Who Destroyed the Middle Class?
June 24, 2012
(This item originally appeared at Forbes.com on June 24, 2012.)
the U.S. middle class?
The difficulties experienced by the great middle in the U.S. can be,
in my opinion, traced to the delinking of the U.S. dollar from gold
in 1971. Now, I know a lot of people are going to say that is
ridiculous. But, one reason I say that is, even by the U.S.
government’s own statistics, the
income of the median full-time male worker begins to stagnate at
exactly that point, after rising by huge amounts during the 1950s
The median U.S. full-time male income was $47,715 in 2010. In 1969,
it was $44,455. The 1969 numbers are of course “adjusted for
inflation,” and you know that the government’s inflation adjustments
are thoroughly low-balled. With slightly more honest statistics, the
trend would not be flat, but instead downward over the past forty
Another way of looking at it is in terms of ounces of gold. After
all, gold was the monetary basis of the United States for 182 years,
from 1789 to 1971, so why shouldn’t we use that as a measure of how
much people are really getting paid?
Our median worker, in 1969, made $8,668 nominal. But, in those days,
the dollar was worth 1/35th of an ounce of gold. It works out to 248
ounces of gold. In 2010, the dollar’s value was, on average, about
1/1224th of an ounce of gold, and the full-time male worker was
making only 39 ounces of gold. This figure exaggerates the situation
somewhat, due to the rapid decline of the dollar vs. gold in recent
years, but it describes, I would say,
the economic reality of the situation.
Think of it like this: what if, in year 1, the average Mexican
full-time male worker was making 8,668 pesos per year, and the
peso’s value was one peso per dollar. The Mexican worker is making
the monetary equivalent of $8,448. In year 40, after four decades of
“easy money” and currency deterioration, the average Mexican worker
is making 47,715 pesos, but the peso’s value has fallen to 35 pesos
per dollar. We can see that the Mexican worker is making only
$1,363, and no amount of government statistical tomfoolery or
“purchasing power parity” arguments will change that fundamental
The fact that you can buy an iPad in Mexico City today, while forty
years ago you would have to make do with a television set based on
vacuum tubes, doesn’t change the fact that the Mexican worker is
making less. For some reason, we are able to see these things easily
when I take the hypothetical example of a Mexican worker, but
Americans are prone to states of denial when asked to consider that
maybe a similar thing has been happening to them.
This is why you “can’t devalue yourself to prosperity.” “Prosperity”
mostly means higher wages. But, each time you devalue the currency,
wages tend to go down in real terms, even if they go up in nominal
The Keynesians are quick to argue that their “easy money” policies
will lead to a reduction in unemployment. Sometimes, this works
(though not always). It often works because, when wages have been
lowered via currency devaluation, then there is more demand for
labor due to the lower price. Currency devaluation might help the
unemployed, but it hurts the employed – always a much larger number
– because their wages have been effectively cut.
Not only do things line up perfectly in terms of timing, but it
makes sense on a theoretical basis too, because stagnation and
indeed a real decline in wages is exactly the outcome you would
expect from a funny-money policy.
However, that is not the only thing that happened to the U.S. middle
class in those years. In general, we have a slightly better tax
system now than then, at least for upper incomes. I would like to
see a much better tax system, more like an 18% flat tax of the sort
that Steve Forbes and others have long promoted.
Reducing taxes on upper incomes may make the rich richer. However, I
don’t see how they make the middle class poorer – and that is the
problem we are talking about here — unless perhaps the tax cuts
reduce funding for government services. That has not been the case
at all: tax revenue as a percentage of GDP has been about as pancake
flat as anything can be for the last sixty years. The variation
which does exist (notably the large decline in the last few years)
is mostly related to economic performance, not tax policy changes.
Government spending as a percentage of GDP is at historic highs
However, one thing that has happened over the past forty or sixty
years is that taxes on lower incomes have increased. The payroll tax
was 3% in 1960, or 6% if you consider both the employer and employee
portions. Today, it is 6.2%, or 15.3% taking both sides and also
considering Medicare. That’s a big increase.
Sales taxes have risen from an average of 7.0% in 1983 to 9.6% in
2010. Unfortunately, the data becomes murkier going farther back,
but it appears that this trend higher in sales taxes has been taking
place since the 1950s.
Also, the basic exemption has been driven lower and lower, mostly
due to inflationary “bracket creep.” In 1950, a married couple was
exempt on its first $1,200 of income. That might not sound like
much, but in 1950, per-capita income was about $1,510. In 2010,
per-capita income was $40,584, and a married couple was exempt on
only the first $11,400 of it.
Overall, we’ve seen a gradual increase in the tax rates on the first
$50,0000 of income. Today, for a family of four that makes over
$36,900 — not exactly a high hurdle — you’ll be paying 15% on
marginal income, plus 15.3% in payroll taxes (directly or
indirectly), plus about 10% in sales taxes, plus additional
state-level and possibly city-level income taxes, plus property
taxes (directly or indirectly), plus additional fees and taxes on
your phone, gasoline, and whatnot. A single taxpayer hits this level
at $14,650. That is, in my opinion, much too heavy a burden at this
Another theme of the past four decades or so has been “outsourcing,”
first to South Koreans or Mexicans, but especially to Chinese or
Indians in the past fifteen years or so. The problem is that a huge
new supply of labor has been introduced to the world market economy.
