• U.S.

Are You Better Off?

12 minute read
George J. Church

Unemployment is near a 14-year low. Inflation has been cut to about a third of its pace in the early 1980s. Interest rates are only half as high as eight years ago. The U.S. economy shrugged off the October 1987 stock-market crash to record a sixth straight year of growth, a feat unprecedented during peacetime. So why, given the fact that pocketbook issues eventually dominate almost every presidential campaign, is George Bush not running away with the election?

One reason is fear that gargantuan budget and trade deficits may yet cause prosperity to fizzle. But there is also a feeling that something is wrong with the boom, that general prosperity is not bringing as much of the good life as the rosy numbers indicate. Though the wealthy are doing noticeably better, – most middle-class Americans feel squeezed. They are struggling harder — and often depending on two incomes when one sufficed for their parents — to pay for housing, tuition and other expenses that have gone up much faster than inflation.

The Reagan boom, for all its success, has not distributed its benefits evenly. It is a theme Dukakis is stressing more and more in his campaign. “In the past seven years,” he declares, “the rich have gotten richer, the poor have gotten poorer, and those in the middle — that’s most of us — have gotten squeezed.”

The trend can hardly be blamed entirely on the Reagan Administration. Economic inequality has been growing through 15 years and four presidencies; it grew especially rapidly through the stagflation of the late 1970s. Bush’s economic advisers argue that Reaganite prosperity has increased the inflation- adjusted incomes of all classes at least since the end of the 1982 recession. In other words, while the rich are indeed getting richer, the poor have stopped getting poorer.

True enough — but not good enough. For while the gains made by the rich have been spectacular, those of the middle class have been barely sufficient, and those of the poor not quite sufficient, to get them back where they were twelve to 15 years ago. So the gap between rich and poor is still growing — to its widest point in 40 years, according to the calculations of some liberal economists. And that trend is alarming. Whether or not it influences this year’s election, it could, if it continues, threaten the American Dream itself.

The Dream has many parts: a comfortable house in a tree-shaded neighborhood, a car, and college educations for the children. But at bottom it is based on two simple articles of national faith: 1) that each generation will live a bit better than that of its parents and build a still better life for its children; 2) that the nation will slowly but steadily progress toward greater equality. These twin pillars of belief have helped create the political and social stability — and the economic dynamism — that have characterized the U.S. for more than a century.

Through the 1950s and ’60s the Dream seemed to be coming true. But beginning with the oil shock of the early ’70s and continuing through the stagflation at the end of that decade, the fortunes of different income groups diverged. And contrary to most expectations, the divergence has persisted through the recovery that followed the vicious 1982 recession.

& From 1977 to 1988, the inflation-adjusted income of the families who make up the poorest 10% of the population has declined more than 10%. The total number of people living below the poverty line fell from almost 40 million in 1960 to less than 23 million in 1973, but shot up to 35.3 million in 1983 and has remained near there ever since.

Meanwhile, for the richest 1% of all families, income has rocketed 74%, from $174,000 a year to $304,000. By some estimates, the U.S. has a million millionaires (defined as someone who has a net worth of at least $1 million). Says California Democratic Congressman George Miller, who chairs a committee that deals with family problems: “We are creating a dumbbell. The poor are poorer, and there are more of them. The rich are richer, and there are more of them.”

And the middle class? As some of its members fall into poverty and others acquire wealth, it has been shrinking. Economic consultant and investment adviser Gary Shilling calculates that the group made up of households earning from $20,000 to $60,000 a year in inflation-adjusted 1985 dollars has dwindled from 53% of the nation in 1973 to 49% in 1985. Median family income is about $30,850, almost exactly what it was 15 years ago when inflation is factored in. But even that may overstate the fortunes of the middle class, whose living standards have gone down in several ways:

Dual Incomes: For many families, it takes two jobs to get by. Last year about 65% of all mothers, including 51% of those with infants under the age of one, were either holding jobs or looking for them. Many women, of course, work because they enjoy the independence and broader horizons that a job outside the home entails. But an even larger number of mothers would rather stay home to raise their children; they feel driven to take jobs by sheer economic necessity. These mothers, and their families, have lost a key choice as to how they will arrange their lives.

Housing: One of the proudest achievements of the post-World War II economy was converting the U.S. from a nation of renters to one of homeowners. But in the past eight years, home ownership has declined for the first time since 1940. The fall has been sharpest for young families; for people between 35 and 39, the percentage owning their own homes has dropped from 61% to 53% since Reagan became President. Middle-class salaries have simply fallen far short of the inflation in housing costs: today’s average home buyer has to save 50% of / a full year’s income just to put up the down payment, as opposed to 33% in 1978. As a result, those buying homes tend increasingly to be those lucky enough to have parents from whom they can borrow money. Then, when they need a bigger home to accommodate a growing family, often the best they can hope for is to inherit their parents’ house rather than to build or buy a bigger one themselves.

Education: Saving to send even one child to college puts millions of middle- class parents on an ever accelerating treadmill. According to the Senate education subcommittee, the full annual costs at a private college come to $12,924 a student. That represents 40% or so of a median family’s total income. Parents who send a son or daughter to a public college can expect to pay $5,823 this year, or almost 20% of median-family income. Many parents have two or more children in college at the same time, and the Reagan Administration has made student loans harder to get.

But many parents feel they have no choice. A college diploma, once the passport to upward mobility, is becoming a necessity just to avoid falling out of the middle class. Frank Levy, a University of Maryland economist, calculates that in the early 1970s a 30-year-old male college graduate could expect to earn at least 15% more than a 30-year-old with a high school diploma. By 1986 the gap had grown to 49%.

