America is Regressing into a Developing Nation for Most People

The U.S. is no longer one country, but dividing into two separate economic and political worlds

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By Lynn Parramore

You’ve probably heard the news that the celebrated post-WW II beating heart of America known as the middle class has gone from “burdened,” to “squeezed” to “dying.”  But you might have heard less about what exactly is emerging in its place.

In a new book, The Vanishing Middle Class: Prejudice and Power in a Dual Economy, Peter Temin, Professor Emeritus of Economics at MIT, draws a portrait of the new reality in a way that is frighteningly, indelibly clear:  America is not one country anymore. It is becoming two, each with vastly different resources, expectations, and fates.

Two roads diverged

In one of these countries live members of what Temin calls the “FTE sector” (named for finance, technology, and electronics, the industries which largely support its growth). These are the 20 percent of Americans who enjoy college educations, have good jobs, and sleep soundly knowing that they have not only enough money to meet life’s challenges, but also social networks to bolster their success. They grow up with parents who read books to them, tutors to help with homework, and plenty of stimulating things to do and places to go. They travel in planes and drive new cars. The citizens of this country see economic growth all around them and exciting possibilities for the future. They make plans, influence policies, and count themselves as lucky to be Americans.

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The FTE citizens rarely visit the country where the other 80 percent of Americans live: the low-wage sector. Here, the world of possibility is shrinking, often dramatically. People are burdened with debt and anxious about their insecure jobs if they have a job at all. Many of them are getting sicker and dying younger than they used to. They get around by crumbling public transport and cars they have trouble paying for. Family life is uncertain here; people often don’t partner for the long-term even when they have children. If they go to college, they finance it by going heavily into debt. They are not thinking about the future; they are focused on surviving the present. The world in which they reside is very different from the one they were taught to believe in. While members of the first country act, these people are acted upon.

The two sectors, notes Temin, have entirely distinct financial systems, residential situations, and educational opportunities. Quite different things happen when they get sick, or when they interact with the law. They move independently of each other. Only one path exists by which the citizens of the low-wage country can enter the affluent one, and that path is fraught with obstacles. Most have no way out.

The richest large economy in the world, says Temin, is coming to have an economic and political structure more like a developing nation. We have entered a phase of regression, and one of the easiest ways to see it is in our infrastructure: our roads and bridges look more like those in Thailand or Venezuela than the Netherlands or Japan. But it goes far deeper than that, which is why Temin uses a famous economic model created to understand developing nations to describe how far inequality has progressed in the United States. The model is the work of West Indian economist W. Arthur Lewis, the only person of African descent to win a Nobel Prize in economics. For the first time, this model is applied with systematic precision to the U.S.

The result is profoundly disturbing.

In the Lewis model of a dual economy, much of the low-wage sector has little influence over public policy. Check. The high-income sector will keep wages down in the other sector to provide cheap labor for its businesses. Check. Social control is used to keep the low-wage sector from challenging the policies favored by the high-income sector. Mass incarceration – check. The primary goal of the richest members of the high-income sector is to lower taxes. Check. Social and economic mobility is low. Check.

In the developing countries Lewis studied, people try to move from the low-wage sector to the affluent sector by transplanting from rural areas to the city to get a job. Occasionally it works; often it doesn’t. Temin says that today in the U.S., the ticket out is education, which is difficult for two reasons: you have to spend money over a long period of time, and the FTE sector is making those expenditures more and more costly by defunding public schools and making policies that increase student debt burdens.

Getting a good education, Temin observes, isn’t just about a college degree. It has to begin in early childhood, and you need parents who can afford to spend time and resources all along the long journey. If you aspire to college and your family can’t make transfers of money to you on the way, well, good luck to you. Even with a diploma, you will likely find that high-paying jobs come from networks of peers and relatives. Social capital, as well as economic capital, is critical, but because of America’s long history of racism and the obstacles it has created for accumulating both kinds of capital, black graduates often can only find jobs in education, social work, and government instead of higher-paying professional jobs like technology or finance— something most white people are not really aware of. Women are also held back by a long history of sexism and the burdens — made increasingly heavy — of making greater contributions to the unpaid care economy and lack of access to crucial healthcare.

How did we get this way?

What happened to America’s middle class, which rose triumphantly in the post-World War II years, buoyed by the GI bill, the victories of labor unions, and programs that gave the great mass of workers and their families health and pension benefits that provided security?

The dual economy didn’t happen overnight, says Temin. The story started just a couple of years after the ’67 Summer of Love. Around 1970, the productivity of workers began to get divided from their wages. Corporate attorney and later Supreme Court Justice Lewis Powell galvanized the business community to lobby vigorously for its interests. Johnson’s War on Poverty was replaced by Nixon’s War on Drugs, which sectioned off many members of the low-wage sector, disproportionately black, into prisons. Politicians increasingly influenced by the FTE sector turned from public-spirited universalism to free-market individualism. As money-driven politics accelerated (a phenomenon explained by the Investment Theory of Politics, as Temin explains), leaders of the FTE sector became increasingly emboldened to ignore the needs of members of the low-wage sector, or even to actively work against them.

