What Middle Class?

Is the middle class doing worse or better since the 1970s? Depends, but if so, just barely. Is this the right question to ask? No. Let us explain.

Recently, a number of commentators have begun pushing back against the claim that the past thirty years have seen stagnating fortunes for the middle class. The claim comes from a variety of sources, perhaps most prominently from Piketty and Saez’s work on inequality. They have argued that median incomes have stagnated and that, from 1979-2007, the median income is up just 3% in real terms. But other mainstream economists think the data answers a poorly framed question. Meyer and Sullivan, two mainstream economsits, argue that “material well-being” for poor and middle income households has increased. Burkhauser et al. claim that if we look at post-tax and transfer household income, rather than pre-tax and transfer individual tax unit income, then the median household had seen a gain of 36.7% in their overall income.

Can everyone be right? Oddly, yes. The reason is that the difference here is not about the data – which we for the moment assume is more or less accurate – but the interpretation of the data. It is true that, as P-S say, the median, pre-tax and transfer individual median income is up just 3%. It is also true that, as Burkhauser et al. say, the median household post-tax and transfer income is up 37%, and that it is also true, as Meyer and Sullivan argue, that the material well-being of the poor is better than it was thirty years ago. That everyone can be right is only the beginning of the story.

Let’s take Meyer and Sullivan first. Note that material well-being or ‘standard of living’ can improve even as the poor take home a decreasing share of the overall social product. It is perfectly reasonable for Meyer and Sullivan to point out that economic growth over the past thirty years has made more high quality goods and certain amenities (like air conditioning) cheaper, and thus available to those who couldn’t afford them. It would be hard to imagine capitalism surviving if it did not improve material conditions. But this improvement in the standard of living is perfectly compatible with increasing exploitation of workers. At least since Marx we have known that immiseration is not an absolute but relative process. We can have increasing living standards for many, while those same many control less of their time than before. If $100 used to buy a black and white TV and now it buys an HDTV, then that qualitative improvement in material human well-being is perfectly consistent with stagnating compensation, declining bargaining power and more injustice. It might take only three hours for society to produce all the things I can buy with $100 rather than the four hours it used to. And so, if all I have is $100, my overall claims on society have been reduced, even if the quality of my goods have improved. Put another way, if originally I had $100 and GDP was $10000, and now I have $100 but GDP is $20000, then just because I have higher quality goods doesn’t mean that my fortunes are increasing.

It would of course be wonderful if we organized production for the sake of human needs, not profits. But it is pretty clear that is not Meyer and Sullivan’s interest in offering material human well-being rather than income and wealth as the measure of growth. Terry Eagleton once said that ideology works by being true in what it affirms but false in what it denies. It is true that standards of living have improved since 1970s, but it is false to think that refutes the concerns people have regarding inequality and growth.

Burkhauser et al. are taking a different tack. They argue that, if we want to know how the poor and middle class (whatever exactly the ‘middle class’ is) are doing, then we need to look at “real compensation.” We have to factor in not just pre-tax and transfer ‘market income’ but all the sources of compensation. After all, why should we care about what people take home before they pay taxes and claim benefits? Surely we care what households take home all things considered. And the real compensation by household has grown over the past 30 years, by about 37%. In fact, even in the worse period, from 2000-2007, while individual market income (pre-tax and transfer) declined by 5.5%, real compensation still grew by 4.8% because of elements of the tax code and public benefits, like welfare, earned income tax credit, unemployment benefits, and so on. Burkhauser supplies the following graph to illustrate his point:

Again, his own terms, Burkhauser is right. Real compensation has grown. Though note, two things. First, real compensation has grown very slowly: 1% per year, and has slowed to a near stop in the past decade. Further, “real compensation” has grown mainly because redistributive state measures have been large enough to cancel out declining individual wages and stagnating household wages. In other words, the market has been unable to produce jobs at the median level that compensate any better than they did thirty years ago (and below the median, real wages are decidedly worse.) Without progressive taxation and redistribution, real compensation would be down. In fact, the implication of Burkhauser’s data is that, for most people, the market has not created better jobs than thirty years ago. The bottom end is hanging on through transfers, not bargaining power and quality work. So when Burkhauser says “the notion that we as a society are not doing as well as we were 30 years ago, I think by virtually any reasonable measure, is just false,” this is not even true by his own measures. It’s certainly not true by the conventional conservative standard that people not be dependent on the state.

