03/24/2014 12:16 pm ET Updated May 24, 2014

The Middle Class Is Totally Hosed

Co-written by Henry Banta

Virtually everyone but a few cave-dwellers knows that the lion's share of our nation's wealth and income is now being siphoned off by the top 1 percent. And the well-informed know that the top 0.01 percent have grabbed an outlandish portion of both. What most of us fail to recognize is that the gulf between the very rich and the rest of us will almost certainly continue to get worse, a lot worse! Most importantly, it may be too late to do much about it.

Except for a bunch of financial wonks, few people seem to recognize exactly how bad things have become. OK, a 2012 YouTube post managed to illustrate the numbers and trends graphically, and very effectively. But even this compelling message largely fell on deaf ears.

The point here is that the people at the very top have already aggrandized so much in the form of interest, dividends, capital gains and government subsidies that it would require drastic measures to prevent the current inequality gap from continuing, inexorably, to widen. If we glance at a few numbers, we see that the steady erosion of the wealth and income of the middle class has occurred over a period of years. For example, between 1979 and 2007, incomes of the top 1 percent grew by 275 percent according to the Congressional Budget Office. And then, just between 2009 and 2012, the top 1 percent captured fully 95 percent of the nation's income growth while most ordinary Americans lost ground.

This is not the place to catalogue all of the ill effects that flow from this massive shift of wealth and income from the middle class to the very rich. But two points are worth noting. It is the middle class' contribution to aggregate demand that propels our economy forward and enables "job creation." After all, the middle class spends most of their income to pay for necessities -- food, clothing and shelter, while the rich spend only a small fraction of their income. Thus, shifting income to the rich reduces the total demand for goods and services and, therefore, the demand for jobs. Perhaps the most pernicious effect of inequality is the erosion of our social contract and our democracy. Americans have always been distrustful of the role of money in politics. The vast amount of money now possessed by the 1 percent with which to influence, if not "buy" politicians scares the hell out of us, as it should.

Of course, given the Republican affection for dismissing any discussion of inequality as nothing but class warfare, we should quickly interject that our discussion of inequality has nothing to do with making everyone "equal." As for class warfare, Warren Buffett has declared it to have already been won -- by the 1 Percent. Redistribution of wealth and income has already occurred; the United States has witnessed the most massive shift in wealth and income ever experienced by any advanced economy. The redistribution went from all of us to the very few at the tippy-top of our economic ladder, not the other way around. The current mantra (from politicians in both parties) about changing the focus from "inequality" to "opportunity" will accomplish nothing in terms of narrowing the gap between the 1 percent and the rest of us; the prosperity train has already left the station. It ignores the fact that wealth begets wealth -- "exponentially!" The wealth of the very rich is a giant snowball growing rapidly larger as it rolls along.

Moreover, talk about "equal opportunity" or "upward mobility" is hopelessly irrelevant to the larger issue of inequality. As James Surowiecki recently pointed out (The New Yorker, March 3, 2014), it's the average worker's share of the pie that has been shrinking. "[M]aking it easier for some Americans to move up the economic ladder is no great triumph if most can barely hold on."

Unfortunately, all of the serious proposals for dealing with inequality face insurmountable obstacles in our current political climate. And many, while socially important and economically helpful, would be relatively inconsequential given the scale of the problem. Moreover, many would take decades to implement. In the end, most would face fanatical political opposition.

Educational reforms

To illustrate, let's start with what are by far the most popular proposals for restoring a measure of equality to the economy. These involve education. The theory is that a better educated workforce would earn more and therefore help close the gap between the middle class and the very rich. These proposals run from promoting early education, expanding and strengthening junior colleges and providing companies with incentives for job training, to college tuition assistance for poorer students. All are popular (until the bill comes due) and have the advantage of being certain to succeed to some degree. The relation between education and income is well established. However, in order to have any real effect on the middle class' share of the national income, improvements in education would have to be sweeping and massive. Raising the total economic value of all the work done by the middle class would be a gargantuan undertaking. It would be expensive and take generations to play out.

