THE Silent Depression

     Rousseau argued that certain economic conditions were necessary for democracy. He advocated a society of economic equality and economic independence in order to insure political democracy. Jefferson made essentially the same point. In both cases the theory does not require absolute equality, as those who like to set up straw men would have it, but rather, the differences that do exist should not lead to political inequality. Ideally, there should be a situation where "no citizen shall be rich enough to buy another and none so poor as to be forced to sell himself." (Rousseau?)

     Tocqueville, in a similar vein, argued that the distinctive character of the American political system was the high degree of material equality found in America. In comparison to aristocratic Europe, Tocqueville was clearly correct, but in fact there was a great deal of inequality in early America, indeed only slightly less than there is now. For example, the bottom seven deciles in 1776 owned a mere fifteen percent of all wealth and in 1973 the bottom seven deciles also owned fifteen percent of all wealth. In the past two hundred years, what has changed is that wealth has become more highly concentrated in the upper reaches. In 1774, the top 1% owned 15 percent of all wealth, but by 1973 the top one percent of families owned 32.6 percent of all wealth, and by 1989 the top one percent owned nearly 40% of all wealth (NYT 4/17/95). Thus, the rich truly did get richer. Over the same period, the gini coefficient increased from .73 in 1774 to .81 in 1973. (Osberg, p. 44.) Since 1983 the distribution of wealth has become even more uneven. The top one percent's share went from 32.6 percent in 1973 to 37 percent in 1989. (Osberg on earlier data, Peterson on later data.) As the graph below shows, in the 1990's the share of wealth owned by the top one percent exceeded 40 percent.


     The significance of this data is that a basic presumption of virtually all versions of democracy is that there is a direct relationship between the distribution of wealth and income on the one hand, and the possibility of democracy on the other. Extreme economic inequalities lead inexorably to inequalities of power. What is at stake, then, is the possibility of democracy. Since wealth can be translated into political power, extreme inequalities in the distribution of wealth tend to produce extreme inequalities in political power. Indeed, virtually every study of political participation, which is, of course, relevant to the exercise of political power, have found a direct relationship between SES and political activity (explain). Likewise, in each succeeding edition of Dye's book, the concentration of wealth and income has increased, and the number of individuals who control more than half the nation's power has decreased. But the reverse is also true. Extreme inequalities of political power lead to extreme economic inequalities. As Wallace Peterson has noted: "Control of the central government is the key to having a major voice in determining the distribution of income and wealth." (p.95)

     What I hope to accomplish today is to explain how the distribution of wealth and income has changed in the past generation, why those changes took place, and suggest some possible reforms to meet this threat to democracy. Let me begin with some graphics:

     Can anyone figure out what these chicken scratches represent?

     Now there is no denying that living standards for most people increased in the post war period. But not everyone has been affected equally by the economic changes since WWII. Furthermore, what many people do not realize is that around 1973, the rising tide that had lifted all boats, suddenly beached a few yachts on the top of a rising volcano of wealth and income, and left the vast majority of remaining boats to gradually sink with the receding tide. Four fifths of the U.S. population has experienced either stagnant or falling real wages since 1973. The average worker in 1991 earned (in constant 1982-4 dollars) $260.37 a week compared to $308.03 a week in 1973. This meant that the average worker in 1991 earned the same as the average worker in 1962. (Peterson, p. 37.) The only thing which has given many families the appearance of economic progress is the doubling of the number of dual earner families. That is, only Mom moving into the workforce has allowed the overwhelming majority of families to stay even or get ahead at all. Indeed, "between 1979 and 1989, women's earnings jumped by 27.4 percent, while the earnings of men rose by only 2.3 percent." (Peterson, p. 73.)

     Most distressing of all, is the growing gap between the richest and the poorest in our society. By 1979 the pattern began to emerge showing a growing divergence between the rich and poor. Every year for the past decade census bureau reports show the gap wider than ever recorded before. If we take one criterion for determining elite rule to be who benefits from the socio-economic system, then given the fact that the overwhelming majority of the population has been on the losing end of our political economy, the evidence points to elite rule. The statistics on the gini coefficient clearly show that economic inequalities have been growing, and growing much more rapidly since 1973. Wallace Peterson has described this pattern as a "Silent Depression", a two decades long deterioration in the economic well being of at least eighty, if not ninety, percent of the population. The fortunate twenty percent are more than satisfied with recent economic history and the most vigorous segments of that fortunate quintile are in positions of power that enable them to protect and expand their advantages unless ordinary people are able to overcome the obstacles to political participation and create a more just economic order. To do that, we must understand how we got to where we are, and for that task, there is no better guide than Wallace Peterson's Silent Depression: The Fate of the American Dream.

