democracy, Economics, latest, USA
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America is Regressing into a Developing Nation for Most People

by Lynn Parramore, April 20, 2017, via Institute for New Economic Thinking
A new book by economist Peter Temin finds that the U.S. is no longer one country, but dividing into two separate economic and political worlds

You’ve probably heard the news that the celebrated post-WW II beating heart of America known as the middle class has gone from “burdened,” to “squeezed” to “dying.”  But you might have heard less about what exactly is emerging in its place.

In a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Peter Temin, Professor Emeritus of Economics at MIT, draws a portrait of the new reality in a way that is frighteningly, indelibly clear:  America is not one country anymore. It is becoming two, each with vastly different resources, expectations, and fates.

Two roads diverged

In one of these countries live members of what Temin calls the “FTE sector” (named for finance, technology, and electronics, the industries which largely support its growth). These are the 20 percent of Americans who enjoy college educations, have good jobs, and sleep soundly knowing that they have not only enough money to meet life’s challenges, but also social networks to bolster their success. They grow up with parents who read books to them, tutors to help with homework, and plenty of stimulating things to do and places to go. They travel in planes and drive new cars. The citizens of this country see economic growth all around them and exciting possibilities for the future. They make plans, influence policies, and count themselves as lucky to be Americans.

The FTE citizens rarely visit the country where the other 80 percent of Americans live: the low-wage sector. Here, the world of possibility is shrinking, often dramatically. People are burdened with debt and anxious about their insecure jobs if they have a job at all. Many of them are getting sicker and dying younger than they used to. They get around by crumbling public transport and cars they have trouble paying for. Family life is uncertain here; people often don’t partner for the long-term even when they have children. If they go to college, they finance it by going heavily into debt. They are not thinking about the future; they are focused on surviving the present. The world in which they reside is very different from the one they were taught to believe in. While members of the first country act, these people are acted upon.

The two sectors, notes Temin, have entirely distinct financial systems, residential situations, and educational opportunities. Quite different things happen when they get sick, or when they interact with the law. They move independently of each other. Only one path exists by which the citizens of the low-wage country can enter the affluent one, and that path is fraught with obstacles. Most have no way out.

The richest large economy in the world, says Temin, is coming to have an economic and political structure more like a developing nation. We have entered a phase of regression, and one of the easiest ways to see it is in our infrastructure: our roads and bridges look more like those in Thailand or Venezuela than the Netherlands or Japan. But it goes far deeper than that, which is why Temin uses a famous economic model created to understand developing nations to describe how far inequality has progressed in the United States. The model is the work of West Indian economist W. Arthur Lewis, the only person of African descent to win a Nobel Prize in economics. For the first time, this model is applied with systematic precision to the U.S.

The result is profoundly disturbing

In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration – check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.

In the developing countries Lewis studied, people try to move from the low-wage sector to the affluent sector by transplanting from rural areas to the city to get a job. Occasionally it works; often it doesn’t. Temin says that today in the U.S., the ticket out is education, which is difficult for two reasons: you have to spend money over a long period of time, and the FTE sector is making those expenditures more and more costly by defunding public schools and making policies that increase student debt burdens.

Getting a good education, Temin observes, isn’t just about a college degree. It has to begin in early childhood, and you need parents who can afford to spend time and resources all along the long journey. If you aspire to college and your family can’t make transfers of money to you on the way, well, good luck to you. Even with a diploma, you will likely find that high-paying jobs come from networks of peers and relatives. Social capital, as well as economic capital, is critical, but because of America’s long history of racism and the obstacles it has created for accumulating both kinds of capital, black graduates often can only find jobs in education, social work, and government instead of higher-paying professional jobs like technology or finance— something most white people are not really aware of. Women are also held back by a long history of sexism and the burdens — made increasingly heavy — of making greater contributions to the unpaid care economy and lack of access to crucial healthcare.

How did we get this way?

What happened to America’s middle class, which rose triumphantly in the post-World War II years, buoyed by the GI bill, the victories of labor unions, and programs that gave the great mass of workers and their families health and pension benefits that provided security?

