The Biggest Ideas of the Year

A guide to the intellectual trends that, for better or worse, are shaping America right now. (Plus a bunch of other ideas, insights, hypotheses, and provocations.)

The Rise of the Middle Class -- Just Not Ours

Gillian Tett
U.S. managing editor and assistant editor, Financial Times

The past year has seen plenty of hand-wringing about the "squeezed middle." Little wonder. Although the U.S. economy might now be rebounding, incomes for most Americans -- if they are lucky enough to have a job at all -- are not rising. On the contrary, since 2002, median household income has declined in real terms, as many middle-class jobs have been either destroyed by technological innovation or lost to competition from overseas. For many of the jobs remaining, employers can pay lower wages.

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The middle class in America (and Europe) is suffering, but that's only half the tale. In the past decade, income per capita in the so-called "BRICs" (Brazil, Russia, India, and China) has surged, as the middle classes in those countries have expanded at a striking clip. That is partly because jobs are shifting from the West to the emerging world (just think, for example, of all those Chinese factories and Indian call centers that have sprung up). However, education is also improving in most of these countries, along with infrastructure, as incomes rise and lifestyles improve.

To many Western workers -- and politicians -- this sounds scary. After all, the addition of millions of well-educated workers in places such as India, China, and Brazil means a lot more competition for Americans and Europeans. However, this cloud has a bright silver lining. Until now, politicians and economists have generally focused on the emerging markets in terms of a "supply shock," in the sense that these countries can supply cheaper and better goods than can be produced in the West. Production, after all, is what has enabled those emerging-market economies to boom; again, think of those Chinese factories.

But now the world is on the verge of a crucial shift: precisely because the middle classes in the emerging markets are gaining clout, they are also becoming a truly formidable consumption force. The emerging markets thus no longer represent just a "supply shock"; they are creating a "demand shock" too. And that raises big questions: Who or what will meet that demand? Will those new middle-class families who are working at, say, Indian call centers or Chinese factories just buy local products? Or could American companies have an opportunity to serve them? And if so, could that opportunity eventually lead to new American jobs, as those consumers start to travel, read, download apps -- and plug in to a globalized lifestyle? The full tale of the "squeezed middle" has yet to be told.

The Rich Are Different From You and Me

Chrystia Freeland
Editor, Thomson Reuters Digital

The rich are always with us, as we learned from the Bette Davis film of that name, released in the teeth of the Great Depression. The most memorable part of that movie was its title -- but that terrific phrase turns out not to be entirely true. In every society, some people are richer than others, but across time and geography, the gap between the rich and the rest has varied widely.

The reality today is that the rich -- especially the very, very rich -- are vaulting ahead of everyone else. Between 2002 and 2007, 65 percent of all income growth in the U.S. went to the richest 1 percent of the population. That lopsided distribution means that today, half of the national income goes to the richest 10 percent. In 2007, the top 1 percent controlled 34.6 percent of the wealth -- significantly more than the bottom 90 percent, who controlled just 26.9 percent.

That is a huge shift from the post-war decades, whose golden glow may have arisen largely from the era's relative income equality. During the Second World War, and in the four decades that followed, the top 10 percent took home just a third of the national income. The last time the gap between the people on top and everyone else was as large as it is today was during the Roaring '20s.

The rise of today's super-rich is a global phenomenon. It is particularly marked in the United States, but it is also happening in other developed economies like the United Kingdom and Canada. Income inequality is also increasing in most of the go-go emerging-market economies, and is now as high in Communist China as it is in the U.S.

These global super-rich work and play together. They jet between the Four Seasons in Shanghai and the Four Seasons in New York to do business; descend on Davos, Switzerland, to network; and travel to St. Bart's to vacation. Many are global nomads with a fistful of passports and several far-flung homes. They have more in common with one another than with the folks in the hinterland back home, and increasingly, they are forming a nation unto themselves.

This international plutocracy is emerging at a moment when globalization and the technology revolution are hollowing out the middle class in most Western industrialized nations. Many of today's super-rich started out in the middle and make most of their money through work, not inheritance. Ninety-five years ago, the richest 1 percent of Americans received only 20 percent of their income from paid work; in 2004, that income proportion had tripled, to 60 percent.

These meritocrats are the winners in a winner-take-all world. Among the big political questions of our age are whether they will notice that everyone else is falling behind, and whether they will decide it is in their interests to do something about that.

Wall Street: Same as It Ever Was

Felix Salmon
Finance blogger, Reuters

The warning signs were there. In the decades before the financial world fell apart in 2008, what had been a great many small and diverse intermediaries merged and grew into a few global powerhouses. The new behemoths of finance were generally far too big to manage: with their trillion-dollar balance sheets and cellars full of assets that no one understood, they were a disaster waiting to happen.

These institutions were, literally, too big to fail. Lehman Brothers was one of the smallest, and its bankruptcy forced governments around the world to carry out formerly unthinkable emergency actions just to keep the global economy from completely collapsing. The cost of the bailout ran into the trillions, and unemployment rose as high as 10.1 percent; we can probably never recover fully from the crisis. The ingredients that spelled disaster were simple: bigness, interconnectedness, and profitability.

Big banks, by their nature, are much more systemically dangerous than smaller ones -- just imagine the cost to the federal government if it had to cover all the deposits at, say, Bank of America. Lehman is a prime example of the dangers of interconnectedness: because every major bank did a lot of business with the firm every day, the chaos when it suddenly collapsed was impossible to contain, and rapidly spread globally in devastating and unpredictable fashion.

