Friday, January 23, 2015

The Shrinking Middle Class: What To Do?

Liberal Harold Meyerson in the Washington Post is delighted. Finally, after 35 years of inaction -- since the Reagan recession of 1980-82 -- someone is doing something about the hole in the middle class. Here's the problem:
A gap between productivity gains and average family income — which didn’t exist in the three decades following World War II — opened in the 1970s and has only widened since.
After 30 years of inaction here comes President Obama with a solution.
This time, he had a concrete proposal to diminish the shift from income derived from work to income derived from investment — by raising the tax on capital gains and using the income to provide a tax credit to help working parents pay for child care. 
I guess what makes me dispirited about an opinion like this is the thought that Mr. Meyerson really believes it. By taking away money from capitalists and giving it away in a tax credit  he thinks we are really going to be able to boost middle class incomes. Where has he been?

Does he not get that taking money away from the capitalists and giving it away is exactly what Lenin did in Russia, exactly what the Castro Brothers did in Cuba, exactly what Chavez and now Maduro have been doing in Venezuela?

OK, let's admit that there are two narratives to account for the modern era.

One narrative is that the surprises of several economic revolutions have showered wealth upon all the people of the world, but disproportionately more wealth upon those communities that let capitalists get stinking rich.

The other narrative is that the benefits of economic production in the last two centuries only got shared because compassionate liberals forced the capitalists to share it out. You can see which side Harold Meyerson is on.

The president's new initiative is really cool, he writes:
Democrats have long sought to represent the interests of both business and labor... They’re the party that rewards work, that seeks to increase labor income even if — and you’d better believe they’ve polled on this — it means taking a bite out of capital income.
Hey, it might even win them back some of the white working class vote, he says. Yay!

OK. Here's my counterblast. (Aside from the fact that, given the swingeing taxes on business and labor, especially payroll taxes on labor collected by business, I'd say that Democrats are strongly opposed to both business and labor.)

The hollowing out in labor income since 1980, sez I, came from a number of secular trends and government policies. Let's list them, in no particular order.

  • Labor income in the immediate post-WWII years artificially boosted by labor unions. After 1980, labor income reverted to the mean, as unionized companies went broke.
  • Great Society programs that made it easier for people not to work, and imposed extremely high marginal tax rates on low-skilled workers trying to get off welfare.
  • Entry of women into the workforce. More workers competing for jobs equals lower wages.
  • Increased economic regulation.
  • Staggering capital gains from the electronic, computer, and internet revolutions, that boosted capital income.
  • Cheap money, which usually screws mom-and-pop savers.
  • "Affordable housing" policy which has wiped out minority homeowners that got mortgages they couldn't afford.
Really, Harold Meyerson and I couldn't be further apart on this. For instance, I think that the current policy across the west of Zero Interest Rate Policy and Quantitative Easing is a clear sign that redistribution is failing. It is telling us that entrepreneurs and capitalists aren't investing enough in new jobs, so government has to pile on and help them by artificially lowering the interest rate. But Meyerson wants to reduce the return on capital with new taxes.

Look. Right now in the United States the governments are spending about $1 trillion a year on government pensions, $1 trillion a year in government health care, $1 trillion a year on government education, and $0.5 trillion a year on welfare. That's according to All this money is straight-up redistribution.

So are we saying that $3.5 trillion a year in straight-up redistribution is not enough?

We are talking about $3.5 trillion in benefits that people don't have to work for. So no wonder the middle class doesn't work as hard as it might. And really, Harold Meyerson thinks that some fiddling with the capital gains tax and middle-class tax relief is going to fix the hollowing out of the middle class?

I tell you what scares me. Imagine what the economy would look like without the extraordinary wealth from electronics, computers, and the internet. And imagine the slashing articles Harold Meyerson would be writing to call for more redistribution from the greedy capitalists to the helpless middle class.

1 comment:

  1. I have been mining the site for the past several months as I write my second book; and wanted to know the person behind all of this great information. Great article on general economic trends and how government spending is ultimately robbing the middle class. It is disappointing that these thoughts are not more widely distributed and read. Unfortunately, Americans will most likely learn the hard way on the truth of these words.