Tuesday, August 16, 2011

Get an education and be adaptable to thrive in the mid-21st Century

It was about the year 2000 that a friend who is a couple of decades younger than me commented "I don't see how my children will be able to afford a house."

I responded with my opinion that in order to be prepared to thrive in the mid-21st Century today's young people will need to get an education and become very, very adaptable. (For the California working class, getting a good education was still within reach in 2000 without incurring a boatload of debt. But that's not the subject here.)

Floating around in my head as I formulated that opinion in the late 1990's were terms like "bourgeoisie", "plutocracy", and "technocrat" and the name "Pareto."

Unfortunately, relatively few Americans have a meaningful understanding of the three terms - in fact most Americans would have some Palinism/Bunkerism understanding of them.

Less than 3% of Americans know who Vilfredo Pareto was and maybe less than 1-in-3 of them have an accurate picture of Pareto's writings, erroneously associating him with the implemented version of Fascism of Mussolini.

Two apparently unrelated pieces of information recently came to my attention which reminded me of my advice of over a decade ago. This also reminded me of those terms and the writings of Pareto.

First, I became aware of a 4-page card-stock insert ad in the September 2011 issue of Vanity Fair for NBC's new 2011 Fall scripted series "Playboy Club". This was a very large print ad expenditure by NBC in a magazine with a limited appeal for a broadcast network TV show. I didn't understand why NBC would spend this much money to advertise a TV show in magazine that targets the fashion industry and upscale young adults.
While I was still rolling this around in the back of my mind, I came across a piece in Advertising Age headlined On the Road to Riches: Those Under 35 With $100K Household Income subtitled "Study Finds Growth for Brands Will Come From Those in 'Emerging' Tier to Wealth" which offered the following chart:

The article provides the usual statistics about how the income for most Americans families has stalled since 1970, a fact that I have prattled on and on about in previous posts here. But the article provides an interesting focus on the data:
The wake of the global economic recession has shown a spotlight on the yawning divide between the richest Americans and everyone else....

And while the social and political effects of this inequality may be cause for concern, the accrual of wealth among the very few is of great consequence for marketers, since 10% of U.S. households "account for almost half of the consumer spending" and represent about one-third of total GDP....

Simply put, a small plutocracy of wealthy elites drives a larger and larger share of total consumer spending and has outsize purchasing influence -- particularly in categories such as technology, financial services, travel, automotive, apparel and personal care.

But just who today is truly affluent? And which group is on the path to the rich life?

A study from Digitas titled "Affluence in America: The New Consumer Landscape" finds that an individual's career choice is perhaps the most important factor in determining whether he or she will ultimately land among the affluent....

It turns out a major predictor of wealth is one's earning a high income in his or her 20s. Those below the age of 34 in households earning between $100,000 and $199,999, identified as the "Emerging" tier, have a far greater chance of eventually crossing the golden threshold of $200,000 than those who achieve household income of $100,000 later in life, identified above as "Aspiring."
The article then gets right to the core rationale of the NBC ad placement:
Before the downturn, luxury marketers embraced the concept of "mass affluence." Buoyed by fatter stock portfolios and exploding equity in real estate -- and encouraged by easy credit -- a larger portion of the population, mainly in the Aspiring tier, considered itself wealthy enough to buy luxury goods. But in 2011, these consumers no longer "feel rich"....

The real growth for luxury brands will come from those in the Emerging tier....

