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Who’s to blame for the shrinking middle class?

The Pew Research Center released a new report called “The Lost Decade of the Middle Class.”  According to the report, the middle class is earning less and shrinking in size.

Money quote:

In 2011, this middle-income tier included 51% of all adults; back in 1971, using the same income boundaries, it had included 61%. 2 The hollowing of the middle has been accompanied by a dispersion of the population into the economic tiers both above and below. The upper-income tier rose to 20% of adults in 2011, up from 14% in 1971; the lower-income tier rose to 29%, up from 25%. However, over the same period, only the upper-income tier increased its share in the nation’s household income pie. It now takes in 46%, up from 29% four decades ago. The middle tier now takes in 45%, down from 62% four decades ago. The lower tier takes in 9%, down from 10% four decades ago.

The problem, to summarize, is growing income inequality.  Who do American blame for this.

The majority of Americans blame Congress and the banks, which they should.  Congress’ inability to compromise on economic issues was highlighted during the debate over the debt ceiling, a debate largely responsible for America’s downgrade from a AAA rating.  Now, we’re approaching a new fiscal cliff which, according to the CBO’s latest report, could bring the U.S. back to recession if Congress fails to act.  As far as the banks are concerned, who can overlook the series of heinous bank scandals these past couple of months, as well as the key role the banks played in the subprime mortgage crisis.

Not to diminish the role that Congress or the banks play in our current economic state, but those are more current developments that have only exacerbated the problem which has actually been unfolding for decades now.  To better understand income inequality, you have too look back three to four decades…and you’ll see this:

For the past few decades, wages have not kept up with productivity.  For some, this is all too familiar.  People are working harder than ever despite the fact that the bottom 40% of our workforce hasn’t seen a pay increase in decades.

Productivity is virtually the supply of goods and services in the economy.  There is plenty of supply given the rise of productivity, but that’s only good news if demand rises with it.  Consumers can only demand products if they have the money to purchase them, which comes from their wages.  When wages don’t keep up with productivity, supply and demand are essentially out of whack.

There are several reasons for this.  Some of it has to do with the introduction of technology.  Some of it has to do with jobs going over seas.  Some of it has to do with decreasing membership of unions.  The bottom line is that most of this has to do with a globalizing economy.

The real problem isn’t globalization but, rather, how we deal with it.  How do you keep high levels of consumerism under stagnating wages.  Our solution was to make credit more available.  The only thing preventing an increasingly unequal economy from slipping into recession was the demand for credit.

This, however, just built the economy on top of debt which just made the problem worse.  There should have been mechanisms in place to protect the labor force from stagnating wages.  This is where we get back to Congress and the banks, but I’m not referring to the bickering and the scandals.  We should expect structural change from these institutions that shift economic power back to the side of labor.  We need to raise minimum wage, grow our manufacturing base, and end corporate favoritism in Congress.  If the middle class doesn’t grow, we can expect the 8% unemployment to be the new norm.



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