The Erosion of the Middle Class

With the revolutions in Egypt, Tunisia and elsewhere in the Middle East fresh in our minds, we have to ask ourselves what inspired such dramatic change. There are a variety of reasons that contributed to the eventual downfall of the ruling parties of theses nations; including corruption, police brutality and the ever-widening gap between the rich and poor. Many of us in North America cannot even imagine living in a country that exhibts these symptoms of plutocracy and a "sweatshop" economy, but it would surprise you how similar America and Egypt really are.

The Gini Index is a measures the inequality of income distribution of a nation on a scale of 0, being perfectly equal and 1, being totally inequal. For example, Sweden has a Gini Coefficient of .23, which is the most equal income distribution in the world. Egypt had a Gini number of .34.4, and Tunisia sat at .4, both of these countries were notorious for their gap between the wealthy and those in poverty. A quick glance at the CIA's World Fact Book will surprise any reader that the United States has a Gini Coefficient of .45, with Cameroon and Iran beating out America with a .446 and .445 respectivly. How is it that the "Land of Opportunity" has a more severe gap between the rich and the poor?  How is it that a country that prides itself on social, cultural and economic mobility scoring higher than nations that are labeled "dictatorships" and overthrown by their people?

America's Gini Index over the decades

One of the main agents of this polarization of wealth is the economic doctrine of Reaganomics or "Trickle Down Economics" so-called because of the idea that the wealth generated by the rich will make its way down to the lower classes. The four main tenets of Reaganomics are reducing governement spending, reducing income and capital gains taxes, reducing government regulation in all aspects of the economy and implementing a monetary style approach to control the money supply. It is important to look at the historical context of this economic doctrine. Reagan gained the presidency in a time when stagflation (a period of high inflation and low economic growth) was occuring due to the control of the oil supply at the hands of OPEC during the mid-seventies. This difficult time in history can be used as justification for Reaganomics, which did help stimulate economic growth for the short run however it has had disasterous effects on the middle class as time wore on. One strategy implemented by the Reagan administration in order to curb inflation was borrowing money both domestically and internationally in order to pay off the mounting federal budget debt. While effective in the short run, this ill-advised policy was devastating to the national debt, increasing it from $997 billion to $2.85 trillion during one presidential term. Ronald Reagan, the great actor, managed to triple the national debt in a time of peace.

Another consequence of the borrowing of money internationally in order to pay off the federal budget debt is America's destitute current account balance. The current account balance of a country is determined by the difference of it's savings and investments. If this number is postive it measures the value of said country's investments abroad. If negative it measures the amount of domestic investments financed with foreign money. America currently has the world's lowest current account balance with a crippling -561 trillion dollars and counting. It was Ronald Reagan who transformed the United States from a loaning nation, to a nation hopelessly in debt to foreign countries such as China and India. What is going to happen when these investors overseas call in their loans?

The final adverse reform that Reagan enacted economically were the Tax Reforms of 1986. This reform reduced or eliminated tax deductions available to consumers and also expanded the Alternate Mininum Tax from being exclusive only to rich investors and made middle class families and those who own a home subject as well. Higher income earners were disproportionatly less affected by this form of taxation than the middle class. The legacy of the AMT reforms is the fact that they were the stepping stone that allowed the tax burden to shift from the wealthy to average citizen. This, combined with rampant deregulation of commerce and industry, union-busting and tax cuts for the rich sets the stage for the decline of the middle class in America today.

 Over the last forty years a phenomenon known as median wage stagnation has been taking place in America. The name of this economic term is pretty self-explanatory, the wage increases of the middle class have risen a paltry 10% in the last four decades while the highest bracket's income has tripled. In 1973 chief executives were being payed 26 times the median income, now their wages are over 400 times the median. Another factor that contributes to the vast expanse between the rich and poor is the outsourcing of manufacturing, information technology, software engineering, research and tradable proffesional services to foreign countries such as China and India. This leaves fewer and fewer jobs for the bottom 90% of the income bracket while the super rich become even more obscenly wealthy. This contributes to Americas high unemployment rate of 9% or 14 million people. Outsourcing also affects the duration of unemployment, the average length of unemployment in the US is 36.9 weeks, whereas Canada's is only at 17.1 weeks. The effects of this more and more common long term unemployment are devastating to the lower classes. As soon as a previously unemployed individual lands a low-paying service industry job, they find themselves working increasingly longer hours to make ends meet. With the many months spent on welfare fresh in their minds, they will comply with  their bosses demands of increased porductivity in order to avoid living a life of poverty.

At this point you may ask yourself why anyone should care about the middle class. The importance of the middle class cannot be overstated. It functions as a buffer zone both economically and socially. Countries that have a strong middle class have a strong tax base, which prevents the wild fluctuations in the marketplace exhibted historically in the Great Depression as well as the Financial Debacle of 2008. The middle class also acts a vehicle that allows social mobility by creating a ladder in which an individual from the poorer classes can advance. This prevents a caste society where the class one is born in is fixed for life. It is in these ways that the middle income group froms the backbone of a nation. They are the shopowners, the mechanics, carpenters, barbers and bank tellers that keep society running smoothly. They are the ordinary folks that embody the so-called American Dream who believe that if you work hard enough, anything is within your grasp.

The erosion of the middle class due to outsourcing as well as increasing productivity despite median wage stagnation creates a "sweatshop" economy where the lower classes have no choice but to work for long hours for little pay in order to make ends meet. The CEOs of  the monolithic corporations that utilize this sweatshop economy are the ones that reap the benefit. Workers who dissent are simply replaced with those who have been looking for a job for months. With the recent uprisings in the Middle East it is only a matter of time before something simaler occurs much closer to home, in the "Land of Opportunity ", the United States of America.

http://www.youtube.com/watch?v=B_kfeRyQxmw&NR=1
Death of the Middle Class Part One

http://www.youtube.com/watch?v=DyiBRFE0ipg&feature=related
Death of the Middle Class Part Two

http://www.youtube.com/watch?v=sYJHW3duSOY&feature=related
Lou Dobs on the War on the Middle Class

http://www.youtube.com/watch?v=U-cbx08CNp0&feature=fvst
CBS on the Struggling Middle Class

http://www.youtube.com/watch?v=VnVJAkhGyjQ
 The Young Turks on "Trickle Down Economics"