By Robert A. Olsen
Elections are about the future. Our choices should reflect our values and our desires for our country. But we need to understand our current situation and how we got here to avoid bad choices. Because economic considerations are important let's look at how America got itself into a major economic recession that's only surpassed by the Great Depression of the 1930s, a recession that very nearly destroyed the American economy.
A replay of this history is quite possible as current economic conditions are most similar to those that brought about the Depression, more specifically, a failed middle class and wealthy political extremists who object to policies targeted toward benefiting the average citizen. The recent financial collapse has been well documented. There's no doubt that financial market collapse was in large part caused by a collapse of trustworthy behavior. Lenders gave loans to those who should have been rejected and bad mortgage-backed bonds were sold to investors because they generated a brokerage commission for investment banks. Households borrowed too much, and when real estate values declined, bankruptcies blossomed and resulted in a lack of economic demand and increased unemployment.
But these financial sins were only the indicators of a more serious and potentially fatal economic condition, a condition that most politicians fear to mention but one that now has become a topic of debate among economists. The condition in question is the great financial discrepancy between the rich and poor in America. At this point the wealthiest 10 percent of the population now own about 75 percent of all that can be owned in America. The remaining 90 percent of the population must share the remaining 25 percent. This wealthy upper class also appears to have a stranglehold on American politics, especially at the federal level through the lobbying process. America now has a very shrunken middle class, and without a middle class a robust economic recovery is a faint hope at best. This was also the case in 1929. As then, major structural changes in the American economy are needed if the economy and democracy are to survive.
How did we get into this position and what happened to the middle class, which was the engine of the economy during the age of American prosperity from 1945 to about 1970?
During this period the productivity of the typical American worker rose by about 300 percent, but wages stagnated after about 1975. A 35-year-old worker today is not significantly better off than his father a generation ago. Increased globalization and manufacturing automation have taken a heavy toll on well-paying jobs. More people are working today, but at service jobs that don't support a decent standard of living. Most of the productivity gains have gone to corporate owners and top executives who have promoted privatization and deregulation for their personal benefit.
The 1945 to 1970 period was one where the federal government took an active role in pushing the economy toward full employment and a higher standard of living by enhancing workers power through unionization, public education, improving productivity, public infrastructure creation and maintaining progressive taxation. For example, the effective top marginal tax rate on the wealthy was then around 70 percent but now has been allowed to wither to approximately 25 percent. Even billionaire Warren Buffet has noted that his secretary now pays a higher tax rate than he does.
The tax revolts of the later 1970s were not so much about tax rates as about the lack of tax benefits going to average citizens. The United States has one of the lowest total tax burdens among all of the developed countries, and much less of the tax revenues go to benefit average citizens. Instead of using ample tax revenues to support the middle class, privatization has shredded the social safety net and redirected money to the pockets of the wealthy. Corporate lobbying has increased to over $3.5 billion per year, and congressional gridlock has almost barred the middle class from needed social programs, as the battle over heath care reform has recently demonstrated. Less government and increased privatization has meant less for the average American and more for the wealthy. Clearly, that's the opposite of what most conservative campaign literature claims.
How has the middle class responded to this deteriorating situation? First, more women went to work outside the home to augment family incomes. The proportion of working wives has risen from about 20 percent to more than 60 percent of households. Second, people began to work longer hours and multiple jobs. By 2000 the average "middle class" family put in more than 12 additional weeks of work per year than it did in 1979. This is more than 350 hours per year than the average European worker. Last but not least, the average family began to borrow heavily, especially against their houses, to get spendable cash. In the 1970s the average total amount borrowed was about 50 percent of one's after-tax personal income. By 2000 it was 138 percent of after-tax income. The average saving rate, which was about 7 percent in the 1970s, fell to nearly zero.
When real estate prices faltered, the debt house of cards collapsed, and we ended in our current predicament. Without a rise in middle-class incomes, there isn't sufficient demand to stimulate production and employment. In the short term the federal government will have to fill the void. But over the longer haul, more equality in incomes will be required to avoid future calamity. Norway, the wealthiest per capita democracy in the world, has relatively low income inequality.
So what are the implications for the upcoming election?
Beware candidates who promise a completely "free market" solution to today's economic problems. That's what got us where we are. We need a mixed economy, capitalism and strong government.
Beware the candidate who gets heavy funding from corporate interests. You may be electing the best candidate that money can buy.
Vote for candidates who don't favor scapegoat solutions such as banning immigration and building a global economic fence around America. This type of "hate baiting" got Hitler elected in the 1930s German recession.
Vote for candidates who favor a strong social safety net and restrictions upon the ability of corporations to claim that they are citizens with rights equal to those of real people. Large corporations with dispersed ownership have no moral center.
Robert Olsen is a behavioral finance research fellow for Decision Research in Eugene and a professor emeritus at California State University.