America’s underlying racism has a continuing distorting impact. A majority of the low-wage sector is white, with blacks and Latinos making up the other part, but politicians learned to talk as if the low-wage sector is mostly black because it allowed them to appeal to racial prejudice, which is useful in maintaining support for the structure of the dual economy — and hurting everyone in the low-wage sector. Temin notes that “the desire to preserve the inferior status of blacks has motivated policies against all members of the low-wage sector.”

Temin points out that the presidential race of 2016 both revealed and amplified the anger of the low-wage sector at this increasing imbalance. Low-wage whites who had been largely invisible in public policy until recently came out of their quiet despair to be heard. Unfortunately, present trends are not only continuing, but also accelerating their problems, freezing the dual economy into place.

What can we do?

We’ve been digging ourselves into a hole for over forty years, but Temin says that we know how to stop digging. If we spent more on domestic rather than military activities, then the middle class would not vanish as quickly. The effects of technological change and globalization could be altered by political actions. We could restore and expand education, shifting resources from policies like mass incarceration to improving the human and social capital of all Americans. We could upgrade infrastructure, forgive mortgage and educational debt in the low-wage sector, reject the notion that private entities should replace democratic government in directing society, and focus on embracing an integrated American population. We could tax not only the income of the rich, but also their capital.

The cost of not doing these things, Temin warns, is incalculably high, and even the rich will end up paying for it:

“Look at the movie, Hidden Figures: It recounts a very dramatic story about three African American women condemned to have a life of not being paid very well teaching in black colleges, and yet their fates changed when they were tapped by NASA to contribute to space exploration. Today we are losing the ability to find people like that. We have a structure that predetermines winners and losers. We are not getting the benefits of all the people who could contribute to the growth of the economy, to advances in medicine or science which could improve the quality of life for everyone — including some of the rich people.”

Along with Thomas Piketty, whose Capital in the Twenty-First Century examines historical and modern inequality, Temin’s book has provided a giant red flag, illustrating a trajectory that will continue to accelerate as long as the 20 percent in the FTE sector are permitted to operate a country within America’s borders solely for themselves at the expense of the majority. Without a robust middle class, America is not only reverting to developing-country status, it is increasingly ripe for serious social turmoil that has not been seen in generations.

A dual economy has separated America from the idea of what most of us thought the country was meant to be. 

Originally posted at the Institute for New Economic Thinking.

2017 April 29

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  • The good evidence the economic mobility is not declining in the US significantly cuts against the thesis of this piece. See

    • Jan de Jonge

      DWA. I know the Brookings Institute as a reliable source. But I also trust Alan Krueger as a serious scholar. About economic and social mobility a lot is written.
      I present you an article of Miles Coral “Income Inequality, Equality of Opportunity, and Intergenerational Mobility”; Journal of Economic Perspectives, Volume 27, Number 3, Summer 2013, Pages 79–102. It gives a nice overall view.(sorry I don’t have a link) It contradicts Scott Winship’s article.

        • Jan de Jonge

          DWA. Your response to this article focuses on Winship’s critique of the “Great Gatsby Chart”and thus on the relation between mobility and inequality. He particularly complains about the data set. ‘Are different income concepts used’? ‘The imprecision of the estimates of immobility’ and so on. Maybe, this criticism in correct in a way, but it does not undermine the big picture. The Regression line in the Chart looks rather
          trustworthy. Winship’s main criticism is that te amount of inequality among families of a specific birth cohort should be taken as starting point. The contribution of Chetty lately in Evonomics fulfills this requirement. Your comment this article refers to this same Scott Winship and the same article (only now not published by Brooking but by Manhattan Institute. But it is interesting to see that Winship refers to an article of Chetty in which he puts much trust because it says that mobility did not fall between 1970 and 1990. This, however, contradicts the article in Evonomics in which Chetty writes that “mobility has sharply declined in America over the past half century because of the growth inequality”. Thus in spite of Winship’s critique of the Alan Krueger and Corak, I think that the combination of this article and Chetty’s article is rather convincing proof of the decline of economic mobility in the USA.

          • Footnote three of Chetty’s paper actually concedes that “relative mobility – the correlation between children’s earnings and their parents’ earnings – has not changed over time”. I think that is the most common meaning of mobility and how most people understand the term.

            The chart of Chetty’s short Evonomics piece purports to show something different: that the number of children that are better off than their parents at age 30 has declined. On only casual inspection, it is hard for me to tease our whether this is really true in any meaningful sense from Chetty’s paper, e.g. how is income being measured for children and their parents. Based on other critiques of such date, e.g. failing to adjust for changes in fringes, household composition, government transfers etc., I am skeptical, but that is a inquiry for another day.

