Will the 2016 Election Really Save the Middle Class?: The Real Cause of Income Inequality

February 7, 2016

By Jon Rynn

Bernie Sanders has stirred the passion of many voters by concentrating on the problem of growing income inequality. Inequality, he points out, leads to stagnating and declining income for most people. The higher income for the top 1% completely distorts the political system. With more power for Wall Street and billionaires, politicians who depend on the rich and powerful for campaign funds pass more bad policies, leading to even worse income inequality, in a vicious cycle.

Thomas Piketty’s book about inequality showed that income and wealth inequality have been getting much worse over the last half-century. There seems to be a “positive feedback” process occurring, that is, the most powerful people accumulate more and more income-producing assets, and this greater wealth allows them to gather yet more wealth. “Positive feedback” is the process that occurs in nature and in engineering that leads to quickly escalating gains, such as when a microphone feeds back and starts screeching. Growing income inequality is our economy screeching.

Manufacturing, on the other hand, is the economic sector that turns off the “positive feedback” of income inequality in the economy. Manufacturing does this in a couple of ways. First, manufacturing generates so much wealth that a middle class can develop, as happened in the 19th century. Before that time, what little surplus wealth was generated was grabbed by the ruling elite, and almost everybody else engaged in the toil of farming. But the surplus that manufacturing creates can also be taken by the ruling elite, leaving everyone else in the same boat as before. However, the second reason manufacturing leads to a middle class is that manufacturing requires high skill levels — which is why Germany now, and the United States before, have had comfortable middle class families working in factories. When people have high skills — assuming they can organize, as in unions — then they have power, and with power comes better income and better income equality.

So a country that has manufacturing has more wealth, and more economic and therefore political power for a large part of its population, what is known as the middle class. But if the manufacturing sectors starts to decline, then so does the wealth-generating power of the country, as well as the power of the middle class. And thus we find that the United States is declining in power and in its middle class. By not focusing on the role of manufacturing in the economy, both Sanders and Piketty miss an opportunity to explain the phenomenon of income inequality that they are describing — and they have trouble proscribing effective solutions as well.

Income equality, and manufacturing, both peaked around 1968 in the United States. Manufacturing has almost always been the quintessential middle class sector because manufacturing employs about the same percentage of the workforce as the income it receives. In 1968, 25% of the workforce was engaged in manufacturing, and 25% of the country’s income went to manufacturing. On average, in 1968 people in manufacturing received the average income of the economy. No other sector can boast this “middle class-ness”.

For finance, insurance, and real estate (abbreviated as FIRE), in 2009 these industries employed only 5.7% of the work force, but received a whopping 21.5% of national income.   Therefore the average person in FIRE made almost four times the average of a working American (these figures come from data from the Commerce Department’s Bureau of Economic Analysis).

On the other hand, if you total up the hotel, restaurant, health, and retail sectors, you will find that in 2009 these lower-income service sectors employed 30% of all workers, but received in income about 20% of the nation’s income. Thus, on average, a worker in a low income sector received about 2/3rds of the average income. And this is an average — if you take out the doctors and other highly paid professionals from these sectors, the rest of the workforce has even lower income.

From 1968 to 2009 the manufacturing sector declined from one quarter of the economy — every fourth working person — to about one in every 11 people, a decline of about 16% of the total employment pool.   Where did those people go? Most of them went into the lower income service workforce, which grew from 12.8% to 20.5% of the workforce (and many others stopped working altogether). So, on average, the people that moved from manufacturing to low income services lost 1/3rd of their income, if not more since most were not the highly paid professionals in those sectors. In mainly white communities, these are some of the people interested in Trump and suffering from high death rates. In mainly African-American communities, the loss of manufacturing is the economic crisis that has been decimating African-American communities for decades.

While many communities were being devastated by factory shutdowns, about half the income drop of manufacturing (from 25% to 11%), was scooped up by FIRE (from 14.2% in 1968 to 21.5% in 2009). Most of the rest of the income was claimed by what are called professional, technical, and scientific services (from 2.4 to 7.6), where on average people are also highly paid. This professional sector accounts for about one quarter of the loss of manufacturing employment (moving from 2.1% of the workforce to 5.6%). Because of this shift from manufacturing to professional income, many in the Democratic Party focused on professional voters instead of working class voters.