The dual economy didn’t happen overnight, says Temin. The story started just a couple of years after the ’67 Summer of Love. Around 1970, the productivity of workers began to get divided from their wages. Corporate attorney and later Supreme Court Justice Lewis Powell galvanized the business community to lobby vigorously for its interests. Johnson’s War on Poverty was replaced by Nixon’s War on Drugs, which sectioned off many members of the low-wage sector, disproportionately black, into prisons. Politicians increasingly influenced by the FTE sector turned from public-spirited universalism to free-market individualism. As money-driven politics accelerated (a phenomenon explained by the Investment Theory of Politics, as Temin explains), leaders of the FTE sector became increasingly emboldened to ignore the needs of members of the low-wage sector, or even to actively work against them.

America’s underlying racism has a continuing distorting impact. A majority of the low-wage sector is white, with blacks and Latinos making up the other part, but politicians learned to talk as if the low-wage sector is mostly black because it allowed them to appeal to racial prejudice, which is useful in maintaining support for the structure of the dual economy — and hurting everyone in the low-wage sector.  Temin notes that “the desire to preserve the inferior status of blacks has motivated policies against all members of the low-wage sector.”

Temin points out that the presidential race of 2016 both revealed and amplified the anger of the low-wage sector at this increasing imbalance. Low-wage whites who had been largely invisible in public policy until recently came out of their quiet despair to be heard. Unfortunately, present trends are not only continuing, but also accelerating their problems, freezing the dual economy into place.

What can we do?

We’ve been digging ourselves into a hole for over forty years, but Temin says that we know how to stop digging. If we spent more on domestic rather than military activities, then the middle class would not vanish as quickly. The effects of technological change and globalization could be altered by political actions. We could restore and expand education, shifting resources from policies like mass incarceration to improving the human and social capital of all Americans. We could upgrade infrastructure, forgive mortgage and educational debt in the low-wage sector, reject the notion that private entities should replace democratic government in directing society, and focus on embracing an integrated American population. We could tax not only the income of the rich, but also their capital.

The cost of not doing these things, Temin warns, is incalculably high, and even the rich will end up paying for it:

“Look at the movie, Hidden Figures: It recounts a very dramatic story about three African American women condemned to have a life of not being paid very well teaching in black colleges, and yet their fates changed when they were tapped by NASA to contribute to space exploration. Today we are losing the ability to find people like that. We have a structure that predetermines winners and losers. We are not getting the benefits of all the people who could contribute to the growth of the economy, to advances in medicine or science which could improve the quality of life for everyone — including some of the rich people.”

Along with Thomas Piketty, whose Capital in the Twenty-First Century examines historical and modern inequality, Temin’s book has provided a giant red flag, illustrating a trajectory that will continue to accelerate as long as the 20 percent in the FTE sector are permitted to operate a country within America’s borders solely for themselves at the expense of the majority. Without a robust middle class, America is not only reverting to developing-country status, it is increasingly ripe for serious social turmoil that has not been seen in generations.

A dual economy has separated America from the idea of what most of us thought the country was meant to be. 

24 Comments

  1. I must say this article fascinated me, but I haven’t had time to comment on it this week. Something major clearly happened in the 70s which has resulted in the ‘Dual Economy’

    As I remember, Piketty’s own analysis was that multi-generational inherited wealth is a big factor. Others have focused on the fact of the ‘Nixon Shock’ (coming off the gold standard and the end of the Bretton Woods system) was the pre-requisite for the multiplication and subsequent deregulation of the money supply – a.k.a. financialization and leveraging of debt. Temin focuses on the Investment Theory of Politics: which has created a social apartheid and destroyed social mobility. David Harvey has commented that the subsequent globalization and neoliberalization of the American economy was the deliberate re-imposition of a structural class divide on society, and has shown how Capital accumulates wealth for itself by dispossession (“accumulation by dispossession” – his updating of Marx’s Primitive Accumulation concept) – which is the phenomena being shown here.

