The Middle Class Squeeze

There are plenty of studies tracking the rise of income and wealth inequality in America and its effects. The overall picture: the wealthiest 10% are now taking more than half the country's income; the wealthy are investing in their children's education and the achievement gap is expanding; it is getting harder to start with little, work hard and rise through income brackets. Poverty levels are dramatic, but the newer phenomenon is the middle class squeeze: as the super-rich get super-richer, pressure keeps increasing on the middle class.

An obvious example: college tuition has reached insane levels. Colleges have had to give out more and more financial aid to keep attracting top students in all income brackets - and to help cover it, have raised tuition steeply for those paying in full, which still includes the middle class. States with budget problems have hiked out-of-state tuition at state schools. Tuition, room and board over all undergraduate institutions rose nearly 120% between 1992 and 2007. Of course, student loan dollar volumes have skyrocketed, as have defaults. In the land of free market capitalism, this is a dramatically distorted market (and rightly so; a meritocracy needs to offer access to quality education even to its poorest). The middle class can no longer foot its college bills. Note Starbucks' recent move to fund employees' college aspirations - a model of corporate social responsibility.

Healthcare reform also aims, admirably, to give greater access to the poor. But the reform doesn't fix the deep distortions in the "market" that are so entrenched in America. A slew of reasons (including employers and insurers acting as opaque intermediaries between the buyers and the sellers of healthcare) has resulted in prices that are 3, 5, 20 times higher than in any other country, dramatically fluctuating and uncertain, and sometimes as negotiable as the price of a rug in a Turkish bazaar. The middle class insured healthcare purchaser with a policy that covers some of the cost but not all (in a totally unpredictable fashion), can easily lose half a month's salary by going to the emergency room to have a dislocated finger checked for breaks. Or it could be, randomly, a whole month's salary, or only 10%, or nothing at all - no way of knowing. Here, the middle class is getting hammered.

The middle class can also be unlucky enough to be hit with legal fees, for a divorce, a random mistake in traffic or in business, an unreasonable neighbor. These are so steep they can be crippling. Of course in many professions it is mandatory to pay for insurance against malpractice lawsuits.

These are all market distortions (most of which have been created, incredibly, in the name of the free market) that are killing the middle class. They are huge problems that must be looked at, problem by problem, piece by piece, and fixed. Not de-regulated, re-regulated.

In the context of widening inequality, these distortions are toxic. Again and again I am reminded of Michael Young's 1958 prediction in The Rise of the Meritocracy: that the meritocratic, educated elite would work to guarantee a better future for itself and its offspring, leading ultimately to a squeezed middle class-turned angry mob. The clock is ticking.

The Big Sustainability Wave

Why should we be optimistic that those in positions of power will move history in the direction of environmental and social stewardship and good governance?

To answer the question we should first look at who has the power. I would list power centers roughly in this order:
Finance
Business
The People
Government
(Of course in certain cases one might want to include the Military, or the Mafia, or Religious Institutions, but for the sake of simplicity let's stick with these four.)

The climate discussions in Rio in 2012 made it clear that it was business, more than government, that had the will, the power and the money to lead change. Perhaps this has to do with the fact that Business is widely seen as the major culprit in this area; perhaps it has to do with a new generation of enlightened business leaders.

The UN Global Compact has a useful list of "eight principal society-based and market-based  drivers":

1. Civil Society Expectations
2. Natural Resource Scarcity
3. Government Policies
4. Enlightened Business Leaders
5. Requirements from Business Partners
6. Customer Preferences and Expectations
7. Employee Demands/Motivations
8. Investor Requests

This last one is critical. I put Finance in the number one position in my power hierarchy, and it is hard to imagine much of a shift in Business if Finance (which over the centuries has moved from a role of support to Business to a role of ownership of Business) dictates a race to quarterly profits above all else. Finance, as we have seen, is too big to fail.

But even Finance is shifting. The UN - supported Principles for Responsible Investment (PRI) initiative now has 1260 signatories representing 45 trillion dollars of assets under management, including Goldman Sachs Asset Management, JP Morgan Asset Management and Morgan Stanley Investment Management.

In financial circles today you hear phrases like "triple bottom line" (financial, social and environmental results, not just financial) or "the three Ps" (which stands for people, planet and profit). CalPERS, which manages retirement portfolios for 1.6 million California public sector pensioners, says in its "Investment Beliefs" statement "long-term value creation requires effective management of three forms of capital: financial, physical and human". It goes on to say they may engage investee companies on their governance and sustainability, looking specifically at governance, risk management, human capital and environmental practices.

Is there cause for optimism? Certainly, a wave has begun that threatens contagion, perhaps very slowly, perhaps not, throughout the investor community and down through business and throughout global supply chains.

Now is the time to ensure that wave is an aligned wave based on common principles, not a fragmented collection of initiatives at odds with each other and lacking momentum.