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The Tragedy of Our Middle Class

They're closing down the textile mill across the railroad tracks,
Foreman says these jobs are going, boys,
and they ain't comin' back …

—Bruce Springsteen

In 2011, Occupy Wall Street brought to the fore a truth that many had known but few had spoken of: a hugely roportionate share of wealth in America is concentrated in the hands of the top 1 percent. This thin upper crust currently owns 35 percent of all wealth, while the next 19 percent claims 53 percent. This leaves the remaining 80 percent of Americans with—well, not much as shown in figure 2.1.

Anyone looking at this graph can't help but ask, “Where's the middle?” It simply isn't there. This isn't the kind of society most Americans want, yet it's what we now have.

This sort of society has two major problems. One is the vastness of the inequality, which has numerous negative side effects. As studies have shown, highly unequal societies have more homicides, obesity, heart disease, mental illness, drug abuse, infant mortality, and teenage pregnancies than do more egalitarian societies. Highly unequal societies also suffer from a loss of spirit. When people know their economic system is stacked against them, they cease to believe they can attain security and comfort, much less riches. They also lose faith in their political system, which, mirroring their economy, makes a mockery of the American vision.

The second major problem is that while incomes of the rich have soared, incomes of the middle class have declined. According to the 2010 US Census, the median household income fell 8 percent in the last decade. More tellingly, since 1970, the incomes of men in their twenties and early thirties have fallen by 30 percent.

This is historically new. When I was growing up, middle-class families with one breadwinner could send their children to college without incurring huge debts. Wages were rising, housing and education were affordable, and health insurance was within reach. Those days are gone now, and today's middle class is as anxious about its future as my parents were hopeful.

AMERICA'S FOUNDERS ARE REMEMBERED for many things, but one of their greatest inventions is often forgotten: the mass middle class. “The class of citizens who provide at once their own food and their own raiment may be viewed as the most truly independent and happy,” wrote James Madison. “They are also the best basis of public liberty and the strongest bulwark of public safety. The greater the proportion of this class to the whole society, the more free, the more independent, and the more happy must be the society itself.”

With this vision in mind, one state after another abolished primogeniture, the feudal system under which eldest sons inherited all of their parents' land, while early Congresses reserved land in every new town for universal public education. Thirty years later, the French sociologist Alexis de Tocqueville observed in America “a democratic people, where there is no hereditary wealth, every man works to earn a living; labor is held in honor; the prejudice is not against but in its favor.”

Things changed with industrialization, immigration, and the robber barons. A large class of factory workers arose in the cities. They earned pitiful wages, toiled sixty hours a week, and lived in squalid, overcrowded tenements. But they joined unions, and after half a century of struggle, those unions lifted wages, reduced working hours, and helped make housing and higher education affordable for the majority. Thus was born the world's first mass middle class, a fulfillment of the Founders' vision in a postagrarian economy.

The quarter century after World War II was the golden age of America's middle class. Twenty million veterans went to college or bought homes thanks to the GI Bill. Green-lawned suburbs sprouted like mushrooms after rain. Families filled their garages with cars, tools, and barbecues. In 1980, Ronald Reagan proclaimed that it was “morning in America,” and most voters believed him, or wanted to.

In fact, it was already after noon, though few realized it at the time. Like agriculture before it, manufacturing had begun shedding workers. Not only were foreign manufacturers outcompeting ours; American companies were moving factories overseas. Americans were told not to worry—we'd become a service economy, and white-collar jobs would fill the blue-collar void. But food servers, retail clerks, and health aides were paid considerably less than their industrial counterparts. A steadily tightening squeeze, with wages stagnating and prices of middle-class necessities rising, took hold.

In addition to deindustrialization, three other long-term phenomena gained momentum after 1980: globalization, automation, and deunionization.

Globalization. Since the early 1800s, economists have argued that trade is good and more trade is better. Their rationale is the theory of comparative advantage. As David Ricardo reasoned, if England could make textiles more efficiently than Portugal, and Portugal could make wine more efficiently than England, then both countries—including their workers—would benefit by trading woolens for port.

But trading in physical goods is one thing and globalization is something else: it is the integration of separate national economies into a single world economy. In any capitalist economy, products are made wherever costs are lowest and sold wherever prices are highest. When the economy is local or national, businesses have some incentive to support the general good—to pay taxes, train workers, contribute to their communities, and so on. But when corporations can scour the planet for the lowest costs and avoid contributing to any community, that is no longer true. The big winners, then, are corporate owners, and the big losers are workers and communities.

Automation. When Henry Ford launched the Ford Motor Company in 1903, cars were built by skilled craftsmen one at a time. Ford had many technical patents, but his most revolutionary invention was the assembly line. Within five years he was making one Model T every ninety-eight minutes. By 1929 his River Rouge plant was turning out a car every ten seconds.

The fear of eighteenth-century English weavers was that textile machinery would put them out of work. And it did. What Ford showed in the twentieth century was that automation could have the opposite effect. By making complex products so cheap that millions could afford to buy them, it vastly increased the number of workers needed. On top of that, it enabled large, automated companies to pay decent wages. This was the beginning of industrial America's mass middle class.

