The slow fall of the middle class
How America lost the world’s best economy
Years ago, one of my News & Review colleagues wrote a piece about how some families establish a “family night”—usually Thursday—on which parents and children have the evening meal together. After reading the article in page proofs, I went to her office and asked, “Don’t most families have dinner together every night?”
“No,” she told me.
I heard a lot of reports like that in subsequent months as I brought up the topic with friends. Even if families do eat together, I heard, they’re likely to be engaged in things other than conversation—working on laptops, studying, whatever. I was astonished. When I was little, our family had dinner together every night. We chattered like crazy, learning what each other’s day was like.
Of course, our upbringings in the 1950s and ’60s were different in other ways, too, and I began researching the differences between the way we lived then and now. The more I learned, the more one question preoccupied me. In the 1950s, lower- and middle-class families could survive—indeed, thrive—on one income. What happened to that one-job economy? How did we let it get away?
After the revival of the women’s movement in the late 1960s, and during the battle over the Equal Rights Amendment in the 1970s, anti-feminist activists accused the movement of trying to force women out of the home and into jobs. Feminists replied that they wanted women to be able to choose whether to stay at home. In retrospect, it’s pretty clear that what was happening was not just that women were choosing to work, but also that they were being forced out of the home, not by the women’s movement but by an economy that was evolving. As the years passed, it gradually became less and less possible to support a family on one income until we reached the situation that exists today. It is now virtually impossible to raise a middle-class family on one income—and increasingly on two.
When I wrote that the economy is evolving, that makes it sound like a natural process. It is not. Humans—mostly men—have engineered a new system with full knowledge that the changes would injure the working poor.
My research uncovered some causes, and I’m going to list a few here. But do not expect an exposé of Republicans. Both parties are culpable. President Clinton once struck a deal with Republican leaders to target the working poor for more tax audits. Once that precedent was established, Clinton successor George W. Bush built on it. Eventually, most tax audits were performed on the poor. No such thing had ever happened in the history of the U.S. income tax. It was not only heartless but also inefficient—audits of the poor produce tiny financial results. It was bipartisanship in the era of polarization and mean-spiritedness.The Kennedy tax cut
The period from 1952 to 1963 was one of nearly unbroken prosperity. The top federal tax rate was 91 percent. That’s not to say all those at the top paid it. The wealthy are very good at evading taxes. But even factoring in evasion, the top effective tax rate was above 70 percent.
On Dec. 14, 1962, Democratic President John F. Kennedy proposed a supply-side tax cut to relieve “an economy hampered by restrictive tax rates.” By November 1963, the votes were in hand to get the cut through Congress. The president’s murder that month may have delayed the vote, but it came in February 1964. It cut the top tax rate to 77 percent.
Pulitzer-winning economic reporters Donald Barlett and James Steele later wrote about the consequences: “The importance of the Kennedy tax-law change would be little noticed at the time. But it was basically a new way of manipulating the system. Once the lawmakers, policymakers and lobbyists had seen the possibilities, they were more than eager to use it again and again. … Over the next 20 years, Congress would enact tax law after tax law that gutted the progressive structure of American taxes while throwing the doors of the U.S. Treasury open to those who could pay for access.”
When the rich paid fewer taxes, the burden of taxation moved lower on the economic ladder. Today the top tax rate is down in the 30s.
In addition, it began a trend toward the accumulation of idle capital. Business people used to plow more earnings back into the business. Pulitzer-winning financial writer David Cay Johnston has written: “A corporate tax rate that is too low actually destroys jobs. That’s because a higher tax rate encourages businesses (who don’t want to pay taxes) to keep the profits in the business and reinvest, rather than pull them out as profits and have to pay high taxes.”
In 2012, Johnston reported, “IRS data suggests that, globally, U.S. nonfinancial companies hold at least three times more cash and other liquid assets than the Federal Reserve reports, idle money that could be creating jobs, funding dividends or even paying a stiff federal penalty tax for hoarding corporate cash.”Deregulation and easy credit
Workers often pay the costs of deregulation. When Congress weakens carbon emission laws at the behest of corporations, children end up with asthma and other respiratory problems. In the late 1970s, deregulation was all the rage in government, particularly among Democrats, who could go against type and make points with conservatives.
