Great Recession: The Limping Middle Class

The 5% of Americans with the highest incomes now account for 37% of all consumer purchases, according to the latest research from Moody's Analytics.

An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well. But when the values of their assets tumble, they pull back.

Look back over the last hundred years and you'll see the pattern. During periods when the very rich took home a much smaller proportion of total income — as in the Great Prosperity between 1947 and 1977 — the nation as a whole grew faster and median wages surged. We created a virtuous cycle in which an ever growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats.

During periods when the very rich took home a larger proportion — as between 1918 and 1933, and in the Great Regression from 1981 to the present day — growth slowed, median wages stagnated and we suffered giant downturns. It's no mere coincidence that over the last century the top earners' share of the nation's total income peaked in 1928 and 2007 — the two years just preceding the biggest downturns.

Some say we couldn't have reversed the consequences of globalization and technological change. Yet the experiences of other nations, like Germany, suggest otherwise. Germany has grown faster than the United States for the last 15 years, and the gains have been more widely spread. While Americans' average hourly pay has risen only 6% since 1985, adjusted for inflation, German workers' pay has risen almost 30%. At the same time, the top 1% of German households now take home about 11% of all income — about the same as in 1970. And although in the last months Germany has been hit by the debt crisis of its neighbors, its unemployment is still below where it was when the financial crisis started in 2007.

How has Germany done it? Mainly by focusing like a laser on education (German math scores continue to extend their lead over American), and by maintaining strong labor unions.

The real reason for America's Great Regression was political. As income and wealth became more concentrated in fewer hands, American politics reverted to what Marriner S. Eccles, a former chairman of the Federal Reserve, described in the 1920s, when people with great economic power had an undue influence in making the rules of the economic game. With hefty campaign contributions and platoons of lobbyists and public relations spinners, America's executive class has gained lower tax rates while resisting reforms that would spread the gains from growth.

For more, see The Limping Middle Class by Robert B. Reich, September 3, 2011 at NYTimes.com.