Why the Middle Class Needs a Financial Bubble to Survive

It needs another round of easy money to revive its dwindling fortunes.

The middle class is in trouble, not just in India, but everywhere in the world. And the only thing that can save it is every economist and policy wonk’s nightmare – a widespread financial bubble.

(Photo: Shubhojit Ghose/ flickr) 

The middle class is in trouble – not just in India, but everywhere in the world. And the only thing that can save it is every economist and policy wonk’s nightmare – a widespread financial bubble.

To explain why, I need to go back to a specific conversation that I still remember from 35 years ago. It was right before our high school board exams, and a few of us friends were chatting about what we would do when we grew up.

“I’ll teach in a college,” I said. That was my natural go-to profession, since my parents were university teachers. “How unambitious of you!” chided one of my classmates. “You’ll never make money as a teacher,” she said.

That was way back in 1989, which happened to be a tumultuous year for the world. The Berlin Wall fell, communist regimes collapsed across East Europe, Chinese students demanding greater democracy were violently suppressed at Tiananmen Square, the racist apartheid regime began to be dismantled in South Africa, Soviet troops withdrew from Afghanistan with a bloodied nose, Tim Werners-Lee laid down the framework for the World Wide Web, and Nintendo introduced Game Boy.

But those changes didn’t make me rethink my career plan right then. It would take another decade for that to happen. By then my father was earning twice as much as his professor’s salary from his consulting work. We, as a family, had got used to a much better lifestyle than what university teachers could afford.

I recall telling my parents that I no longer wanted to teach in a college, since the low pay wouldn’t support the living standards that I had become used to. From a purely monetary point of view, it was the right decision. I ended up earning much more as a journalist than I would have teaching undergrads.

My story is typical of what happened to the middle class from the mid-1980s; not just in India, but across the world. Well-paying white-collar jobs mushroomed, especially in the private sector. Such jobs had always existed right from the birth of capitalism, but they exploded in the 1980s, grew in the 1990s, peaked in the mid-2000s, and have been in decline since the Global Financial Crisis of 2008.

It had one key driver – easy money that could move quickly across national borders, from one market to another, from one company to the other. This process began in the early 1980s, sustained a global economic expansion for 25 years, developed into a massive bubble through the 2000s, till it collapsed into a long winter of recessions and slowdowns across the world, from which we still haven’t recovered.

The turning point for the financialisation of the world was the tectonic shift in the economic consensus in the West in the late 1970s, from Keynesian welfarism to neoliberal free-market economics. Back then, its most identifiable faces were Ronald Reagan in the US, and Margaret Thatcher in the UK. In India, it began with Rajiv Gandhi’s experiments with deregulation and culminated in the Rao-Manmohan reforms of 1991.

In hindsight, these deeper structural shifts were clearly visible in changes around me. First Pepsi, then Coke, returned to India. I started wearing branded jeans and watched American soaps and MTV on telly. My parents opened accounts in Standard Chartered Bank. They also bought themselves a PC each. My brother-in-law got hired by a top MNC (multinational company). People around us started going on foreign holidays, as foreign currency became easier to procure.

What I was experiencing in my life was made possible because of a few interconnected trends in the global economy – trends that gave rise to a new affluent, and upwardly mobile middle class.

The first of these, as I said earlier, was the free flow of easy money. This happened because the financial sector was allowed to do whatever it wanted with very few regulations. At the same time, central banks increased the money supply to keep interest rates low. This not only increased financial speculation manifold but also reduced the cost of capital for entrepreneurs.

The second major trend was the importance given to private enterprise. Before the 1980s, capitalists were often represented as evil parasites in popular culture – not just in ‘socialist’ countries like India, but also in welfare states in Europe. The 80s and 90s turned that upside down. Now entrepreneurs were seen as heroic wealth creators. Labour unions became the villains.

This resulted in a global push towards privatisation of public assets, on the one hand, and workers losing their collective bargaining power, on the other. Entrepreneurs could now keep their wage bills low without attracting public backlash. Hindi movies became about affluent people. Amitabh Bachchan of Coolie gave way to Shahrukh Khan of DDLJ.

The final crucial shift was the dismantling of tariff barriers and foreign investment regulations. This allowed transnational companies to open offices everywhere and sell their goods across the world. Foreign goods became available easily. Refrigerators, TV sets, washing machines, microwave ovens, made by global brands entered middle class homes. Globalisation also gave a boost to the nascent IT industry as companies with businesses traversing the world needed to stay constantly connected.

