Shattered Pillars of the Middle Class

Two and a half years into the biggest financial crisis since the Great Depression, we have gone backward instead of ahead. The pillars of the middle class aren't just crumbling. They're being eroded by systematic policy and failures to react.

• Pillar 1 of the mass middle class was regular wage increases reflecting regular increases in labor productivity. Productvity has continued to increase, but wages have not.

The wealth produced by labor is not getting plowed back into the wages of labor. This was the core problem that Karl Marx addressed in his analysis of capital: exploitation consists of owners' taking the surplus-value produced by labor, or what we now call value-added, rather than splitting it fairly according to the actual contributions of capital and labor.  This critique is more relevant than ever in advanced economies, given data like this.

For more charts straight from ye olde class struggle, see the Bureau of Labor Statistics report - no doubt slated for defunding by the Republican House as a fountainhead of Socialist propaganda.   I can't resist this one:

Labor Share of nonfarm business sector output, first quarter 1947–third quarter 2010

While the causes aren't entirely clear, the result is: a smaller piece of value added for employees.

• Pillar 2 of the middle class: home ownership, now eroded by the steady increase of the home's value, which became a necessity in recent decades because wages were not increasing.  These days, 1,000,000 families have their homes forclosed each year, with 2011's rate due to be higher than 2010s.  And you know all about the crash in prices (Case-Schiller index interactive is here, and Dean Baker's February Housing Market Monitor is here).  There is no housing price bottom yet.
• PIllar 3 was stable pension and benefits.  Defined benefit pensions, based on a service formula that guarnateed a payout, have been destroyed by the private sector. The huge part of the middle and working classes who now depend on "defined contribution" pensions - 401(k) plans and so on, lost a huge piece of their retirement in the 2008 crash, and may or may not have gotten that back. That low private sector standard is now being touted as a benchmark by people wanting to get rid of public sector pensions. The Wisconsin protests are one example.  In the medical benefits arena, HMOs have responded to the coming of Obamacare with the highest price increases since 2006,  Aetna had proposed increases of 25% for 2011, and then withdrew them. Middle class poverty is set to increase even for the older workers who have for a few decades been well off.
• Pillar 4 was public investment - infrastructure, low-cost, high-quality schools and universities, among many other things. These are getting cut everywhere. Higher education is being withdrawn right and left, if not in quantity then in quality. Students are paying more to get less, as public funding continues to plunge below historical norms. One cause is the Great Tax Shift from corporations and the wealthy to ordinary workers:

• Pillar 5 was the proverbial rule of law.  The most powerful members of society don't need rules or justice to protect them, since they have power. In contrast, the middle class doesn't, and in the long run there is no middle class without accountability, due process, and equality before the law.  These are the only mechanisms that keep the middle class from getting crushed.  And yet, although the banking and mortgage industries destroyed trillions of dollars of wealth, much of it of ordinary investors, only one banker, Bernie Madoff, has gone to jail.  

Sorry, that's not quite true.  The UBS banker who blew the whistle on an international tax fraud conspiracy at UBS, Bradley Birkenfeld: He's in jail.

The protests in Wisconsin are a good start on a reaction to the attacks on all the pillars at the same time.  But they are only a start.

Inequality as Theft

Marcus Baram has this nice chart at Huffpo that compares the growth in financial sector bonuses to non-growth in salaries.

Back in 1985, the average annual salary for all workers across the country was actually a bit higher than the average bonus ($19,000 to $13,970). (Note: these numbers are not adjusted for inflation).  How times have changed - while the average bonus soared almost 14 times higher (by 2006), the average salary has essentially been stagnant sine the mid-1980s.

 Meanwhile, the Obama administration got pissed at the insurance industry for its open attack a couple of weeks ago on even the weak reform plan. Obama lit into them, and on This Week White House advisor David Axelrod repeated the basic argument:

we need these reforms. In the last year—in the last ten years, premiums have doubled. You’ve seen the insurance companies take—ten years ago, fifteen years ago, they spent 95 percent of their premiums on healthcare, now 80 percent. More of the money is going to bonuses, salaries, administrative costs. This is not a sustainable path for this country. So we need reform, and that’s what he is arguing for.