So far, we have just been considering the arguments on their own terms. In both cases, the authors do not prove that the economic situation over the past thirty years has been desirable or improving, which was their central intent. But that does not mean that the mainstream, default focus on median market income is still the right way to evaluate economic development. The median unit, whether it is an individual or household, is a narrow concern. It says nothing about class structure, how the worst off are doing, nor about economic possibilities and alternatives. For one, changes in wealth, not just compensation, are better indicators of class structure and advantage. In our society, it is wealth, especially financial wealth, more than income that confers security, greater bargaining power, and overall social power. And by that measure, our society is more unjust and exploitative. Recall this graph, showing decline in wealth for the lowest 60% of the population:

When we combine this graph, with some data on the actual distribution of financial (non-real estate) wealth, we are reminded why ‘median’ and ‘middle class’ are more ideological than they are analytical concepts.

Those who have no reasonable alternative but to sell their labor, as diverse a group as they are, still constitute roughly 80% of the population. These statistics suggest that behind ‘median’ income and compensation there is a much different distribution of wealth, and thus a different class structure than concepts like ‘middle class’ can make sense of.

We can ask even further questions – what kinds of jobs are being created, or could be created? Who controls job creation? Who has the freedom to ‘innovate’ and ‘create,’ and who serves the creators? An economy, after all, is never just about making new things, it is always about making new things under specific social conditions. Those social relationships always have to be reproduced, along with the goods and services that get produced. These are concerns about class structure and social power that mainstream economists are rarely interested in, but which cannot be dismissed by gesturing at living standards and compensation.

“A Populace Softened by a Market Rally”

Buried in an article on this week’s stock rally, the WSJ does some reasonable political analysis regarding public attitudes towards finance:

“Perhaps the biggest factor of them all is the market rally. The Dow Jones Industrial Average is up 12.7% in the last six months, 17.5% in the last two years and 97% from the crisis-era low in March 2009.

The recovery of wealth, leaving the market roughly where it was at the end of 2007, isn’t insignificant. Seventy-four percent of Americans who have yet to retire expect to tap funds they have in 401(k)s and other savings plans, while 40% will primarily use money invested in stocks and mutual funds. Even among those already retired, 30% draw most of their income from market sources, according to Gallup.

It’s only natural that people are feeling richer and less afraid. Reform Wall Street? Why spoil the party?

Tally all of it up and you have a populace softened by a market rally, distracted by home economics and lawmakers worn down by a record $474.1 million spent last year on lobbying by the insurance, real-estate, banking and securities industries.

Meanwhile, some of the protagonists are gone. Sen. Chris Dodd and Rep. Barney Frank have left the building. They both decided against running for new terms.

With resistance softening, it’s no wonder regulators are backing down and the president plays politics more than practicalities with his oil and tax policy.”

Of course, a 97% recovery of stock market values, and return to 2007 heights,  is not reflected in a 97% recovery of anything else. The unemployment rate remains 4% above where it was in 2007, and the upper 1% captured 93% of the growth during this ‘recovery.’  Why persistent high levels of unemployment, alongside stagnant wages and benefits, and and even more unequal ‘growth’ have not produced more social protest is still a mystery. Powerful Wall Street lobbyists can explain some regulatory changes (that’s the WSJ’s view), but not social passivity (very few Occupiers were retirees who had lost their 401(k)s…). It is conceivable that even very modest job gains are enough to give many hope that a recovery for everyone else is on the way. And that kind of hope might make many unwilling to rock the boat. But one suspects it has more to do with desperation mixed with the absence of a party or movement able to represent popular interests in a robust and sustained way.