In 1978, under President Jimmy Carter and a Democratic Congress, a bankruptcy bill made it legal for corporations in bankruptcy to retain the old officers, pay off their own debts first, then pay workers and pensions if anything was left. (The recent movie Going in Style—starring Morgan Freeman, Ann Margret and Michael Caine—is a remake. It changed the motivation of the elderly bank robbers from boredom in the first movie to the loss of their pensions to a bank in the remake.)
That same year, the U.S. Supreme Court released Marquette National Bank of Minneapolis v. First of Omaha Service Corp., which more or less turned credit card regulation over to the states. Congress did nothing to remedy the court ruling. Suddenly, middle-class families—which had not previously had a lot of experience with debt—were being swamped with offers of easy credit. Then the states learned a new way to screw families.
“Have you ever noticed that all your credit card bills seem to get mailed to South Dakota, Nevada or Delaware?” asked Pat Curry at CreditCards.com. During the deregulation mania, the economy was super hot from the end of the Vietnam War, followed by the Arab oil embargo. There was double-digit inflation, and interest rates shot sky high. State governments learned they could attract big credit card corporations by allowing brutal interest rates.
Luring customers into crippling debt became a prized corporate skill. In The Two Income Trap: Why Middle-Class Parents Are Going Broke, published in 2003, authors Elizabeth Warren (now a senator from Massachusetts) and Amelia Warren Tyagi reported how Citibank lending agents would steer families from the loans they wanted to loans they could not afford. The corporation was prosecuted and paid $240 million to settle the case. “In many cases, these lenders don’t just want families’ money; they also want to take people’s homes. … This practice is so common it has its own name in the industry: ‘Loan to Own.’”
Another measure, in a tax bill also under Carter, began the process of allowing corporations to dump pension obligations on workers. Previously, the companies had provided lifelong pensions. Now, the workers were responsible for creating their own pensions through 401(k)s. Whether they would be lifelong depended on how good of investors they were. Working people with little time or financial experience were expected to develop the kind of expertise enjoyed by the staffs of company pensions before the rise of 401(k)s.
Also under Carter, the top capital-gains tax rate was cut from 49 percent to 28 percent.
Usury (unethical or immoral loans with exorbitant interest rates) was made legal. State laws against usury were preempted by congressional action. States could reclaim their authority and reinstate their laws, but many of them never knew they had that option.
Without usury laws, the lending industry concocted an array of new easy credit devices with which to attack workers. Once-cautious financial institutions started handing out credit cards like cookies. Credit limits were increased as long as the payments kept coming. Customers were milked for as long as they lasted. Financial columnist Jane Bryant Quinn wrote in 2007, “Banks don’t cancel your cards, as they did in the old days; they just keep charging until you break.”
When they broke, some availed themselves of bankruptcy, so the corporations demanded that bankruptcy law be made harder to use. In 2005, Congress obediently enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. It did nothing to curb the corporations’ behavior, but made life harder for those trapped by corporate debt techniques.
“The simple fact that credit is easy to obtain doesn’t mean that you should be able to get money and then just wipe it out in bankruptcy,” said then-U.S. Sen. Harry Reid of Nevada, avoiding the issue of corporate conduct. The fact is, credit card holders did pay their balances—sometimes several times over, in interest. The new law did nothing to stop that.
After the period of double-digit inflation passed, the credit card corporations learned from the experience that some card holders will tolerate incredibly high interest rates rather than go bankrupt. So they exploited that sense of responsibility and kept interest rates high long after other interest rates had dropped like a rock. They continue today.
In 2009, after the federal government bailed out Wall Street, lawmakers seemed to feel an obligation to do something about credit cards. The Credit Card Accountability Responsibility and Disclosure Act of 2009 was enacted to crack down on card issuers and the practices they use to lure people into getting in over their heads. The companies said they needed time to get ready before the law took effect. They didn’t, but Congress—stuffed with campaign contributions—gave it to them. It was not nine days to get ready, but rather nine months, during which the corporations sent out interest-rate hike notices and rules changes. The Democrats, knowing the corporations were running wild, talked about moving up the law’s effective date. They dithered and, in the end, did nothing.Part-time work
Then part-time workers and temporary workers became popular with corporations, letting them avoid health insurance, sick leave, vacation pay and investment plans. Even in staid professions like law, medicine and education, what had been careers became the kind of thing college students and interns once did.
