The Vanishing Middle Class: Prejudice and Power In A Dual Economy

Peter Temin, “The Vanishing Middle Class: Prejudice and Power In A Dual Economy,”  The MIT Press, 2017, 166 pp.

I found the statistics and graphs in this book interesting, but the too-far-left agenda of the author is a bit off-setting.  For instance, he perceives our history of slavery as a determinant of today’s inequality, I just had a hard time buying that. He used the Lewis model and Piketty’s data as frameworks for his analysis of income inequality presented in the book.  However I concluded that anyone interested in whether or not there is a vanishing middle class, will better-spend their time reading Charles Murray’s book “Coming Apart,” a book I reported on (January 31, 2018).  Nevertheless, Temin's book’s dual economy concept taken from A. Arthur Lewis is probably a better visual display of what is happening.  Lewis received a Nobel Prize in Economics in 1979 for his ideas. The Middle Class is not necessarily vanishing, it is being fractured into greater income disparities, with a deep divide—hence the “dual economy.”  Many poorer Americans live in conditions resembling those of a developing country—substandard education, dilapidated housing, and few stable employment opportunities This divide (the capitalist and subsistence sectors), is especially correlated to education levels (the cognitive elite as Murray would state).  The country does seem to have entered another Gilded Aged with a wide gap between rich and poor. 

Having said all this, I did read the book and have culled out facts I found pertinent.

My Notes:

Pg. ixf:  The (real) earnings of median-income workers have not risen for forty years.  The median income was about $60,000 in 2014 for a family of three.  The middle class, defined as households earning from two-thirds to double the median American household income, went from earning over 69% of total national income in 1970 to earning only just over 43% in 2014.  The income share lost did not go to the poor, it went to the 29% (1970) who were already making double the median income and by 2014 now earned 49% of the national income.  The poor went from 10% to 9% during this time period.

Pg. xv:  Starting from President Nixon’s declaration of a War on Drugs, the American rate of incarceration has grown from the level of other modern democracies to one previously seen only in totalitarian countries.  By the 21^st century, one in three black men could expect to go to jail (it has become the New Jim Crow).  Also, one out of six Hispanic and one out of seventeen white men can expect to go to jail—but the War on Drugs has especially eroded the black community.  Phrased differently, 22 percent of black males aged 35 to 44 had been in prison in 2001, compared to 10 percent of Hispanic males and 4 percent of white males in this age group.

Pg. 3:  In 1970 real wages stopped growing with the rest of the economy, growth that had been linked to the growth in the economy since WWII.  National production continued to grow after 1970, but not wages.  The added wealth went to the upper-income groups as shown in Thomas Piketty’s book “Capitalism in the Twenty-First Century” (a book I previously reported on).  He defines the top group as containing 20 percent of the population by income distribution. 

Pg. 4:  The disparity in income that begins in 1970, where the top 20% doubled their real earnings by 2005, created gap large enough that the author has characterized it as a dual economy.  The decline in the growth of worker’s compensation has been cited as a cause of the 2008 financial crisis as workers borrowed on the security of their houses to sustain their rising consumption that rising incomes had supported before 1980.  Additionally, the top 1 percent income share in the US went from 11% in 1950 to 8% in 1982 and then to 18% by 2014.

Pg. 4:  The author cites W. Arthur Lewis often in this book, beginning on page four. 
Following is taken and condensed from Wikipedia:

Lewis published in 1954 "Economic Development with Unlimited Supplies of Labor."  In this publication, he introduced what came to be called the dual sector model, or the "Lewis model". 

Lewis combined an analysis of the historical experience of developed countries with the central ideas of the classical economists to produce a broad picture of the development process. In his theory, a "capitalist" sector develops by taking labor from a non-capitalist backward "subsistence" sector (much like our global economy today). The subsistence sector is governed by informal institutions and social norms so that producers do not maximize profits and workers can be paid above their marginal product. At an early stage of development, the "unlimited" supply of labor from the subsistence economy means that the capitalist sector can expand for some time without the need to raise wages. This results in higher returns to capital, which are reinvested in capital accumulation. In turn, the increase in the capital stock leads the "capitalists" to expand employment by drawing further labor from the subsistence sector. Given the assumptions of the model (for example, that the profits are reinvested and that capital accumulation does not substitute for skilled labor in production), the process becomes self-sustaining and leads to modernization and economic development.

The point at which the excess labor in the subsistence sector is fully absorbed into the modern sector, and where further capital accumulation begins to increase wages, is sometimes called the Lewisian turning point. It has recently been widely discussed in the context of economic development in China.

Pg. 8:  FTE sector:  the author transformed Lewis’s sectors in his model to observe the division of the American economy into two separate groups in a different way than the typical division of urban and rural.  He distinguishes workers by the skills and occupations of the two sectors.  The first sector consists of skilled workers and managers who have college degrees and command good and even very high salaries in our technological economy.  He calls this the FTE sector to highlight the roles of finance, technology, and electronics in this part of the economy.  The other group consists of low-skilled workers who are suffering some of the ills of globalization.  He calls this the low-wage sector to highlight the role of politics and technology in reducing the demand for semi-skilled workers.  The FTE sector is largely white.  The low-wage sector is more varied, with about 50 percent white and the other half composed more or less equally of African Americans and Latino immigrants.  (Latino immigrants have grown to around 17 percent of the population and now are more numerous than African Americans).  Note: the FTE sector includes the top 20 percent of American earners, including almost all college graduates.  The top 10 percent of American earners earn incomes in six figures of $100,000 and above.  The median worker earns around $40,000.