          • Jan de Jonge

            DWA. I don’t see any footnotes in the article in Economics. It says clearly, and I quote: “We measure absolute mobility by comparing children’s household incomes at age 30 (adjusted for inflation using the Consumer Price Index) with their parents’ household incomes at age 30. We find that rates of absolute mobility have fallen from approximately 90% for children born in 1940 to 50% for children born in the 1980s.” Of course a comparison in this case is always relative. But the conclusion is about absolute mobility.
            And again at the end: “We conclude that absolute mobility has declined sharply in America over the past half century primarily because of the growth in inequality.”

          • Sorry, I was referring to the paper on which his Evonomics article was based

          • Jan de Jonge

            I have looked into that paper too. I again I didn’t find any notes. When you click on ‘our work’ you find the article as it appears in Evonomics.

          • Footnote thee is at the bottom of the page numbered “2” in the PDF I linked to (which is NBER Working Paper 22910).

          • See as well this note from Brookings that asks “How many people are better off than their parents?” and concludes “In research as in social policy, tradeoffs are everywhere. The point is not that one approach is right and the other wrong; simply that each has pros and cons. Above all, policymakers need to be aware that technical decisions made by researchers can have quite a dramatic impact on headline results.”


          • Jan de Jonge

            DWA. I agree. Your recent references to the New Urban Institute (2016) and the Pew Report (2012) who consider family incomes while Chetty et al. compare parent and child income, underline this. But I don’t know how reliable the data are; i.e., since when was it normal that a family had more than one wage earner? In the Netherlands it was not before the 1980s
            Therefore I keep on basing my arguments on the reports of Chetty (at Evonomics, the NBER or the AER (American Economic review, 2014, 104/5)) because it contains an interesting puzzle: on the one hand Chetty state that absolute mobility has fallen the last half century, on the other hand that relative mobility has not changed over time. Of course, we talk about about trends and not every American is involved, but the question is: how can both trends be true?
            Declining absolute mobility and stable relative mobility could be explained by a general fall of GDP, but this has not happened. An alternative explanation suggested by Chetty et all. is the unequal distribution of economic growth. This has in particular affected the middle classes (see Chetty et al in the AER; Kochbar, Pew research Center, 2017; the report of the New Urban Institute gives data about the rise in Family Income, from 1973-2014 by percentiles, 20th, 40th, 60th and 80th respectively: zero, 10%, 23% and 40%; in her Global Credit Portal, the S&P Global 5 august 2014, reports that between 1979 and 2010 the share of total household income has declined in all quintiles except the highest). The squeeze of the middle classes (the second and third quintile in particular), combined with the low increase of income (Kochan estimated the increase of average hourly earning between 1980 and 2011 at 7%, ILRReview, 66/2, 2013), can explain that ‘on average’ ‘sons’ climbed on the income ladder while they did not earn more than their ‘father’.
            This pattern does not yet justify the statement that the US is a divided nation, but can foreshadow it. When you move from a single income to the combined incomes within a family the picture is less glooming, but the PEW report 2017 apparently has reasons to say that the picture of mobility in the US shows a glass half full and half empty. Depending on your optimism about the future development?

    • Xness

      I say that your comment is bot-like, and further, it cites one, short-term, paltry, terminally myopic data point.
      I suggest that you deploy the knowledge embedded in the following quote to upgrade your philosophic orientation:
      “We need scarcely add that the contemplation in natural science of a wider domain than the actual leads to a far better understanding of the actual.” Sir Arthur Eddington

      Going picture per Sir Arthur, I submit that you, and most economists, do not understand code, including monetary code, in a physics, evolution and complexity context. And that this foundational philosophic omission / flaw crushes many of the conclusions of conventional economics, including yours.

      Concomitantly, this flaw drastically weakens our species’ ability to pass natural selection tests in the near future, converting the sky into a lethal gas chamber of commerce.
      And that’s only one manner of world culture’s non-selectable manner of reality interface, that is, its interactions with geo, eco, bio & tech networks, and within culture itself summon, rapidly (exponentially?), the when-not-if physics of collapse in non equilibrium systems called self-organized criticality.

      Implemented knowledge can forestall self-organized criticality.

  • Patrick Cardiff

    I see too much “missingness” and overlap in the categories that make up Temin’s 20%. Does the 20% include the 1% ultra-rich, and if so, how does that affect the aspirations of lower half of the upper 20%. I don’t appreciate classifications so stark. I know that’s pedantic but to make a statement about a class that class really needs cutoff characteristics that inform class behavior. I just don’t see it.

    I was always wary of a percentile conflating exactly with class behavior. I don’t believe we need it (the percentile) so why not just refer to the behaviors, which are arguably more readily measurable and can stand as features.

    Finally, “They make plans, influence policies, and count themselves as lucky to be Americans.” C’mon, so does my mom! I mean, this is solidarity-seeking language, tugging at our subjective heartstrings. Surely we don’t need it to prove increase inequality over time.

  • Димитър Димитров

    There is no way out of this situation. The misery race is global. Although the US economy is large, it is not possible to apply the old and tested means of change. The trap has been clicked for a long time.