The US Middle Class is Shrinking and Moving Towards a “Dual Economy”

MIT Economist Peter Temin, the author of “The Vanishing Middle Class,” explains how the US is moving towards two economies, one for the lower 80% and one for the upper 20%

By Gregory Wilpert and Peter Temin

Source: Real News Network

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert, coming to you from Quito, Ecuador. Inequality in the world, and specifically in the United States, has been gaining more and more attention recently. Last week, the Pew Research Center, released a new study on the size of the middle class in the U.S. and in ten European countries. The study found that the middle class shrank significantly in the U.S. in the last two decades from 1991 to 2010. While it also shrank in several other Western European countries, it shrank far more in the U.S. than anywhere else. Meanwhile, another study also released last week, and published in the journal “Science”, shows that class mobility in the U.S. declined dramatically in the 1980s, relative to the generation before that. Finally, a book released last March by MIT economist Peter Temin argues that the U.S. is increasingly becoming what economists call a “dual economy”; that is, where there are two economies in effect, and one of the populations lives in an economy that is prosperous and secure, and the other part of the population lives in an economy that resembles those of some third world countries. Joining us to talk about all of this from Cambridge, Massachusetts, is Professor Temin, the author of the book, “The Vanishing Middle Class: Prejudice and Power in a Dual Economy”. He is Professor Emeritus of Economics at the Massachusetts Institute of Technology. Thanks, Professor Temin, for making the time to talk about your book today.

PETER TEMIN: Okay. Thank you. Glad to be here.

GREGORY WILPERT: You begin your book with an analysis of the middle class, kind of like what the Pew study does that I mentioned in my introduction. You show that the middle class’s income, as a percentage of all incomes, has been shrinking between 1970 and 2014. At the same time, the upper class income grew significantly. I want to ask first, how do you define the middle class, and what conclusions did you draw from the shrinking income of the middle class?

PETER TEMIN: Okay. I’ve taken my definition from the Pew Research Service. In a slightly earlier episode, they showed that the middle class was losing out. That’s the first figure in my book. And it’s defined to be from two-thirds of the median earning to twice the median earning. The median earning are the earnings of a person who is mid-way among all the incomes received by people in the United States. And so that’s kind of the middle person there, and that’s why this is called the middle class, deviating up and down around that middle person. And then… okay. The new study uses after-tax disposable income, whereas the previous study that I did used before-tax income; and so that that makes a little difference in the numbers, but the effects are exactly the same. The middle class is shrinking in the United States; and I argue in my book that this is an effect of both the advance of technology, and American policies. That is shown dramatically in the new study, because the United States is compared with many European countries; and in some of them, the middle class is expanding in the last two decades, and in others it’s decreasing. And while technology crosses national borders, national policies affect things within the country. I argue that, in the United States, our policies have divided us into two groups. Above the median income – above the middle class – is what I call the FTE sector, Finance, Technology and Electronics sector, of people who are doing well, and whose incomes are rising as our national product is growing. The middle class and below are losing shares of income, and their incomes are shrinking as the Pew studies, both of them, show. And I argue… Oh, okay. Go ahead.

GREGORY WILPERT: Yeah. No, I was just going to say, before we go into the issue of the dual economy, I just wanted to look at some of the explanations for what has been happening. That is, you show another interesting graph which shows the relationship between the average wages and productivity between 1945 and I think it was 2014; and it clearly shows that while the two lines – productivity and average wages – grew in parallel from 1945 to the 1970s, after the 1970s they began to diverge very strongly; and wages remained stagnant while productivity continued to increase at the same rate as before. What is the significance of this divergence and why do you… why would you say that these two lines have begun to diverge?

PETER TEMIN: Okay. They diverged in the 1970s by policies that were the result of a backlash against the civil rights revolution of the 1960s. And so the policies were against unions; were a reorganization of industry and a variety of things on that side. They were also the result of decontrol of the national economy. It started under President Nixon, and then were expanded greatly under President Reagan in the early 1980s. But the wage divergence from the overall productivity began almost immediately. And the progress that came was partly electronics and the things that we know about communication, that allowed businesses to control the activities of people, and allowed, then, large firms to spin off a variety of their activities; So that instead of making a wage decision about their ordinary, less-skilled workers, they made a purchasing decision to hire a company that supervised these people. And that was good for the company, because it emphasized their core value, and was reflected in their share price and in the stock market. But it was bad for consumers, because… or workers, because there was an ethical… an equity consideration on wage decision, where wages of the less-skilled workers were to keep up with the wages of the highly-skilled ones; but a purchasing decision, or a sub-contracting decision; and none of these equities avail.

