The central tenet of this blog is that America is an Empire in decline. I date the beginning of the fall to the early 1980's. Despite an enormous amount of economic data supporting this view, and the existence in plain sight of "intangibles" or other conditions supporting this view—dysfunctional political theater, crumbling infrastructure, gambling as economic activity, news as entertainment, music as corporate marketing, the cult of personality & celebrity, Hollywood superhero FX movies geared to adolescents in world where adults are stuck in adolescence, cage-fighting on TV, anything on TV, astonishing ignorance about the world and the abject failure of our public education—most Americans refuse to acknowledge the gradual decline in our standards & quality of life.
This is not surprising. One must study the data or actually remember the way things used to be to sense the change. If you went to college when getting a degree was affordable, and didn't require you to take on a boatload of debt, and now have kids of your own for whom college is a risky proposition, it is easy to see the problem. As I've written before, people adapt to gradually deteriorating conditions in such a way that what is "normal" now is worse than what was "normal" last year. This goes on year after year. Few notice the race to the bottom.
Robert Reich, who served as Labor Secretary in the Clinton administration, is one of the few observers who understands, at least as far as working Americans are concerned, that things have gradually gotten worse over time. His recent post The Truth About The American Economy outlines some of the big picture view of our decline.
The U.S. economy continues to stagnate. It’s growing at the rate of 1.8 percent, which is barely growing at all. Consumer spending is down. Home prices are down. Jobs and wages are going nowhere.
It’s vital that we understand the truth about the American economy.
How did we go from the Great Depression to 30 years of Great Prosperity? And from there, to 30 years of stagnant incomes and widening inequality, culminating in the Great Recession? And from the Great Recession into such an anemic recovery?
Reich splits the time line after World War II into two periods, the Great Prosperity (1947-1977) and the Middle Class Squeeze (1977-2007). His "squeeze" (my decline) starts in the 1970s because some trends in labor (lower wages for male workers, loss of manufacturing jobs) started in that decade. Let's focus on the period of decline, how Americans coped with it and why it occurred.
The Middle-Class Squeeze, 1977-2007
During the Great Prosperity of 1947-1977, the basic bargain had ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. But after that point, the two lines began to diverge: Output per hour — a measure of productivity — continued to rise. But real hourly compensation was left in the dust.
It’s easy to blame “globalization” for the stagnation of middle incomes, but technological advances have played as much if not a greater role. Factories remaining in the United States have shed workers as they automated. So has the service sector.But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs. Their more profound effect has been on pay. Rather than be out of work, most Americans have quietly settled for lower real wages, or wages that have risen more slowly than the overall growth of the economy per person. Although unemployment following the Great Recession remains high, jobs are slowly returning. But in order to get them, many workers have to accept lower pay than before.
Starting more than three decades ago, trade and technology began driving a wedge between the earnings of people at the top and everyone else. The pay of well-connected graduates of prestigious colleges and MBA programs has soared. But the pay and benefits of most other workers has either flattened or dropped. And the ensuing division has also made most middle-class American families less economically secure.
I have blamed globalization for downward pressure on wages and the loss of good-paying jobs, but I don't want to argue about that today. Here's where Reich really misses the boat—
Government could have enforced the basic bargain. But it did the opposite. It slashed public goods and investments — whacking school budgets, increasing the cost of public higher education, reducing job training, cutting public transportation and allowing bridges, ports and highways to corrode.
It shredded safety nets — reducing aid to jobless families with children, tightening eligibility for food stamps, and cutting unemployment insurance so much that by 2007 only 40 percent of the unemployed were covered. It halved the top income tax rate from the range of 70 to 90 percent that prevailed during the Great Prosperity to 28 to 35 percent; allowed many of the nation’s rich to treat their income as capital gains subject to no more than 15 percent tax; and shrunk inheritance taxes that affected only the top-most 1.5 percent of earners. Yet at the same time, America boosted sales and payroll taxes, both of which took a bigger chunk out of the pay the middle class and the poor than of the well off.