Reagan came to power largely because he promised to revive the American Dream, which he said was being strangled by high taxation. Indeed, through most of the 1970s, wages rose less than prices but enough to push taxpayers into higher brackets. The double whammy of higher prices and higher taxes cut into the purchasing power of the middle class more than into that of the rich.

Reagan’s tax cuts only worsened the skew. Though income tax rates were reduced in all brackets, the cuts were tilted heavily toward the upper end of the scale. In addition, Social Security taxes about tripled, to a top of $3,379.50 this year. The blow fell most heavily on the middle and lower classes, since the Social Security tax exempts the portion of wage and salary incomes above $45,000 a year and all income from interest, dividends and rent. The result: according to a Congressional Budget Office study, only the top 10% of the population received a significant net tax cut between 1977 and 1988; most of the other 90% paid a higher share of their incomes to Washington. At the extremes, the richest 1% got a net tax savings of 25%; the poorest tenth of workers saw 20% more of their incomes swallowed by taxes.

Dukakis has tried hard to make an issue of the middle-class squeeze. He has proposed programs to relieve specific discontents. One would give students the rest of their lives to repay their college loans; another would require employers to buy health insurance for 22 million workers who have none. Bush, too, has seen the need to cater to the middle class. Last week he announced a plan that would allow savers to deposit $1,000 a year in accounts that would pay tax-deferred interest. Dukakis responded by waving a crumpled $20 bill to represent the amount an average family could benefit in one year.

Still, the issue has not exactly caught fire. If middle-class discontent has been strong enough so far to deny Bush the landslide that unemployment and inflation figures might lead a follower of conventional wisdom to expect, it has not been sufficiently powerful to keep Dukakis from running behind. Many Americans, of course, base their votes on noneconomic criteria. Others associate Democrats with 1970s stagflation; they think, rightly or wrongly, that the Reagan expansion will continue and eventually improve their own financial status. Those who are hazily aware that their relative position is slipping often refuse to admit, even to themselves, that they are losing upward mobility. More important, the poor and many in the lower middle class by and large may grumble but do not vote; the ranks of those who do vote are filled disproportionately by the rich and upper middle classes.

Over the longer run, however, the trend toward inequality is rife with the potential for social and political conflict — not just between classes but within the middle class. The differing prospects between its college-educated members and those who go no further than high school is one potential source of antagonism. Another is the growing cleavage between young and old. While young couples wonder if they can ever buy their dream house — or any house — people of their parents’ generation are sitting on a gold mine. Many have paid off low-interest mortgages on houses bought a quarter-century ago for around $20,000 and now worth perhaps ten times that.

Social Security incomes of the elderly, unlike the salaries of their children, are indexed against inflation. And while Medicare pays many bills for those over 65, some 37 million younger Americans have no health insurance at all.

Growing inequality could even threaten those who now benefit from it by putting an end to the economic expansion. An extreme concentration of wealth and income during the 1920s was a leading cause of the Great Depression. Marriner Eccles, a Republican banker from Utah who became head of the Federal Reserve Board in the 1930s, explained, “While the national income rose to high levels, it was so distributed that the incomes of the majority were entirely inadequate, and business activity was sustained only by a rapid and unsound increase in the private debt structure.” Today there are disturbing parallels. Some 55% of American households owe more than they own in financial assets. And in 1985 household debt relative to disposable income reached a postwar high of 88%. Nor is economic inequality necessary for an efficient economic marketplace.

What to do? Sheldon Danziger, director of the Institute for Research on Poverty, warns against anything other than closely targeted approaches to the problems of the poor: “In the 1970s I would have said we should have a guaranteed annual income. I don’t say that now. We have learned that blunt instruments don’t work.” Making the income tax system more progressive would seem an obvious step, but economists warn that it has its limits. Says Gary Burtless of the Brookings Institution: “There are estimates suggesting that if we raise tax rates on people making more than $40,000, they will actually work harder. Unfortunately, they will probably also work harder to avoid taxes.” Indeed, the most immediate threat to prosperity is the budget deficit, and many ideas for reducing it involve more austerity for the middle and lower classes — for example, a value-added tax, a kind of national sales tax, to discourage consumption and promote savings, and further cuts in Government programs aimed at the working poor. And however attractive the idea may sound, the fact is that the budget deficit cannot be reduced significantly by taxing only the rich.

The most sensible, though politically explosive, step would be to tax Social Security payments like ordinary income, as is done with private pensions. The low-income elderly would still be lightly taxed; those with higher incomes would pay enough more to provide money that could be used to invest in basic medical care for children and to provide larger earned-income tax credits for the working poor who receive few welfare benefits. When the time comes to increase taxes to balance the budget — and come it will, however much politicians shrink in horror from the “T” word — consideration must be given to making the wealthy pay a larger share. Tax rates that range up to 70%, as they did before the Reagan cuts, may be unproductive, but there is nothing sacred about a spread that goes only up to 28% at the top (with a detour to 33% for couples with taxable incomes between $7l,900 and $171,090).

In any case, inequality is a subject that must be addressed — and not just by hoping that continued economic growth will automatically cure it. The danger is that growing disparities in wealth and living standards will undermine the sense of community and of financial optimism that have kept America from being riven by class resentments.


CREDIT: TIME Chart by Joe Lertola

TIME poll taken by Yankelovich Clancy Shulman


Which of these groups are better off economically as a result of Reagan’s policies?

DESCRIPTION: Assessment of economic well-being of several groups under Ronald Reagan; color illustration of White House.


CREDIT: TIME Chart by Cynthia Davis


DESCRIPTION: Percentage change in average family income for several income groups, 1977-1988; color illustration.

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