Obama, The Economy and Upwards Distribution

A recent post by Matt Stoller over at Naked Capitalism drew our attention to one of Emmanuel Saez’s recent papers on ‘evolution of top incomes in the United States.’ Under Obama, the top 1% captured 93% of the growth since the recovery began in 2009. As Stoller observes, that’s 28% more than they captured under the 2002-2007 Bush expansion. It is also, on its own, reason to doubt whether it is reasonable to call the recovery anything like a recovery. Since 2009, the real incomes of the bottom 99% have grown 0.2%. (Saez does not break the data down any further.) Based on these numbers, the surprise is not the (momentary) phenomenon of Occupy, but that it was so short-lived and not more popular.

None of the economic data should be all that surprising since the lion’s share of the ‘recovery’ has been in stock market values and corporate profits (up 70-90% since 2009 Q1, highest since 1950), not employment, wages, and benefits.

Stoller explains this shift by Obama’s policy decisions, including his willingness to broker trade deals and stay the hand of regulations that might either impinge on the profits of the wealthy, or strengthen the bargaining power of the poor. And that may be some small piece of the puzzle. Stoller might have added the unwillingness generally among Democrats  to venture anything so radical as a public employment plan (public employment has in fact declined), or defend labor rights. But as much as we would like to blame Obama, there must be wider forces at play here, and we don’t just mean Republicans. The growth model itself, based on cheap labor costs, debt-financed consumption, and so-called ‘knowledge’ and ‘creative’ classes is what has stalled. That model, not just the banks, is what got bailed out, but it doesn’t do much of anything for most people. The upper end gets fantastically wealthy, throws crumbs and crust down to the professional classes, and the rest do what they can. Obama has surely done nothing to challenge the foundations of this economy, but then again, nor has anyone else.

TCM author Alex Gourevitch responds to critics of ‘equal opportunity’ article

The recent piece that Aziz and I published at Salon.com was a thought piece. Its purpose was to start a conversation about how to organize an economy in which each participant has the possibility of enjoying equal independence. We called this the ‘Lincoln’ vision, and contrasted it with the current meritocratic approach to equal opportunity, which we likened toJefferson’s notion of a ‘natural aristocracy’ (itself taken from James Harrington). On the latter view, there are a few talented individuals, and the primary purpose of an economy is to sort these few from the less talented many. The natural aristocracy is entitled to scarce positions of social and political power because of their purported virtue, a virtue supposedly established by their ability to win an economic rat-race. This is equal opportunity to become radically unequal, and in which most to end up enjoying little real freedom in their daily, economic lives. It is an unattractive ideal in its own terms, and has, anyhow, given some actual facts about theUnited States, become a dead letter.

The attraction of the view we associated with Lincoln is that it presented the economic order with a different task. Its purpose was to make available to all the possibility of economic independence, a condition understood as control over work activity, not just ability to sell one’s labor. Lincoln called this truly free labor, and contrasted it not just with slavery but with wage-labor too (or at least with being a permanent wage-laborer). The overall emphasis is not on selecting the talented few but on freedom for all. Lincoln himself, of course, was limited by a somewhat agrarian vision of what free labor would look like – an individuated condition of personal autonomy. Each individual owned a small share of the ownership of the means of production – land. We live on the other end of the industrial revolution, and any translation of this conception of economic independence has to take account of the collective character and scale of most work. But to get to that conversation, we first thought it necessary to draw the general contrast between the inegalitarian, meritocratic view of equal opportunity, whose purpose is to generate a ‘natural aristocracy’, with another view whose aim is to secure the equal freedom of all.

