The American middle class has collapsed. We’re heading in the direction of looking like the 19th century England that Dickens wrote about in his novels, unless we can stop this grab by the rich. Here’s how and why:
Five years ago the American middle class ceased to be more than half of us: the middle class went from two-thirds of Americans when Reagan took office to 49 percent in 2015. NPR commemorated it with the headline: “The Tipping Point: Most Americans No Longer Are Middle Class.”
This year, according to new statistics just released from the US Census and the Fed, “middle class” households sank below the top 1% in total wealth: a handful of super-rich households have more wealth than the entire American middle class. This month the headline went to Bloomberg: “Top 1% of U.S. Earners Now Hold More Wealth Than All of the Middle Class.”
There’s nothing “normal” about having a middle class.
Having a middle class is a choice that a society has to make, and it’s a choice we need to make again in this generation, if we want to stop the destruction of the remnants of the last generation’s middle class.
Despite what you might read in the Wall Street Journal or see on Fox News, capitalism is not an economic system that naturally produces a middle class. In fact, if left to its own devices, capitalism tends towards vast levels of inequality and monopoly.
The natural and most stable state of capitalism actually looks a lot like the Victorian England depicted in Charles Dickens’ novels. Here’s how it works:
In a classic unregulated capitalist economy like the one in Dickens’ A Christmas Carol there is, at the top, a very small class of super-rich. In Dickens’ time, that was the royal family and the people associated with them.
Below them, there is a slightly larger, but still very small, “middle” class of professionals and mercantilists — doctors, lawyers, shop-owners — who help keep things running for the super-rich and supply the working poor with their needs. In Dickens’ novel, Scrooge was in this class.
And at the very bottom there is the great mass of people — typically over 90 percent of the population — who make up the working poor. They have no wealth — in fact they’re typically in debt most of their lives — and can barely survive on what little money they make. Bob Cratchett and Tiny Tim.
So, for average working people, there is no middle class in “normal” unregulated capitalism. Wealth accumulates at the very top among the elites, not among everyday working people, who remain the working poor.
This kind of inequality is the default option of capitalism unless it’s regulated to establish and maintain a larger middle class.
You can see this trend today in America. When we had heavily regulated and taxed capitalism in the post-war era, the largest employer in America was General Motors, and they paid working people what would be, in today’s dollars, about $50 an hour with benefits.
Reagan began deregulating and cutting taxes in 1981, and today, with more classical “raw capitalism” — what we call “Reaganomics” or “neoliberalism” — in place, our nation’s largest employer is WalMart and they pay around $13 an hour.
This is how quickly capitalism reorients itself when the brakes of regulation and taxes are removed: this huge change was accomplished in less than 40 years.
The only ways a worker’s “middle class” can come about in a capitalist society are by massive social upheaval causing a widespread worker shortage — a middle class emerged after the Black Plague in Europe in the 14th century — or by heavily taxing the rich.
French economist Thomas Piketty talked about this at great length in his groundbreaking book, Capital in the Twenty-First Century. He argues that the middle class that came about in Western Europe and the United States during the mid-twentieth century was the direct result of a peculiar set of historical events combined with high levels of taxation on the very rich.
According to Piketty, the post-World War II European middle class was created by two major things: the destruction of European inherited wealth during the war and higher taxes on the rich, most of which were necessitated by the war.
This brought wealth and income at the top down, and raised working people up into a middle class.
Piketty is right, especially about the importance for America of high marginal tax rates and inheritance taxes being necessary for the creation of a middle class that includes working-class people.
Progressive taxation, when done correctly, pushes wages in the direction of working people and reduces the incentives for the very rich to pillage their companies or rip off their workers. After all, why take another billion when 91 percent of it is just going to be paid in taxes?
This is the main reason why, when GM was our largest employer and our working class were also in the middle class, CEOs only took home 30 times what working people did. The top tax rate for all the time America’s middle class was created was between 74 and 91 percent. Until, of course, Reagan dropped it to 28 percent and began the process of shifting working people from the middle class to becoming the working poor.
Other policies, like protective tariffs and strong labor laws also help build a middle class, but progressive taxation is the most important because it is the most direct way to transfer money from the rich to the government programs that provide a social safety-net “floor” for the working poor, and, most importantly, it creates a disincentive to theft or monopoly by those at the top.
History shows how important high taxes on the rich are for creating a strong middle class. The period with the highest taxes on the rich — the period between the Roosevelt and Reagan administrations — was also the period with the lowest levels of economic inequality.
And, since marginal tax rates started to plummet during the Reagan years, income inequality has skyrocketed.
Even more striking, during those same 40 years since Reagan took office and started cutting taxes on the rich, income levels for the top 1 percent have ballooned while income levels for everyone else have stayed pretty much flat.
Coincidence? Not a chance: this is how deregulated capitalism normally works, eating the middle class and burping what’s left of their wealth up to the very rich.
Creating a middle class is always a choice, and by embracing neoliberal Reaganomics and cutting taxes on the rich we decided, back in 1981, not to have a middle class within a generation or two.
This, of course, is exactly what conservatives always push for. Conservatives — all the way back to their opposition to the American Revolution in 1776 — have always advocated the class interests of the rich over working people. Always. From David Hume (1700s) to John C. Calhoun (1800s) to today’s Republican Party. It’s a functional description of “conservative.”
Conservatives know that when wealth is spread more equally among all parts of society, people start to expect more from society and start demanding more rights. Social and worker movements emerge with actual power behind them because people are no longer impoverished.
That leads to “social instability,” which is feared and hated by conservatives, even though America’s history shows that such “instability” got us nearly all of our significant progressive movements, from the abolition of slavery to voting rights for women and African Americans to the right to unionize.
This is exactly what happened in the 1960s and ’70s when taxes on the rich were at their highest. The Civil Rights movement, the women’s movement, the consumer movement, the anti-war movement, and the environmental movement — social movements that grew out of the wealth and rising expectations of the post-World War II era’s middle class — these all terrified conservatives.
Which is why ever since they took power in 1980, conservatives have made ripping working people out of the middle class and turning them into a more compliant class of the working poor their number one goal.
We now have to make a choice in this country.
We can either continue going down the road to neoliberal oligarchy — absolute rule by the rich, the road we’ve been on since the Reagan years — or we can choose to return to FDR’s Keynesian economics, raise taxes on the rich, and create a more pluralistic society where working class people are able to make it into the middle class. We can’t have both.
And if we want to go down the road to letting working people back into the middle class, it all starts with taxing the rich. The time is long past due for us to roll back the Reagan (and Bush and Trump) tax cuts.
To save and restore the American middle class #TaxTheRich.
Originally posted at The Hartmann Report