This tends to favor capital, i.e. business owners, which is one
reason why U.S. corporate profit margins have been recently near
their highest in decades.
This has been a problem that we have been trying to deal with for
literally the entire history of industrial capitalism. In general, I
like to think of the “capital:labor
ratio.” This is more of an idea than an actual number. All
economists agree that rising incomes are basically a reflection of
rising productivity. You can’t have it until you make it. Think of a
person with “little capital.” We tend to like hole-digging for these
examples, so let’s give them a stick. The person can’t dig many
holes with a stick. Their productivity is low. Now we give them more
capital, such as a hand shovel. Their productivity increases. Now we
give them still more capital, in the form of a mechanized backhoe.
Their hole-digging abilities take a huge leap skyward. Now we give
them a huge amount of capital, in the form of a giant excavator
found in some mining operations. Their hole-digging abilities
increase again. They have become much more productive.
In practice, “capital” usually doesn’t take the form of these
simplistic examples. It could be education, or investment in
software research and development, or investment in a high-end hotel
resort, instead of these outdated “man with big machine” notions.
But, the basic idea still holds: when there is a lot of capital and
relatively little labor, then individual wages tend to rise. The
investment of a billion dollars in a high-end hotel resort allows
several hundred people to provide high-end hotel resort services, in
a similar fashion that investment in a billion dollars of digging
equipment allows several hundred people to provide excavation
Although capital does flow internationally somewhat, I find that, in
general, places with high levels of capital creation (i.e. a high
savings rate and low taxes upon capital and income) also tend to
have high levels of domestic investment. China
takes all the awards here, as it has a savings rate of about
50%, which is extraordinary. Chinese people are climbing the ladder
from stick to shovel to backhoe to giant excavator very quickly as a
result. The U.S. has a very low savings rate, commonly under 5%,
which contributes greatly, I think, to the capital-starved character
of the U.S. economy today.
In short, “labor” has effectively increased dramatically in the U.S.
due to “outsourcing,” while “capital” is scarce due to a low savings
rate and some of the worst treatment of capital, in terms of taxes,
in the developed world.
None of the things that we have enumerated thus far really has much
to do with the so-called “1%.” However, particularly in the last few
years, the character of U.S. policy has become distinctly
corporatist, favoring large-scale theft (“bailouts”) particularly by
the financial sector, although also by the defense, education, and
healthcare sectors in my opinion. Many corporations have also used
their political influence to allow themselves to engage in behavior
that is destructive to the middle class, such as predatory or just
plain excessive lending, for homes, autos and education, which might
otherwise have been curtailed. The U.S. healthcare system has also
become effectively predatory upon the middle class, claiming 17% of
GDP to provide what costs 5-8% of GDP in other developed countries.
In short, certain businesses are using their influence of the
political system to take the government’s money. And, since it is
mostly the “99%” who provide this money, via their tax payments,
this constitutes theft from the middle class by the oligarchical
class. So far, this theft has been financed essentially by debt, so
the effect on the middle class has not been felt directly. But, debt
will need to be paid, and it is the taxpaying “99%” that will do the
Those four elements – devaluation of wages by currency
mismanagement; mediocre tax policy including a gradual increase in
tax rates on lower incomes; the deteriorating capital:labor ratio;
and crony capitalist theft and predatory activities – constitute the
basis for the deterioration of the U.S. middle class today. How
could they be resolved?
A policy of stable money, in practice returning to a gold standard
system as was used for most of U.S. history until 1971.
, including both a reduction in top rates and a dramatic
reduction in taxes on lower incomes
to improve the capital:labor ratio, mostly by way of removing
obstacles to capital accumulation, and promoting a much higher
savings rate. Note that this is completely contrary to Keynesian
notions focusing always on increasing “consumption.”
all “crony capitalist” payoffs
, and regulating corporate
activity that tends to be destructive of middle-class welfare.
Unfortunately, we aren’t anywhere near having a rational discussion
about any of these topics. Democrats, for the most part, don’t even
understand them. Republican thinkers often do understand them, but
rarely talk about them as it tends only to result in an explosion of
I think it would be nice if Republicans could focus their attention
a little more on the median and less-than-median workers and
families in the U.S. Explain how policies such as the ones above
will help them more than any tax-and-spend scheme devised by the
Democratic party. Unfortunately, Republicans have made
themselves largely unelectable due to the fact that Republican
governments tend to forget everything they said in the election, and
instead, once in office, embark on an orgy of war, police state
expansion, and even bigger payoffs to their crony capitalist
Perhaps, before this crisis era is through, the U.S. political
system will get back on track again. But, in the end, it might be
some other country that manages to find the Magic
Formula for wealth and prosperity – the kind of wealth and
prosperity that “lifts all boats,” as it used to be said.