Turns out politicians can in fact discuss parasitism in America, but only when the deal with the newly proclaimed parasites has fallen apart. When will Axelrod substitute "insurance companies" with "banks" in the same phrase?

Inequality as Policy

This is the title of a CEPR report that is clearer than most that inequality has not been an accidental byproduct of high-tech growth and the "service economy" but has been a deliberate strategy.  I elaborate on this in a book on the decline of the paramount middle-class institution, the public university, and am very glad to have this company.

Inequality Takes Another Bow

forever on the rise, now fueled by the recession near you, and with predictable effects on the middle: 

Household income declined across all groups, but at sharper percentage levels for middle-income and poor Americans. Median income fell last year from $52,163 to $50,303, wiping out a decade's worth of gains to hit the lowest level since 1997.

Global Grotesque Inequality

See five thirty eight.com's perverse but illuminating exercise in how much of the world and its population fits into only 5% of world GDP.

Cultural Roots of the Economic Crisis

Insight about the cultural roots of the economic crisis is finally making the rounds of some big-city papers. Gail Collins gets at the heart of the cultural problem with the bailouts, though here she's talking about the governor of Texas:

Perry, who is the sort of person who calls other guys “dude,” used to be a cotton farmer, a group that seems to have a special talent for combining rugged individualism with intransigent demands for government assistance.

I call this psychological structure submissive individualism. It's an old US tradition (I first identified it via readings of Ralph Waldo Emerson work from the 1830s). It's tied up with fear and American Christianity - salvation finally coming only from God and not from You. But the core is that individual agency needs strong social systems to be effective economically, US social systems have always been weak, individual agency is therefore a weak and fragile thing for most Americans, and yet the obligation to have big agency is absolute. The endless attacks of the US Right on government only makes the psychological contradictions worse. The result is hypocrisy and double-standards.

Collins continues.

The big mystery here is why the tax-protest crowds were behaving as if the world was coming to an end when all Obama’s infant presidency has done is lower taxes for a vast majority of the public. And why people like Perry seem to feel compelled to egg them on.

The answer is that what’s left of the Republican Party is intent on cutting off the knees of the administration before it actually manages to fulfill any campaign promises on reducing the huge economic gap between the top 5 percent of the country and the rest of the populace. In pursuit of that mission, fortune favors the hysterical and rewards politicians who behave like gerbils that just bit into an electric wire.

Yes. And what is the link between submissive individualism and the obsessive pursuit of inequality? Because the only psychologically plausible solution to submission is superiority - especially superior wealth, either achieved or imagined for one's future. Imagined superiority drives out individuality. That combination of inequality and repression is the whole history of the modern Republican party.

So we get simultaneously the culture wars and the budget wars. The latter take the form of endless ongoing cuts at the state and city level even as the banks are flooded with public money. And they are driven by the sheer unilateralism of financial rules in the US - the banks decide, we take it, even now after they have ruined everything.

House-Senate: Zero-Zero

The middle-class won in the House-Senate conference on the stimulus by keeping the suspension of the Alternative Minimum Tax that had been hitting it - its upper reaches for years. It lost by seeing huge cuts in education, construction, and health care.

Medical research won because Arlen Specter the cancer survivor was a key Republican vote. In fact, the NYT reporters imply the whole thing was decided by the three "centrist" Republicans and their personal opinions. "it was clear that the three Republicans who agreed to support the bill in the Senate wielded extraordinary power, and along with conservative Democrats in their coalition, had put a firm stamp on the stimulus package."

It's a great way to run a country with 300 million people.

The whole package is 1/3 the size of the bailout for the banks.

The proportion between the deal for finance and the deal for the other 300,000,000 is the exact continuation of Reaganism through its Bushian decadence: public resources must go to the top. The true sign of efficiency is gross inequality.

The British political scientist Ross McKibbin summed up the Reagan-Thatcher model in the London Review of Books:

What is the function of the Conservative Party? It is to defend inequality: to make acceptable the social and economic unfairness inherent in a predominantly capitalist economy; to preserve the interests and privileges of social elites. But historically it has not been committed to a particular strategy to fulfil these aims.

In other words, because of its powerful electoral and financial advantages for the Republicans, inequality must continue by any means necessary. That is the underlying message of the House-Senate vote.