...The Emerging tier presents a golden opportunity for luxury brands to reach consumers who will likely be wealthy in the future -- before they begin to more actively police their interaction with advertising.
This explains the NBC ad. NBC has suffered from ratings problems. NBC needs to find advertising revenue. NBC is focusing on the sophisticated "Emerging" tier which will allow the network to sell advertising for luxury brands hopefully establishing itself in a powerful niche market. NBC may be making a foolish expenditure, but the news release on the Digitas' Study provides the following:
  • The Mass Affluent ($100-$199K household income level) has disappeared.
    • They don't have the leveraged spending power they once had and now have to live on income alone.  Not surprisingly, an overwhelming majority (53%) classify themselves as middle class.  They have been replaced by:
      • The Class Affluent -- earn $200K HHI or more yearly and 54% classify themselves as upper-middle class.
      • The Emerging Affluent -- earn $100-$199K; same as the Mass Affluent yet are under 35 years old.
  • The Rise of the Class Affluent (in a "class" by themselves):
    • Earns between $200K HHI (the minimum threshold for true affluence in America according to our findings) and $1 million+ HHI annually.
    • Represents the minority -- only 8.5 million in a country of 307 million people.
    • Three tiers of Class Affluence.
      • The Affluent -- $200K–$499K HHI -- The Creative Class: The Affluent are the creative class. They are likely to work in creative fields or industries, like software design, publishing, architecture, advertising, or journalism.
      • The Wealthy -- $499K–$999K HHI -- The Money Class: Likely to work in Finance and Consulting.
      • The Rich -- $1 million+ HHI -- The Leadership Class: They are individuals who run companies and influence industry. They command the highest incomes and make decisions that affect many. They can be found in high-income careers, like financial or legal services, or break-out industries like Internet properties/services or real estate.  
    • In terms of media behavior, Digitas has identified a direct correlation between level of affluence and digital media usage.  Early adoption of new digital devices, digital content consumption, and mobile usage all increase with affluence.  
  • Emerging Affluent: 5.5 million people who are currently in the work force and on their way to affluence.
    • They have the same HHI as the Mass Affluent ($100K–$199K) but are younger, under 35.
    • Emerging Affluents work in careers that will eventually deliver affluence -- financial services, legal services, and engineering -- but they are still in the low to middle management tiers.
    • This group has all the attitudes of the truly affluent. They consider themselves opinion leaders, follow trends, love to travel, and are passionate about food and dining. They pursue both stylish youth-oriented brands like Scion, Diesel, and Samsung and true luxury brands like H. Stern, Tiffany, St. Ives, and D&G.
    • What sets this group apart from all others is their intensely digital media behavior.  Universally digital, members of this class use mobile devices for communicating, consuming content, enjoying music, and gaming. They use social networks and blog, and they prefer apps to 411 to research restaurants, recommend products, or get deals from marketers.
The important thing to remember about this whole marketing discussion and the chart above is that it is all about 44 million Americans out of 310 million, or 14% of the population.  Simply 266 million Americans are perceived to be too poor to matter because they are. For decades, their  disposable income has been or become insufficient to make significant purchases beyond necessities. As a group they can't make a difference by choosing to buy one brand of a high-profit luxury product over another.

The second thing to keep in mind is that about 27 million of the 44 million - "The Mass Affluent" or "Aspiring 35+" also are no longer of any import to the discretionary consumption economy - after The Great Recession they are basically unable to afford more than to make house and car payments, send their kids to college, pay their bills, buy groceries and clothes, and worry about their old age (saving for retirement is out the window). As the news release says, the "Mass Affluent" ($100-$199K household income level), also described as the "Aspiring age 35+," has disappeared - meaning achieving affluence is out of reach.

That leaves about 17 million folks, or about 5.5% of population.

And of those folks, only the under-35 "Emerging affluent" or 1.8% of the total American population both:
  • Are still influenced by advertising to have their buying patterns altered through marketing efforts; and 
  • Likely will have sufficient discretionary income in the future to make the market costs worthwhile.
Hence, NBC's new ad effort.

And that is interesting, but to do a bit of a twist of some words from the Advertising Age article, while the marketing implications of this study are important to some, the social and political effects of this shift may be cause for concern.

This returns us to the meaning of the writings of Vilfredo Pareto which cannot be discussed without a common understanding of three key words. Let's start with two of the words:

  • Bourgeoisie is a social class characterized by their ownership of capital and their related subculture.
  • Plutocracy is rule by the wealthy or rule through power and influence provided by wealth.

Neither of these words is new to political science, nor is there some new understanding of economics and politics related to these terms. They were emotionally loaded by political ideologues of the 20th Century, but they have relative simple meanings. American's seem to have trouble hearing words like this without some gut ideological reaction.

As used here, the third word, technocracy, needs some further consideration beyond a definition.

In it's simplest rendering technocracy is a form of government in which engineers, scientists, health professionals, and other technical experts are in control of decision making in their respective fields. But in this discussion, a literal technocracy is not a concern. Rather, a significant change has occurred since 1950 that has altered our economy and, in the end, influences our political and social systems.

In the discussion of technocracy, Wikipedia notes:
...Engineers were faced with a conflict between physical efficiency and cost efficiency in the new corporate capitalist enterprises of the late nineteenth century United States. The profit-conscious, non-technical managers of firms where the engineers work, because of their perceptions of market demand, often impose limits on the projects that engineers desire to undertake.

