A focus on Western impoverishment, the lack of macroeconomic direction of the EU and the future of the welfare state in developed economies:
- Milton Friedman Society
- 11 minuti fa
- Tempo di lettura: 10 min
By Juliette Kate Marie Buzaré
It has long been suspected that the middle class would one day disappear. Still, nowadays, with crippling inflation and millennials faced with the struggle of being unable to become property owners, this long-suspected expectation has now become a reality for an emerging generation of adults who are now unable to become fully independent.
While it seems challenging to conceptualise, we firstly need to acknowledge that the middle class is a modern invention; to have a class of citizens that is neither poor nor rich but able to live above the poverty line and live reasonably well has only been a reality for the last 70 years.
For the vast majority of history, society consisted of a super-wealthy elite and a peasant class that struggled to survive with very little meritocracy in place to ensure the transition out of poverty was never at all possible, so that wealth could be passed down from father to son among the super-rich and that the same bloodlines would continue to hold the majority of wealth.
All of which changed with the Industrial Revolution, there were now middlemen between the uber-rich owners of factors of production, and the proletariat, a class which Marx would call: “The petty bourgeoisie.”
A new class that he predicted would eventually be economically squeezed due to the powers of capitalism, concentrated wealth, and that would never have the courage to overthrow the people above them, due to the comfortable cages created for them by this system. Making them weaker than the proletariat politically, since they will not lead a revolution, and weaker than the bourgeoisie financially, as they will never be the owners of capital. A losing class, lost in translation.
While this may have been partly true, Marx underestimated the resilience and adaptability with which people would embrace their evolving social position, as well as the protective measures governments would implement to safeguard it. Reformers and statesmen such as Otto von Bismarck pioneered health insurance in the late nineteenth century, laying the foundations for broader social insurance schemes that sought to temper the volatility of industrial capitalism. These early initiatives catalysed the development of the modern welfare state, embedding a safety net into Western societies that promised protection from the worst extremes of poverty and insecurity, and enabling the emergence of a stable, confident middle class throughout much of the 20th century.
Yet, as we witness young adults struggling to afford to settle down and buy homes, unable to study without going into enormous debt, and living paycheck to paycheck, it is evident there is now a critical backsliding towards what we knew existed pre-industrial revolution. The 1950s in America, widely regarded as the middle class’s golden age, serve as our benchmark for what the middle class should be. The life they were given was the dream we were always sold: a beautiful home, a white picket fence, dogs playing on the freshly mown lawn, two cars on the driveway and an overall relatively comfortable life. However, 5 years out of a pandemic and a few weeks into a recession, with sky-high rents, record job loss, and an emerging AI industry that claims it will replace most white collar jobs that currently exist by 2030 (1), the mental health crisis plaguing Gen Z seems entirely self-explanatory.
Citibank's ex-star trader and economist, Gary Stevenson, is one of the most prominent voices of this growing wealth inequality in the West, with his current prediction being that the UK’s Labour government is going to go back on their promise not to increase taxation for the middle class. Because, as Stevenson explains it, “there’s no one else to tax”, the government needs money. Since the working class have nothing left, it’s either the middle class or the rich.
However, with the rich, we have witnessed a massive exodus of the millionaires and billionaires that used to reside in Britain, escaping to cities like Dubai, Milan or New York to seek a place that “won’t tax away their success”, as is proven by data that shows more than 16,500 millionaires have left the UK (2), the only people left to tax are the middle class. Ultimately, following Stevenson’s logic, this is the last resort the Labour Party will use to revive the British economy, which will not only mean them going back on their promise not to increase taxes on the middle class, but cause the wealth gap to morph from a gap to a chasm, making this an irrational and recklessly illogical decision.
Furthermore, this train of logic undermines decades of modern economic theories, with the Laffer curve being the most notable example of this. The Laffer curve, developed in 1978 by Arthur Laffer, is a graphical representation of the relationship between the tax rate imposed on individuals and the resulting revenue, depicted as an upside-down parabola. This curve reveals a clear point after the summit is reached, where a negative correlation between the two variables begins to emerge. Ergo, proving that once you set a tax rate above a certain point, you will get less and less revenue from this.