Think for a moment. What's missing in Reich's explanation? Why was the government so mean-spirited? Why would the government sacrifice the Middle Class at the altar of the rich?
And of course the answer is political corruption, which resulted in the financialization of the American economy. Corruption is built right into the long, expensive election process (campaign contributons, aka bribes) and the law-making process (armies of lobbyists writing legislation in the Congress).
During Ben Bernanke's "Great Moderation" (1984-2007), the economy got bigger and bigger with only two brief interruptions. And almost all of that newly created wealth went to the wealthiest 10% of Americans. For workers in the middle and bottom, the share of the pie shrank and shrank. Though never explicitly stated for reasons that are all too obvious, government policy during the "squeeze" aided and abetted the takeover of America by wealthy corporate interests, especially (but not exclusively) in finance. And it worked. And it is still working.
Many called what we had (and still have, sans a housing market) a FIRE economy (finance, insurance & real estate). And if you've got a FIRE economy, and Middle Class Americans are being squeezed, a Housing Bubble makes all the sense in the world. Those in finance and real estate prosper, while those buying houses are led to believe they are acquiring wealth (in home equity) for the first time in three decades. Then the bubble pops, and what does the government do? It bails out the too-big-to-fail banks, who effectively own the Congress, and run economic policy at the Treasury and in the White House. The Housing Bubble "wealth" has vanished now, but for the Middle Class, outside defaults, the debt remains.
Reich notes that Americans coped with what I call "the takeover" by 1) women joining the workforce; 2) working longer hours for less pay; and 3) taking on astonishing amounts of debt, especially mortgage debt.
Coping mechanism No. 3: Draw down savings and borrow to the hilt. After exhausting the first two coping mechanisms, the only way Americans could keep consuming as before was to save less and go deeper into debt. During the Great Prosperity the American middle class saved about 9 percent of their after-tax incomes each year. By the late 1980s and early 1990s, that portion had been whittled down to about 7 percent. The savings rate then dropped to 6 percent in 1994, and on down to 3 percent in 1999. By 2008, Americans saved nothing. Meanwhile, household debt exploded. By 2007, the typical American owed 138 percent of their after-tax income.
Working Americans in the middle took on huge amounts of debt to keep the consumption party going, which direcly benefited the financial sector, and drove income & wealth inequality. Let's face it, those paying interest on debt will always be much worse off than those collecting that interest. That's the truth about the Middle Class.
Reich finishes with the usual aspirational flourish.
The Challenge for the Future
All three coping mechanisms have been exhausted. The fundamental economic challenge ahead is to restore the vast American middle class.
That requires resurrecting the basic bargain linking wages to overall gains, and providing the middle class a share of economic gains sufficient to allow them to purchase more of what the economy can produce. As we should have learned from the Great Prosperity — the 30 years after World War II when America grew because most Americans shared in the nation’s prosperity — we cannot have a growing and vibrant economy without a growing and vibrant middle class.
Yes, yes, yes. Reich's post "is excerpted from [his] testimony to the U.S. Senate Committee on Health, Education, Labor, and Pensions, on May 12. It is also drawn from [his] recent book, Aftershock: The Next Economy and America’s Future." Reich wants to believe that government can and will redress the inequalities in American society. But those inequities will never be overturned because the political system is ineluctably corrupt, which explains why Reich fails to mention the real reason behind government policies he abhors. Of course, another reason Reich fails to mention corruption is that he was testifying before a corrupt Senate Committee. What a tangled web we weave!
I agree— we cannot have a growing and vibrant economy without a growing and vibrant middle class. And in so far as we will never again have a growing and vibrant middle class, America is an empire in permanent decline. Although that conclusion is clear today, I believe events over the next decade will make it crystal clear, even to former Labor Secretary Robert Reich.
Of course, we all know the begining of the end for Properous America was the USA reaching peak oil-production around 1971 and consequently terminal decline in this production around 1986.
Posted by: Loveandlight | 06/01/2011 at 02:06 PM