Bridging the gap: Lessons for tackling income inequality from mid-20th century US education laws
Karen Clay, Jeff Lingwall, Melvin Stephens 22 April 2017
Economist's new book examines decline of the nation's middle class.
Peter Dizikes | MIT News Office
March 13, 2017
For many people in America, being middle class isn't what it used to be.
Consider: In 1971, the U.S. middle class — with household incomes ranging from two-thirds to double the national median — accounted for almost 60 percent of total U.S. earnings. But in 2014, middle-class households earned just about 40 percent of the total national income. And, adjusted for inflation, the incomes of goods-producing workers have been flat since the mid-1970s.
"We have a fractured society," says MIT economist Peter Temin. "The middle class is vanishing."
Now Temin, the Elisha Gray II Professor Emeritus of Economics in MIT's Department of Economics, has written a book exploring the topic. "The Vanishing Middle Class: Prejudice and Power in a Dual Economy," published this month by MIT Press, examines the plight of middle-income earners and offers some prescriptions for changing our current state of affairs.
The "dual economy" in the book's title also represents a bracing reflection of America's class schism. Temin, a leading economic historian, draws the term from the work of Nobel Prize winner W. Arthur Lewis, who in the 1950s applied the model of a dual economy to developing countries. In many of those nations, Lewis contended, there was not a single economy but a two-track economy, with one part containing upwardly-mobile, skilled workers and the other part inhabited by subsistence workers.
Applied to the U.S. today, "The Lewis model actually works," Temin says. "The economy can grow, but it detaches from the [subsistence] sector. Simple as it is, the Lewis model offers the benefit that a good economic model does, which is to clarify your thinking."
In Temin's terms, updated, America now features what he calls the "FTE sector" — people who work in finance, technology, and electronics — and "the low-wage sector." Workers in the first sector tend to thrive; workers in the second sector usually struggle. Much of the book delves into how the U.S. has developed this way over the last 40 years, and how it might transform itself back into a country with one economy for all.
Headwinds for workers
As Temin sees it, there are multiple reasons for the decline in middle-class earning power. To cite one: The decline of unionization, he contends, has reduced the bargaining power available to middle class workers.
"In the [political and economic] turmoil of the '70s and '80s, the unions declined, and the institutions that had been keeping labor going along with rising productivity were destroyed," Temin says. "It's partly [due to] new technology, globalization, and public policy — it's all of these things. What it did was disconnect wages from the growth in productivity."
Indeed, from about 1945 until 1975, as Temin documents in the book, U.S. productivity gains and the wage gains of goods-producing workers tracked each other closely. But since 1975, productivity has roughly doubled, while those wages have stayed flat.
Where "The Vanishing Middle Class" moves well beyond a discussion of basic economic relations, however, is in Temin's insistence that readers consider the interaction of racial politics and economics. As he puts it in the book, "Race plays an important part in discussions of politics related to inequality in the United States."
To take one example: Again starting in the 1970s, incarceration policies led to an increasing proportion of African-Americans being jailed. Today, Temin notes, about one in three African-American men will serve jail time, which he calls "a very striking figure. You can see how that would just destroy the fabric of a community." After all, those who become imprisoned see a significant reduction in their ability to obtain healthy incomes over their lifetimes.
For that matter, Temin observes, incarceration has expanded so dramatically it has affected the ability of society to pay for prisons, which may be a factor that limits their further growth. At the moment, he notes in the book, the U.S. states pay roughly $50 billion a year for prisons and roughly $75 billion annually to support higher education.
Solutions?
Temin contends in the book that a renewed focus on education is a principal way to distribute opportunities better throughout society.
"The link between the two parts of the modern dual economy is education, which provides a possible path that children of low-wage workers can take to move into the FTE sector," Temin writes.
That begins with early-childhood education, which Temin calls "critically important" — although, he says, "in order to continue those benefits, [students] have to build on that foundation. That goes all the way up to college."
And for students in challenging social and economic circumstances, Temin adds, what matters is not just the simple acquisition of knowledge but the classroom experiences that lead to, as he puts it, "Knowing how to think, how to get on with people, how to cooperate. All the social skills and social capital … [are] going to be critically important for kids in this environment."
