The vanishing middle class

Paul Schwietering
For the two weeks since the debt ceiling deal was done, the stock market has been on a roller coaster with wild swings up and down every day. In stark contrast to the frantic activity on Wall Street, the rest of the economy seems placid.

On July 29, the Commerce Department released data showing the economy grew by just 1.3 percent in the second quarter. Also, it revised down the first quarter growth number from 1.9 percent to 0.3 percent. Thus, the economy was growing at an annual rate of 0.8 percent for the first half of the year. As economist Dean Baker notes, “This is well below the 2.5 percent pace that is necessary just to keep unemployment from rising.”

The July figure for unemployment declined slightly to 9.1 percent, but the official unemployment figures are misleading due to a change made back in the 1980’s. Back then, they changed the way they count the unemployed so that if someone exhausts their unemployment benefits, that person is counted as a “discouraged” worker rather than an officially “unemployed” worker. When all of the unemployed workers are counted, the unemployment rate is 10.7 percent.

11.1 million jobs would have to be created in order to get back to the pre-recession unemployment rate of 5 percent in December of 2007. The difficulty right now is that employers aren’t hiring because of weak demand for goods and services. This is, of course, partly a function of our high unemployment rate but it is also the result of a factor that started long before the recession: stagnant wages and salaries for working class and middle class Americans.

In the decade from 2001-2011, 80 percent of productivity gains went to profits. The last time that happened over a decade was the 1920’s. It led to the Great Depression because workers’ incomes were not keeping up with productivity gains, causing the purchasing power of the average consumer to decline. The decline of relative purchasing power combined with greater productivity resulted in many items sitting on store shelves with no buyers for them. This was the most fundamental weakness in the economy of that time.

Combined with the fact that ordinary citizens with ordinary salaries were buying stocks “on margin” (meaning, usually, with 10 percent down and the rest to be paid off as the stock rose in price) because it seemed at the time that stocks could only go up in price, all it would take to crash the economy would be a downturn in the stock market.

There were simply too many shareholders who had to sell almost immediately if the market dipped (due to their position of buying “on margin”). As we all know now, the inevitable eventually happened in the late summer and fall of 1929.

The trend of the past decade is part of a larger trend. U.S. income grew $11,684 on average between 1969 and 2008. All of the income growth went to the top 10 percent. Income for the bottom 90 percent declined. Compare that to the period between 1917 (when the data began) and 1968. Income growth averaged $26,574. The top 10 percent got 31 percent of that growth.

The bottom 90 percent got 69 percent of that growth. As author Holly Sklar says, “You can’t have a strong middle class or a strong economy if the bottom 90 percent gets none of the nation’s income growth.”

If anything, the trend seems to be accelerating recently. According to author and columnist Jim Hightower, “Since the recession technically ended‚ 18 months ago, corporate profits have zoomed, sopping up an unprecedented 88 percent of America’s economic growth. Meanwhile only 1 percent of the growth that we all help to produce has gone to wages and salaries, which is the source of income for about 90 percent of us.”

The economic situation the United States faces today is not identical to the situation in the 1930’s, but it does share many aspects of what FDR faced. This raises the question, “How did the administrations of Roosevelt and Truman bring America from the depths of 1933 to the point in 1953 (when Truman left office) where America had by far the largest and most prosperous middle class the world had yet seen? What policy choices enabled them to accomplish this?”

Paul Schwietering is a resident of Union Township.