Pg. 21:  Modern conservatives fear the power of the federal government that grew in the world wars and Great Depression, and they oppose the redistribution in a welfare state.  They oppose the New Deal and unions as an ‘excess of democracy.’  They believe that the free market is equivalent to freedom itself and that regulating markets means surrendering political liberty.  They draw their inspiration from Friedrich Hayek and Ayn Rand. 

Pg. 24:  Carried Interest Exemption:  Incomes of Hedge Fund managers are taxed as capital gains which is much less than labor income.  (Mitch Romney’s tax returns, for example, showed that he paid taxes of less than 15%).  Another example of the FTE sector reducing their taxes is the 1970s loophole for real estate and Wall Street investors that enabled them to put real estate in trusts to avoid taxes.  The carried interest exemption and real estate trust provision are only two examples of tax loopholes initiated and maintained by lawyers and lobbyists for wealthy people.

Pg. 43:  Declining state support for higher education leads directly to higher tuition charges to students.  Inflation-adjusted tuition and fee charges rose by 250 percent at flagship state universities from 1980 to 2012, by 230 percent for all state university state universities and colleges and by 165 percent for community colleges.  These tuition increases are another barrier in the education link between the low-wage and the FTE sector.  Also, For-profit colleges enroll only 12 percent of college students, but they account for almost half of student loan defaults. 

Pg. 63f:  Another compromise by the founders to get a constitution ratified resulted in turning the regulation of voting to the states along with counting blacks as 3/5’s of a person, albeit with no voting rights—along with women, and people not owning sufficient property.  Another is the Tuesday voting tradition which is a holdover from the nineteenth century when most Americans were farmers and traveled by horse and buggy.  They needed a day to get to the county seat, a day to vote, and a day to get home, without interfering with the three days of worship prevalent at that time.  That left Tuesday and Wednesday, but Wednesday was market day.  So, Tuesday it was.  In 1875 Congress extended the Tuesday date for US House of Representative elections and in 1914 for US Senate.  Now with workers living in cities, work interferes with their ability to vote on Tuesday.  Census data indicate that the inconvenience of voting is the primary reason Americans are not participating in our elections.  Some states have closed polling places, leading to long lines. 

Pg. 74:  Dark Money: that is, money from unidentified sources influencing elections was about a quarter of all money spent in 2006 but was three-quarters by 2014.  Almost forty times as much dark money was in use in 2014 as in 2006. 

Pg. 87:  Democratic Government:  one that is controlled by all or almost all of the people.  It may take the form of a republic if the numbers in the democracy are too large for unified meetings and actions.

Oligarchic Government: is one controlled by only part of the population.  It is called an aristocratic government when membership in the oligarchy is bestowed by birth and a plutocracy when membership is by income and wealth. A dual economy is a plutocracy since the FTE sector determines policy for the whole economy.  Most Americans refer to their country as a democracy, but this is not accurate.  The growing inequality of income has generated politics that are oligarchic and even at risk of becoming autocratic. 

Autocratic Government:  is one ruled by an individual, a family, or another very small group.  Autocratic governments have been the rule during most of recorded history.

Pg. 97:  There were only six cases in which the Senate sought to transfer a sitting president’s appointment power for the Supreme Court to a sitting president’s successor.  These exceptions were confined to cases where the president was appointed rather than elected or where the nomination came after the election of his successor.  Neither of these conditions was present in 2016; the Senate’s actions were without historical precedent and risk politicizing the Supreme Court in a way that threatens the very foundation of our government.  As McConnell said, ‘I can’t imagine that a Republican majority in the US Senate would want to confirm, in a lame duck session, a nominee opposed by the NRA, the National Federation of Independent Business that represents small businesses.’

Pg. 105:  States pay about $50 billion a year to support prisons (contrasted with $75 billion to support education). 

Pg. 106:  One in three black men goes to jail, one in six Latino men also goes to jail.  The rate for white males is one in seventeen.  Three-quarters of today’s imprisoned drug offenders did not have any serious history of violence before their drug conviction.  Yet, the average expected time served for drug offenses is close to ten years.  And, almost all drug offenders are held in state prisons, making it hard to reduce our bloated prison population by, say, cutting drug jail sentences in half.  A bill to reduce mandatory minimum sentences with bipartisan backing failed in the Senate s 2016 election posturing got in the way.

Pg.147:  Inequality between countries has decreased, mostly due to the economic growth benefitting poor people in China and Inia.  However, inequality within countries has increased mostly due to increasing incomes among the richest people.

Pg. 153:  This book has described how the vanishing middle class has left behind a dual economy as depicted by the Lewis model.  The FTE sector makes political choices largely for itself, neglecting the needs of the low-wage sector in order to keep their taxes low.  As Lewis observed, the ‘capitalists’ of the FTE sector want to keep wages low in the low-wage sector to provide abundant cheap labor for their businesses.

The choices made in the US include keeping the low-wage sector quiet by mass incarceration, housing segregation, and disenfranchisement.  The low-wage sector includes roughly 80 percent of Americans—as blacks are only 15 percent of the population, even if all blacks were in the low-wage sector they still would comprise only a minority.  Any member of the low-wage sector who tries to rise into the FTE sector must do so through education.  The cost of this is making this more and more difficult.

Pg. 161:  Piketty summarized his main conclusion as a race between the rate of growth of the economy and the rate of interest.  When the economy grows at a higher rate than the rate of interest, then inequality decreases.  When the interest rate exceeds the growth rate, inequality grows. 

Pg. 165:  There is another kind of capital popularized by Robert Putnam (author of “Bowling Alone,” another book I reported on), called social capital.  Social capital is defined to be the networks of relationships among people who live and work in a particular society that enable their society to function effectively.