A few numbers are relevant here. Across the world, the United States ranks 60th in terms of spending on education as a percent (5.4 percent) of GDP. And according to the Census Bureau, the amount spent per pupil in the United States actually fell for the first time in 2011. Since the start of the Great Recession, states have cut their spending on higher education by 28 percent. At the same time, these cuts have been accompanied by very significant tuition increases. In simple terms, the possibility that we will suddenly begin spending enough money on education to increase the economic value of the entire workforce borders on the delusional.

Tax reforms

Delusional notions and madness brings us to the subject of taxes. Wealth and income inequality could be significantly reduced by a number of tax reforms, perhaps even within a modest time frame. A truly progressive income tax -- as during the Eisenhower years -- and a corporate tax devoid of special provisions, exemptions and loopholes could go far in dealing with the problem. A strong case can also be made for a wealth or inheritance tax, along with a financial transaction tax. And taxing income from capital investments the same as income from labor should have top billing. Indeed, Republican Congressman Dave Camp's recent tax proposal purported to do just that, i.e., tax income from both sources equally, but then coupled that proposal with the wholesale elimination of all tax on 40 percent of investment income. So much for meaningful tax reform!

Despite Wall Street's unpopularity since 2008, Congress has not seen fit to undertake any truly meaningful tax or regulatory reforms. And even if it were to do so, it's unlikely any reforms could undo the damage already inflicted on our economy and our social contract. But let's consider for a moment the prospect of enacting a tiny transaction tax on the purchase and sale of securities which could be helpful in two ways. First, it would put a damper on financial speculation and market gambling. Second, although the revenue raised would be quite modest, it would at least come from those who have previously reaped windfall profits. However, even this modest measure suffers from a fatal political flaw, namely it's being labeled as -- shudder -- a "tax."

A significant portion of any foreseeable Congress can be counted on to sacrifice their lives, fortunes, and sacred honor to block a tax increase of any kind, however minuscule. A large number of Republicans claim, and conceivably even believe, that any tax increase would damage our economy. Walking in a lockstep, they equate the word "tax" with "job killing." They harbor a religious-like fervor, a blind hostility toward taxes in any and all forms that is impervious to fact or reason. Unfortunately, absent a major war, the possibility of Congress enacting a tax increase is remote. And that is all the more true of any increase that could affect the distribution of wealth and income to the rich who so lavishly fund campaign coffers.

Spending on infrastructure and innovation

Turning to our unemployment problem. Increased spending on infrastructure, education and scientific research (innovation) could help both to reduce unemployment and bolster the economy. With interest rates still close to zero, the cost of borrowing the money needed to fund such spending would be negligible. Hence, the argument in favor of an expansive fiscal policy would seem to be irrefutable. Unfortunately, any policy that involves government borrowing and/or spending is also confronted by near fanatical Republican opposition. With bull-dog tenacity, they cling to their notion that the stimulus did not work. They deny that it prevented the total collapse of our economy despite the unanimous conclusion of those economists left standing after 2008. Thus, the possibility of a fiscal policy focused on strengthening our economic foundation while simultaneously increasing employment is dead-on-arrival.

Financial regulation

In addition to financial manipulation and gambling on Wall Street, the other factor contributing directly to inequality has been the explosion of management compensation. CEO compensation has mushroomed obscenely in recent years. In the 1970s, the ratio of CEO compensation to that of the average worker was about 20 to 1. By 2012, it had grown to roughly 350 to 1. While this growing divergence paused briefly during the Great Recession, it is now back on track. Is there a realistic prospect of curbing this aspect of inequality? Probably not. Except in regulated industries, management compensation has traditionally been considered to be a matter for corporate governance -- or lack thereof. It is considered to be a sacrosanct feature of our revered "free enterprise system," and therefore immune from government regulation. While a genuinely progressive income tax might retard, if not arrest, this trend, who in Congress would be willing to curb their voracious appetite for campaign funding from rich CEOs. Even public disclosure of CEO's princely incomes in comparison to what they pay their employees is unlikely, in our contemporary moral climate, to be a source of much corporate embarrassment.

