Originally Posted by miceelf
I guess this is probably the heart of it. I think of the middle class as the majority of people, not a niche group.
I'm skeptical that the heart of it. Nothing in my post was meant to imply that the middle class is a niche group and not the majority of people. The point is that whatever is your economy's current pattern of consumption, there is nothing inviolable about it. Even a shift that affects the consumption patterns of the vast majority of current consumers, while it will have transitional costs, can support an altered and viable pattern of consumption. To repeat, I think it is undesirable for (mostly) non-economic reasons to see a drop in the economic power of the middle class diminish, my point is that the economy as a whole doesn't enforce that normative preference: it isn't going to resist such a shift or collapse as a result of it.
How, exactly does someone downsized into a minimum wage job, or into a part-time "consultant" job so that their employer doesn't have to pay benefits rustle up the capital to invest? I would certainly grant that such a person is going to consume less, but not clear on where the money is going to come from. Perhaps I am being too literal, but I dont see how this works in practical terms.
The circumstances that present any given individual are certainly going to determine whether it is wise or foolish for them to have any configuration of consumption, savings and investment. Your hypothetical individual might rationally do best to have a negative savings rate, and consume more than 100% of his income. Of course it might be good if the incentives facing him were such that his savings rate would be less negative
than it might otherwise be.
(Indeed, much of what we are talking about in terms of shifting the consumption-investment balance among the middle class is having savings rates that are less negative, particularly in the form of restoring equity to houses that were revealed to be underwater when the housing bubble burst.)
It is also the case that if, as stipulated, the issue we are facing is that owners of capital can demand higher than socially desirable rates of return because the supply is too scarce relative to the supply of labor, then inducing the middle class, in the aggregate, to engage in higher rates of investment will have both direct effects for individuals who will reap returns on those investments, but also indirect effects for all laborers, whether they make investments themselves, whose labor will be able to demand a greater share of returns as greater amounts of capital chase the same amount of labor.