Income Inequality and The Failed American Dream

The American dream is dead.

That is, if it ever truly existed and wasn’t some creation of Hollywood or Walt Disney.

My friend John sent me a long e-mail in which he wondered why it is that so many Americans have no clue as to where they stand in terms of wealth. Far too many, he opined, think they are “well-off”. This illusion would have no consequences for the rest of us were it not the part progenitor of perverse political affiliations. Many of these folks who think they are well-off side with Republicans and the pro-market philosophy they imagine is the underpinning for their supposed wealth.

The sad part is that, since they are not truly wealthy, the effect of their political support of pro-market policies has had the effect of making them relatively more poor. In other words they are voting continuously against their own interest.

This is a phenomenon much commented upon during the post Reagan years. The hordes of so-called Reagan democrats who deserted the old Democratic party and fell for the saccharine of the hard right, and openly racist, Reagan established the trajectory of our modern economy. That bulk of voters, who became willing to vote against their own wellbeing in the futile hope that they could participate in the wealth being generated by the lopsided economy, is the single reason we are now in the impasse we are.

We have created – deliberately – the world’s largest banana republic.

The most telling statistic to back up this claim is the current distribution of income.

The top 1% of Americans now dominate our economy. The rest really don’t count for much. In 1915 the top 1% of income earners accounted for about 18% of total income. That was when the ruthless and anti-social activities of the Rockefeller’s, Carnegie’s and Vanderbilt’s was attracting socialist ire and riots in the streets. Now the top 1% account for 24%. The family of the founder of Wal-Mart accounts for as much wealth as the poorest 120 million of their fellow citizens. We have an aristocracy. Where are the riots?

The concentration in incomes has been spectacular over the past three decades. We can run a simple calculation to calculate exactly how skewed things have become. If we begin with the distribution of incomes as it was back in 1979, at the end of a long period of concentration during which the bottom and top tiers converged, and then fast forward to today, we can contrast today’s inequality with what it would have been had the 1979 distribution held constant. The result is astonishing. The top 1% of earners raked in an average of $1,319,700 per year in 2007. It would have been $578,800 if the 1979 averages had held up. But the skew of policy towards the rich over the past three decades has produced an enormous switch: to the tune of an additional $740,900 per person in that top tier. No other group comes even remotely close. Not even the next 5% down from the top. They picked up a skew of a mere $38,100. All other groups lost. The middle getting hammered the most.

The numbers simply don’t lie: the American middle class has lost ground relentlessly over the last three decades. While the rich have plundered the economy in unprecedented abandon. No wonder anger is palpable. No wonder our politics are so volatile.

The damage is even more startling in percentage terms: the middle fifth of income earners pulled in an average of $55,300 in 2007, which was a full $9,400 down from what it would have been had the 1979 distribution held. That loss of $9,400 is equivalent to around 15% of income. That’s a hefty loss. When we consider that average incomes, adjusted for inflation, hardly rose at all throughout much of the last decade or so, that 15% looms very large as a factor in today’s discontent.

Further it helps explain why middle America plunged into debt with so deeply: debt was the only way to finance a rising standard of living. Incomes alone couldn’t provide the necessary lift. The recent debt riddled implosion is partly explained by that shift in incomes towards the top. The middle class was systematically and deliberately being destroyed by the very policies that attracted those middle class voters to the Republican side of the ledger.

When we couple this extraordinary descent into inequality of incomes with the parallel effort by successive Republicans to gut the safety net, and we see the other element in an exquisite pincer move. Not only were the GOP attacking the middle class from above, by degrading it’s share of the national income pie, but they were simultaneously eroding the protection from below that the government had provided during the postwar era. The middle class was being hung out to dry.

By itself.

And that’s the true shocker.

Why on earth would middle America vote relentlessly to destroy itself?

The Reagan illusion.

The only explanation that holds water is that voters are not good at seeing the consequences of policy. They look at the more obvious changes – lower taxes for instance – and fail to grasp the re-distribution implied by the policy over the longer term. They failed to grasp the importance of government in underwriting the entire edifice of middle class lifestyle. They failed to understand just how meager their lifestyle was when compared with the rich. And when pressed on the subject they fell back on silly homilies like the “American dream” or the “land of opportunity” as a crutch. With a near religious fervor they repeated the incantations of those homilies in the vague belief that they applied to the middle class. The story was told that if we all work hard we too can share in the riches. But we didn’t. The rich skimmed it off for themselves. Leaving the middle class threadbare and betrayed.

Yet still they cling to the dream.

No amount of number crunching can disabuse them.

American inequality is now a national shame. We rank up there with places we deride. Venezuela, Nicaragua, and Guyana all have less inequality. We rank alongside paragons of democracy as Uruguay and Ecuador. This is plainly bizarre. And it is massive threat to democracy.