GREGORY WILPERT: I just wanted to turn to now the question about the dual economy. I mean, it was established… or you’ve established that the middle class is definitely shrinking across… according to these other studies. But how do you reach the conclusion that there are two economies in the U.S., that is, a dual economy? I mean, after all, why not talk about perhaps a triple economy: one for the poor, one for the middle class, and one for the upper class? Why a dual economy?

PETER TEMIN: Well, I used that model because the model – which is an old model from the 1950s – shows that the FTE sector makes policy for itself, and really does not consider how well the low wage sector is doing. In fact, it wants to keep wages and earnings low in the low wage sector, to provide cheap labour for the industrial employment. But the people in the United States, in the FTE sector, are largely ignorant of what’s going on in the low wage sector. For example, about this time also started an increase in criminal employment, resulting now in the United States having more people in prison, relative to its population, than any other advanced country in the world. And most people in the FTE sector are not aware of this. Prisons are located in rural areas; the judicial processes take place there; and people are not conscious of this at all. But having a lot of people in prison then rebounds badly on public education in the neighborhoods that the people come from. And the discussion of urban education never refers to mass incarceration. It doesn’t really provide any extra resources to compensate the kids who are involved – who are affected by having so many adults in prison. And so the dual economy helps to take these disparate things about mass incarceration, and education, and see the connections between them.And the connections, I argue, are because the dual economy – they are in their own dual economy – and they make rules, and laws, and so on, for their own benefit, and are punitive or neglectful of things going on in the low wage sector.

GREGORY WILPERT: Well, unfortunately, we need to stop here for the end of the first part of our interview with Professor Temin, the author of the book, “The Vanishing Middle Class: Prejudice and Power in the Dual Economy”. We will return for the second part. We’ll also explore some of the reasons for how this was possible; also particularly that this 20% – or the upper part of the dual economy – is able control the economy to such a large extent, and the politics. So make sure you watch the second part of our interview here on The Real News. Thanks, Professor Temin, and we’ll connect again in a couple of minutes for the second part.

PETER TEMIN: Okay. Thank you.

GREGORY WILPERT: And thank you for watching The Real News Network.

GREGORY WILPERT: Welcome to The Real News Network. I’m Gregory Wilpert, coming to you from Quito, Ecuador. This is Part 2 of our interview with Professor Temin, the author of the book, “The Vanishing Middle Class: Prejudice and Power in a Dual Economy”. Thanks again for being here, Professor. P

ETER TEMIN: Okay. Thank you.

GREGORY WILPERT: You developed the rather provocative thesis that we started talking about in the first part of this interview; about that the bottom 80%, more or less, are beginning to live in very separate and different conditions from the other, the top 20%; and that this bottom 80% lives in conditions that begin to resemble more those of a third world country, than those of a first world country. Explain that a little bit more. How is it that… I mean, what makes this lower 80%’s living conditions resemble those of a developing country more than a developed country, such as we usually think of?

PETER TEMIN: Okay. I thank you. Well, I mentioned in the first part that urban public education was in crisis. And so that’s one way you can see this; that where the rich people live in the suburbs around public schools are fine – you know, they have their problems, but they’re good schools – but in the inner cities, they are starved of funds and having problems. This results, in part, from the great migration, where African-Americans moved out of the South – and the New Jim Crow that they were subject to in there – into the North. And court decisions, Supreme Court decisions in the 1970s, deprived the inner cities of funds. Now, in addition to education, if we take infrastructure, and think about public transportation in the cities; that the rail systems that served the larger cities – you know, the ones … Boston, New York, Washington – are aging, and they are beginning to break down. And yet nothing is being done to really help them. The American Society of Civil Engineers gave the United States a D-minus – that is, almost failing – grade for its infrastructure. Going up from subways and things; if we think of rail tunnels, Governor Christie, some years back, halted a program to build another tunnel under the Hudson River from New Jersey to New York, to enable cars and trains to go from where people could afford to live with where they were working; and so that results in much congestion and delays and problems in getting there. On the roads, also in urban roads, there are lots of potholes and so you have to drive carefully. Very much, I had better roads in Guatemala when I was there some years ago, it seems to me. Although there were some problems there, so I don’t want to say they were great roads. But of course there wasn’t as much traffic on the roads, so it was easy to avoid…

GREGORY WILPERT: Sorry. One thing that I’m wondering about, though, is… I mean, you kind of mentioned this, or alluded to it, in the first part; which is this kind of strange phenomenon where… I mean, 80% make up a vast majority of the population, yet they’re suffering from the policies that are determined by the top 20%. Supposedly — or presumably — the United States is a democracy. How is it possible, then, that we live in such a dual economy, in which the 80% don’t get a chance to change the policies that are contributing to this, so to speak, the dualization, if you will, of the economy?

