Meanwhile, the median middle-class family – the one smack in the middle of the income distribution — saw its net worth (assets minus liabilities) drop from $102,844 in 2005 to $66,740 in 2010 according to the U.S. Census Bureau. So while the richest 400 Americans increased their wealth by 54 percent since 2005, the median middle-class family saw its wealth decline by 35 percent. Welcome to the new American math.
It’s not easy to wrap our arms around so much financial fat. The numbers involved are truly mind-boggling. Here’s more new math:
The rich list gives us insight into how wealth is accumulated today. Are the super-rich “wealth creators” who bring new goods, services and jobs to our economy? Or are they “wealth extractors” who cleverly skim it from the rest of us? Here’s the breakdown of the main industries represented by the 400 richest Americans:
|Investment ||24.0 percent |
|Media ||8.8 percent |
|Energy ||8.0 percent |
|Food/beverage ||7.5 percent |
|Fashion/retail ||5.8 percent |
|Manufacturing ||3.8 percent |
|Healthcare ||3.3 percent |
The very first Forbes 400 list, published in 1982, reflects a different economy. Only 9 percent were in finance while 15.5 percent came from manufacturing. But since then, our best and brightest have learned a new lesson: it is far better to take than to make.
Why are the super-rich getting richer while the middle-class implodes?
To break out of the 1970s economic doldrums, the economics and policy establishment, including leaders of both parties, agreed on a new model. We needed to build an investment-led economy, they said, by cutting taxes, deregulating industry and creating more labor “flexibility” (which is French for union-busting). Together, they argued, these policies would dramatically increase capital investment, which in turn would lead to innovation, more jobs and higher incomes for all Americans. Here’s what actually happened.
1. Tax Cuts for the Super-Rich
Step by step, the tax code was altered to appease and aid the super-rich. First, marginal tax rates were dramatically reduced on the top brackets, falling from a post-war high of 91 percent in the 1950s to 35 percent today. But the biggest giveaway was cutting the capital gains rate to 15 percent. Since most of the super-rich receive their income in the form of capital gains, this was like winning the lottery, each and every year. That’s how Mitt Romney could pay only 13 to 14 percent on his enormous income. As this chart shows, the tax bite is fading away for the super-rich.
2. Financial Deregulation
Both parties tripped over themselves to assist Wall Street by dismantling nearly all of the critical New Deal financial curbs. Until deregulation, Wall Street was a boring place to work with incomes nearly identical to those with similar education in other sectors. After deregulation it became a gold mine (see chart below). Anti-trust actions to break up big banks no longer occurred. Glass-Steagall (which separated speculative banking from commercial banking) was gutted. Too-big-to-fail casinos flourished (until they crashed) along with ever rising incomes for financiers.
Say what you will about unions, but the fact remains that when unions are strong, the middle-class prospers and the income gap closes. It’s remarkable how the rise of the super-rich and the decline of the middle-class correspond to the generation-long assault on unions. National Labor Relations Board (NLRB) and court rulings combined with new anti-union tactics by employers to make organizing new members more difficult. Also the decline of domestic manufacturing, aided and abetted by rapacious financial engineers, further eroded labor’s base. Until this turns around, the middle-class, as well as the poor, will suffer.
4. The Wall Street Crash and Bailouts
The financial crash devastated the middle-class, largely because its wealth is largely dependent on housing values. When the financial casinos went under, the housing bubble imploded. As the economy nearly came to a standstill in 2008-’09, eight million jobs vanished in a matter of months, all destroyed by Wall Street’s reckless adventurism. To prevent another Great Depression, Washington bailed out the big banks and hedge funds, but not homeowners. The idea, successfully marketed by Wall Street’s minions in government, was that by saving Wall Street, the economy as a whole would be resurrected. Again, trickledown failed to aid the middle-class as unemployment grew to depression-era levels. Yes, GM and Chrysler received support as well, which kept employment from crashing even further. But Wall Street received most of the booty. No wonder super-rich financiers are prospering.
