The revenge of the middle class

Many of us have probably wondered how it is possible that Donald Trump, the outspoken and controversial business tycoon and reality TV star, has progressed this far in the US presidential election process? During our recent trip to Washington, we got plenty of insight into this, of which I will now cover only some aspects.

The answer to the above mentioned question can be essentially explained in just three main reasons.

1. A reduction in the standard of living of the average US citizen during the past 14 years
2. The breakdown of the US political system
3. The changing media landscape; the reduced importance of traditional media and the increasing role of big data combined with social media, and its resultant dramatic effect on democracy

I will focus on the first point above, largely based on my interpretations of a phenomenal presentation given by Matthew J. Slaughter (the Paul Danos Dean and the Earl C. Daum 1924 Professor of International Business, Dartmouth).

Most American citizens’ standard of living declined between 2000 – 2014, a phenomenon that, to many, proved to be both dramatic and surprising.  Mr. Slaughter showed us that during this 14-year period, 96 % of the population (ranked by the level of education) had at least a 5.8 % decline in their “total money earnings”, i.e. real purchasing power.

Only those people with PhDs (1.9% of population) and MDs, JDs, MBAs (2.1% of population) increased their purchasing power during the same period, by 4.5% and 12.3% respectively. This staggering and unintended consequence of US economic policy has hit society like a tide that cannot be stopped with simple reassuring comments and loudly trumpeted election promises. More recent statistics show an increase in purchasing power during the last year for most income groups, but that is too little, too late.

What makes this all the more surprising, is that while this decline has happened, the GDP in the US has grown by nearly 2% annually. From 2000 – 2014, this 14-year growth amounts to about a 30% increase in overall GDP. A society’s GDP growth stems from population growth and productivity. However, during the election cycle, the average voter is mostly interested in his or her own wellbeing – making the population ‘factor’ less relevant.  We are left with increased productivity, that obviously has not benefitted the workers.

Given the GDP growth and income decline, the income gap is at least 36% lower for around 96% of the US population, measured from year 2000 to 2014. The standard of living has not only declined then, in absolute terms, but it has also been significantly lower than the average in society. It is no wonder the electorate is fed up.

So, where has the increased wealth and income gone? The answer is, perhaps unsurprisingly, to corporate profits, which are currently reaching an all-time high level compared to the GDP. So, who benefits from this? Well, that would be the holders of capital. The consequence of this is that income inequalities have increased dramatically, as putting capital to work has been more profitable than labour. This, in large part, explains the frustration.

The contrarian would argue that if wealth, or in this case sales and profit, is made by a US company based on its own innovations, but produced and sold abroad with a very limited US labour contribution, the benefits of this economic activity should fall into the hands of the owners of the company. A good example of this is the tech giant Apple, which produces its products mostly in lower-cost countries and then sells the products across global markets (the US representing only 5% of global population). Clearly this makes sense, but even if this was the whole truth (which it is not), in elections; appearance and mental images are the fundamental realities that dictate voting behaviour.

The original question of “how is it possible that Trump has reached this stage in the presidential election?” gets some clarity here, but there is one more point I would like to make. Consider the following three groups of voters and their current preferred candidate; a) within the non-white part of the electorate, Trump has very little support; b) most of the establishment, including within the GOP, are against Trump; c) to the rest, i.e. the white middle class has to be backing Trump. In the 2012 presidential election, white working class voters made up approximately one-third of the voters, significantly down from the two-thirds of voters  32 years earlier in the 1980 elections. What does this tell us? Simply, that even though Trump’s current supporters are, in the long term, in relative decline, they still have power in today’s society and Trump’s support among the white middle class is considerable.

Despite repeatedly promising to “make the US great again”, Trump will likely not be the solution to the economic issues described above. On the contrary, he could well prove to be the opposite. The conclusion is that voting behavior represents an enormous protest directed squarely at ‘the establishment’.


Johannes Schulman
MD, Miltton Markets

Johannes is a former equity analyst and financial services executive who is passionate about focused value-creating communication.