The neoliberal moment created a new affluent middle class. I am not using this term to describe just an income group. It is more a sociological category, of a class of people who had a symbiotic relationship with the entrepreneurial class above them. They were professionals who earned their living as salaries and fees. Managers, bankers, financial analysts, IT professionals, doctors, lawyers, journalists, and even teachers.

Their earnings depended on how much their employers and clients made. And these were great times for corporate profits, because both the cost of capital and wage bills had gone down. As companies expanded, they needed professional managers at every level. Sales, marketing, and general administration jobs became lucrative options for the middle class, and parents began sending their kids to business schools to learn the tricks of corporate babudom. Finance, itself, became one of the biggest white-collar employers. Then came IT – in India this sector was even bigger because of our success with outsourcing.

As this professional-managerial middle class earned more, it started spending more on things their parents would have considered to be luxuries. This gave a massive fillip to industries like health and fitness, beauty and fashion, restaurants and hotels, furnishing and interior décor. A culture of consumption developed, which included the consumption of information and entertainment. This made the media a lucrative industry to be in.

The middle class gained from free-market economic policies, but it didn’t have any skin in the game. Whether their capitalist employers made profits or not, their salaries were secure, at least in the short-run. And as long as a sizeable middle class had money to spend, professionals who were self-employed also flourished.

The honeymoon turned into a rave party in the early 2000s, when all restrictions and regulations were lifted on finance capital. Money flowed like water through the global economy. New entrepreneurs who would have otherwise found it difficult to challenge established companies could easily raise funds through loans and as equity investments.

They spent a big chunk of it on poaching talent from existing players, offering fabulous raises and bonuses, with ESOPs thrown in. Older companies had to follow suit to hold on to their senior employees, and attract freshers. The high salary bills were now being funded not by earnings but by leveraging the fabulous valuations all companies had achieved.

This was the golden period for the middle class professional. People started going on long foreign holidays, flying business-class, buying designer clothes, and eating out regularly at overpriced restaurants. Most ignored the fact that they were being paid far more than what their company’s profits justified. In many cases, managers got huge salaries even when the firm they worked for made losses.

As profits collapsed, new companies found it difficult to service the loans they had taken. As the news spread about their financial problems, their valuations tumbled making it impossible for them to raise more equity. Banks were suddenly faced with borrowers who had turned insolvent. They stopped giving new loans, or refinancing old ones.

The financial system was grinding to a halt.

The final trigger was the collapse of the home loan business in the US, and the mayhem it unleashed in the housing-based financial derivatives market across the world. As big investment banks went bankrupt, thousands of financial sector employees lost their jobs. Remember, these were among the highest-paid middle class professionals in the world, and some of the biggest consumers.

The contagion spread across industries. People from every sector were asked to leave. Others had to take pay cuts. Restaurants and hotels ran out of customers. Designers shut shop. Media houses downsized drastically. Lawyers were taken off retainerships. Even doctors saw a drop in patients coming in for regular health checkups.

The 2008 recession was also the world’s first televised economic crisis. It led to a huge public backlash against bankers and wealthy CEOs. Governments, central banks, and economic policy-makers became forever cautious about letting such bubbles develop again. One sign is how quickly interest rates are raised as soon as there are signs of economic growth or inflation, and how reluctant central banks are to cut them, even during periods of visible slowdown.

This excessive caution has resulted in a global collapse of demand. Since there aren’t enough takers for their goods and services, corporates have stopped investing. Instead, they are using their cash to reduce their debt, buy back shares and distribute dividends among existing equity owners.

This has reduced the need for professional managers, and reduced job opportunities and pay for the middle class. In fact, many companies are now anticipating that Artificial Intelligence will soon help them maximise profits without needing to hire human managers. So, they are pre-emptively downsizing, and asking existing white-collar employees to work harder, for longer hours.

It is no coincidence that all global money is flowing into AI right now. It is the only space where it is easy to raise funds and bet on future earnings, while incurring huge losses in the present. It is the only space open for middle class professionals to get lucrative jobs.

The current middle class needs another round of easy money to revive its dwindling fortunes. It needs yet another financial bubble. But it is unlikely to happen anytime soon. Inflation is too high for central banks to cut interest rates significantly. And the world is going back behind tariff barriers, reversing four decades of globalisation.

Most importantly, the middle class has lost its political clout across the world – from India to the US. It is too small in size to matter in elections. And it has lost control over public opinion, especially since legacy media today is dominated by monopoly capital.

The middle class could have made a dent had it allied with the wider working classes – blue-collar workers, gig workers, farmers and labourers. But that is no longer possible, because ideologically the middle class identifies with owners of capital.

So, unless governments and central banks bailout the middle class by allowing another financial bubble, its future looks bleak.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)