The recent recession and housing collapse seems to have finished off what the past two decades of globalization started: the old American “middle class” is only a fraction of what it once was. This was a segment of the working population that held a large number of good paying factory jobs, with excellent benefits. Others worked in construction or in the plants that made the materials that go into homes and commercial buildings. Many households in the late 20th century still lived a good life, mostly on a single-wage-earners’ income. Secondary wage earners often worked to pay for special things like vacations, new cars or other amenities.
Now, with unemployment officially at 9.6 percent and true unemployment and underemployment at almost double that rate, the old “middle class” has been devastated. It takes two wage earners working to earn enough to even approximate what the primary income producer earned a few decades ago. Competition and globalization wiped out most of those old jobs and the service jobs that replaced them paid a fraction of the wages. The projected recovery of jobs is likely to take 5-10 years, and many of these jobs simply will not come back at all.
Consumer spending – which made up 65-70 percent of America’s GDP – has suffered greatly as a result of this shift in employment and pay. Hard earned pay is now spent on necessities, and is frequently not enough for even that. With this bleak scenario, how can America’s vitality be rebuilt? The answer is by encouraging and supporting a whole new, growing sector of the economy, but one that is similar to what created American growth in the past.
The New American “Middle Class”
I believe that a new middle class will emerge, one based on the very characteristics that distinguish America: innovation, creativity, ingenuity, initiative and the ability to meet unmet needs of customers/consumers wherever they might exist. This new middle class will be made-up predominantly of small businesses and their employees! This new group will create value in goods and services, but will necessarily define what the words “make” and “serve” mean in the American vernacular.
This new middle class will be made up of solo entrepreneurs, consultants, sales representatives, service providers, shop owners, distributors, converters, customizers, specialized production shops, health care and care for the aged/aging, and (of course) totally new businesses based on the exploding convergence of info-tainment. The needs are already there and some people are already exploiting them. Where labor cost content can be relatively low, jobs will stay in the U. S. or even be repatriated. Some outsourcing will be converted to “insourcing.” As housing slowly rebounds, it too will spawn a new class of smarter small business owners—who learned from the past collapse.
Some of these small businesses will serve as intermediaries between large firms and offshore suppliers. Others will provide the intellectual links to make sure “things work right,” in long and often awkward supply chains. Yet more of them will grow into larger businesses and/or be purchased, merged or combined to form the new firms like eBay, Yahoo and Google, but new versions that fit tomorrow’s needs.
Government Must Help, not Hinder
This is why the role of government to help and not hinder this class of businesses is so important. As our government considers its relationship with business, it must temper its zeal to tax, regulate and control business—caused by misadventures of large firms—and “give the little guys a break.” Like young seedlings in nature, small businesses are fragile and need a favorable environment to grow and become larger and stronger.
They also need “sunlight” which for small business is usually access to working capital. Lending institutions must find new ways to help small businesses get that working capital they so badly need to grow, and cope with temporary cash flow problems that arise. The government may have a role in “backing up” the banks, but it cannot bury the small businesses with paperwork, bureaucracy and delays in doing so. Part of the advantage of a small business is its speed and nimbleness to capitalize on opportunities. Taking this away through government red tape is detrimental to their growth.
History Repeats Itself—in the 21st Century Version
When a small business is founded, it usually only includes one or two principals. As it grows, it hires the people it needs, and as the growth continues, those people also grow into more responsible roles with better compensation. This is how America was build. In its infancy, early Americans were blacksmiths and saddle makers, tailors, grocers and general store operators, bankers, doctors and, yes, undertakers too.
When mechanized transportation replaced the horse with cars, trucks and trains, repair shops and gas stations popped up to fix the cars, sell tires, batteries, and fuel. Grocery stores and drug stores—locally owned—opened to serve the newly mobile Americans. These were all small businesses at their inception, and only grew larger through the needs of the market and the consolidation into large chains. Barbers, dentists, and a whole range of other professionals set up shops.
Marketing was via word of mouth. At first news traveled at the speed of a horse. Later, small towns grew into small cities. Small cities grew into larger ones. The neighborhoods of many of these cities are still lined with shop after shop, serving their own neighborhood needs. Large stores and large factories will still exist and be powerful, but the new middle class will be made up of freedom loving, entrepreneurial innovators fueling American free-enterprise with their abilities, creativity and ingenuity to make a career out of what they choose to do—and know how to do—and working for themselves more often than not.
All we must do is make sure that this new middle class gets a chance to grow and thrive, and hope that our government learns to help rather than hinder its progress. Then we will have a new middle class, who will make up the new wave of consumer spending, which will reinforce the economic cycle over and over again. This is America, the land of opportunity. It can and will happen, here in America—if only we encourage it.
John L. Mariotti is President and CEO of The Enterprise Group. He was President of Huffy Bicycles, Group President of Rubbermaid Office Products Group, and now serves as a Director on several corporate boards. He has written eight business books. His electronic newsletter THE ENTERPRISE is published weekly. His Web site is Mariotti.net.