From the April 2011 issue of Research Magazine • Subscribe!

April 1, 2011

The Demise of the Great American Middle Class

Corporate executives have been taking the lion’s share of profits while squeezing workers, suppliers and other stakeholders.

I spent the 1980-81 academic year at a graduate program in Bologna, Italy, under the aegis of Johns Hopkins University’s School of Advanced International Studies. The Cold War was on and it was by no means obvious which side was going to win. Jimmy Carter was in the White House. In Italy and Germany, leftist terrorists struck regularly, murdering police officers, business executives and politicians. Legal communist parties seemed strong enough to win power in France and Italy.

The purpose of our small program, set up soon after the end of World War II, was to broaden the horizons of about 60 Americans, and to teach a similar number of future European leaders the basics of the U.S. democratic system. Our American professors of economics and political science were fond of extolling the great American middle class and its role in our stable, moderate and tolerant society. Because most Americans were solidly anchored near the middle as far as the standard of living was concerned, radical movements that had been shaking Europe over the previous century never took root in the United States.

Everyone at the Center

Indeed, that was the heyday of American egalitarianism. The Gini coefficient, which measures income differences in society and goes from 1 (absolute inequality) to zero (absolute equality), fell from 0.45 at the end of the 1920s to 0.38 in 1968.

But income equality was only the tip of an iceberg. In the early postwar decades, middle class virtues and aspirations were broadly shared by Americans of almost all social strata, from blue-collar workers to upper-income executives and professionals. They included stability, continuity, family values and community involvement — typically at church, in kids’ schools and kids’ athletics.

Even though mortgages and consumer credit made its lifestyle possible, the middle class tended to live within its means and had fairly similar tastes and consumption habits. Families shopped at the same supermarkets and bought the same brands. Price differences at department stores, ranging from Sears and Montgomery Ward to Macy’s and Saks Fifth Avenue were not dramatic. A union plumber might drive a Chevrolet, a salesman might be able to afford a Mercury and a doctor might plump for a Buick or a Cadillac, but price differences between different models were not astronomical.

In the late 1970s, CEOs of major banks made in the environs of $200,000 to $400,000 a year. Senior corporate executives lived in large houses, but they were still white-collar employees, albeit successful ones.

Income Polarization

The ongoing polarization of incomes in the United States and the emergence of the super rich classes over the past 30 years is a recognized economic trend. There are various statistics on how well the upper 1 percent or 5 percent income bracket has done, and how incomes in the middle have stagnated or declined. The Gini coefficient has been climbing and in recent years stood at 0.47 — moving closer to countries like Mexico and Brazil and away from egalitarian societies such as Sweden, where the Gini coefficient hovers around 0.25.

Since the advent of the 2008 economic crisis, income differentials have widened. The rich have rebounded from the crisis extremely well, getting even richer as a result of the financial market boom of the past three years, whereas the middle class has been hit hard by the jump in unemployment and the decline in real estate prices.

In recent decades, entire social categories have dropped out of the middle class. The decline in the social status of blue collar workers closely parallels the decline of industrial unions. Teachers, government and municipal employees, university professors, those who work in the arts and humanities and journalists are no longer able to maintain middle class lifestyles. The same is true of airline pilots and even some doctors, who are being squeezed by aggressive cost-cutting on the part of insurance companies and the government.

At the same time, there has been a dramatic rise in the number of the rich, and the emergence of upper middle class families whose spending patterns resemble those of the rich and very rich in the 1960s and 1970s. Corporate executives are one such group. Because of new compensation patterns executives have become owners of their companies, and owners have been taking the lion’s share of profits while squeezing workers, suppliers and other stakeholders.

It has been noted by sociologists that the new rich class is different from the old: It is self-made, first generation money. Those who build those new fortunes are highly skilled, result-oriented, driven individuals. If anything, they tend to be workaholics, the opposite of the old leisure classes.

Social Turmoil?

Social attitudes have changed not only among the rich, but in society as a whole. For example, until the early 1980s the federal government was considered a benign force and its involvement in the economy was generally welcomed. The state was on the side of the middle class and its policies were specifically directed toward income equalization. It supported organized labor, implemented highly progressive taxation scales and provided various entitlements for the middle class, notably scholarships and soft educational loans. Richard Nixon, the conservative standard-bearer of his era, greatly expanded the role of the federal government in the economy during his time in office.

The current hostile attitude toward the state was unthinkable in an earlier age. It would have made sense if it was limited to the new rich, who indeed dislike paying taxes and would want the government to get out of the way. Hostility toward the state on the part of the sinking middle is more puzzling. It might have been seen as a newly found belief in the traditional American doctrine of self-reliance, had it not been accompanied by an unsustainable borrow-and-spend orgy, which predated — and in many ways caused — the 2008 global financial crisis.

My old professors would have probably expected the polarization of American society to result in instability and a rise of radical ideologies, especially of the leftist kind. But there has been exemplary stability and an almost total lack of strikes, protests or street rallies. The state has shifted toward protecting upper income individuals, giving them sizable tax cuts and chipping away at middle-class entitlements. The irony of it is that it was 1968, the peak of U.S. egalitarianism, that saw the worst protests against the “oppressive government,” culminating in pitched battles between radical students and the police in the streets of Chicago during the Democratic National Convention.

The middle class, after all, was not necessary to ensure social peace and stability. It was more an outgrowth of the kind of economy the United States had at the time, which was dominated by large, established corporations selling familiar brands in stable markets. Those corporations had set market shares and consistent profit margins, and they were not interested in changing anything. Their employees worked for the same company; changing jobs more than once or twice in the course of a career was rare. It was a stake-holding economy in which employees, management and shareholders all got a piece of those profit margins.

Today’s economy and society couldn’t be more different. Not only do we not work for the same employer for long, but we are often forced to change careers several times during our working life. The pace of technological innovation drives dramatic change, but our social and economic system also pressures companies to innovate. Changes in information technology may be driven by Moore’s Law. It predicts the rate of development and price declines in the computer industry, though the breakneck pace of innovation affects other industries as well.

Ours is a more dynamic, mobile and creative society. It is not socially unstable or torn by radical ideologies, but the verdict on its economic stability is still out. To drive innovation and entrepreneurship we need a financial system that consists not of stolid Main Street banks and S&Ls, but venture capitalists and risk takers. The highly creative entrepreneurial class has a moral code all its own. Apparently, Silicon Valley investors refuse to back start-up companies unless their managers have gone through at least one bankruptcy. Thus, bankruptcy, which was anathema for the middle class, has become a badge of honor in the new economy.

It is an economic model that is built on bubbles. The dot.com frenzy in the 1990s was the most fertile period in 20th century U.S. economic history.

When that bubble burst, a new one immediately inflated, and when the real estate bubble burst in turn, it was replaced by a government debt bubble and a China bubble. Now those two are also on their way out, and the question naturally arises: What happens to this economic model when it runs out of fresh bubbles to inflate?

Reprints Discuss this story
This is where the comments go.