    Rather than focus on the uncoupling of Capital and Labour: something else happened in the 70s that does not feature here. A third, and often overlooked, pillar of economic development is the quality and abundance of input energy: cheap oil. Following (as I do) the work of Charles A S Hall and others: the quality (if not he quantity) of oil peaked in the 70s – and has been declining ever since. The fundament of this approach is that as the quality of recoverable oil decreases: the net energy available for productive work in an economy also decreases – called ‘exergy’ analysis. That means the economy, and particularly economic growth, will be hampered by its biophysical restraints. Also, all social diversity and complexity is built and maintained by the amount of surplus net energy (exergy) available. It’s not the economy; it’s the EROI, stupid!

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    • What we appear to have here are two economies: one that is (broadly) in keeping with the Laws of Thermodynamics and planetary boundaries – and one which is not. What are the FTE sectors: if not debt leveraged bubbles? How long can the ‘elite economy’ continue to grow, without biophysical restraint, on a highly leveraged almost free money supply – available only to those who already have capital – which Mad Max (Keiser) calls ‘interest apartheid’? [Not very much longer, if Yellen and the Fed ‘unwind QE’, and raise interest rates to historically ‘normal levels’ – as they have just announced?] There are other major factors involved (such as the Maximization of Shareholder Value: which limits the level of production capital and reinvestment into the business {which negatively impacts workers wages}; off-shoring into a globalized economy {i.e. make cheaper elsewhere and re-import – which ‘exported’ the middle class}; and the ersatz ‘productivity’ of the ‘real estate’ sector {yet another bubble} that Michael Hudson has highlighted – which Temin may deal with in his book?) – but a major omission here appears to be an exergy analysis.

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      • The crux of this comes in the paragraph headed “What can we do?” This makes some pretty fine suggestions – but based on an incomplete analysis. I am suggesting that we could implement all of these ideas (in an ideal world): and still watch the economy collapse – unless we take into account the energy input (and exergy creation) part of the equation…

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  2. alex in san jose AKA digital Detroit says

    I’m white, born in California, and came, originally, from the middle class. By the time I was a teenager we were in the “welfare class”. I studied electronics, did all the things you’re supposed to do, went to college with no family help (borrowed money) and ended up making less than the high school drop-outs in the warehouse who got to drive forklifts. You can do everything right. You can invoke all the spells: High IQ, hard work, long days, taking math classes over summers instead of having fun, good language skills (English is a skill, trust me) and even fairly good looks. It won’t lift you up out of the proletariat; your place in society is determined for you and this is not Stalinism, it’s capitalism.

    I am not learning more electronics, there’s zero money in it now. The two best possible things, for me, that I can self-train in are sign-painting and developing my voice to be a singing street musician because that pays better than being a trumpet playing street musician.

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  3. rtj1211 says

    It is very simple it comes to how you value societal contributions.

    One way to change that away from bot-controlling day traders is for the real economy not to raise finances on public stock markets. The downside is less ease in investors selling shares. The upside is a return of the link between share values and actual company performance. The peer-to-peer lending/investment space is one way that can happen. Ethical banking like that of Triodos bank (which last time I looked had a Tier 1 capital:equity ratio of around 14%).

    A second way is to boycott firms which treat workers badly or have aggressive tax avoidance/evasion policies. I have not used Google search engine for six months and I am no worse informed now than before. I buy all my vegetable seeds from small UK suppliers who produce all their seeds in the UK. Their quality is as good if not better than larger competitors.

    Quite frankly, a third way is to emulate the Amish and simply set up a parallel life outside establishment control. You could resurrect Detroit pretty easily that way, although no doubt the powers that be would stop it.

    A fourth way is to call for the execution of 100 democrats and 100 Republicans from government positions if they do not cut military spending by 10%. Very, very senior ones. America could cut its defence spending by 80% and still be more than adequately defended. It might not be an imperialistic crusader, but then terrorists would have less excuses to hate Americans. Of course, an instant 80% cut would derail the economy, but over two Presidential cycles, the defence economy junkie could be put through cold turkey and rehab programmes.

    What is needed is a new political culture which is not a war between labour and capital. Playing economic tug of war is not the way to build a society.

