Modern capitalism isn’t working for the middle class

Sep 20, 2011 13:16 EDT
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We know one thing for sure: the gap between rich and poor in the United States has widened in the past 30 years. In 2007 the top 1 percent of earners took home 18.3 percent of national income — that is more than two and a half times their level in 1973, when their share was 7.7 percent. Those at the top haven’t enjoyed such a big slice of the national pie since 1929. The middle-class dominated nation that the Greatest Generation inhabited has become as polarized as the plutocracies of Latin America or as America itself was during its fevered Gilded Age.

For a long time, the United States was in denial about its growing income gulf. The middle class clung to the old promise of mass affluence — and used home equity loans and credit card debt to make that dream real.

The elite, particularly the conservative intellectuals who have dominated the national economic debate since the Reagan era, insisted that growing income inequality was propaganda invented by the class warriors on the left, and cited robust consumer spending as evidence. In a 1998 speech at Jackson Hole at the annual gathering of American economists and economic policy makers, Alan Greenspan, then chairman of the Federal Reserve, argued that what mattered was what people could buy, not what they earned.

“Inequality in consumption, when measured by current outlays, is less than inequality in income,” he said. Greenspan illustrated his point with some unusual measures of inequality — ownership of consumer goods like dishwashers, microwaves and clothes-dryers. The comforting result? Even though inequality as measured in dollars was growing, when measured in dishwashers, microwaves and clothes dryers it was decreasing.

The 2008 financial crisis and the prolonged economic downturn has eviscerated((To take away a vital or essential part of: a compromise that eviscerated the proposed bill.
)) the consumption defense as ruthlessly as it has burst the credit bubble that allowed the middle class to feel richer than it was. Income inequality is today a fact of life, as essential to doing business as the rate of inflation: Proctor & Gamble executives study the Gini co-efficient, a technical measure of income inequality, to divine what is happening to their erstwhile middle-class consumer base, and have decided the best strategy is to give up on the center and to market instead to the top and the bottom.

Citigroup advises investors to design their portfolios around income inequality. It calls this strategy the “Consumer Hourglass Portfolio” and has created an index of companies that serve the rich and the poor while avoiding the vanishing middle.

Once income inequality has become a tool for marketing executives and stock pickers it becomes pretty hard to deny. But we can still argue over what is causing it.

The left likes to blame pro-rich tax policy. And it is certainly true that the gap in the U.S. has widened even as taxes on the rich have decreased. Today’s top tax rate, 35 percent, is half what it was 30 years ago. Capital gains taxes are even less than half of what they were 35 years ago — 15 percent today, compared to 39.9 percent in 1977.
Politics have tilted the playing field in favor of those on top in other ways, too. Unions are less powerful than they were 30 years ago, and an ever bigger gap between executive officers and the average worker has become acceptable to shareholders and boards: in 2010, C.E.O. pay at S&P 500 companies was 343 times the median wage.

But taxes, unions and compensation committees tell only part of the story. What’s also happening is an economic revolution — actually, a pair of them — that favors those on top and squeezes those in the middle. The technology revolution and globalization have allowed the very talented, the very lucky and the very brave to build companies and make fortunes nearly overnight. They have also created a highly numerate superclass of workers — technologists, engineers, traders — whose skills are in great international demand and whose salaries have soared accordingly.

Meanwhile, a vast swath of jobs — ranging from manufacturing, to clerical work, and now to routine law and accounting — can be done much more cheaply by machines or by people in lower-income countries, and this is devastating the U.S. middle class, even as those at the top prosper.

Justice is a central issue in American politics and in American society. That’s why it seems so important to figure out whether the rich are paying their fair share. It is a crucial question — and the truth is that the rich are getting a better deal than they used to. But the even more central issue — and it is one that both left and right are reluctant to acknowledge — is that the fundamental forces shaping U.S. capitalism today are hostile to the middle-class majority, which defines U.S. democracy.

The rancor and the paralysis that characterize American politics at the moment are the result of this conflict. Someone needs to admit that modern capitalism isn’t working for the middle class, and find a way to make it work better, before it is too late.

This piece was originally published on the New York Times’s Room for Debate blog. You can read the rest of the debate here.