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Confessions of a class worrier

Robert Reich, professor of public policy | August 12, 2010

The decline of America’s middle class can be charted directly. In the three decades after World War II, the median wage (smack in the middle) grew rapidly, right along with productivity gains. Even as late as 1980, the richest 1 percent of Americans received only about 9 percent of the nation’s total income.

But starting in the 1980s — and increasingly since then — the economy has made the rich far richer without doing squat for the vast middle. The median hourly wage has barely grown, if you take inflation into account. Indeed, it dropped in the last so-called “recovery” between 2001 and 2007. And health-care and pension benefits have declined; we’ve gone from defined-benefit pensions to do-it-yourself pensions, while health insurance premiums, deductibles, and co-payments have skyrocketed.

Meanwhile, the rich have been getting a larger and larger portion of total income. From 9 percent in 1980, the top 1 percent’s take has increased to 23.5 percent in 2007. CEOs who in the 1970s took home 40 times the compensation of average workers now rake in 350 times. Financiers who forty years ago made only modest fortunes today, even after the Great Recession they helped bring on, routinely earn seven and eight-figures. In 2009, when most of the nation’s middle class was deep in recession, the 25 best-paid hedge-fund managers took in an average of $1 billion each. (Their marginal income tax, by the way, was barely over 17 percent, while the typical family paid a marginal tax far higher.)

What happened? It wasn’t just greed. It was also the systematic and ever cleverer manipulation of laws and rules by those able to pay lobbyists, legislators, lawyers, accountants to do their bidding. As income and wealth have risen to the top, so has the power to manipulate the system in order to acquire even more money and more influence.

To be sure, globalization and technological change have bestowed gains disproportionately on those with the education and connections to benefit most from them, while burdening Americans without the education and connections most needed.

But instead of enlarging the circle of prosperity so that the vast middle class could come out winners as well — instead of strengthening trade unions, improving public education, deepening public investments, enlarging safety nets, and making the tax system more progressive — the nation took direction from those at the top, and did the opposite.

It is not surprising America’s middle class is increasingly frustrated and are venting their anger — at politicians, the leaders of big business and Wall Street, as well as global traders, immigrants, and others who are easy targets of resentment.

A politics of audacious hope has turned into a politics of fear — meaner spirited than at any time in recent memory.

I’m not a class warrior. Call me a class worrier.

Our choice in the years ahead is either demagoguery that turns Americans further against one another and the rest of the world, or genuine reform that enlarges shared prosperity. It is the responsibility of all of us to fight the former and work toward the latter. (Pause for commercial announcement: In my forthcoming book, “Aftershock: The Next Economy and America’s Future,” I discuss this choice in detail.)

Cross-posted from Robert Reich’s blog.

Comments to “Confessions of a class worrier

  1. The thing that baffles me is how the rich continue to get richer off of their own wealth. For instance, how is it that a former governor or Massachusetts is able to earn $42 million over a two year period, and only pay $5.8 million in taxes because of a low capital gains rate? The system is geared to make the rich even richer, and place the burden of paying for the necessities of our country on the middle class.

    Meanwhile, people in the middle class are constantly asking the question, “How will I stop foreclosure?”, while paying a third of their hard earned salary in taxes.

  2. Hiya, I’m really glad I have found this information. Today bloggers publish just about gossips and internet and this is really irritating. A good blog with interesting content, that’s what I need. Thank you for keeping this website, I’ll be visiting it. Do you do newsletters? Can’t find it.

  3. Americans must again return to its principles, dynamism, innovation, meritocracy … back to a strong middle class capable of creating new businesses and employment … the financial industry will no longer be your solution

  4. Kurt it would appear that like during FDR’s presidency Kinesian economics is not the medicine this sideways economy we have needs.Spending on a grand scale,like the power elite would have you think to cure the sickness that besets us,can and only will make the already to powerful richer,and more
    determined to continue the propaganda blitz,we must face every time we turn on the tv to the news.Our outrage should be aimed at restoring the regulation
    to the FTC,that were removed during the Clinton Presidency.and the FCC should be overhauled,and the antitrust laws enforced to keep monopolies
    of the like of the new robber Barons of 21 century.[media types,like
    Bill Gates,Rupert Murdoch,Ted Turner,from brain washing our youth,and those who are the consumers of there spend and acquire things based culture.

  5. With regard to the “Proposal to Immediately Reduce Unemployment in the U.S.”, if business were given a Fica tax holiday of $215 billion, it would result in the rehiring of 5,400,000 people off the unemployment rolls, resulting in the 6% unemployment rate cited. Proportionately a full $430 billion FICA tax holiday for business would result in the rehiring of 10,800,000 for the resulting 2.5% unemployment rate cited.

  6. Proposal to Immediately Reduce Unemployment in the U.S.

    I would like to modify or improve on a notion I recently submitted to the blog.