    I want a society where firemen and nurses, doctors and engineers are valued more highly than duplicitous stock traders. One where creating bubbles for the sake of it is not valued. One where a woman is believed to have grown as an individual giving her young children the best start in life, rather than becoming unemployable. One where those who grow healthy nutritious food whilst improving soil fertility are not facing annual bankruptcy. One where the value of ones humanity is not primarily measured by your salary, your wealth, your power.

    Politics as is is meaningless and dead for the majority. It is a career for self-serving bullshitters in the main. People are not represented, they are duped and betrayed.

    What is amazing is that apathy rather than insurrection is the effect of that….

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  4. Reblogged this on Move for Change and the Brooklyn Culture Jam and commented:

    Another voice about the reality of our current economy. For what it’s worth, people like Paul Craig Roberts were predicting over a decade ago that we were headed for third-world status if we didn’t address off-shoring and the death of middle-class employment. A nation of Walmart Greeters and hospital orderlies cannot pay for the huge military juggernaut we have, let alone cover the FICA costs of the Boomer generation. and the disconnect between salaries and productivity can’t be called out often enough. As for the racism that made this possible, not nearly enough has been written.

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  5. noreen cerino says

    While I agree with the premise of an economic and social divide between the coasts and middle America, I find much of this article to be patronizing and misleading. For one thing 30% of Americans have a BA or greater, not 20%, and many don’t live in the “FTE sector”. Here in middle America, a place this person has obviously never been to (you know, flyover country), we also have many wealthy people, people with good jobs, people who read to their kids, help with their homework, get a good nights sleep, actually ride in airplanes(!), have traveled both inside and outside of the country,enjoy enriching pastimes, read books, drive new cars and pick ups, are educated about politics and the world, etc. Your coastal elitist enclaves are also full of the “economically disadvantaged” who don’t have, or do any of these things. Many just rely on the government teat. Has middle America and the middle class taken a hit with the loss of blue collar jobs? Yes, certainly. Unlike the rest of you, we prefer, in general, not to think of ourselves as victims. You make middle America, the “other 80%, sound like a third world country, like we have the lock on single motherhood and poverty. Are you serious? Here in the heartland, we probably have a stronger work ethic, more intact families, certainly more self reliance, a better ability to take care of ourselves and others when the SHTF, and a stronger spiritual life which enables all these things. But as long as you have more new cars. Oh, look, here comes my broken down public transportation to get me to my night job cleaning toilets at Walmart. Gotta run.

    And there is the real divide. That people actually believe that’s how the rest of us live.

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      • Zabastovshchitsa says

        Not so, Vaska. I can’t recognise myself in Temin’s description either. Yet I expect you’d lump me in with the “victimisers” since I have a uni education and spent most of my working life in the “TE” part of the “FTE”.

        What my uni credentials and work history don’t tell you is that I grew up in poverty with no sense of stability at all, in and out of foster homes–never the same one twice– because my parents, both working-class, were disabled, my Dad away dying of tuberculosis and my Mum often in hospital with brain-chem problems. The first in my family to complete secondary school, I finally got a bachelor’s degree at night from a public uni at age 37 while working full time thru the day as the sole support of three kids, five cats, and a mortgage. Now in my late 70s and again involuntarily poor, my tiny flat is filled with books and a rescued cat (he seems like more), and my politics remain fiercely democratic and anti-elite.

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        • I don’t contest the reality of life experiences such as yours. They don’t, however, amount to a refutation of the fact that 40% of Americans are now jobless, as even Fortune magazine has been compelled to admit while minimizing the significance of that figure.

          http://fortune.com/2015/09/14/donald-trump-unemployment-rate-jobs/

          And that’s just for starters, as it doesn’t even touch the dismal state of the US education system, its health-care system, its infrastructure, its manufacturing sector, and its insanely bloated military budget which benefits only a minority.

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          • Zabastovshchitsa says

            I was objecting to your characterisation of Noreen as “one of the victimisers”.

            There didn’t seem to be anything obviously wrong in what she wrote, apart from “Your coastal elitist enclaves are also full of the “economically disadvantaged” who don’t have, or do any of these things. Many just rely on the government teat.” As far as I know, the only “government teat” is accessible only by the owner class. But that she’s wrong about that doesn’t seem to be evidence that she’s one of the predators.

