The Rise and Fall of the Middle Class

AlterNet quoted a excerpt from a speech by Economist and New York Times columnist Paul Krugman. In a rambling speech full of vague statements designed apparently to avoid offending his employer, he attempts to explain in "simple terms how the American economy went from having the world's most dynamic middle class to being on the verge of a rich-poor state in only 30 years."
It's shocking but true. While the Republican Party distracted us with the "evil empire" and "axis of evil", our precious middle class has been squeezed until the American dream has been considerably redefined. The poor have gone from a welfare system that created a permanent underclass, largely designed by Democrats, to a slippery slope of what is called "workfare", but is in fact a means to cut people off the rolls. The result is that 1/3 of the millions homeless in America are children. That is simply not acceptable for the richest country in the world.
It's fallen out of fashion to call it "class warfare". But I believe the term is justified. The Republican drive to "starve the beast" has bankrupted our country, dug a huge hole of debt that leaves us owing huge interest payments to China and Japan. Those payments will ensure that any participation of the US government in the solution to our middle class and poor dilemma will necessarily be limited.

[..]And if you're looking for a progressive agenda, certainly from my point of view, a large part of that ought to be straightforward orthodox stuff, which is still very hard to do politically. It would be essentially restoring progressivity of the tax system, and using the revenue to improve social insurance and, above all, health care.
So, if you say what would I really like if I went into a Rip Van Winkle sleep and woke up ten years from now, I'd like to wake up and discover that we have a national health care in some version with the necessary funding supplied in part by higher taxes on me, or actually, the top two percent of the income distribution. But people a lot richer than me, of course. But it's not the whole story that the only thing you can do is taxes and social insurance. And the arc of history for the United States suggests that there's actually a lot more that can happen.


[..]If you actually look at some of the measures -- I'm really into quantitative political science these days -- of political positions that political scientists calculate, it does look as if what the main thing that moves actually over time is in fact the Republican party. The Democratic Party has not -- at least with northern Democrats -- gotten significantly more liberal over the past. They haven't moved much at all over the past 30 years.


But the Republican Party, which had largely converged on the Democrats in the age of Eisenhower, has moved sharply to the right. And so that one party, in effect, moves with the income of the top 5 percent or 1 percent of the population. So that seems to be the story. I mean, we can think about reasons why that might be true.


[..]The official economic story about rising inequality is one in which we have a whole bunch of villains, which all seem to be playing a role.


So we've got skill bias and technological change, which is shifting demand towards highly educated workers. We've got growing international trade with increased imports of labor-intensive products further reducing demand for less educated workers. We have immigration, possibly similar in its effect to trade. We have the falling real value of the minimum wage contributing at the bottom end. We have some affected unionization driving the change in income distribution.


Finally, in terms of at least the after-tax distribution, we have changes in taxes which have, in general, reinforced rising inequality. It could be true, but it's kind of funny that all of these different things should be working in the same direction. In "Murder on the Orient Express," there is an elaborate conspiracy that means that all 12 of the potential suspects were actually in collusion. It's a little hard to see how all of these factors and economics are in collusion.


[..]You might say that's the causation running from income distribution to politics. But if you actually then just start to look at it through history, the timing actually seems to be reversed. The rise of an aggressive or rightwing movement and the rise of a really major assault on the New Deal great society legacy both come before the big shift in income distribution takes place.


The emergence of the modern right is something that obviously dates back to Goldwater, but really becomes a political force in the '70s. You don't really see the big changes in income distribution until the '80s. So it looks almost as if, just in this crude sense, politics is leading the economic changes. How could that operate? I just want to talk about two things. I suspect that there are quite a few channels that we don't really perceive, but there are two that are fairly clear. One of them is unionization.


Obviously, private sector unions were very important in the U.S. 30 years ago and have very nearly -- not completely, but very nearly -- collapsed, and they are down to eight percent of private employment. Why did that happen? You will often see people saying -- well, that's because of de-industrialization, and because of the decline of manufacturing. But that is actually not right. It's not right in two ways.


First of all, arithmetically, most of the decline in unionization is a result not of the decline in manufacturing share, but of the decline of the unionization of manufacturing itself. So the big thing that happens is that there is a collapse of unionization within the manufacturing sector and then of course also a smaller share of manufacturing in the economy, but it's much more dramatic on the collapse within the sector.


The other is that there is no law that says that unionization should be a manufacturing phenomenon. What it really is, to the extent that there is a story, is that large enterprises are more likely to be to be unionized. The reason why the high tend of unionization was also a period when manufacturing was the core of the union movement, is that at that time, large enterprises were largely a manufacturing phenomenon.


Now we have a service economy in which there are a lot of large service sector enterprises. Not to put too fine a point on it, but why exactly couldn't Wal-Mart be unionized? It doesn't face international competition. There is no obvious reason why it wouldn't be possible to have a strong union in Wal-Mart and in the big box sector and other parts of the economy. And just think of how different the whole political economy would look if the service sector enterprises were unionized.


[..]Not necessarily all the effects would be positive, but it would certainly be very, very different. What happened? Why did manufacturing unionization collapse? Why didn't the emerging service sector get unionized? And the answer is actually pretty straightforward and pretty brutal. It's politics and aggressive employer behavior enabled by politics.


I have seen estimates of a fraction of workers who voted for a union and who were fired in the early '80s. They range from a low of one in 20 to a high of one in eight. There is no question that aggressive, often illegal, union busting is the reason the union movement declined. And the change in the political climate that began in the '70s clearly played a role in making that possible.