The 5 per cent of Americans with the highest incomes now account for 37 per cent of all consumer purchases, according to the latest research from Moody’s Analytics. That should come as no surprise. Our society has become more and more unequal. When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt — which, as we’ve seen, ends badly.
An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back. That can lead to wild gyrations.
The economy won’t really bounce back until America’s surge toward inequality is reversed. Even if by some miracle president Obama gets support for a second big stimulus while Ben Bernanke’s Fed keeps interest rates near zero, neither will do the trick without a middle class capable of spending.
Look back over the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.
Slow growth
During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.
Starting in the late 1970s, the middle class began to weaken. Although productivity continued to grow and the economy continued to expand, wages began flattening in the 1970s because new technologies — container ships, satellite communications, eventually computers and the Internet — started to undermine any American job that could be automated or done more cheaply abroad. The same technologies bestowed ever larger rewards on people who could use them to innovate and solve problems.
The middle class nonetheless continued to spend, at first enabled by the flow of women into the work force. (In the 1960s only 12 per cent of married women with young children were working for pay; by the late 1990s, 55 per cent were.) When that way of life stopped generating enough income, Americans went deeper into debt. From the late 1990s to 2007, the typical household debt grew by a third. As long as housing values continued to rise it seemed a painless way to get additional money.
Eventually, of course, the bubble burst. That ended the middle class’s remarkable ability to keep spending in the face of near stagnant wages. The puzzle is why so little has been done in the last 40 years to help deal with the subversion of the economic power of the middle class.
With the continued gains from economic growth, the nation could have enabled more people to become problem solvers and innovators — through early childhood education, better public schools, expanded access to higher education and more efficient public transportation.
We could have raised taxes on the rich and cut them for poorer Americans. But starting in the late 1970s, and with increasing fervor over the next three decades, government did just the opposite. It deregulated and privatised.
It cut spending on infrastructure as a percentage of the national economy and shifted more of the costs of public higher education to families. It shredded safety nets. (Only 27 per cent of the unemployed are covered by unemployment insurance.) And it allowed companies to bust unions and threaten employees who tried to organise.
More generally, it stood by as big American companies became global companies with no more loyalty to the US than a GPS satellite. Meanwhile, the top income tax rate was halved to 35 per cent and many of the nation’s richest were allowed to treat their income as capital gains subject to no more than 15 per cent tax.
The economy cannot possibly get out of its current doldrums without a strategy to revive the purchasing power of America’s vast middle class. The spending of the richest 5 per cent alone will not lead to a virtuous cycle of more jobs and higher living standards.