I have some assumptions about economics, finance, and trends but I don’t spend much time looking at how things would have to change to accommodate my weird predictions. So that’s what I’m writing about tonight… Tonight I make omelets.

My condensed take on the economic camps’ assumptions about our predicament: The Austrians assume job growth resulting from lower taxes will organically release us from the Great Recession. The Keynesian camp assumes deficit spending will save us. I think both are wrong in this case. The housing boom masked the fact that the middle class is shrinking due to automation and global wage arbitrage. Neither of which show any signs of abating.

Both camps assume that for 300 years the middle class will remain stable. They do that because their models (mainly Keynesian) get too complex unless you assume all things are equal. So the complexity of their models preclude the notion that demographics and common sense can come into play. This is probably why they missed the housing bubble. My take assumes accelerating societal change.

The Austrian school isn’t so burdened by math (they did see the housing bubble coming) but its practitioners are burdened by political assumptions about fairness and justice (Bastiat and Rand). The social consequences of a shrinking middle class aren’t a concern for most Libertarians. But in the long run you start to have serious problem with a society with no middle class (so I’ve heard).

In short, they Keynsians think they can avoid the inevitable and the Austrians just don’t give a damn. So nobody is writing much about the problem.

In the back of my head I’ve remained optimistic that the brains in Washington can transition society to a future where there is no middle class because of rampant productivity growth which will (not ironically) make increased wealth redistribution palatable. This rising productivity simultaneously solves the deficit problem. Then I read this unfortunate bit of research today from Julius Wilson via The Atlantic:

“A neighborhood in which people are poor but employed is different from a neighborhood in which many people are poor and jobless. Many of today’s problems in the inner-city ghetto neighborhoods—crime, family dissolution, welfare, low levels of social organization, and so on—are fundamentally a consequence of the disappearance of work. “

So there are two problems for the future. The first is dealing with the potentially outdated financial framework that assumes a healthy, stable middle class (think 30 year mortgages). And the second is the psychological ramifications of joblessness even with bountiful welfare benefits.

So politicians are going to have to look at how to make wealth redistribution work given the understanding that you can’t just throw money at the jobless and expect them to avoid dysfunction.