Reagan Set Up The Death Of The Middle Class, But China Was The Clincher

Dave Johnson

Our 2010 Reagan Revolution Home To Roost series, especially the post Reagan Revolution Home To Roost — In Charts described the beginning of the great decoupling of the American economy from the middle class.

The summary:

Conservative policies transformed the United States from the largest creditor nation to the largest debtor nation in just a few years, and it has only gotten worse since then.

Working people’s share of the benefits from increased productivity took a sudden turn down.

This resulted in intense concentration of wealth at the top.

And forced working people to spend down savings to get by.

Which forced working people to go into debt. (total household debt as percentage of GDP)

None of which has helped economic growth much. (12-quarter rolling average nominal GDP growth. More detail here and here.

The 2000 “Inflection Point”

In “America Out of Whack,” Thomas Edsall has written an important piece for understanding another, more recent source of what has been happening to our economy. Edsall describes a number of things that changed in our economy after roughly 2000:

  • “… the Fed reported that since 2000, household wealth in the United States has grown by $37 trillion — from $44.45 trillion to $81.49 trillion at the end of the second quarter of this year, but these spectacular gains in wealth are mostly benefiting upper-income Americans.”
  • “Not only has the wealth of the very rich doubled since 2000, but corporate revenues are at record levels. From 2000 to the present, quarterly corporate after-tax profits have risen from $529 billion to $1.5 trillion. …”
  • “The labor force participation rate rose steadily from 58.4 percent in 1963 to 67.3 percent in April 2000, but it has steadily fallen since then, dropping to 62.8 percent in August 2014, back to where it was in January 1978.”
  • “Until 1999, median household income (as distinct from wealth) rose in tandem with national economic growth. That year, household income abruptly stopped keeping pace with economic growth and has fallen steadily behind since then.”
  • “One of the bright spots in the national economy – the growth in high skill, well-paying jobs – came to an end in 2001.”
  • “In 2001, what had been a slow decline in the share of total national income going to labor took a sharp downward turn that became a precipitous fall.”
  • “From 1990 to 2000, productivity grew at an annual rate of 2.1 percent, and workers’ compensation rose by 1.5 percent. In the period from 2000 to 2009, workers’ annual productivity rate rose 2.5 percent, but raises got smaller, with compensation rising by only 1.1 percent annually. …”

The Reagan Revolution hit us hard, but a lot of hardship hit the fan right around the year 2000. The benefits of our economy had already been going more to a few at the top than to the rest of us, but something happened in 2000 to make that trend seriously accelerate. After 2000 literally everything was going to a few at the top, with things just getting worse for the rest of us

So what happened? Edsall spoke with Paul Beaudry, an economist at the University of British Columbia, “whose research showing that high-skill job growth came to a halt around 2000 has successfully forced a major change in the debate over employment.”

Beaudry theorizes that it was in 2000 that advances in technology and automation, in trade, especially with China, and in the outsourcing of American jobs abroad came together to produce an inflection point.

The net result, Beaudry said, is that a significantly smaller fraction of the population benefits from growth.

What happened was trade, especially with China, and the outsourcing of American jobs. Combined with “advances in technology and automation,” 2000 was an “inflection point.”

“Globalization” Killed The Middle Class – And Our Democracy

Edsall continues, citing a number of other studies showing roughly the same thing. Of one study Edsall notes, “Their predictions of future trends are not optimistic”:

“If globalization continues during the next decades, the labor share will continue to decline, especially in sectors that face the largest increases in foreign competition.”

If “globalization” – moving jobs and factories to China to escape the rules our democracy puts on companies – continues things will just keep getting worse. And, Edsall notes, this leads to the question: Is the “legitimacy of free market capitalism in America facing fundamental challenges?”

So why don’t We, the People do something about this? Edsall continues,

“Globalization and technological innovation have diminished the power of elected officials to control national economic trends, although politicians retain substantial influence over the allocation of the costs and benefits of those trends.

