The Free Market 14, no. 2 (February 1996)
Middle-class incomes, the core of what we call the “standard of living,” have been falling for more than two decades. Though people have known this intuitively, only recently have we heard much about it. Economists and the media have been conditioned to look for the ups and downs in the business cycle, meanwhile missing the single most ominous trend in American economic life.
The resulting sense of fear and insecurity that our long-term decline generates is probably the primary cause of the growing dissatisfaction with practically everything in modern life. Yet even among those who recognize the problem--and many still deny it--hardly anyone has either the cause or the solution right.
The problem itself is massive. Adjusting for inflation, men’s earnings have fallen 11% since 1968, with the wages of white men age 25-35 having dropped the most. Because of a mass influx of married women into the workforce during the 1970s and 80s, overall family income did not fall. But the result was a social revolution that still hasn’t sorted itself out. But by 1989, women’s wages also began to fall along with men’s. After correcting for inflation and family size, median family income has fallen more than 7% in the past six years alone, and the rate of decline is accelerating on a quarterly basis.
Yet productivity as measured by the GDP has been increasing at the same time, which makes the present trends even more of a historical anomaly. As far back in history as we look, wages for the majority of people have not fallen at the same time the per capita GDP has risen, and certainly not for this length of time.
Because of the way GDP is calculated, it grows whether a dollar is in government or private hands, whether investment is efficient or wasteful, or whether consumer spending flows from income or generates debt. Thus the economy can appear to be growing by leaps and bounds, even while private sector income—the only kind that matters for our prosperity and security—is on the decline.
What, then, has caused the decline? Inflation, whether high or “low,” has had terrible effects on wages, savings, investment, debt, and capital accumulation. In particular, the inflation of the late seventies, a consequence of getting off the gold standard, tossed married women into the workforce during their childbearing years. The costs of this are incalculable.
Moreover, the size of the public sector relative to the private sector, as measured by the federal tax take of family income (2% in 1950; 25-30% today) has zoomed, and so have the costs of a frightening large regulatory state. In short, the government has taxed productivity and grown at the expense of the middle class. The result is deep public discontent with government and its connected elites.
What’s astonishing is not that the mixed economy has harmed us so much—economic thinkers for centuries have pointed to the connection between tyranny and poverty—but that so few among those who see the problem are aware of its cause.
Lester Thurow of MIT thinks the problem is linked to the growing inequality between the rich and the poor that capitalism “inevitably” produces. Not that he argues the point. He merely assumes that because inequality is bad, more inequality is worse, and that the market is what brought us out of a mythical state of nature in which we are equal.
The inequality problem can always be solved in theory. Tax the rich until they are poor too. But that doesn’t help anyone but the government that gets the revenue. It certainly doesn’t raise living standards.
Yale feminist economist Juliet Schor struck a similar chord in The Overworked American. Americans work longer and longer hours, she notes, and married women working is the rule today; only a decade and a half ago, it was the exception (in the 1920s it was unheard of). Yet on average, two-thirds of their income goes to pay taxes, while the other third goes to paying the expenses associated with work itself.
Her analysis is trenchant, but her discernment of causes is fallacious: she blames employers for demanding longer work hours from employees. Let’s grant that all employers want all employees to work 100 hours a week and accept no wages; that still doesn’t address the question of why employees have to accept longer hours and lower pay. Since Schor fails to understand simple concepts like supply and demand in the labor market, she too calls for an end to the capitalist economy.
Robert Reich of the Labor Department sees public discontent, but says the trouble is that people are afraid of losing their current jobs. That myth, long perpetuated by the left, assumes that people have a strong desire to keep the same job year after year—a strange assumption. If they did, this could easily be accomplished by socialism.
What people want is not the same job forever, but work that pays the same or more for doing something worthwhile, whether that requires a job change or not. Decades of government invasion of private markets is taking a toll here too.
Economic ignorance isn’t a monopoly of the left, however. In right-wing punditry, Ben Wattenberg, Julian Simon, and Alan Reynolds are the leading deniers of decline. They rest their argument on the availability of technology (computers, cash machines, etc.) and the growth in consumption spending.
But technology alone doesn’t equate to prosperity. Public sector technology (e.g. star-gazing spaceships) is a net negative because it doesn’t serve consumers and is funded by taxes. The benefit of private technologies derives from creating economic growth over and above that which is not taxed or inflated away—not often the case these days. Gadgets themselves are not discretionary income, the heart and soul of family well-being.
Neither does our level of consumption define prosperity. Vast increases in consumption are real, but they have driven up consumer debt to the $1 trillion mark. Borrowing is increasing at a 17% annual rate, credit card debt alone is approaching $400 billion, delinquencies are at record highs, and savings are still plunging. It’s called living beyond our means.
These are not encouraging signs, but further proofs that our economic future is dim. The hallmark of a growing capitalist economy is the sacrifice of current consumption for future consumption. Economists call it having a “low time preference.” “High time preferences” are associated with the poverty of third world and the controlled economies like the old Romania, Bulgaria, and East Germany where “consumption” (overutilization of resources) was very high.
Another member of the see-no-evil school is Robert Bartley, editor of the editorial page of the Wall Street Journal. His book Seven Fat Years came to the defense of the 1980s, but it’s not until two-thirds the way through that we find his proof of prosperity. It’s summed up in two words: job creation.
But whoever said that prosperity should be measured by the total number of people punching clocks? You can always cause “job creation” by sending a wife to work along with her husband and children, but how does that make the family better off if incomes are falling? It turns out that this is precisely what happened in the eighties, a fact which shows that Bartley’s “job creation” signals not prosperity but a struggle to keep up.
There are still other explanations for our plight. Some people blame free trade for everything from family break-up to street crime, while others think the answer to middle-class woes is more managed trade agreements like Nafta and Gatt.
Irving Kristol may be wrong that decline is “our fate” as it was Britain’s, but at least he admits there’s a problem. That can’t be said of the legions of journalists who perform statistical somersaults to prove we are actually richer than we used to be. Nearly always overlooked is the explosion of two and three income families in the last generation.
What opportunity costs are imposed on families when wives and mothers have no choice but to work for wages and salaries? We can’t know. They are high and devastating, but ultimately unquantifiable.
What can be said of pundits who go to such great lengths to tell us we are not as bad off as we feel? Why must we believe that the direction of history is always onward and upward? The reason, it seems, has to do with the unpredictability of mass anger.
If the middle class—oppressed by the thievery and tyranny of statism—were to develop a class consciousness, and act on a coherent theory of who is doing what to whom, the result could be an authentic revolution against those who have transferred wealth and liberty to Washington, D.C. That’s why it’s time we admit it: we’re getting poorer and government’s the reason.