Even higher education uses and abuses part-time workers.
Said Robert Samuels, leader of a union representing librarians and nontenured faculty in the California higher education system: “So what you have at universities and colleges, you have top administrators, the people kind of running the show, making hundreds of thousands of dollars, sometimes, you know, close to $1 million, and coaches making over $1 million, and all these people who are not connected to the essential mission of research and teaching, they’re making all of the money. Meanwhile, the people who are doing the basic function of teaching students and doing important research often have very low wages and very insecure jobs.”
In 1992, Microsoft paid a $97 million settlement to 8,000 part-timers for benefits it had failed to pay. “These temp workers at Microsoft, who called themselves ‘permatemps’ because many worked there for more than two years, asserted that the company maintained a fiction that they were temp workers by hiring them through temp agencies to avoid paying them stock options, pensions and health coverage,” The New York Times reported. Instead of changing its ways, Bill Gates’ corporation thereafter just adjusted its behavior by firing temps after six months, escaping the law. Hundreds of major corporations followed Microsoft’s lead.
Another avoidance tactic involved the Patient Protection and Affordable Care Act, which requires owners of large businesses to provide health care coverage for those who work 30 hours or more per week. “To avoid that law, several companies like Walmart (WMT), Target (TGT), Trader Joe’s, Home Depot (HD) lowered the number of hours that employees worked to avoid paying health care,” CNN Money reported. “Some ended health care coverage for part-timers in 2013 and 2014. Thousands of workers were impacted.”The Bush tax cuts
Some legal strategies against the working poor are deft and surreptitious. Not these. They came right out and redistributed income upward. The working poor got nothing. The middle class got a little—a $1,180 tax cut per year, according to the Congressional Budget Office. Ah, but the folks at the top got more—$58,000 a year for the top 1 percent and $520,000 a year for the top 0.01 percent.
The tax cuts were enacted in 2001 and made permanent by the Democratic Congress and a reluctant President Obama in 2013. They increased both income inequality and the deficit.
Meanwhile, the middle class got a tax hike—a 4.2 percent payroll tax increase, more than doubling the payroll tax. Like the sales tax, this is a small but potent tax that is collected so gradually that workers have no idea how heavily they are being taxed.
And more …
This is hardly an exhaustive list. There are hundreds of ways government and business have ruined quality of life for workers. Start with the books listed at the end of this article.
Workers do their part. They work hard and have productivity that is the envy of the world. But Germany, France, Portugal and every other democracy gives workers better pay, more vacation, better benefits, fewer hours. The U.S. has the highest number of two-income households.
Pulitzer-winning author Hedrick Smith: “Americans, far more than people in the advanced economies of Europe and Asia, accept and even endorse economic inequality as an integral feature of modern capitalism.”
David Cay Johnston: “Now, less than a century after its adoption, the tax system is being turned on its head. Since at least 1983, it has been the explicit, but unstated, policy in Washington to let the richest Americans pay a smaller portion of their incomes in taxes and to defer more of their taxes, which amounts to a stealth tax cut, while collecting a higher percentage more in taxes from those in the middle class. The Democrats embraced this in 1983 when they controlled Congress. … Under the Republicans, beginning in 1997, this policy of taxing the poor and the middle class to finance tax cuts for the super rich was expanded through changes in the income tax system.”
Slowly, steadily, the burden on families over the decades grew. And there a toll in everyday life. When we postwar babies were kids, we never heard the term “latchkey kid.” It apparently existed as early as the 1940s but was not in common usage. There was usually a parent there when we got home after school. It was usually a mother. Today, there likely would be a fair number of fathers, too—if families could still afford it. We experienced joyful childhoods and started out in life with the pleasure of parents.
But the middle-class squeeze is destroying family life. Politicians talk about family values but tailor laws to annihilate families. Those families are burdened by taxes that used to be paid by those who could afford them, by debt shrewdly imposed, by jobs or multiple jobs that make off with family life.
Robert Kennedy once said that our incessant tracking of the gross national product does not count “the health of our children, the quality of their education or the joy of their play.” But when an economy tailored to the rich makes the lives of most people tense, driven, even miserable, we know those children pay a price—though it may not be counted—in the time they do not get with parents, in the time parents do not get with them.