            What she wrote appeared to me to be a defence of the people in the “flyover states” against the coastal elitist dismissal of them as worthless Lumpenproletariat.

            I lived for years in a “flyover state”, and graduated from its uni: few apex-predators live in those states, but millions of crypto-socialists do. People who still maintain the strong sense of community and interpersonal responsibility brought over from the old country in the 1800s. They’re not flashy, and will never go skiing at Gstaad or rub elbows with the Wall Street banker class. They raise their kids, go to church or shul most weeks, contribute to charity, mostly keep themselves to themselves. and steam quietly rather than make a fuss. But as Alinsky observed with relish, they’re potentially a bomb waiting to go off under the oligarchy.

            The Forbes apologia about 40% unemployment is a really nice example of dissembling and obfuscation. While acknowledging that women are half the workforce now, and that back in the day there was effectively a higher rate of unemployment because we weren’t, they don’t (and can’t really be expected to) connect the dots: our situation is even worse than it seems because there’s no longer any margin for bad luck or elite viciousness. If one member of a non-elite couple loses their job for any reason, the couple becomes poor because the other member is, perforce, already working.

            Effectively, we’re at something like 75% unemployment as compared to the halcyon days after WW2.

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            • My bad in wording it that way. I meant the second sentence to still refer to the 20% at the top of the socio-economic pyramid, and not to Noreen Cerino personally.

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      • noreen cerino says

        You just proved you have no idea what you’re talking about. I am neither a victimizer, nor a victim. I also think that classifying 80% of Americans as “victims” is just a ridiculous assumption. To fall prey to the idea you are a victim, often means you are not living up to your potential as a human being. I come from a hard working, middle class family. Grandparents and parents were both small business owners, among other things. All were immigrants who arrived with nothing in their pockets, working in the silk mills and one as a shoemaker until they saved enough to open a small business. None of us ever got rich, but we all survived and managed to build decent lives, in spit of some hard times. The majority of my friends and family have lived similar lives. Yes, I realize the middle class has shrunk tremendously in my lifetime, and I won’t even go into the reasons, only to say that your assertion we all are the 20% (victimizers) or the 80% (victims) is an ignorant premise. Part of the problem is that the 20% thinks we all must strive to attain their idea of what is a good or “successful” life. Much of that consists of how much stuff, or new toys you can amass. I have news for you. The key to a happy life is not if you can fly to Paris for the weekend. It’s the people who will be eagerly awaiting your return. In the long run, it’s the people in your life and your ability to except responsibility for your own actions and deeds, that make you a successful human being. I have never had enough wealth or power over others to be a “victimizer”, and while I’ve lived well below the poverty line at times, I will never, ever, be a victim. Possibly your biggest flaw, is you just don’t get that.

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  6. Fair dinkum says

    It was only a matter of time.
    Once the underclass had been crushed and squeezed for all they had ( which was SFA), the psychopaths were gonna go after the middle class.
    Cannibalistic blood$ucker$ who will not stop until complete collapse occurs.
    When that happens they won’t have enough soldiers, guns or bullets to stop the wars of revenge.

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  7. The US lost its way several decades ago and has wandered off the path of democratic capitalism. Today it is an oligarchy where the rich get richer and the poor get poorer. A false distaste for social capitalism has been inculcated in the population and it has worked to worsen their economic position now for many years. Americans are not the most erudite people in the World and the fact that all other First World nations have some form of socialism to take care of their whole society is not known to Americans generally. In a World of instant communication and instant access to information and knowledge, this problem could be cured immediately if an individual has the interest to pursue it. Unfortunately most don’t. In reality Americans are their own worst enemy!

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  8. worldblee says

    This article is on point. I work on the fringes of FTE sector, but I am acutely aware of the struggles facing the majority of Americans. However, most of the privileged class have no awareness or sympathy for those who didn’t get the same breaks they did. At most, they funnel any concern they have into the D party, which works hand in hand with the R party to preserve the current dual-nation setup in perpetuity.

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