    Clearly the economy is drifting, getting nowhere because of the chicken and egg relationship between the bad employment market and the bad foreclosure ridden housing market. It is staring us in the face that national wealth must be expended, or we won’t get out of the economic stall caused by the negative interplay of these two fundamentally sour markets.

    A national re-employment program is needed. So we ask, “At what cost?” Well, is it worth 1 ½ % of GDP to pull the unemployment rate decisively back to 6% range right away? I think so. And the sooner, the better.

    Some rough math: 3% of GDP is $430 billion. And $430 billion is the share of the FICA tax paid by employers for the total annual U.S. payroll (not counting exempt workers such as Federal civil service). And $430 billion is also 1/13th or 7.65 % of that total annual U.S. payroll (not counting salary earned above $106,800).. In other words, the cost of increasing all employer’s staffing in the U.S. by 7.65%, e.g. adding one additional worker for every current 13 now working would be 3% of GDP. Extrapolating, for every 13 workers employed there are 1.36 workers currently un-employed at the current unemployment rate of 9.5%. Adding one worker for each current 13 workers reduces the unemployed population to .36 workers for every 14 that would then be working, producing an unemployment rate of 2.5%, for which the payroll cost in the U.S. would be 3% of GDP or $430 billion or the amount employers are currently contributing annually in FICA taxes now to social security, medicare, and disability insurance.

    If Washington thinks American workers and American homeowners are at all important, Washington is in the position and can afford to give U.S. employers a deal. Washington can tell U.S. employers that for every instance where they rehire a worker who has collected unemployment benefits, they will then get a credit against their FICA tax obligation equal to the payroll cost of that newly rehired employee up to a maximum $106,800 of his or her salary for a defined period of time with the stipulation that the credit not exceed any given employer’s total payroll FICA obligation. Every employer in the U.S., if Washington offered this deal, could essentially afford at no additional cost to that employer to have 14 employees working in the place of every 13 employees now working for them currently.

    Perhaps not all employers would or could avail themselves of such a deal, but certainly it could swiftly bring unemployment into the 6% range with only 1 in 16 workers unemployed, so long as employers engaged the program to the extent of at least hiring on average nationwide ½ worker for every 13 now working (.86 workers unemployed for every 13.5 working = 6% unemployment rate ), which would earn employers at least a total FICA tax credit of $215 billion nationwide, or 1 ½% of GDP. We would feel we had quickly come a long way for the money. Remember, If employers indeed engaged totally to earn the total maximum nationwide $430 billion FICA tax credit, the unemployment rate would drop to 2.5%. Wouldn’t we like to have such a problem at this time? Remember, a $215 to $430 billion FICA tax holiday is only by comparison a quarter to a half of Paulson’s TARP for Wall Street and only a quarter to a half of the 2009 stimulus package for the States, which package has put barely a negligible number of the population back to work. And a $215 to $430 billion FICA tax holiday is only by comparison a small fraction of the Iraq and Afghanistan war costs, and is only a small fraction by comparison of the Federal Reserves’ multi-trillion dollar balance sheet enlarged to save Wall Street banks and markets, and is only peanuts compared to the $1.8 trillion corporations are now hoarding in their bank accounts while laid off workers suffer.

    At this time a $215 to $430 billion FICA tax stimulus in direct re-employment of American workers would be a far more preferable expenditure than an $800 billion over 10 years tax extension for the rich earning above $250,000 per year.

    As the economy stabilizes, thanks to such a re-employment program, the FICA credit to employers could then be phased out appropriately over time.

    Compared to the heavy lifting the country has already done to save Wall Street, this would require negligible effort, and get the best result for the least cost. There is no excuse for the current 9.5% unemployment rate (Some estimate it’s 16% counting discouraged workers and ninety niner’s). If one thinks of the economy as a 3 legged stool: Wall Street, Housing, and Labor, 2 of the legs are still cracked, and for sure money will be lost to the economy for the repair of those 2 cracked legs one way or another. A quick and decisive FICA tax holiday now is the cheapest way to make the needed repair. All that is required is that our leaders have the imagination, creativity, and fearlessness to stop fearing and to put the country back to work.

  7. I recently did my best to work my way through Reinhart’s and Rogoff’s “This Time is Different”. It certainly gives one a sweep of economic history, and puts our current hangover from our most recent “This Time is Different” economic binge decade in perspective. It certainly teaches that the cure for “This Time is Different” economic binges is that in their aftermath the national debt of the country so beset must increase by 80% before it clears its hangover. That would seem inexorable for us, looking at history as outlined in the book. And perhaps we shouldn’t be afraid of this fate.
    One correlation the book fails to provide in its survey of the economic indicators of the many episodes of economic crisis throughout the history it traces, is the correlation of the gap between the rich and the poor in each episode of crisis. I suspect such a study would show that all economic crisis throughout history have been the result of a destabilizing rise in the rich/poor gap. I suspect such a study would show that as a nation is unable to wring tax revenues from its elite, but must alternatively borrow from its elite in order to operate, that nation enters an inexorable path toward economic crisis accompanied by a concomitant bloating of the wealth of its elite.