A response to a few critics of the piece:

‘Equality of opportunity’ v. ‘equality of outcomes’

More than one commenter has argued we are proposing to replace ‘equality of opportunity’ with ‘equality of outcomes.’ First, this forgets the basic factual point that ‘equality of opportunity’ never existed, we did not replace it with anything, and even if you think it at one point existed, it certainly does not exist in any reasonable measure in the United States at present. The gap between the rewards to positions for those ‘natural aristocrats’ and the rest has widened radically, and this economy is creating two kinds of jobs – a few very high paying, high status positions that come with significant amounts of power and influence, and the rest fairly crappy ones. As we noted, in this supposed knowledge economy, “according to the Bureau of Labor Statistics, of the 20 occupations projected to grow rapidly over next decade, just five require an associate’s degree or more. Just two require a doctorate or professional degree.” And everyone knows the direction of the wealth and income statistics.

But more than that the distinction between ‘equality of opportunity’ and ‘equality of outcomes’ is too vague to be meaningful. What is meant by opportunity or outcomes here? Even on current ‘meritocratic’ interpretations, equality of opportunity requires equality of certain outcomes. Minimally, certain laws must be in place, from equal civil rights to anti-discrimination statutes. More, everyone must have a certain level of educational achievement, range of skills, amount of mobility, and access to certain basic social goods; otherwise they won’t be able to compete for the available opportunities. Lack of education leaves individuals unqualified; lack of basic social goods makes individuals unable to take the risks, or at least not feel the pressure of the labor market so intensely that they cannot wait for something better to come up. If the relevant opportunities include something like starting a business, then some access to capital is necessary. But all of these preconditions – education, welfare, access to capital – are ‘outcomes.’ They are conditions that individuals have to actually achieve before we can say they enjoy anything like equality of opportunity. But those achievements or outcomes are not conditions that create themselves. They have to be maintained by social policy. So even on its own terms, the quest for equal opportunity is not the opposite of equal outcomes. Of course, the opportunities for economic freedom that we were talking about would require more radical economic reorganization than all that – the creation of a much different set of opportunities, of transformed work and economic structures. But that is not replacing ‘opportunities’ with ‘outcomes,’ it is an argument for the creation of different kinds of opportunities.

The vagueness in the contrast between ‘outcomes’ and ‘opportunity’ is not a product of lazy thinking, it is purposeful. Its rhetorical purpose is to associate any attempt to intervene in or manage an economy, especially redistribute property, with ‘outcomes’, and thus with unjust, authoritarian coercion. The thought is that all attempts to give people at work a say in the conditions of their own employment means the repudiation of “excellence” and “innovation” by the talented few. Such a view implies that equal opportunity is about individual “free choice” – where those that succeed were the “innovators” – even if the range of individual free choices is nominal, radically unequal, and indifferent to the resulting distribution of social and political power. It is a conservative talking point whose function is to redirect a serious discussion even of the minimal ideal the United States claims to uphold.

Lincoln v. Jefferson

Other critics were unhappy with our use of Lincoln and Jefferson, but mainly Jefferson. Let it first be said that our purpose was not to give an exhaustive interpretation of Jefferson, Lincoln and the differences between them. It was heuristic, to present two different ideals, one which saw the economy organized to reward those deemed fit to rule, and another whose purpose was to create conditions in which everyone could enjoy economic independence. We called one inegalitarian and the other egalitarian, but are well aware that the specific individuals can be found making other kinds of statements. Lincoln himself, even in the very speech we quote, pairs his egalitarian vision of an economy that makes equal independence for all possible, with the idea that people will fail because of their own lack of virtue. Some post-Civil War liberals used this idea to blame the working class for its poverty. These liberals made the deeply troubling jump of blaming individuals for outcomes that were the product of economic structure – a structure that, anyhow, in agrarian Wisconsinin 1859 (where Lincoln gave his speech), was not nearly as vivid as it would later become.

