The Census Bureau’s study of American incomes, poverty and health coverage issued last week was most interesting when considered, not as a metric of this recession, but as a long-term picture of where American living standards are going. If median incomes are back to 1996 levels in real terms, then the stagnation which followed the 1973 living standards peak has intensified and the prognostication for the future must be thoroughly unpleasant. It’s thus worth examining how much of the decline is only a medium-term problem, due to mistaken policies that can be reversed, and how much is an inevitable and permanent decline from what may have been a fleeting middle class Nirvana in 1950-73.

Real U.S. median household income of $49,445 in 2010 was 6.4% below its level in 2007 and 7.3% below its peak in 1999. Given the performance of the economy it’s likely that this position has worsened in 2011. More alarmingly, median household income is only 0.9% above its value in 1989 and 6.3% above its level of 1973. For most households, an entire working life of 38 years has elapsed with no significant increase in living standards. As is well known, the dispersion of income has also sharply increased; in 1973 only 1.2% of households had an income above $200,000 in 2010 dollars, whereas in 2010 3.9% of households exceeded that level. The middle middle class, with incomes of $35,000 to $74,999 has shrunk from 40% of the population to 31%.

Even this grim tale does not give a full picture of the decline, because household income has been sustained compared to 1973 by a much higher proportion of women in the workforce. Real median male earnings have declined by 4% since 1973, whether you consider all men or only those with full-time, year-round jobs. However the picture is brighter for women, whose workforce participation rate was around 70% of men’s in 1973 if you consider all jobs, or a mere 43% of men’s participation if you consider only full-time, year-round jobs. Today female workforce participation is 90% of male whichever way you look at it. Furthermore women’s earnings have done much better than men’s, up by 85% for all workers or 33% when only full-time workers are considered. Still the bottom line is that for traditional families, real incomes have only increased since 1973 at the cost of the wife going out to work and childcare being hired (if necessary.)

Unsurprisingly, the U.S. workforce is thoroughly disgruntled, with attitudes to public institutions, politicians, churches the media etc. having declined catastrophically since the 1970s. This is in no way a sign of deteriorating national character, but simply of stagnating and in many cases declining national fortunes.

There appear to be two culprits for stagnating or declining living standards, apart from technological change, which may also have played a complex role. The first was a blizzard of regulation beginning in the 1960s and intensifying after 1970, with a second burst in 1989-94 and a third since 2009. In the 1970s, living standards’ fall from their 1973 peak coincided with (i) more U.S. income going into environmental cleanup (probably mostly beneficial, even if not directly included in GDP) (ii) into intensified safety and workplace welfare legislation (a bonanza for trial lawyers but probably little benefit to others, and certainly tending to reduce wages and increase healthcare costs) and (iii) such nonsenses as the Corporate Average Fuel Economy standards, which added a huge drag to the U.S. economy, wiped out well over a million high-paid jobs in the U.S. automobile industry and achieved far less fuel saving than would have been achieved by a 50 cent tax on gasoline. Second and third bursts of regulatory hyperactivity, in 1989-94 and since 2009, have coincided with further erosions of U.S. living standards; this is most unlikely to be a coincidence.

The other major culprit, which kicked in around 1995 or so, is globalization, caused by the immense technological change of the Internet and modern cellphones, which have made multinational logistical sourcing chains infinitely more efficient and cheaper. This is not simply a one-off effect; outsourcing a product or service to India, China or Vietnam not only makes it cheaper, but also increases the capabilities of the local Indian, Chinese or Vietnamese workforce, raising its capability still further and making it competitive in more sophisticated products and services. In this respect David Ricardo’s Doctrine of Comparative Advantage, which essentially said that outsourcing was beneficial to both the rich outsourcer economy and the poor outsourcee economy, has been proved to be completely wrong. Ricardo failed to take account of the improved capabilities in the outsourcee that would result from the outsourcing, and the ability of newly empowered impoverished outsourcee workforces to learn the business, clamber up the value chain and eat the outsourcer’s lunch.

The same dynamic that has sapped US growth has also been at work in Europe. In Britain, the regulatory blizzard (for example infamous real estate planning regulations that have made British housing among the most expensive in the world) came in the 1940s and prevented the country from having a postwar “wirtschaftswunder” like Germany. In Germany and France, the huge expansion of the regulatory state came in the early 1970s and the late 1970s respectively, with substantial jumps in government’s size coinciding with an abrupt ending of rapid economic growth. In Italy and Spain, government’s expansion came in the late 1980s and early 1990s, when EU-wide regulations were adopted and previously robust growth rates slowed to a halt. In Europe, the expansions of regulation tended to coincide with expansions of the welfare state, and the latter has frequently been blamed for the economic sluggishness, but in reality Spain’s 20% unemployment rate, for example, is more the result of regulation than welfare.

