from the American Prospect:
The Middle Is Falling Out of the Economy
What has happened that has so changed the economic life of the American people? And what changes in public policy can our government undertake to remedy the fact that so many Americans to believe that our best days may be behind us? Harold Meyerson | February 13, 2008 | web only
At the surprising invitation of House Appropriations Committee Chairman David Obey of Wisconsin, I testified today to the Labor Subcommittee of the House Appropriations Committee (Obey chairs the subcommittee as well) on the long term state of the economy, rising inequality, the dearth of good jobs in the middle of the economy, and America's changing role in the world economy. What follows is an edited version of my written testimony.
Mr. Chairman, over the past three decades, not the bottom, but the middle has fallen out of the American economy. The great social achievement of the United States in the 30 years after World War II—the creation of the world's first majority middle-class, of a society that offered more economic stability to more people than any in human history—has been undone.
The stagnation of incomes for most Americans, the injection of insecurity and instability into the lives of the American people, is at the root of many of the seemingly discrete problems that we are grappling with today. The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, "forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income." And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.
Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.
I do not mean by these assertions to hold those financial institutions blameless in the current crisis, far from it. They aggressively marketed credit cards and mortgages to consumers whom they knew would have trouble paying back their debt. I merely wish to point out that had the incomes of ordinary Americans continued to rise over the past 30 years as they had in the previous 30, the American people would not have taken on so much debt.
What has happened that has so changed the economic life of the American people? Why do a clear plurality of Americans, in several polls over the past two years, now say they believe that their children will have a harder economic life than they themselves have had? Can this really be Americans speaking—that most optimistic of peoples, believers for centuries in the certitude that their children will have a better life than they had? How has this nation of incorrigible optimists become a nation of pessimists? And what changes in public policy can our government undertake to remedy the problems that have caused so many Americans to believe that our best days may be behind us?
THE MIDDLE VANISHES In 1980, economist Alan Blinder, later to become Vice-Chairman of the Federal Reserve, wrote that the level of economic equality in America had become a constant. "Income inequality," he wrote, "was just about the same in 1977 … as it was in 1947." Blinder was right, but even as he was writing, the situation was beginning to change.
In the 1980s, economic inequality in America soared. Many mainstream economists at the time laid the blame on technological change, which enabled better educated Americans to benefit from productivity gains while less educated Americans lagged behind. As Thomas Lemieux, an economist at the University of British Columbia, argues in a paper ("The Changing Nature of Wage Inequality") issued by the National Bureau of Economic Research last October, that thesis failed to explain why the same rise in inequality wasn't evident in other advanced economies undergoing analogous technological changes. ......(more)
The complete piece is at:
http://www.prospect.org/cs/articles?article=the_middle_is_falling_out_of_the_economy