Today, automation is displacing workers again. ATMs replace human tellers, e-mail replaces postal workers, computerized trading replaces floor traders, and so on. The result is an American workforce that's splitting into well-paid elites at the top and low-paid service workers at the bottom, with few decently paid punters in the middle.

Deunionization. An affluent economy is a prerequisite for a large middle class but by no means a guarantee. To sustain a large middle class, a nation must consciously and continuously temper the natural impulse of capitalism to minimize labor costs. That has been done by various countries in various ways, but there's always pushback and never a guarantee that gains for the middle class will endure.

Sustaining a large middle class requires counterbalancing the profit-maximizing imperative of corporations. For much of the twentieth century, the requisite counterforce came from labor unions. In the United States and Western Europe, labor unions finished the job that Henry Ford started. Through collective bargaining, they drove up wages and shortened the workweek; through political power, they won such benefits as unemployment insurance and Medicare. In countries like Germany and Sweden, where labor unions have remained strong, so has the middle class. In the United States, by contrast, union membership peaked in 1945 at 35 percent of nonagricultural workers, then started declining. It's now at 12 percent of the total workforce and just 6 percent of private sector workers, and the trend isn't likely to reverse.

THESE THREE PHENOMENA, though distinct, aren't unconnected. They all result from the dominant corporate imperative to maximize profit. And as figure 2.2 shows, they've all shifted money from the middle of our economic ladder to the very top.

Americans were surprisingly slow to notice that the golden era of the middle class had passed. As former Labor Secretary Robert Reich has explained, three factors masked the middle class's descent. First, women entered the labor force in large numbers, providing two incomes for many households. Second, many Americans made ends meet, or tried to, by working overtime and taking second jobs. And third, middle-class families maintained their lifestyles thanks to a vast expansion of consumer debt. But these masks couldn't last forever. When the credit bubble burst in 2008, so did the accompanying illusions.

All this is a tragedy not just for hard-hit families but also for the idea of America as a nation of self-reliant citizens. And the tragedy is far from over. According to a recent study, three-quarters of Americans nearing retirement have less than $30,000 in retirement savings. Even with Social Security, they'll end their lives in trailer homes. On top of this, millions of today's twentysomethings will be saddled for decades with student loans they can't repay.

THE DECLINE OF THE MIDDLE CLASS is now in full view, and Americans are hungry for solutions. But what are they? With much fanfare, President Barack Obama in 2009 created the White House Task Force on the Middle Class, headed by Vice President Joe Biden, to find some. The task force dutifully held hearings, consulted experts, and published reports. To no one's great surprise, the reports recommended more education, job training, chi ld care, “green jobs,” retirement savings, and other piecemeal measures. Most would be beneficial as far as they went, but they wouldn't go very far, and they certainly wouldn't fix the causes of middle-class decline.

Republicans, meanwhile, have been calling for more tax and spending cuts, deregulation of business, and privatization of Social Security and Medicare. It's not immediately obvious how such policies would strengthen the middle class, but Republicans insist that they would. They argue that unburdened “job creators” would generate rising incomes for all, without unions or higher minimum wage laws. It could happen, I suppose, but I wouldn't bet on it. Far more likely is that wealth would flow upward at an even faster rate.

Think tanks have been busy, too, cranking out papers with lots of bullet points. Mostly, these papers revamp policies that worked a few decades ago. But as financial prospectuses are required to say, “Past performance is no guarantee of future results.” Indeed, in history, the way forward is rarely the way back.

Here are the four most-touted pro-middle-class policies and the reasons why they won't halt the current decline:

Stimulus. Though they quarrel over details, most economists agree that when recession strikes, government should rekindle the economy by adding money to it. Democrats prefer to do this through direct spending, Republicans through tax cuts. The Federal Reserve often plays along by lowering interest rates or printing money through a process called “quantitative easing.”

Such fiscal and monetary pump-priming often perks up the economy for a while, but it doesn't fix the causes of middle-class decline. As we're seeing nowadays, it's easy for GDP and corporate profits to grow without more income flowing to the middle class.

Job creation. Listen to any politician and you'll hear bold promises to spur job creation. The underlying premise is that more private sector jobs will save the middle class and that given enough incentives, profit-seeking entrepreneurs will create them.

There's no question that the middle class needs jobs. But it doesn't follow that jobs by themselves can sustain a large middle class in the future. Most jobs today pay barely enough to make ends meet. What a large middle class needs is good-paying jobs in large numbers, and those simply aren't being created.

In the heyday of America's middle class, jobs at IBM and General Motors were often jobs for life. Employers offered health insurance, paid vacations, and good pensions. Workers' pay and responsibilities tended to rise with seniority. In today's globalized economy, by contrast, good wages and long-term relationships are rare. Workers are expendable—often they're literally “temps”—and their benefits are shrinking. And that's unlikely to change.

It's also unlikely that jobs of the future will pay more than today's (adjusted for inflation). In unionized industries like autos and airlines, two-tier contracts are now the norm. This means that younger workers get paid substantially less than older ones for doing the same work.