The Bell Tolls

Amazing headlines today for your old m-c pals Freddie Mac and Fannie Mae, the descendants of Bailey's Bank in It's a Wonderful Life that kept the speculative mogul wolf Potter outside the door and built the US middle-class. How about "Big Mortgage Death Watch - Freddie and Fannie in freefall." As we saw yesterday, even airline management has figured out that the US run by finance capital is a chain of Pottersvilles.

The Thrifty Middle Class - Not!

A good piece today gets at one of my worries about the U.S. economy's ability to avoid long-term decline. That is the failure of Americans to spend less than what they earn, i.e. save.

The hook is that some Americans are actually waiting to have the money before they spend it! This is news only because we haven't been doing this. "In 1984, Americans were still saving more than one-tenth of their income, according to the government. A decade later, the rate was down by half. Now, the savings rate is slightly negative, suggesting that on average Americans spend more than their disposable income."

The article suggests that there's going to be a cultural shift against having debt-fueled stuff.
"In homes now saturated with debt, conspicuous consumption and creative financing have come to seem a sign of excess not unlike that of a suntan in an age of skin cancer." See the quotations from people trying to get over their low-grade envy of the Cadillac next door.

But there are a couple of problems. One is that the economy depends on overspending. And people overspend not just because they like Cadillacs, but because they don't make enough money. Individual wages for the bottom 80 percent have barely budged for 35 years.

Given our low-cost low-wage economy, will employer be able to imagine how to raise wages so that people can save?

PS: See also a nice column last month by David Leonhardt on the direct conflict between spending on social development and spending on the war in Iraq.

Why Care about Keynes

Thinking about the presidential campaign makes Fr. Frank dull this morning. A fit of economic nationalism makes Maureed Dowd more interesting. Actually the term economic nationalism just means healthy concern at the blatantly negative effects of the dogma of free trade and the decoupling of the financial sector from national development.

In case anyone thought the Bush Administration would think about the national welfare instead of the welfare of its wealthy core, the president's "stimulus package" wants to make permanent the upper-bracket skew of his tax cuts, which will fail to stimulate. Fail, that is, to stimulate anything except more donations to him from the very rich, who appear to be giving more money than usual to the Democrats.

I'm not sure folks have grasped the philosophy behind the Republican hatred of "Keynesian" economics. Keynes was a major source of the idea that a government-led stimulus could reduce and end a downturn, like the one that in the 1930s was known as the Great Depression. The core concept is that you give money to people who will spend it. They get the goods the money pays for, and the economy is stimulated by their spending on those goods, which increases sales of products and services, which increases investment and hiring, which gets the economy going again.

Republican hatred starts with the association of Keynesian policy with the Democrats, and specifically with their most influential and effective president ever, Franklin Delano Roosevelt. They never stopped hating his New Deal, and here we get beyond the surface partisanship. The people who most immediately and completely spend the extra money they get from a tax rebate or government program are the middle-class and the poor. Keynes offered a solid technical reason for targeting generous, substantial public services at the bottom and the middle of the income ladder rather than at the top.

Even worse for Republicans, Keynesian policy worked. It created a counter-cycle during the Depression. It justified the massive public investment that was the fundamental ingredient of the economic "golden age" after World War II (I've written about this more than once.) It greatly expanded the American middle class (and the British, and the French, and the German . . .) It also, for a time, made a huge number of basically conservative white voters into Democrats. Only Nixon- and Reagan-pioneered campaigns against ungrateful Negroes and hippie students started to peel off the white middle-class from the Democrats (Nixon-Wallace in the 1968 election, Reagan in the 1966 election for governor of California). Good public services remained very popular - as long as their main beneficiaries didn't seem to be "welfare queens" and unAmerican critics of big business or war.

Beneath the political concerns lies a Darwinist disdain for the financial status of ordinary people. The silent assumption is that if ordinary people were any good with money they would already have more of it. If they deserve more money, then they will go out on their own and get more money. Republicans generally deny the economic conditions, discrimination, structural problems, or the sheer mediocrity of the wages nearly all of us earn doing basically useful things like teaching children how to add and subtract or or like nursing hospital patients. There are still some "Main Street" Republicans who don't stick their fingers in their ears or cover their eyes - Kevin Phillips has long been one, and has railed against Wall Street economic concentration better than nearly any Democrat. But the party leaders oppose economic power and broad-based wealth every chance they get.

