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The lack of a middle class

18 April 2019

 Salomons Judgement

When the baby boomers were between 20 and 30 years old, a large majority immediately belonged to the middle class. For the current millennials this is not a given. Not only did the inequality between generations increase over time, frustration did too: houses are too expensive, jobs too insecure and finances too fragile.

Across the global the middle class is under pressure. According to an OECD study 61% of the people in developed countries is part of the middle class, 30% is part of the lower-income class and 9% is upper class. The middle-class percentage in the United Kingdom and the United States is smaller than in the rest of the world. In the Netherlands the middle class is still bigger than in the rest of the world, but our country also faces stagnation in mobility.

Why is this a problem? It raises the question whether capitalism still works for the middle class. Income inequality is rising and capital is concentrating with the upper classes. Also see the interview with hedge fund manager Ray Dalio.

Unequal opportunities

Unequal outcomes may be a result of how markets work, but the situation becomes problematic when income growth for the middle class is limited. And it’s simply bad when social mobility decreases as well.

In that case, we’re talking about unequal opportunities, the current sentiment of the middle class. When this is a result of inequality in income and capital, then capitalism doesn’t work the way it should.

This is not the case now or in Europe, but it’s something to keep a close eye on. The United States has a clear connection between the access to healthcare, child care and technology, the income of parents and grades that are attained at school, and future salary and capital of the kids.

Catalyst of growth

Last year I wrote about the relationship between populism, economy and the financial markets. I argued for a greater role of the government as a catalyst for growth. That is something else than a plea for a larger government. Socialism is not the solution.

I largely agree with the OECD’s advice to reform taxes and invest in education and affordable services. However, I missed a recommendation about the role of the government as a market regulator in that report. A topic I discussed here previously.

A government with confidence in the market is a government that is in favour of competition. That is different from a pro-business government. It’s often explained too narrowly and incorrectly. Make sure that capitalism works again. This will only make the middle class stronger.

The author

Roelof Salomons

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