In the book Temin bluntly advocates for greater investment in public schools as well as public universities, saying that America's "educational system was the wonder of the 20th century." It still works very well, he notes, for kids at good public schools and for those college students who graduate without burdensome debt.
But for others, he notes, "We don't have a path for the next generation to have what we expect for a middle-class life … [and] not everyone wants to finance it."
"The Vanishing Middle Class" comes amid increasing scrutiny of class relations in the U.S., but at a time when the public discussion of the topic is still very much evolving. Gerald Jaynes, a professor in the departments of Economics and African American Studies at Yale University, calls Temin's new book "a significant addition to the existing literature on inequality."
Temin, for his part, hopes that by the end of "The Vanishing Middle Class," readers will agree that a society paying for more education will have made a worthy investment.
"The people in this country are the resource we have," Temin says. "If we maintain the character of our fellow citizens, that is really our national strength."
This is Part 2 of a four-part article by Jayati Ghosh, published in the March/April 2017 special "Costs of Empire" issue of Dollars & Sense magazine. Part 1 is available here. Subsequent parts will appear on Triple Crisis over the next two weeks. In this section, Prof. Ghosh focuses on the new international economic architecture for trade, investment, and property rights.
International Economic Agreements
The past two decades have witnessed an explosion in the treaties, agreements, and other mechanisms whereby global capital imposes it rules upon governments and their citizenries. Unlike the conditions imposed on developing countries by the IMF and the World Bank, these rules apply even to countries that are not debtor-supplicants to international financial institutions. They require all countries to restrict their policies, though these restrictions are especially damaging to the prospects of autonomous economic development in the "periphery" of the world capitalist economy.
The Multilateral Trading System
In terms of the multilateral trading system, the Uruguay Round of the General Agreement on Tariffs and Trade (signed off in 1994) moved to a single-tier system of rights and obligations, under which developing countries have to fully implement all rules and commitments. This was a quid pro quo for access to developed-country markets in agriculture, textiles, and clothing—sectors that had previously been highly protected. This has constrained the possibilities for autonomous development in the peripheral countries, reducing the policy choices open to them and denying them some of the most important instruments that had been used by countries of the current capitalist "core" in their own industrialization.
For example, the Agreement on Trade-Related Investment Measures (TRIMS) does not allow practices like local content specifications, designed to increase linkages between foreign investors and local manufacturers. The Agreement on Trade-Related Intellectual Property Rights (TRIPS) not only allows for the concentration and privatization of knowledge as noted above, but also restricts reverse engineering and other forms of imitative innovation that have historically been used for industrialization. It has forced the extension of patent rights in many countries, allowing the patenting of life forms. Under this new property regime, a large and powerful multinational company can, for example, sue a poor small farmer in a developing country for setting aside part of the harvest as seed for the coming year, on the grounds that this violates the company's patent rights. The Agreement on Subsidies and Countervailing Measures (SCM) prohibits subsidies that depend upon the use of domestic over imported goods, or that are conditional on export performance. Ongoing negotiations in the World Trade Organisation on Non Agricultural Market Access (NAMA) are currently proceeding on the basis of much deeper tariff cuts in developing countries, which will further deprive them of a crucial policy instrument to support their infant industries.
The Agreement on Agriculture (1995) contained fine print that effectively allowed the developed countries to continue the massive subsidization and protection of their own agriculture sectors (and agri-business interests), but prevented developing countries from doing even a small fraction of this. Most developing countries are allowed only subsidies of 10% or less, while most developed countries only have to reduce certain agricultural subsidies, while maintaining and even increasing some others. Developing countries (like India) that attempt to provide some protection to farmers and to ensure food security are coming up against constraints imposed by the agreement. All subsidies, even in developing countries, are measured in relation to 1986-88 prices, not current prices, so even low subsidies run afoul of the 10% limit. Instead of recognising the ridiculous nature of this clause, the developed countries are resisting any change and have only agreed to provide a "Peace Clause"—applying only to certain countries and only for a limited period, preventing any case being brought to the dispute settlement panel of the WTO until the matter is finally resolved.