The Internet-based increase in outsourcing took effect in Europe mostly after 2000, and has contributed to the severity of this recession, which had far less financial cause than in Britain and the United States. Its effect has been dampened and delayed by European protectionism, since France at least was never entirely convinced by Ricardo’s doctrines. However the euro has played a pernicious role in deepening the Internet’s unemployment-producing effect in southern Europe, where competitiveness was already weak. On the other hand Germany, already positioned at the top end of the value chain in many of its industries, has been able to gain from their relative competitiveness compared to southern European rivals.

In Japan, the regulatory state arrived in the 1970s, slowing the miracle growth rate of the 1960s, but Internet outsourcing played a more important role, preventing from about 1995 the natural recovery of the Japanese economy from its 1990 crash. Japanese industries were already positioned in many of the market niches that were to be occupied by China, and had not fully transformed themselves from their previous role as low-wage suppliers; consequently the effect of the emergence of China, India and other emerging market sources was both more rapid and more severe in Japan than elsewhere. Japan’s continued economic sluggishness is a portent for the fate of the U.S. and Western Europe going forward.

The overriding question is thus how much further this impoverishment of the wealthy West will proceed. Is it inevitable that western living standards will rapidly fall to the global average, so that the U.S. median household income of $49,000 becomes around $10,000, at purchasing power parity? Alternatively, can such an outcome be delayed until global living standards have increased to the current western level?

Policies of cheap money, high legal and illegal immigration, encouragement of global population growth and a “level playing field” in international trade all accelerate the move to equality. While nearly half the world’s population, including most of India and much of China, is still not fully connected to the world economy, that connection has already been revolutionized by cellphones and with money readily available, barriers are descending all the time, in all but the most abominably run nations. By and large, this is to be welcomed; one can as an American morally wish for the preservation of differentials between U.S. and coastal Chinese living standards but cannot morally wish to perpetuate the miseries of the world’s poorest.

However, if almost all the world becomes fully connected to the globalized economy and its capabilities are brought up to Western levels through outsourcing, then all remaining protections for higher Western living standards become artificial barriers that will inevitably disappear.

In the very long run, this is almost certainly inevitable. Thus if we wish to preserve our living standards, two policies are essential. In the long run, we must stop global population growth and begin the process of its decline. The planet simply will not support 10 billion humans with western living standards. Even if the “global warming” threat is a fantasy, the resources consumed by such a world will run up against the planet’s limitations, causing an economic collapse from which exit will be impossible. With improving technology and good management we may be able to support a 5 billion global population at Western living standards – we’re supporting perhaps 2 billion currently at something approaching them – but the resource burden of 10 billion is too heavy. Accordingly, population reduction programs are a matter of great urgency, in order to bring forward the year in which population growth ceases, and accelerate its decline back to a tolerable level.

In the short run, the emergence of emerging markets must continue, but it is not in the West’s interest that it should continue too fast. Reverting to protectionism is not the answer – as the 1930s demonstrated, it reduces the world’s potential output and makes everybody poorer.

However the West’s current wealth depends crucially on its capital base. Technology is largely available to all, especially as outsourcing has spread much modern technology throughout the world. But capital isn’t; the West’s wealth was originally built up largely through its superior capital resources, which both produced factories and allowed more to be spent on the health and education of its workforce. Policies of low interest rates, below zero in real terms, have reduced the West’s comparative advantage in capital cost and have spread capital availability much more widely through emerging markets, with China building up foreign exchange reserves of close to $3 trillion. Since 2008, the de-capitalization of the West has accelerated, with negative real interest rates ensuring that its capital stock, receiving negative real returns, degenerates each year. This process must be reversed, and its reversal is above all urgent in the United States, whose monetary policy has since 1995 exhibited the greatest folly.

Only when real interest rates are positive will the dissipation of the U.S. capital base end and U.S. corporations once again have the incentive to employ domestic labor rather than being lured through endlessly available zero-cost capital to outsource production to new manufacturing facilities in cheap-labor economies.

The global overpopulation threat to Western living standards is a long-term one; it will become acute only around 2050 or so. Even before that date however, we will impoverish ourselves if we continue to allow the outward flow of resources and know-how to continue at its current rate. Yes, we want emerging markets to grow rich, but not at the expense of our own citizens’ living standards. Fortunately, the policies to reverse this trend are available.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)