Put another way: those much laughed at “Old European” countries riddled through with class rigidities are all, without exception, more equal than we are. More to the point – and this really hurts – the poor in those Old European nations all have a better chance of making it to riches than the poor of America.

So much for the land of opportunity.

The defenders of laissez faire all argue that income inequality doesn’t matter. What matters to them is mobility. The opportunity counts, and if someone manages to exploit the opportunity they should be allowed to reap the rewards. I agree. The problem is that we have constructed a society where that isn’t happening. Our economy is more rigid than any other western rival. We are fast building the most regressive class riddled society ever. Ever.

The opportunities for the children of the rich are being quickly skewed to protect the elite. Education at a top university is prohibitive for most middle class families. Financial aid is being whittled away. The great state schools, whose emergence was so key to the postwar creation of the American advantage in technology, are being starved of funding by conservative efforts to reduce government. The provision of health care is highly dependent upon incomes: fully a third of Americans treat the emergency ward as their family doctor. Why? Because our health care system is skewed towards after-the-fact cures, not before-the-fact prevention. And preventative care is expensive for many families. Further: middle class Americans rely on subsidies for health care. Those subsidies come in the form of employer provided insurance. And employers have been steadily cutting their share of the cost. The escalation of health acre cost has undermined another plank of the illusion.

Middle America could always pretend that it had good health care because it was subsidized. The government gave business big tax breaks so that business could provide benefits. When health care costs rose so high that even this government subsidy was insufficient, businesses started to reduce coverage. This exposed the middle class to the stark reality that it had never paid for its own care. It always relied on the government as a backstop.

Likewise in real estate. Americans are obsessed with owning a home. But many could only ever do so as long as the government chipped in to help. That infamous mortgage interest tax relief is welfare for the middle class.

These are instances of just how dependent the middle class is on the government for its standard of living. Yet the middle class has sought, for three straight decades, to neuter government.

The only people who are able to withstand the loss of government assistance are the very rich.

And they have been busy stacking the game to their advantage.

This cannot end well for America.

Income inequality on the scale now apparent here is a surefire way to undermine society. We are seeing the edges of such discord now with the Tea Party and its extremism. Social instability centered on middle class discontent tends towards the right in politics. That’s why I refer periodically to the current Weimar like tone in our politics. If the right of center party fails to stop its drift ever rightwards we will end up in even worse trouble. The middle class will become ever more susceptible to the allure of the anti-government policies it perceives as defending it from predation by the “freeloaders” and “others” such as illegal immigrants or the welfare queens who are thought to syphon off tax dollars unfairly.

And if the left of center party fails to find the resolve to defend its constituency, the poorer strata of society, the rightwards drift will accelerate. Ideological system failure lies ahead. With no fire in its belly the left will seek to appease continuously. The middle class voters will continue to vote against their interests because the left fails to articulate the damage being done. In that sense the left is complicit: too many of the left have bought into the pro-market dogma and laissez-faire political paradigm. The Obama administration’s reaction to the 2007/2008 recession is a case in point. Rather than articulate the need to attack inequality, they caved into to the call for yet more tax breaks. Even now they are laggardly in re-instituting the pre-Bush tax regime.

Let me end by giving a more concrete example of how the middle class undermines itself.

The Clinton era welfare reforms.

The urge to reduce welfare rolls was a right of center priority. Somehow welfare was conflated with laziness and was seen as an affront to hard working folks. Clinton caved in. Welfare rolls were purged. The result? A tide of newly desperate poor looking for work at any wage. The advantage in hiring shifted decisively to the employer. Consequently wages were driven down. This is one of the biggest single reasons why wages for the lower levels of wage earners failed to advance throughout the late 1990’s and into the 2000’s. The social contract was re-written. By a left of center government trying to appease the right.

And so it goes.

America is now distorted sufficiently that even economic policy is affected. One reason why it is hard to get the economy going again is that incomes are so skewed towards a group that sees little need for marginal consumption – it already has sufficient – and the vast mass we need to kick into gear just doesn’t have the necessary margin for error. When the middle class is plunged into survival mode, the nation is in trouble. It’s very hard to stimulate an economy so out of balance.

I wonder whether we can fix this before the riots begin in earnest. Up until now we’ve only looney parades and marches.

I have my doubts.

With the extent of corruption in American politics – the volume of cash that flows at election time is unhealthy for democracy – it is little wonder that the agenda seems to be tilted away from a community oriented perspective. How can the middle class voice be hear when the rich can drown it out with a flood of money?

Income inequality is an insidious disease that destroys the least balanced societies. It has become our issue. How we handle it will determine the course of our politics for decades. Do we want to head more in the direction of Latin America and its perpetual upheavals? Or do we want top head back towards the period between 1950 and 1979, the golden era for the American middle class? It’s our choice.

But, as John points out, it’s hard to choose wisely if you live in a dream world, or if you delude yourself into believing you are well-off when you’re not.

The American Dream is dead. The issue is how to resurrect it.