Perhaps there is a further problem. As one of our critics argued, Lincoln appears to assume the existence of a working class – “the prudent penniless beggar” – who rises through hard work. This is a vision of interclass social mobility, but there is no social mobility among classes unless we first assume class. So Lincoln is spouting mere class ideology. Here again, the criticism too quickly reads the vagaries of industrial society backwards. In fact, it is a reproduction of an ideological victory. That ideological victory is the one that wipes out alternatives that existed in the past, but were defeated. Permanent wage-labor and industrialization had developed in parts of the US northeast, but it was post-bellum America that saw explosive industrialization. In those social conditions, a particular assumption about the necessity and permanence of a working class became widespread, and was dressed up in the language of the nominal freedom of each ‘free laborer’ in contrast to the unfreedom of former slaves. In the minds of newly mobilized industrial workers, their nominal freedom paled in comparison to the old Lincolnian ideal of economic independence.  It also meant that such independence could not be achieved through a self-regulating commercial society or on laissez-faire grounds; independence would require a dramatic rethinking of economic relations.  This is why so-called “labor republicans” called for the creation of a cooperative commonwealth as the key instrument for fulfilling long-standing goals of equal freedom.  Importantly, for Lincoln, although it may have been a tenuous position even on the eve of the Civil War, he still assumed that economic independence was perfectly compatible with small-scale capitalism (of homesteading, shop owning, and even petty manufacturing).  Unlike later post-war liberals he was not forced to confront as fully the incompatibility between the goal of independence and the limitations of free market relations.

Still, for our purposes, the important point is that regardless of his conclusions about the market, Lincoln nonetheless was still working with a vision of economic independence as the goal of an economy, a vision very different that the meritocratic one today. Indeed, this ideal of independence entailed truly radical possibilities – possibilities which became central to the labor movement – precisely because it had not been stamped by the later Gilded Age view that freedom only consisted in the legal self-ownership of the penniless worker. Even for Lincoln, whatever his profound limitations, freedom carried with it the belief that an economy ought to make possible the equal independence of all workers.  That is freedom for all, not power and prestige for some, and it is worth recovering and adapting to our present conditions.

Expropriating the expropriated (1983-2009), or, Why It’s the Top 20 not Top 1% That Matter

Recently, the Economic Policy Institute published “11 Telling Charts from 2011,” including the following one showing the share that different segments of the US Population took of the wealth gain from 1983-2009.

When we first looked at this chart, we started reading from the left and adding the numbers but did a double take by the time we added the Top 1%, Next 4%, Next 5%, and Next 10% – or the top 20%. Add their shares together and you get 101.7%. At first that just didn’t seem right, since our assumption was that when you add up all the shares one would get 100%. Naively, we had assumed that, while radically unequal, the gain in wealth for all quintiles would positive. A piece of folk philosophy in the United States is that the rich can gain huge gobs of money and power, so long as the poorest can also have some piece; and that those who rise do so on their own merits, but not by making the worst off even worse off. That, as it turns out, is also a premise of the most influential theory of justice in contemporary political philosophy, which states that the only permissible inequalities are those that make the worst off better off than they otherwise would be under pure equality.

The past twenty-five years have followed a different path from mainstream, common sense theories of justice. The worst have been made worse off. Meanwhile, the massive gains of the top 20% were only as large as they were because wealth was redistributed from the poor to the rich (with very moderate gains for the top 20-40%). The expropriated were expropriated some more.

These figures are even more important than the income inequality statistics with which everyone is now familiar, because those income statistics alone give the impression that, at the very least, nobody is being made worse off. In addition, wealth is a much better indicator of social and economic power than income, as it shapes individual bargaining power, determines who controls investment, and establishes the distinction between those who are economically secure enough not to have to work, and those who aren’t. Looking at the graph again, a key political point emerges, which we have made before: the problem is not with the 1% alone. The expropriators area larger class than that. After all, the next 4% took just as large a share of the total wealth increase, and overall, the top 20% are doing quite well. To reuse a chart we have used before, the top 20% control 85% of the total wealth in the United States, and if residential wealth were removed (at least, value of primary homes), that would undoubtedly rise much higher.

So the current political obsession with the 1% introduces a very problematic distortion into the actual dynamics of class, and the real distribution of wealth and power, in the current political economy. We are the 99% has a wonderful, quasi-universalist ring, but actually real distinctions under the rug, and implicitly dodges hard conversations about the real class composition of the United States. A real critique would have to reach beyond mere populism.