  8. In a way, the Middle class got bought off by all those refi’s and cash that came with it. Interest-only loans, 0-balance transfers, those were the days. And who didn’t know what the future was going to bring. One year, I noted that 84% of the refi loans were interest only; clearly we all knew there was a price to pay. Once the Obama administration got into the finance business, interest rates on credit cards unilaterally went back to the 18-24% that was the lay of the land in the 80’s-another squeeze, not help for the compromised “middle class.” And nothing has improved, nor will it for those who engaged in the “magic” economics and the dot com boom.
    But what should be our concern since most of us knew what we were doing, is that the folks at the bottom never got a leg up, and that all that boom happened without bringing up the folks at the bottom was our country’s loss, THE missed opportunity, in my opinion.

    The WWII vets were the beginning of the Middle Class with VA loans for homes and schools, leaving the places they were born for new horizons in other parts of the country, disconnecting from the support of families just like the farmers who came to the city and lost their ability to feed themselves. I’m going to look for your book, ’cause I don’t see any solutions and I’m not worried about the Middle Class, we’re a crafty group. I’m worried about those who got cut out the game when there was a bounty to share.

  9. our lives have become overwhelmed with the “must have” items and new technology and one should always appreciate the finer, simpler things in life however having such items does give one some joy and excitement and should be enjoyed and appreciated aswell. a right balance is all that it needed

  10. Oh – my apologies Rosalea, I misread Bronwen as the author of your comment – but Bronwen, I liked yours too.

  11. I think Bronwen is on to something important here. We Americans use the term ‘middle class’ in a very sloppy way, as describing pretty much everyone who is neither desperately poor nor obscenely wealthy. As if a professor earning six figures has the same issues as the guy earning $30k making camper tops in Bakersfield. A large and growing percentage of what Bronwen might include in the ‘working class’ do not seem to have skills relevant to the future of the US economy. I’m hoping Prof Reich has something meaningful to say about this in his new book, but too many economists seem to be stuck in the 20th century, as if this depression is no different than the last one.

  12. In today’s America, low-income people are the middle class.

    My question, why were so many reasonable educated citizens willing to purchase homes at inflated prices and then spend the equity? Somewhere in the back of our minds we knew the road we were taking was full of potholes, but we thought someone else was going to pay for our ride.
    We even tried to pass it on to the younger generation, but it all fell apart before we could hand it off.

    Mr Reich is correct, we must learn to do our share and be willing to share with others

    • Great question, the truth is that we consume as much as we can without giving serious consideration to consequences of excess until damage is irrecoverable.

      E.O. Wilson and other evolutionary biologists have studied and documented this fact of life that is the Achilles heel of humanity throughout our history.

  13. Prof. Reich, To your trenchant commentary it is important to add that there can be no economic recovery without jobs. There can be no solid economic progress without a solid middle class. The current situation is destabilizing not only our economy but also our polity. Democracy cannot long abide an under-educated electorate.

  14. This is a very eloquent piece. I would like to point out that a lot of middle-class misery can be traced to our thirst for consumption of all sorts of goods and services. The credit bubble has been quite the catalyst for the “must have lots of new stuff” feeding frenzy. Perhaps this economic downturn is a hint that our lives can be richer without lots of money and things.

  15. As someone who comes from a British background, the very definition that America has of “middle class” seems to me to be a stumbling block to understanding how economic forces affect its citizens. Originally, the three British classes were “upper”–titled and landed gentry; “middle”–business-owners or professionals, such as accountants, doctors, lawyers, with some control over their income; and “lower” or “working” class, whose income depended entirely on having an employer pay them a wage or salary.

    In the US, a “middle class standard of living” has been confused with being “middle class” in the classic sense of having some control over your income. Pretending that it makes no difference whether you do or don’t have control over your income may make for endless self-congratulation about having created a classless society in the US, but it is also a cruel self-deception, as many millions of people are now finding out.

    I’m not for creating any kind of class system along the old British lines, but perhaps economists and the media could put more emphasis on some metric that categorizes the degree of control people have over their income. I think it would show a truer picture of the economy and of society.

  16. Prof Reich,
    For a minute there, I thought you were about to include low-income people in your discussion of Americans. That was close.

  17. Robert, this is by far the most important summary of our current state of decline and fall that you have ever written.

    The key fact of life continues to be that there has been no substantial change in man’s nature during historic times, and all technological advances have merely been new means of achieving old ends.

    Worldwide web communications could have created a better world but there are too many same old forces that continue to overpower any that would dare to make the world a better place for all mankind, even when humanity is at greater risk than ever before.

    Far too many scientists, politicians, religions, scholars, etc. who could have made a difference ask the same question first:
    Show me the money!

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