Pushing people toward stocks, real estate and credit cards have all come at a cost — and with one goal in mind
If you’ve paid attention to the economy over the last few years, you’ve doubtless seen the charts and figures showing the decline of the American middle class in concert with the explosion of wealth for the super-rich. Wages have stagnated over the last 40 years even as productivity has increased, which is another way of saying that Americans are working harder but getting paid less. Unemployment remains stubbornly high even though corporate profits and the stock market are at or near record highs. Passive assets in the form of stocks and real estate, in other words, are doing very well. Wages for working people are not. Unfortunately for the middle class, however, the top 1 percent of incomes own almost 50 percent of asset wealth, and the top 10 percent own over 85 percent of it. When assets do well but wages don’t, the middle class suffers.
This ominous trend is particularly prominent in the United States. That shouldn’t surprise us: study after study shows that American policymakers operate almost purely on behalf of wealthy interests. Recent polling also proves that the American rich want policies that encourage the growth of asset values while lowering their own tax rates, and are especially keen on outcomes that favor themselves at the expense of the poor and middle class.
So why isn’t the 99 percent in open revolt? The answer lies in part because the top 1 percent have done an excellent job disguising the upward transfer of wealth by making the rest of us feel better off than we actually are while enriching themselves in the process.
To understand how they accomplished this, we have to realize that the peculiarities of American politics and culture do not tell the whole story. The trend toward greater hoarding of wealth by economic elites and shrinking middle-class incomes is not limited to the United States. It is present to one degree or another throughout the industrialized world. The self-interested preferences and self-serving ideology of the super-rich surely have influence, of course, but it also seems clear that a broader range of factors and economic policy decisions come into play. And indeed they do. The current inequality crisis has its roots in a series of decisions made in response to the inflation shocks of the 1970s and to the growing threat of globalization and workforce mechanization.
Simply put, starting in the 1980s policymaking elites in the Western world were scared to death of oil shortages, inflationary spirals and the impact of jobs being shipped to lower-wage nations or made obsolete by increasingly powerful machines and computers. Something had to be done. Even as foreign policy became explicitly focused on securing access to oil, domestic policy became focused on quashing inflation while disguising wage stagnation. Either countries needed to move sharply to the left through increased worker protections and redistribution of incomes, or to the right by substituting an asset-based economy for the old wage-based economy. Most chose to go right — an understandable move at the time given that state Communism was still a threat to capitalist economies, but also a spent and discredited ideology. Ronald Reagan best made the case for the new economic model in a speech from 1975:
Roughly 94 percent of the people in capitalist America make their living from wage or salary. Only 6 percent are true capitalists in the sense of deriving income from ownership of the means of production …We can win the argument once and for all by simply making more of our people Capitalists.
One of the chief ways that American and British policymakers put this vision into reality was by crippling organized labor. But while that certainly placed downward pressure on wages in the U.S. and Britain, labor was not so similarly affected in most of the rest of the developed world. Organized labor remains a powerful force throughout most of Europe, yet growing wealth inequality and a declining middle class are present trends there as well. The health of organized labor abroad has helped stem the tide, but has not managed to stop it. The less noticed but potentially more consequential way that policymakers across the industrialized world set about accomplishing this goal was to push their middle classes to invest their wealth into assets, especially stocks and real estate, then use the levers of public policy to inflate the values of those assets in order to disguise the inevitable declines in wages. There was also a concerted effort to hide wage losses by lowering the prices of non-perishable goods — even if doing so meant domestic job losses. These goals were accomplished in several ways:
1) Push people away from defined-benefit pensions and into stocks and 401(k)s. Believe it or not, there used to be a time when the Dow Jones and S&P 500 indices were little-noticed figures in the business section of the newspaper. That’s because most people’s retirements weren’t tied to the stock market. The switch from pensions to market-based 401(k)s helped change all that. Moving employees into 401(k)s did more than just reduce the obligated burden on corporate bottom lines. It also helped goose the growth of the financial sector upon which the ultra-wealthy depend for their passive incomes. This was not an accident. Combined with the Reagan-era excesses and the explosion of the tech bubble, suddenly Wall Street was hot popular culture, and the nation watched breathlessly as the health of the Dow Jones was commonly equated with the health of the overall economy. The share of GDP taken by the financial sector grew from 2.8 percent in 1950 to 8.4 percent and rising as of 2006, and financial sector profits account for nearly a third of all corporate profits in America. As a broader sector of Americans watched their meager stock portfolios rise, they weren’t as concerned with the slow growth of their regular wages. Only lately has the damage done to retirement security by moving from defined benefits to uncertain stock markets started to become more widely known.
2) Push more people into buying real estate, and increase home prices by all means possible. Rates of homeownership increased most dramatically in the 1940s to 1960s, creating the first major bump in housing prices. However, the period between 1960 and 1975 saw home prices decline slightly when adjusted for inflation. The government used the levers of public policy to encourage greater homeownership and reduce interest rates. Big business and wealthy interests pushed through Wall Street deregulation during the Reagan and Clinton eras, which not only boosted the stock market but also allowed large banks to make unprecedented money off of home loans. The end result was that wealthy landlords and asset owners got much richer while rents increased and wages declined, but most Americans didn’t feel the pinch because rising home values made them feel rich on paper until the Great Recession. After the financial crisis, policymakers have done everything in their power to boost both stock and home prices through quantitative easing, 0 percent interest rates, and increased homeowner incentive programs.
3) Democratize consumer debt, especially through credit cards. Americans born after 1975 don’t remember a world before the widespread use of credit cards. But it used to be that if a regular member of the public couldn’t pay his or her bills, debt wasn’t usually an option. But that wasn’t usually a huge problem, either: Because jobs were plentiful and wages had more buying power against the cost of living, most Americans didn’t need credit cards. Revolving credit used to be the province of capitalists, not of wage earners.
Though Diner’s Club cards originated in the 1950s, the charge cards as we know them today were truly born and popularized in the mid-1970s and early 1980s – not coincidentally the same time as Wall Street deregulation, 401(k) transitions and the birth pangs of the real estate boom. The boom in popular credit had two major effects: to enrich the same financial services companies whose success disproportionately benefits the wealthy, and to disguise and soften the effects of stagnant wages.
4) Reduce the cost of goods through free trade policies. The same decades that produced the previous trends also saw the implementation of free trade agreements like NAFTA. It is commonly understood today that these treaties benefit wealthy stockholders while reducing jobs in developed nations. But their less-discussed effect was also to reduce the price of many consumer goods made overseas, which in turn helped to disguise wage stagnation.
All of these moves toward increasing the value of assets do directly benefit the wealthy. But more important, they have served to create a more purely capitalist society, hide the decline of the middle class and mitigate public discontent over stagnant wages. There are many problems with this, of course. The first is that the vast preponderance of wealth will accrue to the very top incomes in an economy where assets inflate while wages deflate. The second is that a purely asset-based economy is bubble-prone, deeply unstable and given to sharp and painful boom-bust cycles. The story of the last half-decade is in part the removal of the blindfold that has been hiding wage losses over the last half-century. Housing prices have skyrocketed beyond the ability of most people under 40 to afford, even as household debt nears record highs. Nearly half of Americans have no retirement savings at all, while much of the rest of the developed world faces a pension obligation crisis.
The tools policymakers have used to distract the public from the raw deal of low wages are no longer working. And that may more than anything else help usher in a new era of populist progressivism in the U.S. — if, that is, the Democratic Party can shift itself away from reinforcing the asset-based economy toward rebuilding a sustainable model that encourages wage growth and a strong labor market.