Sounds a little extreme to say so, but in fact Republicans have spread economic Darwinism, rationalized all inequality booms, and suggested in effect that if schoolteachers don't like their salaries they can always quit and become intellectual property lawyers. They always oppose minimum wage policies,wage increases for the public-sector employees that have been the backbone of the black middle class, and broad-based stimulus packages that give meaningful rebates to regular people. "Free markets" have for a quarter-century been moving wealth and income from the bottom and middle to the top, and Republicans will protect the perimeter that defends around market inequality to their dying breath.

As long as the Democratic candidates don't really attack the inequality perimeter, I will stay bored with them.

Culture War Dumbness

David "Schoolboy" Brooks outdoes himself today with a particularly desparate, silly piece blaming fears of immigration on college elites. Don't ask about the logic, which would be like looking for the Sermon on the Mount in a long dribble of uncooked batter. The basic idea is that working people don't have any real economic problems after 30 years of Republican rule that has seen zero real income growth for about 80% of the population - they just don't like the liberal cosmopolitanism of college-educated elites. The essay is an aggravating five-minute escape from any known reality here on Earth One, where Schoolboy's culture-warrior pals have been helping destroy the economic base of their beloved "regular folks" while telling them their real enemies are liberals who send money to save Darfur. Gaaah!

Schoolboy's New York Times pals wrote a good editorial on Monday that he obviously didn't read. The editorial reported that accoreding to a study by Frank Levy and Peter Temin, two MIT economists, the top 1 percent of Americans (average income, $1.1 million) took almost a quarter of the nations income, "their largest share since 1929." There's a connection between the Republican's happy inequality boom and the anger of Brooks' "nationalists," which someday may finally focus on the real cause - conservative economic policies that reward the destruction of jobs.

A better account of growing inequality appeared in the same paper on Sunday. "The orthodoxy surrounding income inequality is being undermined by research that looks at institutional issues: changes in the way the corporate world measures the performance of workers, the decline of unions, and government wage and tax policy." Doh!

And for a sad tale of the king of Clintonian economics, Larry Summers, now suprised by inequality, see a short Sunday Magazine piece. "I'm finding my way," Summers says about the effects of his own policies. Far better is an interview with the producer of "Entourage," Doug Ellin, with his jaundiced desire to exploit the dumbness of Beemer lust and related more expensive desires. He doesn't make the Schoolboy mistake of confusing the desire to be rich with a noble vision for a red-state America.

Dumbness and the Fight Against It

Today's New York Times has a nice illustration of the battle for what's left of the middle-class mind. There's Paul Krugman fighting dumbness by showing how the media has turned politics into a beauty contest that prevents people from voting on the basis of issues. "listening to what candidates say about substantive issues offers a much better way to judge potential presidents than superficial character judgments. Mr. Bush's tax lies [in the 2000 campaign], not his surface amiability, were the true guide to how he would govern."

In the other corner, representing dumbness, is David "Schoolboy" Brooks, with another of his grandiloquent philosophical frameworks leading to Reaganite cliches. Painting himself as a "Hamilitonian" in an epic battle with "mainstream liberals" and populists, he concludes, "Government is really bad at rigging or softening competition. It can do some good when it helps people compete." This distinction rests on a Schoolboy contrast between job retraining, job protections, and jobs programs (where gov is bad), and portable pensions and health insurance and skill-based immigration and encouragement of marriage (where gov is good). In fact all Schoolboy does is slam programs for workers and praise programs for the middle-classes. Blue-collar is bad, white-collar is good. Programs that make blue-collar people like white-collar people are good. Schoolboy wants a world in which gated commuters are subsidized and nobody else is - a paradise of bobos, paid for by everybody else.

If we don't start catching on to this classic middle-class dumbness, were not going anywhere except down.

Which reminds me: in March I blogged about Pakistani lawyers in revolt; this past week the U.S. press has realized that the protests have spread widely enough to be threatening to the Musharraf regime.