Regional and Bilateral Trade Agreements
However, if the WTO has constricted the "policy space" for developing countries, the many regional trade agreements of the past two decades have been even worse. There are nearly 400 such agreements in force, and they have become more comprehensive over the past twenty years. Most of these agreements, especially North-South agreements, tend to be "WTO-plus" (augmenting provisions already covered by the multilateral trading regime) or "WTO-extra" (containing provisions that go beyond current WTO rules). They often require reductions of actually applied tariffs, rather than of "bound" maximum tariff rates: Countries are forced to reduce tariffs from whatever level they happen to be at the moment, even if this is already below the upper limit. They demand more deregulation of trade in services. They require more stringent enforcement of intellectual property rights and reduce exemptions. For example, they allow compulsory licensing of medicines for generic (lower-cost) production only in emergencies. They also prohibit parallel imports (purchases of needed medicines from countries with cheaper production because they have used compulsory licensing). These agreements extend intellectual property rights to areas like life forms, extend exclusive rights to test data, and make intellectual property rights provisions more detailed and prescriptive. They forbid technology-transfer and knowledge-transfer requirements, as well as conditions on the nationality of senior personnel, as conditions for access to a country's markets. They also enter into a range of areas that the WTO still leaves open to individual countries' policy choices, such as antitrust policy, rules on investment and capital movement, government procurement, environmental standards, and even labor mobility. Further, unlike the WTO, most regional trade agreements do not provide exceptions to countries in cases of serious balance-of-payments problems or other external financial difficulties.
In addition, there are more than 4,000 bilateral investment treaties (BITs) in force in the world. These are all about protecting and promoting private investment of all types, and effectively privileging the rights of investors over the rights of citizens in the host country. There is typically a very broad, asset-based definition of investment that includes foreign direct investment (FDI), some types of investment in stocks, purchases of real estate, and even intellectual property rights. There is also a very strong and expansive view on what constitutes "expropriation" of assets for which investors can demand compensation. It is not only outright nationalization of assets that can be interpreted as expropriation, but also all sorts of government regulation (even for environmental or labor protection) as well as taxes. So for example, in Mexico, companies that have polluted municipal water supplies—and therefore been ordered to stop production until they can prevent such pollution—have successfully claimed damages for the associated losses. Other companies have won cases under BITs when governments have imposed higher taxes on their profits.
Both bilateral and, increasingly, regional agreements are subject to dispute settlement mechanisms, both between states and between an investor and a state, that are highly arbitrary, opaque to public scrutiny, and generally pro-investor in their judgments. Since they are legally based on "equal" treatment of legal persons with no primacy for human rights, they have become known for their pro-investor bias. This is partly due to the incentive structure for arbitrators, since there is a lucrative "revolving door" for legal experts between serving as arbitrators and as legal advisors for corporations. And it is partly because the system is designed to provide additional guarantees to investors, rather than making them respect host countries' laws and regulations.
Similarly, the rules governing international finance and debt work in ways that reinforce the unequal global power relations between large capital and people across the world. Nowhere is this more evident than in the legal structures governing sovereign (national government) debt. The lack of any coherent system to deal with debt default and to enable the restructuring of sovereign debt has led to situations in which countries and their populations are bled dry over years and even decades. "Austerity" measures that reduce public spending on social essentials are forced upon unwilling societies. Developing countries have known this for some time, but some developed countries (such as crisis-ridden economies of the European periphery, like Greece and Spain) are now experiencing the same.
Countries that somehow manage to restructure debt or that unilaterally decide to renege on some patently unfair debt taken on in the past are punished. Under the systems governing international debt, entire national populations lack even the minimum conditions of debt workout that are routinely accorded to individual and corporate debtors within national legal systems. Here, too, legal proceedings tend to be biased towards investors and show little recognition of the minimum rights of the citizenry in affected countries. (Take, for example, the travails that the government of Argentina currently faces in U.S. courts, in lawsuits brought by financial "vulture funds.") This is another way in which contemporary imperialism is expressed.
NOTE: Parts of this article appeared in "The Creation of the New Imperialism: The Institutional Architecture," Monthly Review, July 2015.
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