India: Gutted America’s lessons for New Delhi

GlobalPost unveiled an ambitious, worldwide investigation into the ramifications of globalization for the US middle class on Wednesday.

But this America The Gutted project also offers at least one salutary lesson for policymakers in New Delhi.

In a compelling story outlining just how America's middle class became an endangered species, GlobalPost's David Case suggests that it wasn't outsourcing, or cheap labor in China, that did the damage–or at least not those things alone.

It was also a dramatic shift in US policy, which eroded the foundations of the consumer-based economy pioneered in the days of Henry Ford: You turn workers into consumers, so that they both build and buy your products.

Here's Case:

Experts increasingly date the financial gloom back to the 1970s, when globalization, technology and politics first started rewriting the social contract.

After stripping out factors that artificially elevate earnings — such as health care inflation and additional hours worked — “middle-class incomes grew just 4.9 percent across the 28 years from 1979 to 2007, with most of that growth occurring just in the late 1990s,” according to a recent Economic Policy Institute study. That means despite the advent of computers, the 24/7 work week and all the productivity gains achieved over the past third of a century, when adjusted for inflation, a family earning $50,000 under President Carter could be expected to earn $52,450 today — and the bulk of that gain actually came in a few prosperous years in the late 1990s.

So even though the real economy expanded by an average of more than 2.6 percent annually over the past three decades, middle class earnings benefited from essentially none of this.

The reason?

Experts generally trace America’s prosperous middle to 1914, when Henry Ford vowed to pay workers the generous wage of $5 a day, hoping that workers would spend that money on his cars. It worked. Other manufacturers followed, triggering to a virtuous circle of consumer-driven prosperity.

Government spending helped as well. Following World War II, the GI Bill gave the middle class a massive financial jolt. Veterans could suddenly attend college, start businesses and buy homes. Suburbs sprawled as the ultimate symbol of middle class status. In 1947, developer William Levitt would convert 4,000 acres of Long Island potato fields into a vast middle class haven, cranking out 30 new homes daily, each with a tree in the yard.

Meanwhile, a post-war social contract was forged between workers and managers, under which corporations offered decent pay and generous benefits, in return for peace and cooperation from labor. Between 1947 and 1979, income for Americans in the middle quintile (earning between the 40th and 60th percentiles of the population) grew by a robust 2.4 percent annually. That growth freed families to spend, which in turn boosted the economy, making the quarter century following World War II the most broadly affluent in American history.

But now:

It was inevitable that globalization and technology would disrupt America’s employment market. The jobs of bank tellers and secretaries could never have been saved. Likewise, the work of stitching jeans was bound to shift to lower cost countries, with the textile mills employing thousands in places like North Carolina doomed to extinction. And now as lawyers and other professionals compete for work with highly educated individuals in places like India, professions that were once considered highly secure are facing softer wages and potential layoffs.

But globalization and technology didn’t emerge in a vacuum. Instead, they coincided with a major shift in the way that politics and power work in America, a market Darwinism experts say harmed middle class prospects, and reduced the chances that a displaced worker would land on her feet.

The 1970s began an era in America that tilted the balance toward the wealthy. In Washington DC, deregulation fostered a freewheeling, often reckless brand of capitalism that benefited the elite, and particularly bankers, at the expense of the masses. This was most acute in the mortgage meltdown of 2008, when millions lost their homes while banks that engineered the crisis dished out hefty bonuses.

In the name of job creation, Congress and the White House have repeatedly slashed taxes on upper income families, cutting the highest rates from 70 percent or more to 35 percent today — with an effective rate for the super rich that is far lower than the middle class. “The wealthy are taking home a larger share of income than they have in 80 years,” explains Robert Reich. “The top 1 percent is getting more than 20 percent of total income,” Reich says.

“You can’t tax the job creators” is a political mantra that has taken on an patina of indisputable fact. But countless studies have shown that tax cuts for the rich don’t generate employment. On the contrary, higher taxes in the 1990s and in the decades after World War II coincide with prosperity and faster growth. “The real job creators are the American middle class, whose spending spurs business to add jobs,” Reich argues. “And the real reason that unemployment is so high is that so much of the nation’s earnings go to the rich.”

Think about that in the Indian context, where "reforms" are touted as solutions in themselves and any move to increase the spending power of the vast, impoverished population is decried as a "sop."

We track India's gross domestic product growth obsessively. But maybe what we ought to be obsessed with is gross domestic consumption–if such data is even available. For surely India's future, like America's past, lies in employing its population–at a better-than-living wage–and turning workers into consumers.