In order to have class warfare you first need to have a class
President Obama is spitting into a Chicago wind if he thinks his tax increases and reduced government spending proposals will stimulate the economy and reduce unemployment. The Republicans are cutting wind if they think reducing taxes on the rich and eliminating corporate regulations will stimulate the economy and reduce unemployment.
The economy and unemployment have been resistant to recovery efforts because both the Democrats and Republicans have misdiagnosed the economic ills of the country. They are wrongheadedly using traditional remedies that are quite simply ineffective against a new type of economic illness. The politicians are like the doctors who, when they first encountered AIDS, prescribed penicillin as a cure. Penicillin had always been effective against a virus and the doctors assumed they were dealing with nothing more than that. The doctors failed to recognize that they were facing a completely new and unknown affliction that called for a completely different and innovative treatment approach. And now our political leaders are following the same naive path in responding to the current economic illness.
Conventional Thinking Won’t Work
Like catching the flu bug, down cycles in a capitalist economy are a natural risk that can be treated but not eliminated or cured. Traditionally, when the economy caught the “flu,” the prescribed treatment was for the government to order up large doses of labor-intensive projects, i.e. build new roads, reduce interest rates and cut taxes for individuals and corporations. The idea was to “stimulate” the economy by pumping huge amounts of cash into the system. The assumption was that “extra cash” in the hands of consumers encourages them to buy things and this in turn, creates a “demand” for products. To meet this incremental demand, the companies would gear-up to expand production by building new factories and hiring people to make the things the consumer wanted to buy. Part of the theory was that the “re-stimulated” economy – with higher employment and profits – would provide the government with enough new revenues (even at lower tax rates) to pay for the stimulus. (This is generally referred to as “supply-side” economics.)
Historically, both Democrats and Republicans believed in this strategy, since it provided notable relief in earlier economic downturns. The only difference today is that Democrats believe that the bulk of new stimulus dollars should be directed primarily to the middle class and allow the recovery to work its way from the bottom up; while the Republicans believe the best approach is to offer most of the stimulus to the wealthy and to corporations and let the benefits “trickle down.”
Does Either Strategy Work Anymore? Test Results Prove Otherwise
In 2000 the first contemporary test of these economic philosophies came with the burst of the “dot-com bubble” that deflated not only the stock market but the economic welfare of millions. Since the Republicans were in control, the legislative response was to pass the “Bush Tax Cuts.” Believing the tax cuts would quickly stimulate the economy, the Republicans agreed that these cuts would expire after 10 years. Then along came the economic collapse of 2008-09. Now the Democrats are in control, and the response was the “American Recovery and Reinvestment Act of 2009” (commonly called the “stimulus.”). The stimulus called for flooding the economy with cash by spending almost $1 trillion on such efforts as infrastructure, health care, energy, and federal tax incentives, along with expansion of unemployment benefits and other social welfare provisions. (The economic collapse of 2008-09 was really a two-pronged calamity, as reckless management actions on the part of banks, insurance companies and investment firms caused the need for hundreds of billions more to bail them out.)
Did either approach work? Did the Republican’s answer to the dot-com bomb work any better than the Democrat’s answer to the more recent economic collapse? If the Democrats and Republicans were subjected to a good dose of water-boarding, they would readily admit that both the Bush Tax Cuts and the Obama stimulus plan achieved neither anticipated nor desired results. Which leads us to the critical question of the day: Why did economic policies that used to dig us out of our economic woes now fail so miserably? The answer comes in two parts:
- America no longer manufacturers most of the products the consumer buys.
- The middle-class in America is disappearing.
The Spectacular Global Shift of America’s Manufacturing Base
America is suffering economically today because, for the past 30 years, there has been a war-of-attrition being waged against the middle-class spawned by myriad causes. Among them: A convoluted tax code that excludes foreign profits from American taxes; one-sided trade agreements that are disadvantageous to American manufacturers and access to cheap labor in emerging countries have all conspired to encourage American companies to shutter thousands of factories and move manufacturing to countries like Mexico, Korea, China, India and Indonesia, among others. As a result, the percentage of GDP attributed to domestic manufacturing has declined by over 50 percent.
