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The Middle Class Faces Extinction—So Does the American Dream

Income inequality is now as high as it's been since the Great Depression, and the middle class is nearly extinct.
 
 
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This article first appeared in the  Los Angeles Review of Books.

Inequality is now one of the biggest political and economic challenges facing the United States. Not that long ago, the gap between rich and poor barely registered on the political Richter scale. Now the growing income divide, an issue that dominated the presidential election debate, has turned into one of the hottest topics of the age.

Postwar American history divides into two halves. For the first three decades, those on middle and low incomes did well out of rising prosperity and inequality fell. In the second half, roughly from the mid–1970s, this process went into reverse. Set on apparent autopilot, the gains from growth were heavily colonized by the superrich, leaving the bulk of the workforce with little better than stagnant incomes.

The return of inequality to levels last seen in the 1920s has had a profound effect on American society, its values, and its economy. The United States led the world in the building of a majority middle class. As early as 1956, the celebrated sociologist, C. Wright Mills, wrote that American society had become “less a pyramid with a flat base than a fat diamond with a bulging middle.”

That bulge has been on a diet. The chairman of President Obama’s Council of Economic Advisers — Professor Alan Krueger — has shown how the size of the American middle class (households with annual incomes within 50 percent of the midpoint of the income distribution) has been heading backwards from a peak of more than a half in the late 1970s to 40 percent now. The “diamond” has gone. The social shape of America now looks more like a contorted “hourglass” with a pronounced bulge at the top, a long thin stem in the middle, and a fat bulge at the bottom.

One of the most significant effects of America’s hourglass society has been the capping of opportunities and the emergence of downward mobility amongst the middle classes, a process that began well before the recession. Around 100 million Americans — a third of the population — live below or fractionally above the poverty level. A quarter of the American workforce end up in low-paid jobs, the highest rate across rich nations, while the wealthiest 400 Americans have the same combined wealth as the poorest half — over 150 million people.

With a growing percentage of the current generation facing a lower living standard than their parents, more and more US citizens express a “fear of falling,” worried about a further loss of livelihood and their relative income status. The nation is at last waking up to what has been reality for years — the vaunted American Dream (the ability of citizens to go from rags to riches, and one of the country’s most enduring values) is increasingly a myth.

In a poll conducted for The Washington Post before the 2012 presidential election, respondents were asked which was the bigger worry: “unfairness in the economic system that favors the wealthy” or “over-regulation of the free market that interferes with growth and prosperity.” They chose unfairness by a margin of 52–37 percent. The mostly pro-self-reliant American public are perhaps coming to recognize that their much-heralded virtues of hard work and self-help are no longer an effective means to economic advancement.

The most damaging impact of growing inequality has been on the American — and global — economy. It has been one of the central rules of market economics that inequality is good for growth and stability. The idea was enshrined in the postwar writings of the New Right critics of the model of managed capitalism that emerged after the war. “Inequality of wealth and incomes is the cause of the masses’ well being, not the cause of anybody’s distress” wrote the Austrian-American economist Ludwig von Mises, one of the leading prophets of the superiority of markets, in 1955.