The ideal that once defined how Americans lived and dreamed has gone.
John Cassidy looks at what has replaced it.
JOHN GARRETT / CAMERA PRESS
William J McDonough, the President of the Federal Reserve Bank of New York, watches his words as closely as a Savile Row tailor watches his stitches, and with good reason. Any mis-statement on his part, or even an intentional but slight deviation from the previous official line, can send the financial markets into a multi-billion-dollar tizzy.
McDonough shuns press conferences, but in November 1994 he invited 35 academics, executives and journalists to a day-long conference at the New York Fed’s headquarters in lower Manhattan. When they had assembled, some from as far away as Los Angeles and London, he addressed them as follows: ‘I am very pleased that all of you are here today to discuss what I feel is a critical issue facing our country. The issue is, of course, the growing disparity in wages earned by different segments of our labor force. It is deeply troubling that during the 1980s the real wages of low-skilled workers in the United States have fallen sharply, both in absolute terms and relative to the wages of highly-skilled workers. These dramatic wage developments raise profound questions for the United States, issues of equity and social cohesion, issues that affect the very temperament of the country.’
For a pillar of capitalism like McDonough to express concern about low wages is surprising. For him to then question, as he did, whether America ‘will be able to go forward together as a unified society’ is virtually unprecedented.
Until recently, it was an empirical law of American economics that the majority of citizens, including virtually all those who considered themselves middle class, received steadily rising wages. In the three decades after the Second World War in particular, the American dream of moving to the suburbs, buying a house and even sending the kids to college was no mere election slogan. Home ownership soared and the living standards of the middle class – idealized in television sitcoms – were the envy of the world.
Today that image is as dated as the television shows it spawned. Falling wages and rising prices have transformed the home economics of tens of millions of Americans. The trend is best illustrated with the help of a mental experiment. Imagine lining up the entire population of the US in order of ascending income, with the poorest on the extreme left and the richest on the extreme right. The person smack in the center of the line – the meridian – would be, by definition, the most middle-class American alive.
In September of 1979 this person was earning (in constant, inflation-adjusted dollars) $498 a week, or $24,700 a year. By 1995 he or she had suffered a wage cut of about a hundred dollars a month, or 4.6 per cent.
The citizens on the right of the income line-up fared very differently. In 1979 the typical full-time worker in the top third of the income distribution was earning $890 a week, or $46,280 a year. By September of 1995 his or her pay-check had swelled to $960 a week, or $49,920 a year – an increase of 7.9 per cent.
The fortunate souls on the extreme right of the income line-up were doing best of all. In 1979 the richest five per cent of American families earned, on average, $137,482, according to Census Bureau data. By 1993 their income had risen to $177,518, an increase of $770 a week, or 29.1 per cent. The top one per cent of families have made spectacular gains. According to the Congressional Budget Office, between 1977 and 1989 their average income rose from $323,942 to $576,553 – a gain of $252,611, or 78 per cent.
The numbers prove what many Americans have suspected for a long time: living standards have fallen or stagnated for the majority, while a small minority have enjoyed a bonanza. Taken together, recent wage and income trends suggest an unavoidable conclusion: America is no longer a middle-class country; indeed, the term ‘middle class’ has lost its meaning.
The idea that the United States is a middle-class country is at least as old as de Tocqueville (‘The whole country seems to have melded into one middle class’) and Matthew Arnold (‘That which in England we call the Middle Classes is in America virtually the nation’). By the 1950s opinion polls showed that the vast majority of Americans referred to themselves as middle class, regardless of their income. Despite this consensus, the exact meaning of ‘middle class’ remained vague. In contrast to what it meant in Europe, it did not mean the bourgeoisie, who were clearly defined by Engels as ‘the class of modern capitalists, owners of the means of social production and employers of wage labor’.
Few inhabitants of California’s Orange County or New York’s Suffolk County owned factories or speculated on Wall Street. Most were regular employees of major corporations like McDonnell Douglas, Grumman or Hughes Aircraft. If they didn’t go to work they risked losing their livelihoods, their houses and their cars. They were, in fact, not middle class at all in the Marxian sense of the word. They were working class but, unlike similar people in Britain or Germany, they called themselves middle class.