Truth be known, the Obama stimulus plan did work. The billions of dollars pumped into the economy did encourage consumers to buy things. The problem is that most of what they bought was not made in America. The stimulus did create higher employment, but unfortunately it was in China, Indonesia, Korea and Mexico. Why do you think China is so eager to buy hundreds of billions in US debt to fund the stimulus? Because they know Americans will use the money to buy products made in China, and this will create millions of new jobs—for the Chinese. It has been estimated that in the past 10 years alone, over 3 million jobs have been lost to China. Ironically, the number of illegal immigrants entering the US has declined precipitously during the past three years. This is not the result of the “fence,” but because there are now more jobs available in Mexico – working for American companies – than in America. The euphemism used to describe this activity was “outsourcing.”
This situation helps explain why profits for American corporations and cash on their balance sheets are at record levels, while few new jobs have been created in America and unemployment remains at near depression-era levels. Companies are making profits but not things (at least not in America) and so they need fewer and fewer employees. Despite the bleating of Republicans, the primary objective of corporations is to create profits, not jobs. Recognizing the reality of this state of affairs illustrates why the old-world thinking of reducing tax rates for corporations and offering incentives to hire new employees is an act of futility that went out with the Great Depression.
The Disappearing Middle Class
Since the ratification of the Constitution in 1787, the lynchpin for American political stability and economic dynamism has been predicated on the vitality of a large middle class. The United States was the first country to consciously structure its government to open the way for a strong middle class and to provide the opportunity for an individual to rise above the class into which they would have previously been born. This was a revolutionary new concept. The traditional structure of society at the time (and still is the case in many countries) was to have two classes – rich and poor. The American concept was one of “parallel interests,” that spanned all strata of society, not to create a leveling equality, but a society based on equitable opportunities for all to achieve and improve their status. (Of course, there existed the recognized hypocrisy of slavery.)
It was the development of a vibrant middle-class, filled with the promise of opportunity to do better, that propelled the economic success of America. Unfortunately, for the past 40 years a combination of government actions that disproportionally favored the wealthy, along with the development of “entitlements” for the poor has systematically squeezed the opportunity and promise of the middle-class to the point that it has become an “endangered species.” The tax code has eroded to the point that a person making $50 thousand per year will pay a higher percentage of their income in total taxes than an individual making $5 million. (The Buffet rule.) The passage of so-called free trade agreements such as NAFTA have given corporations license and incentive to move factories and jobs overseas. This forces American workers to compete with low-paid workers of other countries.
There is abundant evidence to show the resulting decline of the middle-class. Income for the median American family, adjusted for inflation, is lower now than in 1998. Median family income (around $49,000) allowing for erosion during periodic recessions is essentially the same as it was 45 years ago. As this census table below shows, the rich get richer and the fortunes of the middle class melt like ice crease in a microwave.
The U.S. Census Bureau reported that in 2010 the number of Americans living in poverty was 46.2 million; the highest number ever reported and 6 million more than in 2004. At the same time, the Census Bureau reported that the richest 20 percent of Americans now control 84 percent of all wealth, an increase from 54 percent in 1980. During the past 20 years virtually all the new jobs created have been in the low-income service segments of the economy, i.e. McDonald’s, Wal-Mart etc., not in middle-class manufacturing, teaching and technical areas. Today, even when major industries, i.e. auto-makers and airlines, hire new employees they do so at about half the pay of previous hires.
That’s why the structure of the American economic system has assumed the shape of a buxom movie starlet; a perverted hourglass with a large bulge of very wealthy at the top, a large bulge of very poor at the bottom, with the middle being unnaturally squeezed. The rise of the “Tea Party” is a reflection of a frustrated and fearful middle class who feel that the promise of upward economic mobility, based upon individual effort, is being squeezed and threatened by the government, the wealthy, even the poor and of course illegal immigrants. The economic triumph and buoyance of the American economic miracle has been powered by middle-class Americans making and buying products made in America; that dynamic is declining rapidly and along with it the middle class.
And the Moral of the Story …
President Obama and the Republicans are singing an old song that is as out of touch with current reality as “Happy Days are Here Again.” The idea of using an infusion of cash and a reduction in corporate tax rates as a defibrillator to shock the old economy back to life will no longer work.
The American economy will continue to stumble and stall until our political leaders exhibit the courage, tenacity and vision to commit to a re-vitalized American system. America needs to re-invent Capitalism for the 21st century. To do so calls for the development of new industries, taking advantage of new American technologies, re-writing the tax code to favor domestic manufacturing; and most important of all, it means fully developing the still bountiful cache of America’s natural resources, especially the potential of a talented and vibrant middle-class. America will always do better when we engage in economic warfare with others and not against ourselves.