Organized Labor

Lastly we must consider a revitalized labor movement. For decades after WWII, wages tracked the growth in worker productivity. Sometime around 1980, the link between wages and productivity was broken. Productivity continued to rise, while wages flat-lined. One can get into a grand argument over the cause of this de-coupling, but it is undisputable that it was accompanied by the decline of the labor movement which has been under a relentless assault by Corporate America. In its heyday, organized labor bargained, in effect, for the wages of the entire middle class. As labor unions pushed up their members' wages, it created upward pressure on wages throughout the non-union sector as well. Correspondingly, as union membership and bargaining power declined, middle class wages in general suffered.

Today, as made clear by the recent rejection of the UAW by VW workers in Tennessee, the American worker is not inclined to look to the labor movement for salvation. The successes of the labor movement of the '50s and '60s appear to be long forgotten. The incessant promotion of non-union culture and right-to-work laws by the U.S. Chamber of Commerce and others has created a hostile environment for the labor movement. American workers have been propagandized into voting against their own economic self-interest.

The Only Way Out of the Conundrum

The inescapable conclusion is that inequality and the condition of our middle class will continue to worsen in the foreseeable future -- at least until the political and moral climate in our country fundamentally changes. And, that is unlikely to occur anytime soon. Indeed, it may only occur as a result of some new crisis of sufficient magnitude to "weaken the iron grip of the wealth oligarches."

The problem is that our democracy, "of, by and for the people," has been transformed into a plutocracy, "of, by and for the 1 percent and our newly minted corporate Citizens United" -- thanks to the Supreme Court. Our government has been put up for sale to the highest bidders, primarily the 0.01 percent and Wall Street's financial and corporate entities. A tidal wave of their cash has crashed ashore in our nation's capital, anonymously funding campaigns as well as "super PACs" which seek to manipulate public opinion to the economic advantage of their benefactors.

So also has their money bought state houses which have, in turn, gerrymandered political districts to ensure the perpetual election of House candidates of their political stripe. Thus, during the 2012 mid-term elections, the Republicans managed to win a majority of the seats in the House of Representatives despite receiving more that a million fewer votes than won by Democratic candidates. So much for "majority will." And as an extra measure of security, voter suppression has been adopted in a host of states in order to further undermine our democracy and indefinitely perpetuate its replacement -- our current plutocracy. Voter rolls are being purged, voter registration made burdensome, and photo IDs required -- but only for targeted populations likely to vote for their political opponents.

Not content with their destruction of the economic foundation of our middle class, the political operatives funded by the plutocrats have been actively recruiting to their cause the most deeply alienated, most poorly educated, most vulnerable and resentful elements within our middle class, contending that their declining fortunes are the fault of our government's support of the undeserving poor with their tax dollars. In doing so, they have sought to divert public anger and to cynically harness the politics of resentment -- even racism -- among the victims of unemployment, income flat-lining, and inequality. And they have been remarkably successful in this hypocritical campaign.

Sooner or later, the economic deep freeze, whether unwittingly or deliberately, imposed by the 0.01 percent of our population on middle- and lower-income Americans is bound to result in social unrest. The adage, "be careful what you wish for," may come back to haunt Wall Street and the uber-wealthy whose money has captured control of Congress and focused its members on their benefactors' economic well-being rather than the welfare of our overall body politic. Unless they wise up soon, the socioeconomic volcano that our nation's wealthy plutocrats have created, with help from their minions in Congress, is likely to erupt. Exactly when and what form this eruption will take, along with its outcome, remains to be seen. One can only hope that our citizenry would use the occasion to rise up and demand both the restoration of their democracy and the enactment of the many remedies needed to address inequality and to create a more socially balanced, humane and healthy economy.

Arthur Fox, a public interest litigator, has devoted his career to working within the union movement to assist democratic-minded union leaders, members, and dissident organizations. Henry Banta, an attorney and life-long student of economics, has dealt with many related issues during his career.

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