Nor is the picture brighter in other industries. Figure 2.3 shows the US Labor Department's list of the ten fastest-growing occupations.

What these numbers tell us is that the middle class in 2020 will consist largely of nurses and teachers. Never mind that these occupations depend in one way or another on public funding, which nowadays is shrinking. The deeper question that leaps from these numbers is: Where are the millions of good-paying private sector jobs that are needed to sustain a large middle class? The Labor Department doesn't say. Nor does anyone else.

Education. About a year before the financial meltdown, President George W. Bush told a friendly Wall Street audience, “Income inequality is real—it's been rising for more than twenty-five years. And the reason is clear: we have an economy that increasingly rewards education and skills because of that education.” The solution, he argued, was for young people to study harder and schools to teach better.

Education—by which I mean both academic and vocational—is a worthy endeavor in its own right, so there's every reason for America to invest more in it than we now do. But we mustn't delude ourselves into thinking that education will cure inequality or sustain a large middle class. It won't.

The reason is simple though not immediately obvious. While it's true that people with college degrees earn more than people without them, it doesn't follow that cranking out college graduates creates more high-paying jobs. It's a logical fallacy, called the fallacy of composition, that what works for a few will work for all. Increasing the supply of college grads doesn't increase the demand or the pay rate for them. It gives us better-educated taxi drivers, salespeople, and carpenters, but not better-paid ones. As economist Lawrence Mishel has written, “Boosting college graduations will not materially address either past or future inequalities. In fact, it will exacerbate the already deteriorating pay and benefits facing young college graduates and lead to falling wages among all college graduates.”

The same is true for job training. As economic historian Joyce Appleby has observed, “It is true that there are businesses that require labor and individuals who would like jobs but don't qualify for them. And it is true that job training can help. But it doesn't follow that job training programs reduce unemployment or poverty. The reason is that poverty and unemployment are not much influenced by the qualifications of the workforce. They depend, rather, on the demand for labor.”

Innovation. American companies love to innovate, and they do it very well. That leads to clever new products and more efficient production processes, but it doesn't lead to more good-paying jobs. In fact, it may lead to fewer.

Consider Apple, the world's most valuable company and exemplar of American ingenuity. Apple's brilliant products are designed in Silicon Valley but made almost entirely in China. What's more, Foxconn, Apple's low-wage Chinese manufacturer (and also Dell's, Hewlett-Packard's, and Intel's), has broken ground on a new factory to make robots. Its goal is to “hire” one million robots, displacing hundreds of thousands of Chinese workers. “Robots don't complain, or demand higher wages, or kill themselves,” the Economist noted wryly.

Then there's Apple's neighbor Google, which along with its online services is developing a driverless car. If it catches on, it will be an awesome innovation, but not one that cab or truck drivers will like. Will FedEx stick with humans when mechanical drivers are a fraction of the cost? Not likely.

And what are we to make of the “insourcing” of manufacturing jobs that has recently raised hopes in the Midwest? North Canton, Ohio, for example, used to be home to the Hoover Vacuum Cleaner company, which once employed seven thousand people there. By 2007, Hoover had closed all its US factories and moved them to Mexico and China. It was therefore big news in North Canton when a company called Suarez Industries announced that it was moving a heater factory there from China, seemingly reversing the direction of globalization.

Unfortunately, Suarez needs only 250 local workers to churn out 10,000 heaters a week. How can they do that? “We reengineered the Chinese heater,” the production manager explained. The Chinese model had 192 screws; the revamped model has 31. So yes, thanks to innovation, some manufacturing jobs are returning to America, but they aren't many, and they don't pay well. When Hoover left town, it was paying assembly-line workers $13 to $17 an hour. Suarez will pay its screw turners the minimum wage, $7.85 an hour as this is written.

If stimulus, job creation, education, and innovation—helpful as they may be — can't sustain a large middle class in the twenty-first century, we'd better do some deep rethinking. And that means digging into all the sources of income within capitalism.

BROADLY SPEAKING, CAPITALISM CREATES two kinds of income. One is derived from physical or mental labor, the other from ownership of property rights. At this moment, the middle class gets nearly all of its income from labor. (I'm counting Social Security and pensions as deferred wages and salaries.) By contrast, the top 1 percent reaps the bulk of our economy's capital gains, dividends, and other forms of property income, which not coinci-dentally are taxed at lower rates than labor income. This arrangement works nicely for the rich but not so nicely for workers whose wages are being squeezed.

The question that needs to be asked is this: From where might the middle class get some nonlabor income? As far as I can tell, almost no one is asking this question today. The unchallenged assumption is that nonlabor income is fine for the top few percent, but everyone else should toil to make ends meet.

To be clear: I'm not saying that nonlabor income should be the primary source of income for most people; I'm saying that it should be a supplement. The rich would still get most of their income from property, and everyone else would still get the bulk of their income from working. But everyone should also get some nonlabor income as a birthright. Otherwise, we can kiss our large middle class goodbye.