I’m not sure there is a hollowing out of the middle class because it’s hard to define. For most of history, the middle class was the group of independent small to medium size business people that socialists called the bourgeoisie. It made up about 5% of the population until the class exploded in size during the industrial revolution. At some point in the 20th century the term was redefined to include workers whose income was in the middle between the rich and poor, mostly factory workers without a college education. So the decline of manufacturing jobs as a percentage of the total workforce terrifies conservatives and socialists.
Libertarians, classical liberals and other free marketeers should keep in mind that real conservatives never liked free markets. Read Russel Kirk’s The Conservative Mind. The original conservatives were mercantilists who endorsed state granted monopolies, promotion of exports and blocking of imports. Conservatism gained a free market gloss in the late 19th century when socialists under the leadership of economist J. S. Mill hijacked the term “liberal.” True liberals joined conservatives to fight socialism, which now battled under the flag of liberalism.
The shot gun marriage of conservatives and free marketeers endured the 20th century as long as conservatives controlled social issues and left economic ones to free marketeers. The election of Donald Trump as president has triggered conservatives to relapse into mercantilism and demand a divorce from free marketeers. To justify their divorce, they have re-written US economic history to prove that the nation’s families, churches, businesses, sports, art and communities flourished under mercantilism and floundered in the late 20th century under slightly freer international trade. They have joined socialists in indicting “globalization” for every ill in society including the decline of Christianity, the destruction of the family, bad movies, loneliness, failing education, flat tires and broken bed springs.
On old economics professor of mine warned his students to ignore any economics in the popular press and half what appears in the financial press. I would add that we ignore the revisionist histories of relapsed conservatives. The best economic historians show that the nation grew wealthy and powerful under free markets and has weakened under the burden of creeping socialism.
It would take a book to rebut the many false accusations leveled against free markets by relapsed conservatives, so I want to concentrate on one issue, the hollowing out of the middle class. (This is the part of the article where I lose socialists and conservatives because they can’t understand the simple math involved.) The US middle class, defined as middle income wage earners, has declined, but not because of globalization. It’s faltering because of the “social contract” that conservatives praise as having held the country together before the Godzilla of globalization began stomping our cities. That contract supposedly united the safety net of the welfare state with a free hand for the market and instantiated the nirvana that conservatives long for.
That’s fake history. Conservatives have never loosened the noose around the market’s neck and that noose is strangling the economy, but that’s another story. It takes a Dane to explain real cause of middle-class pain. He wrote this:
“In Denmark you get your free day care so you can become a 2 income family, double income outs you very quickly into the top marginal tax rate of around 60%. Average income tax rates are 45% there, plus a non deductible 25% VAT, plus a 45% top marginal rate for capital gains in case you were trying to save for retirement, plus a 1-3% land tax.
“Are these taxes creating ‘equality’? Nope, Denmark has a widening gap in wealth and income, they have started from a very narrow distribution, but have steadily worked to hollow out the middle class. It makes no sense to earn in the middle of their income distribution, you either need to drop into the range where you receive net benefits or jump way into the top of the income range to afford what amounts to top rates of 70-80%.”Dr. Kling has the US version in his article “Universal Basic Income: The Basic Trade-offs.” He wrote that if everyone received a payment from the government of $20,000 per year as their UBI and the tax rate on income was 20%, then those earning $100,000 per year would break even. They would pay $20,000 in taxes (20% x $100,000) and receive $20,000 in UBI. So people would optimize their income by earning up to $100,000 per year and no more because they would lose money on earnings above $100,000.
But if we raised the tax rate to 80%, the break-even point drops to $25,000. It wouldn’t pay to earn more than the break-even amount unless you could earn so much more that you didn’t care about UBI, say $1 million per year. That strategy hollows out the middle because people stop earning at the break-even point unless they can earn much more. The problem is, we’re already there, says Kling.
“You might think ‘A tax rate of 80 percent? That’s crazy. There is no way that would be adopted in the U.S.’ But it turns out that is close to what we have.
“Instead of a single tax rate and a universal basic income, we have a complicated tax system and a set of ‘conditional transfers,’ meaning money that people receive that can only be spent in certain ways (food stamps, for example) and only if they satisfy eligibility rules, including strict income cut-offs.
“Examining the overall impact of all of these taxes and transfers, economist John F. Early found that the middle-income group averages only 20 percent more spendable income than that of the lowest group. Government income redistribution basically flattens out the bottom 60 percent of income to within 20 percent of each other.
“Taking into account the way that they lose eligibility for conditional transfers, low-to-middle income families face an average tax rate of close to 80 percent.”Conservatives still think the welfare state they laud has no inconvenient consequences, but it has played the most important role in skewing effective taxes so as to gut the middle class. Of course, they won’t be able to understand this explanation, so they will continue to blame free markets and globalization alongside their socialist friends.