     A major symptom of the Silent Depression, is the disappearance of jobs in general, but good paying jobs in particular. As for the general disappearance of jobs, we must first understand that the official unemployment statistics do a very poor job of capturing how many people are actually out of work. The official unemployment measures do not include "discouraged workers", that is, people who have given up looking for a job. If discouraged workers are included in the unemployment statistics, the unemployment rate would be closer to 10 or 11 percent, rather than hovering around 7 percent in 1993, and about a percentage point or two less in 1997. Unemployment, it should be mentioned, has social, as well as economic consequences for families that experience it. We know that with every percentage point increase in unemployment, there are measurable increases in all sorts of social pathology: suicide increases, child abuse increases, domestic violence increases, first time admissions to mental hospitals increase, and so on. For example, for every percentage point increase in unemployment there are approximately 10,000 additional divorces. Also, as one might expect, child support payments, obligations already only poorly met, disappear in equally large numbers.

     The recessions in the early 80's and early 90's were different from past recessions in that the number of discouraged workers increased, fewer workers returned to the same jobs from which they were laid off, and those who successfully found work, were paid wages substantially lower than they received in their previous jobs. "Of the 3 million workers laid off between July 1990 and the end of 1992, only 15 percent expected to return to the same job. In past recessions, an average of 44 percent of workers expected to be recalled." (p. 22) Throughout the economy, employers have been "Downsizing", and not just at the lower levels. "Since mid-1980, over two million middle-management jobs have been permanently eliminated." (p. 23) And those "downsized" workers who eventually found a job, found a job at downsized wages. The majority of jobs which have been created over the past two decades, and in particular the past decade, offer wages that leave even those with a job hovering around the poverty level. According to a Senate report published in 1988, "of the nearly twelve million new jobs 'created' between 1979 and 1987, one half (50.4 percent) paid an annual wage below the poverty level ($11,611 for a family of four in 1987). Only 11.9 percent of these new jobs were high-wage jobs, ones that paid over $46,444."

     Wages are not the only resources that have shriveled up. One statistic that should hit home for you concerns student financial aid. "In the late 1970's, the average federal packet of financial aid covered slightly more than 80 percent of tuition costs, according to the National Education Association. By the early 1990's, this figure had slipped to 60 percent." (Peterson, p. 25.) For the poor, things were no better. "From 1972 through 1991, the combined real value of AFDC and food-stamp benefits dropped by 27 percent. While this was happening, the number of children living in single-parent families with their mothers increased by 86.2 percent." (Peterson, p. 143.) In short, just about any way you cut it, the bottom 4 quintiles have been running harder just to stay in place, and millions have fallen off the tread mill entirely.

     Accompanying the increasing disparity between the rich and the poor is the changing shape of the class structure. There is no agreed upon definition of upper, middle and lower class status, but a reasonable way to make the division is as follows: in constant 1990 dollars the lower class is from $0-24,999; middle class is $25,000-74,999 and upper class is above $75,000. Of course, $75,000 in Fargo North Dakota is not the same as $75,000 in L.A., and I doubt that any family making $75,000 would describe themselves as upper class, but we need baselines in order to establish trends and these are as suitable for that purpose as any other. Using these definitions, comparing 1973 to 1990 the results are as follows:

1973 1990 %Change
Upper 8.6% 12.3% +43.0%
Middle 59.7 54.4 - 8.7%
Lower 31.8 33.3 + 4.7%
(Peterson, p. 57)

