How The Middle Class Dies

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The following picture is worth a thousand words.  It shows US workers’ share of national income.



As you can see, the American worker’s share of income has been trending lower since the 1960’s.  And in the new millennium, it’s simply fallen off a cliff.

The really scary part is... it’s only going to get worse.

Take another look at the chart.  You can see periods of economic expansion in white.  The shaded areas are recessions.

From the time they began tracking until 2000 the key to increasing workers’ share of national income was long periods of economic expansion.  During economic booms of the 50’s, 60’s, 70’s, 80’s, and 90’s, workers grabbed an increasing amount of national income.

Why?

It’s simple.  When times were good, corporate executives became more confident in the future.  They would project steady growth in sales and profits year after year going forward.

As a result, they happily spent money to make money.  And one area they spent heavily on was their workforce.  But they were competing over a finite pool of quality workers… American workers.

In order to get the manpower they needed to grow, businesses had to pay higher wages than their competitors.  This process drove up wages and increased workers’ share of national income.  And it produced the world’s strongest middle class and led to the greatest economic expansion in the history of humanity.

But the economic cycle that built the middle class came to an end in the 1990’s.

You can see the US economy had a long expansion in the first decade of the 2000’s.  Yet, workers’ share of national income didn’t spike like it had during previous expansions.  In fact, it continued falling, and is still falling today.

What changed?  Why aren’t US workers taking home their fair share of company profits?

I’ve poured through the data, and I can only find one explanation... It’s NAFTA (North American Free Trade Agreement) and other free trade agreements.

You see, free trade agreements make it easier for US businesses to send American jobs across the border or overseas.  And people in these developing countries are happy to do the same job for a lot less pay.

What’s more, there’s little or no incentive for American businesses to employ fellow Americans.  Managers and executive are charged with making money for the owners and stockholders.  If that means sending jobs overseas where it costs them less money, they’re going to do it.

And who can blame them?  Lower labor costs mean higher profits for the company.  Increasing profits is an exec’s job after all.

In short, free trade agreements are shifting America’s middle class prosperity to developing countries.

Owners of the largest multinational business are growing wealthier every day.  But the US worker’s standard of living is falling back toward those of developing countries.

The worst part is America’s middle class will continue losing ground until the rest of the world catches up.  Only then will the entire world benefit from free trade.  In the meantime, free trade agreements will continue destroying America’s middle class.

The situation makes me sick to my stomach.  But free trade isn’t going away.  We can either profit from it or get left behind.

One way to profit is by owning shares of US companies targeting the growing middle class in developing countries.

Take a look at companies in the S&P 500 who are growing sales in Asia, Africa, and South America.  These stocks should deliver bigger gains than companies who are betting on a rebound in America’s middle class.

Another heavy IPO calendar this week with five companies planning to offer shares to the public.  One issue expected to see heavy interest is biomass company Kior (KIOR).  They make crude oil from renewable, non-food biomass like wood chips and switch grass.  The IPO is scheduled for Friday with an expected offering price of around $20.  The company expects to net $214 million and have a market cap of over $2 billion.

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