The Vanishing Middle Class: Prejudice and Power in a Dual Economy

by Peter Temin

Private equity firms, the “corporate raiders” of an earlier era, increasingly have taken over a wide array of civic and financial services that are central to American life since the 2008 financial crisis.

Like private prisons, their interests do not align with the public programs for safety. Their aims are to cut costs, increase prices, lobby, and litigate to expand their reach.

if you are in prison and need to be transported elsewhere, chances are you will be moved by Prisoner Transportation Services of America, the nation’s largest for-profit extradition company.

Most reforms being proposed today seek to help former inmates rather than to reduce mass incarceration.

We have, according to an assessment, “a two-tiered system of punishment: one for those with financial means and one for those who are poor.”

Most felony defendants in state courts come from poor neighborhoods with high unemployment and failed schools; they cannot pay or escape their legal financial obligations even if they are released from prison.

Sociologists have argued that incarceration is used in the United States to keep the poor quiet as politicians destroy the safety nets that used to help them.

Lisbeth Schorr wrote a book on urban education with the hopeful title, Within Our Reach.

Despite getting the vote in 1920, women were not emancipated from their traditional roles, and they continued to have restricted job choices for two-thirds of the twentieth century.

School districts cannot raise teachers’ wages because they do not have the resources to do so.

The tax base for urban schools decreased as urban factory jobs also decreased and fleeing whites avoided paying for urban schools. The result was segregated schools with inadequate resources for urban schools attended by the children of the Great Migration. Separated and unequal, one might say.

any self-interested investment the rich make in their own communities has little chance of ‘spilling over’ to benefit middle and low-income families. In addition, it is increasingly unlikely that high-income families interact with middle- and low-income families, eroding some of the social empathy that might lead to support of broader public investments in social programs to help the poor and middle class.”

Teamwork is a form of social capital—which

Good education, improving both human and social capital, is a tall order for the low-wage sector, and it goes against the grain of politics in a dual economy. The threat of mass incarceration hangs over black and Latino communities, and the presence of hostile militarized police makes investments in social capital even harder. Far more resources need to be allocated to urban education to make progress, but none will be forthcoming soon. Instead, poor education will keep black and brown communities down, providing more opportunities for mass incarceration. And mass incarceration will contain the people operating without social capital in prison. The money that should go to schools will go to prisons instead.

And diversity is healthy, and not just in schools. Sociologists have found through market simulations that diverse market participants reduce the frequency and damage of booms and busts. When everyone thinks alike, it is easy for people to convince themselves that a bubble is not taking place.

Tax revenues were used to facilitate suburban expansion by building roads, schools, water, and sewage systems to serve the suburbs.

The ability of cities to finance decent schools was made even harder in the 1980s as Presidents Reagan and Bush cut back federal grants to cities; federal grants to large cities fell over the decade by 35 percent, from $5.2 to $3.4 billion.

Acidic water is soft water; hard water contains minerals that reduce soap suds and leave deposits on sinks and bathtubs. People like soft water, but the acid in soft water erodes pipes faster. When iron pipes corrode, people ingest iron and zinc, which are not harmful to most people. When lead pipes corrode, people ingest lead, which is harmful.

Among the reasons for low success in urban schools may be the results of lead in the pipes of old schools.

We have a dual residential system. Low-wage workers live in decrepit cities, and the FTE lives in ever more separated suburbs. Since the FTE sector will not support city services, urban conditions continue to deteriorate.

Policies toward cities since 1970 have starved urban schools of funds. They have created hostile environments for black families stuck in these cities and recreated the conditions of blacks—and now increasingly Latinos—before the Civil Rights Acts. African Americans were deprived of education completely when slaves and given only the semblance of an education before the First World War. They began to get good education in the 1960s and 1970s, but opposition to the Civil Rights Movement has blocked and reversed these gains.13

ASCE gave American bridges a C+ in 2013, a low grade for one of the world’s richest countries.

American bridges on average are over forty years old and near their fifty-year design life—the time that bridges are expected to function without problems.

ASCE gave American mass transit a D. Rail-based systems carry just over a third of all mass transit trips.

The interstate highway system was started in the 1950s and cut into railroad revenues in the following decade. While the roadbed for trucks was constructed and maintained by the government, the roadbed for trains was built and maintained by the railroads. The U.S. Postal Service switched its business from trains to trucks and airplanes in 1966. Congress combined several troubled railroads into Amtrak in 1971—that pivotal year—to preserve passenger train transport.

Even though the FTE sector depends in part on the services of the low-wage sector, American politics do not seem to consider indirect effects.

Many members of the FTE sector would rather keep their taxes low than consider investments that may indirectly help them, much less the needs of the low-wage sector.

