of the work to keep America afloat? Does it make sense that 10 people out of 1,000 should hold as much power and wealth as 900?

I shared these shocking facts at the dinner table the other night, and one son quipped, “So what are you going to do, vote for Bernie Sanders now?” It’s a fair question.

I believe there’s something here that we all need to look at – together – without allowing the conversation to be quickly dismissed by labeling each other with hot-button political terms. I also get that it’s hard to do.

I’ll leave you with some questions from a prominent American economist whose self-published book has sold millions of copies and is one of the most widely published books ever. From the inside flap:

“Why do we have ups and downs in the national economy? Why does poverty continue to exist while a minute number of Americans enjoy a staggering increase in their personal wealth year after year? What went wrong in a country that professes to be dedicated to the proposition that we are all created equal?”

That economist was Henry George, and his book Progress and Poverty was first published in 1879 – and no, that’s not a typo. His book is still in print today.

George’s burning question was simple: Why, in spite of increased productive power, do wages tend to a minimum that will give but a bare living?

What a great question.

Speaking for many, after 100 years of the industrial revolution, George observed, “At the beginning of this marvelous era it was natural to expect, and it was expected, that labor-saving inventions would lighten the toil and improve the condition of the laborer; that the enormous increase in the power of producing wealth would make real poverty a thing of the past.”

Now here we are again, almost 150 years later, and 75 years into our own information age, still asking the same questions. What is going on here?

What do you think? Do these questions matter to you? I’d really like to hear from you because I know that I’m wading into some deep waters. I just can’t escape the conclusion that capitalism, as we know it today, is broken – and that much of what we call “investing” today isn’t helping.

I’ll have more on George’s thoughts and my own thoughts next time.

Fight the noise,
Dr. Richard Smith