PETER TEMIN: Yes. That is the big question. But another Supreme Court decision decided that money was speech; and therefore the constitutional grant that there should be freedom of speech, meant that there should be freedom of people to spend money to support political candidates. And that has resulted in a tremendous increase in the amount of money going into politics. And so the influence of this money has pushed the representatives who make the decisions toward being responsive to the upper… the FTE sector, rather than the desires of the voters. And many political scientists have found that congressional decisions — the policies that come out of congressional action — are in fact responsive more toward the moneyed group of people than they are toward the majority. And so this is coupled with another Supreme Court decision that gutted the part of the Voting Rights Act from the 1960s – that’s in the civil rights revolution – that allowed the federal government to suspend state actions, mainly in the South where the Confederacy was, but some in the North too. That was eliminated, and so voter suppression has increased. And the way… after the civil rights movement, we can’t talk about whites versus blacks as they did earlier; but you have code words that you say; for example, that several states are flirting at the moment with requiring a photo ID in order to vote. And I heard on the radio, when this was being discussed, that one of the commentators said, “Oh, yes, well, that’s no problem. Everybody has a photo ID.” Everybody in the upper sector has a photo ID, because that person has a driver’s license, or a passport, or something else related to their employment. But in the lower sector, a lot of poor people do not have photo ID; because they don’t have cars; because they use the subways, that I say are now in trouble; or they’re rural; or all kinds of reasons why poor people don’t have photo ID. But that’s a coded word for keeping African-Americans from voting. And the policies are directed towards all poor people, so they keep Latinos from voting, and they keep poor whites from voting.

GREGORY WILPERT: Sorry – just before we finish up – I just want to quickly touch on the issue of the policy recommendations that you develop in your book. In order to get the U.S. out of the dual economy, what kinds of measures could be taken – just very briefly?

PETER TEMIN: Well, the most important one, and the one I listed first, was to improve public education.That is to say, in the model that I’m using, the transition – which you say is getting harder in the United States because of the growing inequality of income –- the primary way of getting from the low wage sector into the higher sector is through education. But education requires a lot of commitment on the part of the families being educated, and a lot of support from the government, which it is not getting at this point. Support should start really with early education — the mayor of New York is trying to have early education start at three years old, and that is a very good measure; I don’t know how successful he will be; but it’s a move in the right direction – to compensate for the fact that in the upper sector children grow up with books all around them. In the lower sector, children have often not even seen books until they get to school. And so there is a whole question of acculturation to academic study for these poorer people. That is to say, that urban public schools need to have more resources than suburban schools – which serve the higher people in the higher sector – but in fact now they get fewer resources per student. And this education needs to be continued through schools; through primary school, secondary school; and then to get into the higher sector, you really need to go on to college. And college, a generation ago, let’s say before the 1970s, was open, because every state had a state university with essentially free tuition. Now, the states have withdrawn from supporting the state university, and so most of the revenue of the state universities comes from private sources; and they need to raise tuition on the student to keep the college operating. Now, when poor people try to go to college, they don’t have the money, and there are none of these free colleges available for them. They need to borrow money. And the amount of educational loans has skyrocketed in the last several decades; and so the problem of student debt is second only to the problem of mortgage debt in the United States.And the oppression of having large student debts keeps people – youngsters – from trying this effort… well, they keep trying, and that’s why they get into debt. But it keeps more of them from getting… well, more of them from trying to get into the higher sector; and those who try often find themselves so burdened by debt that they can’t get there at all.

GREGORY WILPERT: Right. Well, unfortunately we’ve run out of time. But thanks so much, Professor Temin, for having joined us today to talk about your book, “The Vanishing Middle Class”.

PETER TEMIN: Okay. Thank you very much for having me.

GREGORY WILPERT: And thank you for watching The Real News Network.

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