5. Corporate Money in Politics
As more and more money gushed to the top, more and more money entered into politics and lobbying. The net result was more government goodies for the super-rich. Corporate America, in every shape and form, took effective control of the legislative process so that both parties continued to shower the wealthy with tax breaks, and their industries with direct subsidies. While conservative political theorists sang praises to the all powerful free market, the largest corporate players raided the treasury again and again. And while some complain about the undo influence of liberal “special interests,” the biggest interest of all is business which outspends labor to the tune of $14 to $1…and that was before Citizens United.
Why the Ryan-Romney Plan has zero chance of resurrecting the middle-class
Ryan and Romney are in love with wealth and the few who amass it. As a result, they are fully committed to precisely the same policies that created the obscene wealth gaps in the first place. They want even more tax cuts for the rich, even more regulatory freedom for Wall Street, and even more attacks on unions. If they reinstitute these failed policies, we certainly will see larger too-big-to-fail banks that will gamble and fail, and again grab bailouts from us. All the while, those juicy tax cuts for the super-rich will float over to the Grand Caymans, while average middle-class incomes decline. Maybe before the 2008 crash we could have had a serious argument about the merits of tax cuts and deregulation. But we just lived through a real-life experiment using precisely those policies, and the results are in: This dog don’t hunt.
What will it take to resurrect the middle-class?
Americans don’t begrudge the accumulation of wealth as long as our own standard of living improves and our children have a good shot at doing better. We do not expect to work hard and then watch our standard of living decline, while the uber-rich live lavishly by skimming away our collective wealth.
There is a way out — but it won’t come easy. It’s a hard road because it runs counter to nearly everything we hear about the economy. Revitalizing the middle class (and lower-income groups as well) starts with one central observation – the private sector on its own will never create enough jobs for all who need them. And without full-employment we will continue to see our incomes stagnate and decline.
Unfortunately, it’s hard for us to trust government in part because we live in a surround-sound world that incessantly blares out anti-big government ideology. As a result, many believe that a government job is somehow less worthy than a private-sector job. But is a teacher employed at a private school somehow more valuable than a teacher in your public school system? Is a private security guard more worthy than a policeman? You can try this kind of thought experiment up and down the occupational ladder and you’ll find millions of jobs that are done better in the public sector.
But that’s just a start for retooling our minds. The biggest breakthrough comes when we finally realize that after a major financial crash, it’s just not possible for the private-sector economy on its own to produce the jobs needed to put our people to work. We’ll be waiting decades to get back to full-employment if we rely solely on private-sector expansion. It won’t expand until demand increases, and demand won’t increase until we expand, not contract, public employment.
If you want to see a vibrant middle-class, then we should be creating vibrant middle-class jobs in the public sector – more teachers, more social workers, more workers rebuilding our infrastructure and weatherizing our buildings. (And yes we can fund private contractors to help out as well.) Instead, we are doing precisely the opposite: we are gutting public employment –about 650,000 good-paying federal, state and local government jobs were eliminated over the past two years, all in the name of debt reduction.
A simple reform
We don’t need to run up debt to put our people to work.
All we need to do is make those who caused the crash pay to clean it up. Here’s a simple reform program that neither party has the guts to implement:
1. A financial transaction tax on Wall Street on each and every trade, especially on risky derivatives.
2. Eliminate the special tax rate for capital gains.
3. Institute a 3 percent yearly wealth tax on anyone with a net worth of $10 million or more.
Collectively this would produce revenues in access of $300 billion per year which could readily create 6 million new public-sector jobs both directly and through contractors. (And if we do it right every new job could be green and reduce our carbon footprint.) Add in a multiplier, and our economy would soon reach full-employment.
We are at a clear fork in the road: either we create the jobs we need right now by taxing Wall Street and the super-rich, or the rest of us will suffer several decades of stagnation, while the private sector continues to mint a surplus of financial billionaires and a deficit of decent jobs.