Most commentators let them get away with the theoretical confusion, and it is easy to see why. From 1945 until 1973 – a period that economic historians now refer to as the Golden Era – the American economy resolutely refused to conform to the pattern predicted by the left-wing graybeards. Yes, the rich got richer, but almost everybody else got richer with them, and at roughly the same pace. The spoils of economic growth were divided remarkably evenly. Broadly speaking, all Americans’ incomes doubled – secretaries’, factory workers’, bank executives’.
A chart that is particularly worth examining divides the nation’s 68.5 million families into fifths, or quintiles, with the poorest fifth on the left and the richest on the right, and covers two periods: from 1947 to 1973 and from 1973 to 1993.
As Paul Krugman, an economist at Stamford University, has noted, the 1947-73 graph looks like a picket fence, which is entirely fitting: during the Golden Era income growth, like the picket fence, was an icon of middle-class America. The annual growth rate of family income was between 2.4 and 3.0 per cent, regardless of where the family stood in the income distribution.
A glance at the 1973-93 chart, however, shows that the picket fence has been replaced by a small staircase – and some of the steps are underground. The bottom two-fifths of American families saw their income fall, while the average family in the middle saw its income basically stagnate. Only the top 40 per cent enjoyed any income growth, and only the very rich enjoyed growth comparable with that of the Golden Era.
Some conservative economists have attempted to challenge these findings, but with little success. However the figures are shuffled, the basic picture remains the same: the staircase has replaced the picket fence and the country has experienced an unprecedented redistribution of income towards the rich.
The staircase graph and the changing distribution of income suggest that the country has now split into four groups. At the top there is an immensely wealthy élite, which has never had it so good. At the bottom there is an underclass which is increasingly divorced from the rest of society. And between these extremes there are, instead of a unified middle class, two distinct groups: an upper echelon of highly-skilled, highly-educated professionals who are doing very well; and a vast swathe of unskilled and semi-skilled workers who are experiencing falling wages, stagnant or declining living standards, and increased economic uncertainty. To label this group ‘middle class’ doesn’t make sense. That phrase implies two things – rising living standards and a high degree of economic security – that no longer apply.
The dramatic rise in inequality has had one beneficial side effect: it has provided gainful employment for hundreds of economists who have been burrowing away in universities and research institutes trying to solve the mystery of who killed the middle class. Sad to report, they have yet to come up with a single murderer.
One thing we do know is that the murder has nothing to do with taxation. This bit of knowledge will disappoint both conservatives who lay the blame for the middle-class squeeze on a growing tax burden, and liberals who link rising wealth concentration to regressive tax policies. But it is indisputable: the fact is that the rise in equality happened before the Internal Revenue Service got its hands on anybody’s paycheck. And, contrary to popular myth, the over-all burden of taxation has remained remarkably constant. In 1973 federal taxes swallowed 19.5 per cent of the gross domestic product and in 1993 the figure was 19.9 per cent. It was the free market that decreed that most people’s wages should fall or stagnate after 1973. And it was the free market that handed out pay bonanzas at the top of the income distribution.
Education, global competition, technological progress and the demise of the trade-union movement have all been identified as possible suspects – some of the factors probably interacted and reinforced each other. The rise of global competition may have encouraged managers to break unions and invest in computer technology. Similarly, the threat of corporate relocation and the growth of cheap immigrant labor may have contributed to the weakness of labor unions. But what nobody has yet explained satisfactorily is the explosion of incomes at the top of the distribution. The gap between the shop floor and the executive suite has turned into a chasm.
Labor Secretary Robert Reich, somebody who understands what is happening, says that the fallout from the decline of the middle class ‘could be very divisive in this country’. He goes on: ‘You end up pitting working American against working American, or against the poor, for portions of an ever-decreasing slice of the national pie.’ The process is already visible in the rise of anti-immigration, anti-affirmative-action and anti-incumbency rhetoric. At least one Wall Street observer thinks he has spotted a new populist movement on the horizon: anti-capitalism. Stephen Roach, the chief economist at Morgan Stanley, told his clients in a circular that ‘worker backlash could be one of the key issues of the 1996 presidential campaign’.
At some point politicians are going to have to level with the voters and tell them the truth: that the postwar Golden Era is gone forever, and the great middle class has gone with it.
© John Cassidy writes for The New Yorker magazine, where a longer version of this article originally appeared.
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©Copyright: New Internationalist 1996
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