But when the issue is presented to the electorate, the supporters of lower taxes win the day. Governments have to borrow to finance reinvestment in the absence of more tax revenue now. But the FTE sector wants to reduce the public debt. An infrastructure bill passed Congress late in 2015, but it was only for highways and to relieve congestion. This limited kind of spending was approved by both political parties because members of the FTE sector get caught in traffic and waste time.

Mortgage default normally is considered a problem for each individual, but the accumulation of household debt, which doubled relative to income after 1980, was encouraged by government subsidies through tax deductions, guarantees from Fannie Mae and Freddy Mac for home mortgages, and the stagnation of working incomes.

Mortgage relief would promote prosperity better than standard fiscal policies because it would help people most likely to increase spending.

The government announced in early 2009 its housing program, entitled the Home Affordable Modification Program (HAMP). Money was allocated for the modification of home mortgages, and mortgage holders in trouble were invited to apply to HAMP for help. But only a small proportion of the money was spent and few potential homeowners were helped. The problem was that the banks involved with HAMP rejected more than seven out of every ten homeowners who applied. Citibank denied 87 percent of its HAMP requests.

JPMorgan Chase rejected 84 percent, and Bank of America rejected 80. The banks holding the mortgages refused to write them down even when subsidized by the government—and the government did not enforce and impose this obligation on them.4 This should not have been a surprise.

Public support for public colleges and universities has been declining since the 1980s. When states get into financial difficulty in a recession or similar cause, it is easier to cut support for higher education than to lay off police. Public funds for state colleges and universities have decreased in a series of downward steps.

Public colleges and universities have become more and more private,

Private public colleges need to charge tuition to stay in business, and students have seen the cost of college rise rapidly. The result, as described in chap...

Mortgage and educational debt are parts of a single problem. The accumulation of these debts was promoted by public policies, subsidizing mortgages and withd...

The government, run by members of the FTE sector, has been unwilling and unable to pressure organizations owned and operated by members of the FTE sector to engage in programs to help people in the low-wage sector.

Social Security taxes are levied on wages up to $118,500 at the moment. If this cap on taxable wages were eliminated, the financial problems of Social Security would vanish.

The recent history of the Affordable Care Act provides another example showing how the dual economy affects government policies. The Supreme Court stopped short of declaring the act unconstitutional, but it said that the federal government could not force states to expand Medicaid.

This program is designed to help members of the low-wage sector. It also has been vilified as serving African Americans even though they are a majority of those served in only a few states. Given the Supreme Court’s decision, several states opted not to expand Medicaid even though the federal government would pay the whole cost for three years and 90 percent after that.

The Voting Rights Act of 1965 was passed in order to complete the integration started by the Civil Rights Act of the previous year.

Giving all Americans the vote could lead to policies that would benefit all Americans. It would help the United States to become a democracy.

An implication of the dual economy model is that the FTE sector operates independently of the low-wage sector. If substantial parts of the low-wage sector in addition are not able to vote, then the neglect of the interests of the low-wage sector will not be represented in the political process. Present trends will continue and perhaps accelerate.

The FTE sector and the very rich assert over and over again that we cannot afford to spend money on education and infrastructure; we must instead reduce the national debt. They idolize Reagan, but ignore the massive federal debt he created. The drumbeat goes on despite the enormous decrease in the federal deficit that has taken place since the financial crisis of 2008. Yet, as noted earlier, military expenditures are exempt from this directive. As in the eighteenth century, the function of the state is confined to defending the realm. We have been involved in wars in and around the Middle East for thirty years.

We have spent more than three trillion dollars on our Middle Eastern wars, and there is no end in sight. We continue to spend massive amounts of money dropping bombs in the Middle East with no apparent aim or end. And the richest part of the FTE still keeps saying we cannot afford to spend money on programs to help prisoners and urban schools, repair and improve infrastructure, or provide debt relief.

If the FTE sector were to support domestic activities, the middle class would not vanish as quickly as the long-term trend suggests.

The decline of the middle class has left us with these two parts of an economy, governed by policies made by the FTE sector for the benefit of the FTE sector.

None of the European countries has America’s long history of African slavery and subsequent efforts to subordinate African Americans in other ways. Without the American attempts to divide populations into different groups—us and them—economies of rich and poor may not have separated into dual economies.

This account shows how the United States can stand at the top of the countries in per capita income—behind only Switzerland and Norway—but rank sixteenth in social progress indicators. This is still high among the 133 countries listed, but distinctly lower than other rich countries in the index of basic human needs, foundations of well-being, and opportunity.

the United States ranks very far down the list of countries by the proportion of children in poverty, with a rate of child poverty more than twice as high as the Scandinavian countries and close to the rates in Spain and Mexico.