One of the largest issues facing this country today is the lack of jobs. Creating jobs and reducing unemployment are hot topics of discussion for pundits and people seeking elective office.
TheU.S.economy is a consumer-based economy. Businesses employ people to produce goods and provide services. Consumers, including people employed by these businesses, turn around and purchase additional goods. In this way, money is circulated through our economy. In order for this system to work, everyone must have some money to purchase goods and services. According to Moody’s Analytics, the five percent (5%) of Americans with the highest incomes now account for thirty-seven percent (37%) of all consumer purchases. When so much goes to the top, the middle class lacks enough purchasing power to keep the economy running. An economy greatly dependent on the spending of a few is prone to booms and busts because of inadequate amounts of money in the market. A stimulus package and interest rates near zero cannot end the economic downturn without a middle class capable of spending.
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During periods when the rich took home a smaller proportion of total income, from 1947 to 1977, the economy grew faster and median wages soared. During this time, the middle class had the ability to consume, which created more jobs and increased demand for products. In periods where the very rich took home a larger proportion, as between 1918 to 1933 and 1981 to the present, growth slowed, median wages stagnated, people relied more on credit, and we suffered giant downturns. It’s no coincidence that the top earners’ share of the nation’s total income peaked in 1928 and 2007, the two (2) years preceding the biggest downturns.
In the 1970s, the financial situation of middle class started to worsen. Productivity continued to grow while the economy continued to expand, but wages began to flatten. New technologies started to undermine American jobs thanks to computerization and outsourcing abroad. To make up for this loss of income, people relied more on borrowing money and creating two (2) incomes in the household. In the 1960s, only twelve percent (12%) of married women with children worked for pay; by the late 1990s, that number had risen to fifty-five percent (55%). From 1990 to 2007, the typical household debt grew by one third (1/3).
In the last ten (10) years, the middle class invested heavily in the housing market. Housing related debt expanded, but as long as housing values continued to rise, it seemed like a painless way to get additional money. Then, the bubble burst and ended the middle class’ remarkable ability to keep spending in the face of stagnant wages. Little was done in the last 40 years to deal with the loss of economic purchasing power of the middle class.
In recent decades, the safety nets were reduced and greed became idealized. Our government did many things incorrectly through deregulation, privatization, cutting spending on infrastructure, and shifting more of the cost of higher education to families. Companies considered “as American as apple pie” went global and outsourced jobs to other countries with absolutely no loyalty to theUnited States. The top income rate was slashed to thirty-five percent (35%) and many of the rich treated income as capital gains subject to no more than fifteen percent (15%) tax. Inheritance taxes, which affected only the top one point five percent (1.5%) of earners were sliced. At the same time, sales and payroll taxes were increased. Regulations on Wall Street were reduced and, by 2007, financial companies accounted for over forty percent (40%) of American corporate profits.
Americans still wanted all the services they had and more, but they were against paying additional taxes on stagnated incomes. The inevitable happened, government services deteriorated and deficits exploded. This increased cynicism and people asked, “Can the government do anything right?”
The real reason forAmerica’s regression is political. As income and wealth becomes concentrated in fewer hands and influence in making policy is concentrated with hefty campaign contributions, thousands of lobbyists and public relation spinners saw an opportunity. The executive class gained lower tax rates and resisted reforms that would have spread the gains from growth.
This economy cannot improve without a defined strategy to revive the purchasing power of the middle class. The answer to this is threefold, jobs, jobs, and jobs. The United States Conference of Mayors has presented a jobs bill to the White House. The content of that jobs bill will be discussed in my next editorial.
Some of the information was provided by former Labor Secretary Robert Reich.