The prices of all inputs vary with market forces thereby upsetting the engineer's careful calculations. As a result, the engineer loses control over projects and must continually revise plans.
Indeed, when the transistor was invented, it was invented by folks at Bell Laboratories, a subsidiary of AT&T. Typical of the times, most significant research and development (R&D) was funded either by major corporations or the Government. While this system brought significant resources to the lab, it also kept the bean counter mentality in the middle of everything holy to the researchers. This slowed things down. And the financial benefits from discoveries - the incentives - went to the corporation or the universities and Government, not to the persons who made discoveries and designed new ways of doing things.

While that model of R&D continues (though in some cases less vigorously), a whole new process opened up with the advent of "venture capitalists." The relationship between venture capitalists to the "idea people" who create early-stage, high-potential, high risk, growth startup companies is critical to understanding how our economy has changed.

This relationship altered the bean counter influence in the lab and, more significantly, shifted the benefits of success to the founding members of the startup companies, usually "techies," and to the venture capitalists. In this process, the seeds were planted to undermine the social status and economic security of the class described above as the "Aspiring" or "Mass Affluent."

It all may seem mind boggling, but not when you consider the writings of Vilfredo Pareto (1848-1923).

In The rise and fall of elites after substantial statistical research Pareto explained that elites rise to power, maintain dominance, and then fall; but only if another elite is struggling to take its place.

Indeed, though his times and experiences were different, Pareto noted that economic reality was not a pyramid with its sides from rich to poor sloping gently from one class to the next. Rather it is very fat on the bottom where most people live, steeply sloping to a very thin top where we find the bourgeoisie.

In between we have a narrow neck of turmoil and motion: families rising and falling, some members climbing by talent or luck but most ultimately hitting a ceiling while other members fall. At the top are the elite of the bourgeoisie, the Plutocracy, who control wealth and power for a time – until they are replaced through some change, sometimes a revolution, sometimes economic evolution.

Today about 266 million Americans live somewhere in that fat bottom lacking affluence.

Another 27 million were in the narrow neck getting a glimpse and feel of affluence, in turmoil and motion, but now find that they have fallen or at least hit an impenetrable bottleneck.

The remaining are the "Class Affluent" or "Emerging Affluent" - the American Bourgeoisie, the social class characterized by their ownership of capital, a portion of whom constitute the American Plutocracy, for the most part, ruling indirectly through power and influence provided by wealth.

What happened in the late 20th Century is that the members of the old American Bourgeoisie and Plutocracy started giving way to those who, when they gave it any thought, probably would prefer that we lived in some version of a technocracy, but who have been too busy to engage in politics except occasionally.

One of Pareto's works is entitled The transformation of democracy in which he explains the how and why democratic forms of government undergo decay and are eventually reinvigorated through a shifting balance among the countervailing forces of centralization and decentralization of power, economic expansion and contraction, and liberalism versus traditionalism in public sentiment. And it ties to his concept of  the rising bourgeoisie replacing the old bourgeoisie.

It is no coincidence that we see the President Obama and the Governor Brown paying regular visits to the leaders of the bourgeoisie in Silicon Valley and other centers of new technology. It reflects the change.  Our leaders after President George W. Bush will not be holding hands with a leader of Saudi Arabia. Members of the bourgeoisie who still do are members of families on their way out - out of power and wealth - a slow evolutionary process, but inevitable according to Pareto.

The problem to be solved for Americans not on the chart above - those with annual incomes of less than $100,000,  and for those in the Aspiring 35, is how to survive and thrive in the 21st Century.

The new bourgeoisie derives from enterprises that do not to create jobs except for a relative few. Manufacturing and support for their products is eventually outsourced. That is why the Bay Area/Silicon Valley had the same number of jobs in 2010 as it did in 1990.

The new bourgeoisie cannot relate to the undereducated even as they permit, indeed advocate, tax policy that is destroying education. As technocrats they cannot relate to the complexity of public education - they believe it can be engineered, put computers in front of kids not teachers. (In California we are discovering that the poorly performing students in this new machine are being thrown out like defective parts.) As I noted in previous posts, the irony is that most of the technocrats were products of California's public university system.

It appears that a cyclical significant disruption has impacted our economy as the change in the American Plutocracy evolves. I'm not sure how inevitable this was or is, but by 2000 it was clear to me it was coming.

Perhaps President Obama and the Governor Brown understand the disruptive change going on. But it appears to me that they are throwing 94.5% of the American population under a bus when it comes to ameliorating the effects of the change. And that leaves a political vacuum in the United States similar to the one experienced in the European democracies in the 1920's, giving rise to demagogues similar to Michele Bachmann and Rick Perry and ultimately to despots.

I told my friend that in order to thrive in the mid-21st Century today's young people will need to get an education and become very, very adaptable.