Building on this, another economic theory — the Ricardian equivalence — highlights how today’s fiscal choices inevitably shape tomorrow’s burdens. It suggests that debt-financed spending does not eliminate costs but merely postpones them, since people anticipate higher future taxes and adjust their behaviour accordingly. In practice, this means that the massive debts accumulated over the past sixty years will not simply vanish; younger generations will repay them through higher taxation. This is already evident in the 50–60% tax rates borne by the middle class, a direct consequence of the obligations left behind by those before us. At the same time, the structural weakness caused by de-industrialisation in Western economies — as countries like Germany, France, and the UK outsourced manufacturing to the Global South — has deepened the squeeze. Far from raising living standards, this process has eroded middle-class security and accelerated its economic decline.
For the UK, cities such as Birmingham, Manchester, Newcastle, Nottingham and so on, that used to be industrial hubs driving the British economy, have been gutted from within, leaving Britain with one of the lowest levels of industrial activity in developed nations. I find that this phenomenon is best explained in Michael Kitson’s and Jonathan Michie’s paper on the Deindustrial Revolution: The Rise and Fall of UK Manufacturing, 1870-2010, at Cambridge, which highlights explicitly the societal shift we’ve experienced following the industrial revolution (3).
“Following the 2007-8 credit crunch and the global recession of 2009, a political consensus emerged around the need to rebalance the economy, with a stronger manufacturing sector.”
Yet, despite widespread consensus on the need to transition from the service economy we’ve created to investments in manufacturing, no tangible results emerged. Quantitative easing, increased credit from banks and slashing interest rates to boost FDI all had minimal effect.
To pinpoint where this economic decline started, Kitson and Michie take us through the past 150 years of policy in the UK, from the Victorian era to the Edwardian era, to the interwar years, to the present day. 150 years of decline, as they saw it, with the peak of the industrial age being around 1870.
A decline that started with the erosion of the UK’s dominant position as one of the world’s leading exporters of manufacturing, which declined from 43% in the mid-1880s to 32% in just a few years going into the early 20th century as a result of the UK’s lack of price competitiveness and difficulty competing with emerging powers like the US. And although the UK’s financial sector was able to prosper alongside the British Empire’s conquest of the world, as their global dominance waned, the financial sector became the backbone of their economy and capital development became an afterthought, a shift in priorities which has shaped the British economy into what it is today. An adjustment that even Churchill notably disapproved of, famously stating, “I would rather see finance less proud and industry more content” (4) emphasising his awareness that a strong economy cannot be sustained without a strong industrial sector.
This further worsened during the 60s, when Britain underwent a process of deindustrialisation as manufacturing was gradually wiped out, which solidified its position as the sick man in Europe.
However, the paper also points to how this deindustrialisation may just be a process in evolution, a natural way in which, as we have become more skilled and educated in the West and therefore more capable of providing services, we have moved away from manufacturing, hence “positive deindustrialisation.” Yet, as can be seen with the UK, such a lack of industrial policy leads to an economy that is unable to support itself and must therefore constantly rely on imports, laying the foundation for the crippled economy it is today.
Kitson’s and Michie’s paper enables us to draw two main conclusions: the first being that a manufacturing sector is a non-negotiable part of a thriving economy, and that the UK economy would be best served by moving away from its over-reliance on the banking sector and towards an economy that can support a manufacturing sector.
And the second is that we can trace back England’s economic decline to its manufacturing prowess, having been overtaken by the US due to a lack of strategy and price competitiveness.
This is particularly poignant due to it echoing of the current crisis the EU (and UK) faces with regards to their growth strategy in comparison to that of the US; which is that: the EU has none and is being overtaken, as can be seen with the data that shows that out of all the countries in the G7, the only country not to have had productivity losses is the US, with IMF data also showing the US as having had the highest real GDP growth in the G7.
Regardless of one’s personal sentiments towards the current administration in the US, it is undeniable that they have a growth agenda for the country. In contrast, we have the United States of Europe, a directionless list of countries that seem lost in the face of their own lack of strategy towards this issue. This can be analysed on a subnational micro level, with countries in the EU, such as France, that have seemingly done everything possible to de-industrialise and damage their economies, for example, the move away from nuclear energy which previously supplied up to 70% of France’s electricity, to this having been dramatically reduced in recent years due to the anti-nuclear policies put in place (5).
