The Curious Case of the Western Lower Middle Class

The last thirty to forty years have arguably been the most successful years in human history. Hundreds of millions of people have been able to grow out of extreme poverty and global inequality has declined for the first time in the last two hundred years. This global exercise in re-distribution of incomes has obviously been a boon to the upper and middle classes of the relatively poor Asian countries (and, of course, the global 1%).

At the same time, the lower middle class of rich developed (i.e., Western) countries has curiously found itself between a rock and a hard place.

When it comes to income distribution percentiles, the Western lower middle class is indeed in a pretty unique position: It seems to be the single massive loser of Globalization, at least compared to the real income gains enjoyed by all other percentiles.

The Western lower middle class has not only been squeezed on the income side, it has also faced a massive increase in essential costs.

A well-known blogger going by the pen name Scott Alexander recently wrote an excellent expos√© on "Cost Disease", detailing how much more expensive essential middle class expenses like housing, schooling and college and healthcare have become without having seen adequate corresponding increases in quality.

Not adjusted for inflation, though

Is it then really any wonder that the Western lower middle class recently seems to have embraced nativist solutions. How much of Donald Trump's or Marine Le Pen's popularity is a consequence of pure economic anxiety? 

The past forty years may not even have been the worst to come for the Western lower middle class. Ongoing automation of routine work tasks that in decades prior had been solid middle class jobs will only increase in scope and intensity. 

As Andrew McAfee, a MIT research scientist, recently stated, the US will probably never again have a large middle class doing industrial-era routine work - although the last four words are certainly the key ones (to quote Erik Brynjolfsson, a professor at MIT).

The next forty years will not only see massive rates of job displacement and automation of all kinds of tasks historically thought of as requiring human input. They will at the same time show job creation in entirely new and different fields, but with a globally competing work force.

Without mitigating effects, it will become very hard for the Western lower middle class to even preserve their relative status (as measured in global population income percentiles).

In order to preserve their political stability in the decades to come, Western countries will have to face a Herculean task: How to build a new middle class in an information society.

Angela Merkel's very interesting 2017: Limiting expectations on Germany's geopolitical role

Martin Schulz, the former president of the European Parliament and a social democrat, recently entered this year's German electoral frenzy by declaring his candidacy for chancelor. He will be Angela's Merkel main contender. New surveys show that he even seems to stand a chance: given a direct choice between Angela Merkel and him as chancellor, voters preferred Angela Merkel only by a slim margin of 4 points.

Unfortunately for Schulz, a candidate's popularity does not necessarily correspond with a parliamentary majority for his party. Given her party's relative popularity and strong backing in most parts of Germany, Angela Merkel thus seems to be set for a fourth term come September. Still, German media will gladly play up the rivalry between the two candidates. Greater media attention during the election year will ensure that Merkel needs to focus on domestic policy and a relatively flawless campaign. This will be challenging as her party will be prone to extended infighting, especially over the aftermath of the refugee crisis.

More importantly, Merkel's focus on the parliamentary election will set natural limits on her willingness to accept a more prominent German role in geopolitics during 2017. 

Regrettably, the world has never before looked more strongly to Germany to step up and accept broader geopolitical responsibilities. 

As rising nationalism and populism have started to drive EU members apart, the EU will be in dire need of a constructive, inclusive and strong German leadership. Not just in France and Italy, leading politicians will keep a close watch on Merkel's campaign to gauge how mainstream politicians can successfully ward off nationalist and populist challengers like Germany's right-wing AfD. 

Particularly beyond campaigning, the EU will need to come up with substantial answers to its own problems. Low economic growth and high unemployment numbers have been driving a wedge into the stability of the eurozone for years. Brexit negotiations will also provide the EU with a difficult balancing act. The EU will not want to drive too soft a bargain against the UK or else it risks encouraging other members to edge closer to exiting the union. But at the same time trade with the UK remains economically vital to many member countries and therefore cannot be encumbered too heavily. 

Germany's continued focus on the future of the EU and the eurozone remains integral. To make no substantial progress during 2017 would make for a wasted year and a much-worsened outlook for the survival of the EU in its current form.

Also, global power politics will be shifting much more in 2017 than in many years prior. Not only will there be significant saber rattling in many a trade conflict. More importantly, former pillars of the international security order like NATO will need to be shored up as America increasingly looks inward. 

Given its preference for democratic norms, trade, globalization and a well-balanced foreign policy, Germany would be a natural candidate to help international institutions like NATO prevail that once helped Germany rediscover its international role. Germany will even be the host of the G7 meeting in Hamburg in July, providing a good occassion for a restrained but determined Merkel to shine amongst the other more controversial and less successful G7 leaders.    

Alas, Merkel's 2017 will be confined to a strict focus on domestic policies. Immigration and economic security and fairness will feature prominently in Germany's election season and will not allow Merkel to stray far into foreign policy, else she be vulnerable to "Germany first" Trump-like upstarts. 

Although Merkel is surely looking to establish her legacy, she is much too tactically savvy to keep her eyes off the importance of winning re-election first. 

From 2018 on, though, expect a much less restrained Merkel than ever before.

It will be a long twelve months.