At the moment, Republicans have the whip hand, empowered to prevent Democratic intervention to alter what is now a decisively upward redistribution of the benefits of economic growth.

It is uncertain, however, whether the Democratic Party, even if it were empowered to set the agenda, would adopt policies to restructure the distribution of wealth. Those advocating such initiatives might well face an internal veto exercised by the party’s financial elite and by the party’s affluent constituencies.”

“Globalization” – opening up trade with China – is what killed off the middle class. This was a policy choice, not some force of nature that we can’t control. But one result was to put big money even more in charge of our political process.

But it wasn’t just globalization, it was the way we did it. In “Why the Economy is Still Failing Most Americans,” Robert Reich notes that Germany has also “globalized” – opened up trade – but has higher wages than we do. Why is this?

The answer is that we set up trade policies specifically designed to break unions and enrich the owners of corporations. The owners of corporations are pretty much the only players at the table when the U.S. negotiates trade deals. Labor unions, environmentalists, consumer groups and other “stakeholders” are not allowed to participate, and the resulting treaties are pushed through Congress with a rigged “fast-track” process.

But Germany worked both with its companies and its labor unions to forge trade agreements that benefit businesses, workers and Germany’s overall economy. Robert Borosage explained how this happened on Richard Eskow’s “The Zero Hour” radio program. (Scroll to 5:15.)

Globalization isn’t an act of nature; it’s a set of policies, tax, trade, financial, monetary policies where you make choices and those choices benefit parts of the economy and injure others.

We made choices. Multinationals basically wrote our globalization strategy and they chose to benefit investors, made it easy to ship jobs abroad, made it even easier to threaten to move jobs abroad and dramatically weakened the ability of workers here at home.

But that was a choice.

In Germany they made a very different choice where unions were stronger, and the companies and the unions together navigated a globalization strategy that has made Germany one of the great export powers of the world and allows German workers to sustain middle class incomes and benefits.

Trade policies can help working people and economies. But the U.S. used trade and globalization to enrich a few at the expense of everyone else, our economy and our democracy.

The Effect On 99% Of Us

1980 was a turning point, and 2000 was the clincher. The Center for American Progress (CAP) describes the effects of these two inflection points in “The Middle-Class Squeeze: A Picture of Stagnant Incomes, Rising Costs, and What We Can Do to Strengthen America’s Middle Class“: According to CAP, “the cost of key pillars of middle class security has risen by $10,600 since 2000.”

According to the CAP report, since 2000:

  • Healthcare costs for families have risen dramatically, from $11,790 total to over $20,000
  • Child care is more expensive than median rent in all 50 states. The estimated cost of a high-quality public preschool program ranges from $6,500 to $11,000
  • Higher education: While income is staying the same or even declining among families, the cost of higher education has skyrocketed. From 2000 to 2012, higher education costs have risen 62 percent.
  • The cost of owning a home has risen, on average, nearly $3,000: from $10,200 to $13,000 per year. Half of renters spend over 30 percent of their income on rent.
  • Retirement: While the costs of other essentials increase, it is no surprise that saving for retirement has become much more difficult for those in the middle class. Now, approximately half of all American households are in danger of having insufficient savings for retirement.
  • CAP’s report found that as a result of this middle-class squeeze, a typical middle-class family had $5,500 less for basic necessities like groceries, clothing, and emergency savings by 2012, compared to 2000.

This chart from “The most important chart about the American economy you’ll see this year” by Matthew Yglesias at Vox shows the difference in distribution of the gains during expansions.

Before Reagan working people benefitted more during economic recoveries than the top 10 percent. After Reagan the top 10 percent benefitted more. But after 2000, 90 percent of us not only didn’t benefit during economic recoveries, we continued to fall behind. Reagan shifted the power to the wealthy, and the wealthy used that power to escape the borders of democracy by moving production to China. And that, my friends, was that.

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