When you combine these kinds of policies with a country that has a borrowing rate that could only be compared to that of Greece, with a debt-to-GDP ratio of 114.1%, Bayrou’s talk of the country’s survival being at stake due to its financial woes feels like an understatement.
In German, the word for debt, “schuld”, coincidentally translates directly to culpability, because when you have debt and owe something to someone, there is a sense of guilt that one feels because of the actions one has taken to borrow whatever it is they needed. The debt issue in Europe is two-fold because it’s damaging to everyone, as debt is a generational issue. Towering debt will cripple any economy, as evidenced by Greece and, soon, France, not only because of the interest the countries will need to repay on the debt or its effect on attracting FDI, but because whatever is borrowed must eventually be repaid, and although the Ricardian equivalence makes sense in theory, it overlooks the fact that the debt future generations will incur could be so massive as to crush them. In 2020, debt levels reached the same height as after WW2 (6) as a result of the pandemic, but if we look away from economic crises and downturns, where it is natural for debt levels to be higher than usual, average debt levels have never waned and been brought down to “normal” levels even in economic booms.
If we look at the graph above, we can see the public debt to GDP ratios over the years for advanced and emerging economies, with non-stop growth since the late 19th century. All of which, my generation and the one above have inherited and will need to repay. Higher interest rates, inflationary pressure from countries trying to repay debt by printing money, and higher tax rates are just some of the consequences that come from these record debt levels, and have fuelled the divide between the different purchasing powers across generations.
In every study that can be found, Zoomers and Boomers are at opposite ends of the purchasing power spectrum, with Gen Z’s purchasing power being found to be 86% (7) lower than that of Boomers when they were in their 20s.
Yet, whenever millennials or Gen Z voice their economic reality about facing the fact that they will likely never be homeowners or live comfortably on an average salary, the disproportionate amount of “schuld” felt between the different generations is palpable and the words: lazy, complacent and unmotivated come flying out of boomers’ mouths, evidently ignoring that our purchasing power has been eroded.
In an interview over 10 years ago on CNN Business, “Omaha oracle” and mega investor Warren Buffett was asked who’s winning in this economy.
Buffett unequivocally said: The rich, because the middle class can’t keep up.
Buying a home, paying for education, financing a vehicle, these are the primary most expensive purchases one will make in their life, and when you increase the price of these goods disproportionately in comparison to wages, as can be seen with the more than 1000% increase in housing prices from 1973 to 2023 (8) , you create a middle class that cannot afford to live, thus impoverishing the backbone of your society that have no welfare state to fall back on since there is no one left to fund it.
The ability to not suffer from poverty through a stable stream of income and save for the future, as well as afford minor luxuries when the budget permits it, are the features that make the middle class what it is. By creating their livelihood from work, rather than wealth, the middle class finds itself in the uncomfortable position it has always occupied, with very little flexibility, as actively working jobs is how the middle class sustains itself.
And when you tax away the middle class’s ability to save and afford their necessities, and replace their jobs via automated machines, you fulfil the populist prophecy.
So what’s next for this post-capitalistic world where our welfare state is completely bankrupt? What is Europe’s growth strategy? And how do we re-industrialise our countries? What happens to the middle class?
One of my favourite economists, Paul Krugman —a Nobel Prize winner and columnist for the New York Times —has weighed in several times on the destruction of the middle class. Particularly, the loss of manufacturing jobs, which contributed to this, was not caused by prior Presidents and their administrations, but rather by technological advancements and policies that have only been implemented to benefit the 0.0001%. Paul notably emphasises that the US has growth, reinforcing, as Peter Lynch says, “the US creates, China replicates, and the EU legislates.”
The US has many issues, but growth isn’t one of them. When a country leads the free world as the US does, it is apparent that they will also be leaders in innovation in how they manage their industries. Krugman explains this further in his book, “The Conscience of a Liberal”, where he details the “Great Compression” that he believes the middle class has experienced since the 70s, explaining that when you have a culture that disfavors paying the middle class and erodes unions, the status quo is what we’re left with.
It is Nietzsche who said, “Where there is no will to power, there is decline.”
If we fail to confront these questions and acknowledge our respective economic realities, particularly in Western Europe, where the EU appears unwilling to accept its role in this matter, the decline will continue, and the middle class as we know it will perish, and be no more than the “historical anomaly” Krugman describes.
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