     Another study done in the mid to late 1980's by CBS News found that the middle class had shrunk by 11%, with 2% going up and 9% going down. Other studies come up with different numbers, but all agree that the middle class has been hollowed out, with a slight increase in the number of upper class families and a much larger increase in the number of lower class families. This can also be seen from the quintile data. In 1973, the combined proportion of income received by the middle 60 percent of families was 53.4%, but by 1990 their share had fallen to 51.2 percent, a decline of 4.1 percent in the relative size of the middle-class piece of the income pie." (Peterson, p. 58) Another way of looking at it is, "In 1973, families in the top 5 percent bracket had an average income 11.3 times greater than families in the bottom fifth. By 1990, the income of the top families was 15.1 times larger, a 33.6 percent increase in this ratio." (59) These trends are also shown in the social mobility statistics. "The last decade saw an increase in downward mobility and a decrease in upward mobility." (62). According to a SRC study at the University of Michigan, "before 1980,...35.5 percent of low-income individuals moved into middle-income groups, but after 1980, the number dropped to 30.4 percent." (63), A 14.4 percent decline in upward mobility after 1980. This was accompanied by a 37.1 percent increase in downward mobility. David Gordon at the New School also reached similar conclusions. He found that "Increasingly,... there is similarity between the occupational status of parents and children."(65)

     I will have more to say about poverty in the U.S. in later lectures, for there are some important trends within the lower class that we will need to focus upon, but let me turn away from describing what has happened in the past twenty years, and address the question of why it happened.

     The first point to make is that the effective tax rate changed substantially over the past twenty years. "Between 1977 and 1992, the effective tax rate for all federal taxes combined declined for the lowest fifth of families, increased for the second, third, and fourth quintiles, and dropped for families in the top fifth." (p.104) That is, the middle 60% paid more taxes precisely when they were losing ground, while the poorest and the richest paid less tax. But significantly, the rich got the biggest breaks. "According to the House Ways and Means Committee, tax savings in 1992 for families in the upper 1 percent income bracket totaled $41,886, a result of the drop in the effective tax rate for these families from 35.5 percent in 1977 to 29.3 percent in 1992." (104) As Peterson concludes, "The 1981 tax cuts, in combination with the exploding deficits and the gargantuan federal debt, played a major role in reversing the trend toward more equality in the distribution of income." (121) Particularly important is the fact that interest income has grown faster than any other kind of income and interest is the fastest growing segment of the federal budget. What this means is that our tax dollars are going substantially to pay interest to those who own capital thus increasing the disparity between rich and poor. This, in combination with other programs, has resulted in government transfer payments going more to the more advantaged segments of our society than to the least advantaged. So, in addition to decreasing incomes for the bottom quintiles, government policies add increased burdens for the poor and increased benefits for the rich.

     The tax advantages and the transfer payments favoring the rich are really only a small part of the story. "The most important single fact about the American economy is the productivity slowdown since 1973." (171) Productivity is the measure of output per hour per worker. Traditionally, the U.S. has had the highest rate of growth in productivity in the world, and we remain the most productive nation on earth, but what has changed is the rate of growth in productivity. To give you a ball park estimate, "In 1990 an employed person in America produced $35,249 worth of goods and services, measured in 1982 prices. Forty-two years earlier (in 1948), an employed person produced $19, 017 worth of goods and services...Over this period, the average productivity of an employed person increased by 85.4 percent." (172) What should be obvious is that the key to prosperity is productivity. The more productive a society the greater the standard of living. Perhaps less obvious is what the key sources of productivity are. These are three: 1) capital goods such as tools, machines, building and so forth; 2) technology, for example the shift from typewriters to word processors vastly increased secretarial productivity; and 3), the skill of the worker, which is where the question of human capital becomes important. The question is, what forces have impacted on these three key elements of productivity to produce the decline rate of growth in productivity, and concomitantly the Silent Depression?

     Peterson argues that there are three major long term developments that account for the sagging rate of growth: 1) military Keynesianism, 2) the decline in public investment in the nation's infrastructure, and 3) the failure of the private economy to invest adequately in the quantity of equipment available for every worker in the labor force. "Since 1947, slightly more than 75 percent of the goods and services purchased by the federal government were for military purposes." (175) This has produced what Ann Markusen and Joel Yudken call the "aero-space-communications-electronic complex (ACE)." (175) "These three industries, plus those that supply ships, ordnance, and tanks have been the prime beneficiaries of the more than $4.5 trillion spent on defense since the end of WWII. (Discuss drain on resources, failure of spinoff, etc.) A problem peculiar to the defense generated ACE complex is that "Not only is the ACE complex dominated by a relative handful of very large firms---the top twenty-five corporations have 50 percent of prime military contracts---but often these firms depend upon the Pentagon for 50 percent or more of their sales." Used to operating in a single buyer market, these ACE firms find they cannot survive in the more competitive atmosphere of the civilian economy, spitting large numbers of workers into unemployment offices in the process.

