War Against the Middle Class

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Why is the middle class shrinking?

By David Korten

This is the ninth of a series of blogs based on excerpts adapted from the 2nd edition of Agenda for a New Economy: From Phantom Wealth to Real Wealth. I wrote Agenda to spur a national conversation on economic policy issues and options that are otherwise largely ignored. This blog series is intended to contribute to that conversation. —DK

A pro-union protester in Madison, Wisconsin on February 18, 2011. David Korten points out that America's once strong middle class came out of New Deal legislation, including strong support of labor unions.

Photo by Rob Chandanais.
As did most Americans of my generation, I grew up in the post-World War II years believing that America was defined by a strong middle class supported by a durable bipartisan political consensus.

In fact, the American middle class was created in the space of just a few years by New Deal legislation that established Social Security and other safety-net programs, implemented a highly progressive taxation of income and estates, supported unions, and raised the floor on wages to narrow the wealth and income gap between the upper and lower economic classes.

Perhaps because I was living abroad during most of the 1970s and 80s, even into the 1990s, I believed until the mid-1990s that the middle class is a universal American ideal. It was quite a shock when I eventually came to realize that America is governed by an owning class that considers government intervention to maintain an equitable distribution of wealth anti-American, socialist, and a threat to individual liberty and national prosperity.

In the 1970s, an alliance of elite interests began preparing to roll back the measures that created the American middle class and launched a full-scale class war during the 1980s under the banner of the Reagan revolution. Corporate interests provided the money and controlled the real agenda. Religious fundamentalists provided votes in return for lip service to a conservative social agenda opposing abortion, family planning, and gay marriage. Libertarians provided an ideological framework removing constraints to the unlimited concentration of wealth in the name of market freedom. Neo-conservatives provided justification for wars and outsized military expenditures to swell the profits of the defense industry and secure corporate access to the world’s resources and markets. 

By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health, and wholesale/retail combined.

Once in power, the Reagan administration rolled back taxes on the wealthiest Americans, ended robust antitrust enforcement, and launched a stunningly successful campaign to make finance the U.S. economy’s dominant and most profitable sector. This process continued seamlessly through subsequent Republican and Democratic administrations.

In 1950, arguably the peak of U.S. global power, manufacturing accounted for 29 percent of the U.S. gross domestic product and financial services for 11 percent. By 2005, manufacturing accounted for only 12 percent of the GDP, and financial services for 20 percent—more than manufacturing, health, and wholesale/retail combined. This weakened unions, put downward pressure on wages, and increased the power of the owning class.

Bigger than Unions, Bigger than Wisconsin
How Americans of all stripes are uniting in opposition to Wisconsin's anti-union bill—and cultivating a movement that reaches far beyond the state border.

In 1999, on the recommendation of Wall Street insiders, Congress “modernized” the country’s financial system by repealing Glass-Steagall, a Depression-era law that limited commercial banks to commercial banking activities. In 2004, the established requirement that investment banks maintain a 12-to-1 leverage ratio of debt to equity was repealed, leaving them free to make much greater use of borrowed money.

Between 1980 and 2005, there were some 11,500 bank mergers in the United States, an average of 442 per year. As the banking system consolidated, its focus shifted from providing financial services for productive activity on Main Street, to funding speculation on Wall Street.

Hedge funds, the high rollers that led the speculative frenzy responsible for the 2008 financial collapse, proliferated from a few hundred in the early 1990s to some ten thousand in mid-2007, by which time they had more than $1.8 trillion in financial assets under management.

The richest 2 percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only 1 percent.

Wall Street used its political influence and control of the money supply to ensure that its players captured virtually all the benefits of productivity gains in the Main Street economy as interest, dividends, financial service fees, and inflated asset prices.

This effort to achieve an upward redistribution of wealth was so successful that from 1980 to 2005, the highest-earning 1 percent of the U.S. population increased its share of taxable income from 9 percent to 19 percent. Most of that gain came from the bottom 90 percent and went to the top tenth of 1 percent. In 2007, the top 400 U.S. tax returns reported an average annual income of $345 million—compared to an average of $12.7 million for the top 427 returns in 1955, adjusted to 2007 dollars.

As Wall Street exported its modernization plan to the world, the wealth gap widened almost everywhere. In 2005 Forbes magazine counted 691 billionaires in the world. In 2008, only three years later, it counted 1,250 and estimated their combined net worth at $4.4 trillion. According to a United Nations University study, the richest 2 percent of world’s people now own 51 percent of all the world’s assets. The poorest 50 percent own only 1 percent.

Efforts to fix Wall Street miss an important point. Wall Street, as we know it, is an instrument of class war that poses a mortal threat to the middle class and democracy. For the sake of our most cherished American ideals, it must be dismantled and replaced.

David Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and YesMagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

The ideas presented here are developed in greater detail in Agenda for a New Economy available from the YES! Magazine web store — where there are 3 WAYS TO GET THE BOOK and a 22% discount!