Thus, there has been a movement of people from middle class manufacturing jobs to lower middle class and lower class service jobs, even within the higher average service sectors, while at the same time income moved to smaller, non-manufacturing sectors, particularly FIRE, and particularly to the “ruling elite” within FIRE.

The decline of manufacturing in the United States is usually framed like this: “Because of globalization and automation, manufacturing is never coming back.” I will address the nature of globalization and whether ‘manufacturing is never coming back’ in subsequent posts, but automation is not the reason manufacturing in the U.S. is declining.

Manufacturing is automation. That is, manufacturing is the process of people using machinery to create goods, including other machinery which can then be used for making more machinery and goods. When people use the word “automation,” they are generally referring to using some kind of computer technology within the machinery used for production. Computer technology is another form of machinery, and is in turn made by people and machines. But more importantly, there is no sharp break in capability that computer technology has brought to manufacturing. For the entire 20th Century, the productivity increase of manufacturing, that is, the value of goods that a particular value of machinery could produce, has been going up by about 3%, at a pretty steady rate, and computer technology has not significantly increased those gains. The German middle class has been doing very well, even with computer technology, because the German government intervenes in the economy in order to support manufacturing. Although the share of manufacturing in Germany has been going down over the last 40 years, it is still at around 20% and forms the basis for their prosperity. Moreover, a recent assessment by Bernard S. Bernanke at the Brookings Institution found that “in 2014, Germany’s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country’s GDP,” continuing “an upward trend that’s been going on at least since 2000.” Manufacturing has therefore continued to contribute wealth to German society which conceivably can be partially taxed or redistributed to lower income earners.

Throughout history, and even at points in American history (for example, Alexander Hamilton and Abraham Lincoln), the government has made manufacturing the focus of national policy. There is nothing inevitable about the decline of manufacturing, in the U.S. or anywhere else.

The rise of FIRE and the decline of manufacturing are linked, because the increased profits resulting from the imported manufactured goods that used to be made in the United States now go to the top 1% or so, where much of FIRE resides. That is, when goods are made in China, and sold in the US, the profits eventually wind up in FIRE and with billionaires, instead of going into the pockets of middle class manufacturing workers in the US. With those greater profits, FIRE and the billionaires indulge in the positive feedback processes of accumulating greater and greater economic and then political power, leading to growing inequality.

By the late 1990s, this financial power led to a further positive feedback loop, as the government deregulated the financial industry, allowing for the emergence of the “too big to fail” banks, leading to our financial oligarchy of five or so huge banks and a bunch of hedge funds and their billionaires. Thus, Sanders correctly calls for breaking up the banks, to roll back this “positive feedback” process. Trump, too, has used what used to be called “economic nationalism” to call for tariffs (or taxes) on imported goods to encourage manufacturing, and both Sanders and Trump are against the TransPacific Partnership, whose passage would continue a long tradition of destroying the manufacturing sector. However, both politicians do not explicitly get to the bottom of the problem: we need to rebuild the manufacturing sector, which will simultaneously decrease the power of FIRE and increase the power of the middle class.

Of course, Bernie Sanders would fight for policies that are much more progressive than Donald Trump. But I fear that unless we start to attack the root of the problem, and in particular unless progressives make rebuilding manufacturing a central plank of their platform, there will be more and even worse Donald Trumps to come.

Even calling for the rebuilding of manufacturing is much easier than laying out policies to do it. I think that the US has passed a point of no return, and the government must step in and directly encourage a manufacturing renaissance by rebuilding the American infrastructure. That is the topic of the next post (you can see a more detailed look at this and other issues in my book chapter, “A green energy manufacturing stimulus strategy,” available at jonrynn.com, and also look at plan details at GreenNewDealPlan.com)

Jon Rynn is the author of Manufacturing Green Prosperity: The power to Rebuild the American Middle Class, parts of which are available for reading at ManufacturingGreenProsperity.com.

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