In a post from last year, I described our overall socioeconomic arrangement as the American Algorithm. This algorithm is a set of rules and patterns we have laid down over the decades, and we expect certain things to spit out the back end as they work themselves through. Very briefly, these rules include: economic individualism (One Person, One Job), the nuclear family as the basic social form (One Family, One Dwelling), support for free-market economic growth, government as a catalyst for economic growth, and freedom as the ultimate social and economic value. We have established these conditions in America, and we expect their operation to churn out specific results: meaningful work, lots of good stuff, social progress, personal fulfillment, etc. Certainly, conservatives and liberals argue over the particulars of how to maximize these conditions, and they make pointed accusations on how the other side has betrayed these principles. But in general, the guts of the American Algorithm are universally embraced. Economic growth is always good. Helping the nuclear family is always virtuous. Increasing the stock of individual jobs is always a positive goal. Etc, etc.

Unfortunately, for the last couple years, the wheels have been coming off of our arrangements, and the American Algorithm is severely wobbling. We all know the condition of the housing market. One in every 84 households in America has received some kind of foreclosure notice. People keep hoping for a "rebound" in this area, for building and lending and buying and nesting to resume, at their former pace. But how can this happen? As we detailed in our last posting, the official jobless rate is at a 26-year high of 9.5%, with actual conditions on the ground (underemployed, incarcerated) much worse. It's hard to see banks lending to people who don't have jobs, and it's hard to imagine people who do have jobs leveraging their situations to earn enough additional money to upgrade from renting to owning, or moving from smaller to larger houses. This last point is important, because the housing bubble was heavily dependent on home flipping via borrowing against the surging equity in housing stock as a whole. This really camouflaged the fact that there are just too many houses in America. We kept building and borrowing and buying, and all of this activity spun out the illusion that our overall economy was productive. In fact, it was just one large ponzi scheme, with financial companies footing the underlying bill by hyper-leveraging assets through bogus instruments like credit default swaps. In essence, we were putting all of our eggs in one social basket: the overconsumptive, wasteful suburban social form. We sold jet skis and plasma TVs and real estate to each other, imagining that an economy without manufacturing, farming, and physical skills was possible.

So now, the basic pillars of the American Algorithm are wobbling, and could crumble in the next few months. Some indicators of how the underlying ratios (of labor to earnings to economic health) are changing in fundamental ways have come out of the Bureau of Labor Statistics. In a June study, the BLS confirmed what many others have been saying for a long time. The middle class is being hollowed out, and jobs are flooding down to the lower-paying tiers. As many have noted, the value of work is quickly eroding. Globalization and technological changes are allowing many jobs to be deskilled and shipped overseas, or simply automated out of existence. Computerization has allowed the emergence of powerful financial tools, mechanisms that funnel money upwards to a small elite. We are now in the midst of another GIlded Age, with the Fortune 500 companies controlling about two thirds of the entire economic base of the nation.

In another BLS study, the jobs of the future are analyzed and predicted. Tellingly, the fastest areas of job growth are expected in low-paid service jobs like retail clerks, food preparation workers, and child care attendants. Manufacturing is expected to continue its prodigious collapse. But bizarrely, the BLS still sees a substantial increase in the construction industry. I would disagree on this point, as it is becoming evident right now that state infrastructure budgets are kaput, and the political will for massive federal stimulus is fading quickly. And as mentioned above, the residential construction sector cannot recover when there is a housing glut, a lending freeze, and a general cratering in overall employment.

What we're really seeing here is a major adjustment of how labor relates to the price of housing, the availability of commodities, and the general distribution of wealth. The past few decades have shown that economic growth does not accrue to the entire spectrum of workers. The system can churn out gobs of cash and goodies, without lifting the families at the bottom or in the middle. It is becoming evident that our service industry economy has been bloated with workers all along, and the only thing that preserved those occupations at all was the serial financial bubbles constructed out of smoke, mirrors, and hubris.

One indication that economic "success" is decoupling itself from our desired full employment condition is the nature of the recent stock market rally. Stocks have been going up for a bit, as earnings reports continue to be released by companies. But corporations are only making things look rosy because they are drastically cutting costs (i.e., layoffs), and not increasing sales. Paul La Monica explains this very well in a recent article on CNN.money. Revenues for big companies (the major employers and basic movers of the economy) were down 7.5% from last year in Q2, and overall yearly sales are expected to dip 5%. So for now, firms are trimming and cutting to get to some semi-respectable numbers. But you can only sack so many workers and put off major investment in your business before it catches up to you. Sooner or later, lagging sales mean an entirely different landscape for how many workers are actually needed in the overall economy.

It is an incredibly difficult mental adjustment to think that the future may not look like the recent past at all. One Person-One Job/One Family-One Dwelling may simply not be economically sustainable, as the epic bubbles of the late 20th century unwind themselves. We will come to realize that we've just been building the wrong kind of social form, and something radical at the very core will need to be overhauled.