There’s been a lot of finger-pointing and talk about the decline of the American middle class, but politicians show little will to take action.
It has only taken about 40 years, but our politicians have finally come to recognize the long-term challenges to American economic vitality that will be caused by the decline in, if not the elimination of, the American middle class. Not that they have shown any signs of possessing the creativity, courage or will to do anything about the issue, but at least they are doing what they do best: giving lip-service to a problem.
For 200 years the celebrated promise for Americans – what made America great – was the promise of upward mobility. Unlike citizens of other countries who were locked into a rigid caste system with no hope of escape, Americans (at least the free, white male ones) were assured that if they worked hard and persevered, they would be rewarded with upward financial and social movement. Each generation had the opportunity and promise to rise higher than the last. And it was this prospect of doing better that fueled the American economic engine; at least that was the case until about 40 years ago.
Beginning in the 1970s a number of factors coalesced to break the promise of upward mobility for the middle class.
- One dynamic was the emergence of what was called economic globalization. That meant American workers had to compete against workers in other, less developed countries, who often were paid far less for far more work.
- Economic and tax policies of the government began to favor corporate rights over individual rights and policies that gave preference to capital (owners) over labor (workers) were implemented.
- There was pushback against labor unions that had been overreaching in their demands.
There were other factors as well, but the reality is that pressures on the middle class have not only reduced the opportunity “to get ahead,” but have worked to push the middle class into downward mobility and greatly increase the disparity between the wealthy and all others. Every one of the 50 states witnessed its share of middle-class families shrink during the past decade while those in the top 1 percent captured all the income gains. It was sinful to allow this to happen, but it is a crime that our political leaders are doing nothing to resurrect the opportunity for the middle class, other than to talk about it and point fingers at each other.
Giving New Life to Upward Mobility for the Middle Class Calls by Understanding and Responding to the New Economic Reality of Capitalism
It is difficult enough for politicians to deal with realities as they know them, but it is virtually impossible for them to respond with constructive action when the old realities are changing. In such a conundrum, politicians only fully understand the blame game that accuses others for problems caused by a changing reality. (Or even their own inaction.) Worse, they confuse reality with truth, and they are two decidedly different things.
Reality is the imagery of an accepted belief at a point in time that is based on the experience and knowledge available. But unlike truth, reality is subject to change. Reality is not rigid; it evolves with increased knowledge, perspective and experience. For example, there was a time when “reality” declared that the sun and all other planets revolved around the earth; and a time when the earth was flat. Institutions and beliefs firmly tethered to the realities of the past become an anachronism in the world of new realities that ultimately will destroy their very purpose and existence. The bottom line is painfully obvious:
Today’s political leaders are trapped in the imagery of capitalism as it was in the past and this prevents them from creating a new type of capitalism needed to meet new realities.
Needed: A New Definition of Capitalism and a Capitalist
The theory of capitalism is based on the simple idea of risk and reward. Capitalism offers individuals – capitalists – the freedom to risk their personal capital in an enterprise with the understanding that failure of the enterprise will mean loss of their capital, while success of the enterprise will translate into a significant return on the capital invested. Capitalism comes down to being willing to put “skin in the game.” The great historical capitalists of America – Rockefeller, Ford, Carnegie and Harriman along with multitudes of others – all accepted the risk of investing their personal capital.
The early capitalists arrived on the scene when America needed the infusion of vast amounts of capital to build the infrastructure – factories, transportation, steel and energy – required to lay the foundation for economic growth. These great entrepreneurs truly had their own “skin in the game” and it showed in the results they achieved. Of course they were lavishly rewarded for the risks and efforts they took, but they earned and deserved it.
Today, there is a new reality for capitalism and the concept of being a capitalist. If this new reality is accepted and encouraged by our leaders, it can resurrect the cherished idea of upward mobility for the middle class, while stimulating a vibrant new American economy.
Creating the Reality of Participatory Capitalism
In the old reality of capitalism large amounts of cash capital was contributed by the few and the rewards were limited to the few. The economy of today and tomorrow still demands investment, but what it needs is recognition of a new type of capital to fund success. It is not the type of capital necessary to build a railroad but rather the type of capital that built Facebook, Twitter, Google and Instagram. The new reality of capital comes in the form of education, experience, creativity, innovation and technology. This new type of capital is not a bastion of the few, but is controlled by and can only be invested in a business by the well-educated, thinking and creative employees of today. They should no longer be thought of as cogs, but as capitalists, because their talent is invested in the business and they are key to its success.
Restoring the American Dream of Upward Mobility
The path to reviving the middle class is to consider and treat today’s well-educated, thinking employees as capitalists not captives. In the same way that the Rockefellers of yesterday were not willing to risk their capital without the promise of potential reward, the employees of today will not risk their capital – their education, experience, creative brilliance and loyalty – unless they have the promise of potential reward beyond the simple quid pro quo of an obligatory paycheck. And if they are given this opportunity the rewards for all can be immense.
The new reality of capitalism should be defined as: Those who have the ability to add value to an enterprise and do so are allowed to share in the value their invested capital creates. It is what could be called participatory capitalism that is open to all, not just a few. Participatory capitalism allows all employees to invest their personal capital in the enterprise in exchange for the potential to receive a return on that capital.
Implementing Participatory Capitalism
The government could use the same economic policies and tax incentives that triggered the decline of the middle class to resurrect the middle class. The government could offer an incentive for a company to distribute 25 percent of its gross profits to all employees by not taxing the profits distributed and in fact offering a tax credit for that amount.
One-half of the distribution to employees could be paid as a “dividend” on their investment; the other half of the distribution could be placed in a 401K type of trust – tax free for employees – and available for distribution at retirement (helping to solve another pressing problem). The end result is that employees – when treated as “investors” in the company – and the company are in positions of parallel. What is good for the company is good for the employees. The more “capital” they invest in the company, the better chance they have to receive a return on that capital. Of course some will argue this approach is not capitalism but socialism and that profits will be reduced. They will be wrong. If capitalism is good for the few, it will be even better for the many. Participatory capitalism will focus everyone on a single goal that will create higher profits and greater reward.
Others will suggest this approach is nothing more than Pollyanna that would destroy capitalism, but the reality is that today’s form of Corporate Capitalism is destroying capitalism. Under this corrupted form of capitalism the basic elements of free-market and private ownership remain, but the system is dominated by hierarchical, highly-bureaucratic corporations and obscenely wealthy individuals fixated on narrow self-interest for profits with little or no concern for the best interests of the nation and society; let alone the survival of the middle class. Allowed to proceed uninterrupted this constricted capitalism will lead (if it has not already) to an oligarchy of wealth.
What will save the middle class and capitalism itself is to recognize the lost truth of capitalism and return to the fundamental premise that offers reward for those who have the capital – in any form — to invest in the enterprise. This approach gives everyone the chance to have “skin in the game.” And this creates the incentive to work and to add value. It is what true capitalists do. Participatory capitalism will achieve that and bring with it a rebirth of a new upwardly mobile middle class. If this happens, as in the past, America will be better for it.