And great profitability, of course, is as good a proxy for risk as any. If someone tells you that he can make huge profits, year in and year out, without taking on big risks, then he's probably Bernie Madoff.

As of now, not only have we failed to fix these three problems, but we've made them all worse. The big banks are bigger than ever, after having swallowed up their failed competitors. (Merrill Lynch, for example, is now a subsidiary of Bank of America; don't believe for a minute that BofA's senior management or board of directors has a remotely adequate understanding of the risks that Merrill is taking.)

Interconnectedness, too, has increased. With the bailout came a deluge of liquidity, courtesy of Ben Bernanke: the Fed bailout was tantamount to dropping billions of $100 bills from helicopters over Lower Manhattan. That money got spent on financial assets -- that was the whole point -- and as a result, financial assets started moving in conjunction with one another. If my shares are rising, your shares are almost certainly rising too. And your commodities, and your municipal bonds, and your Old Master paintings. Because of this increase in financial correlation, if and when another crisis hits, it will be uncontrollable: it's certain to strike absolutely everything, all at once. And though some people think Congress can simply regulate the problems away, there's no way to legislate solutions to problems that are endemic to our financial system.

Meanwhile, Wall Street pay is back at record highs -- that didn't take long -- and the financial industry once again accounts for more than 30 percent of U.S. corporate profits. This doesn't look like low-margin utility banking, where you take a small fee for matching buyers and sellers, borrowers and lenders. Beware. This is big-money gambling, back with a vengeance, and riskier than ever.

Grandma's in the Basement (and Junior's in the Attic)

Hanna Rosin
Senior editor, The Atlantic

American families are supposed to disperse. We raise our children, they mature into young adults, and, if all goes correctly, they strike out on their own. That last stage is critical. Unlike the many cultures that rank filial duty above other virtues, Americans value independence. The self-supporting man (or woman) cannot be asking his mommy to do the laundry for him and going after the same Pop-Tart stash he raided at age 10. But lately it seems we might have to adjust that list of priorities. Recent census data show that the number of Americans ages 25 to 34 living with their parents has jumped to about 5.5 million -- a figure that accounts for roughly 13 percent of that age range. Compounding this full-house phenomenon, the grandparent generation is "doubling up" too, as the sociological literature says. A recent Pew Center report, "The Return of the Multi-Generational Family Household," chronicles the trend: during the first year of the Great Recession, 2.6 million more Americans found themselves living with relatives; all told, 16 percent of the population was living in multi-generational households -- the largest share since the 1950s.

The spike is just the latest result of a long string of personal disasters brought on by the recession: lose your job, lose your home, find yourself bunking with Mom again and experiencing "alternating surges of shame and gratitude," as one Slate writer recently put it. For the young people expecting to be independent, the small humiliations are endless: How do you date, invite friends over, feel like a grown-up going to a job interview, when your mom is polishing your shoes? But family members also find, thankfully, moments of small, unexpected connection -- while, say, laughing over old movies they used to watch together but haven't seen in years.

And more broadly, the situation brings one major plus: the American family may finally get a long-overdue redefinition. With all the changes -- more than 40 percent of children are born to unmarried mothers, many families include gay parents or adopted children or children conceived via a variety of fertility technologies, couples are choosing to marry but not have children -- it seems exclusionary and even cruel to keep defining the American family as a mom and a dad and two biological children. That's not what our households look like anymore, so we might as well recognize that Grandpa, and some kids too old for ducky barrettes, belong in the holiday photos too.

Bonds Are Dead (Long Live Bonds)

Clive Crook
Senior editor, The Atlantic

Investors in U.S. government bonds have had a fabulous run, and it's over. For more than a decade before the Great Recession began, a surge of global saving increased the demand for Treasury bonds and raised their prices, delivering handsome capital gains. When the economy tanked, the government had to sell its bonds even faster to pay for its stimulus -- and the price of its debt kept rising anyway. Investors saw U.S. bonds as a safe asset and demanded them all the more; the Federal Reserve started buying them too, in massive quantities, to keep interest rates low. So Treasury bonds delivered income and capital appreciation rivaling the historic return on equities -- a much riskier asset.

It couldn't last, and it hasn't. By this spring, long-term interest rates had fallen so far that they had only one way to go. The exact opposite was true for bond prices. Whether you call this "the end of bonds," as some market-watchers do, depends on your tolerance for hyperbole. Bonds aren't going away. Balancing the budget will take time. Even the most zealous deficit-cutters foresee heavy borrowing for years to come. The government will have to keep selling its debt. The question is, how cheap will bonds have to be to persuade private lenders to buy -- and will the Fed be willing, if necessary, to remain an investor itself?

For now, capital has no other safe haven, so private investors will think hard before shunning the market, and will likely settle for a moderate increase in yields. Certainly, the Fed would love to get out. But the U.S. is in the nice position of borrowing in its own currency -- Greece and Portugal should be so lucky -- so its central bank can always fund the government by "printing money" and buying the bonds itself. The more it does this, the greater the risk of high inflation later. Interest rates could soar in the meantime too, and that would depress physical investment -- that is, spending on things like factories, machines, and roads. But the option of buying its own bonds is there, and having it is better than not having it. One way or another, this is not "the end of bonds."

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