     The second drag on the rate of growth in productivity is the sorry state of our infrastructure. It amounts to a "third deficit" after the budget and trade deficits. It is the product of a massive, nation-wide neglect of public investment in infrastructure in the past two decades. To give one example of the costs involved, "Gasoline wasted by cars and trucks stuck in idle or slow-moving traffic now equals three billion gallons, almost 4 percent of the total gasoline consumed annually. The cost of this waste is estimated at $9 billion. The Federal Aviation Administration estimates that air-travel delays cost the airlines $1.8 billion in additional operating expenses, and travelers $3.2 billion in time lost." (179) How large is the effect of infrastructural deterioration? Aschauer argues that nearly 60 percent of the drop-off in the annual rate of growth in productivity is explained by the downturn in spending for public investment in the 1970's and 1980's" (181) The rate at which the nation invested in its stock of nonmilitary public capital rose from 3.4 percent of GNP in the early 1950's to a peak of 3.9 percent in the late 1960's, and then fell to a low of 2.2 percent in the latter half of the 1980's...Extensive recent economic research...shows that there is an extremely close correlation between the rate of growth in public capital and the rate of growth in labor productivity, a relationship that exists not only for the United States, but for the other so-called G-7 countries...Between 1950 and 1970, when the nation's stock of public capital grew at 4.1 percent annual rate, productivity was growing at an average annual rate of 2.0 percent. From 1971 through 1985, however, the average annual rate of growth of public capital dropped to 1.6 percent, while productivity growth slumped to .8 percent." At the earlier rate, over a life time a worker's productivity would easily double, but at the later rate, it would take several generations to double productivity, the consequence being stagnant or declining standards of living.

     The significance of the infrastructural deficit, is that it has had an impact on private investment as well. People invest when they can anticipate higher profits. If profitiablity is adversely affected by the poor systems of communication and transportation, investors are reluctant to commit their resources. This is born out by Aschauer's research. He found that "over a period of four or five years, for every dollar of investment in public capital, private investment will increase by about 45 cents." This in turn impacts on productivity because workers do not get access to the most advanced tools and machinery and must compete in a twentieth century world using 19th century technology. Furthermore, the type of investment is very important. Because of changes in the tax laws granting investment tax credit in 1981 for business structures, the U.S. is oversupplied with buildings, and undersupplied with the tools and machines workers need to do their jobs.

     This investment failure is one crucial reason for the reduction in both the relative and absolute importance of manufacturing in the U.S. economy. In 1947, 35.3 percent of the nation's work force were employed in manufacturing. By 1991, this percentage had fallen to 16.9 and the absolute number of jobs began falling in 1980 until an estimated 2.5 million jobs were lost permanently up to now. (189-90) These were relatively high paying jobs and their loss helps explain the growing disparity in incomes. The additional problem is that as manufacturing declines, the service jobs associated with manufacturing will also begin to disappear. For example, "Cohen and Zysman estimate that possibly forty million workers now classified as being in services have jobs that depend on the eighteen million workers directly employed in manufacturing." (196)

     If we are to escape the Silent Depression, there are a number of steps that will have to be taken. Chief among those steps will be to revitalize the infrastructure to increase profitability and stimulate private investment in productive capacities. This could be done by shifting federal spending out of the military sector and into the building of highways, bridges, airports, rail, hospitals and the like. Peterson estimates that it will take $100 billion annually to accomplish the task. Unfortunately, the peace dividend from the end of the cold war has yet to be issued. For example, "in constant 1992 dollars, the Bush projections {on military spending} average 98.9 percent of the annual average spending on the military during the forty years of the Cold War. Even after cutting back the Bush figures, President Clinton's projections for 1994-8 are, on average, 88.6 percent of Cold War spending." (202) The average military spending during the cold war (1948-1991) was $303.7 billion per year.
Clinton Administration's Military Spending Plan (Billions of dollars)
1997 1998 1999 2000 2001 2002 TOTAL
262.3 265.3 269.2 275.0 281.5 281.9 1,642.4
The Defense Monitor, June, 1997

To generate the necessary 100 billion per year, we will have to cut back defense to around 73% of the Cold War totals, but that's when the power factor kicks in since the industries affected are among the largest and most powerful in the country.