Presidential campaign needs to get real on salvaging middle class

Occupy Wall Street and its coast-to-coast spinoffs captured the headlines in 2011, but the economic debate it helped trigger should reverberate deep into 2012.

That’s the debate over the future of the American middle class. Rarely has its economic plight been an explicit issue in a presidential election, but candidates on both sides of the partisan divide are poised to make it the centerpiece of their campaigns in the coming year.

President Obama, delivering a theme-setting speech December 6 in Osawatomie, Kan., called the coming campaign “a make-or-break moment for the middle class.” Mitt Romney, the once and possibly future Republican front-runner, consistently identifies the middle class as the chief victim of Obama’s economic policies.

Yet so far the lionization of the middle class has been largely rhetorical. The year just past was one in which the stagnation of income and wealth for the great majority of Americans continued — indeed, bit so deep that it helped fuel the Occupy movement taking as its constituency the “99%,” those left behind by the continued gravitation of economic bounty toward the top 1% of U.S. taxpayers.

With the coming election, however, the year ahead offers voters, business leaders and politicians an opportunity for a joint debate over the fundamentals of capitalism in America. As the president put it in Kansas: “What’s at stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, secure their retirement.”

Those four goals have been undermined since the 1970s by the unequal distribution of the wealth created largely by the American worker’s boundless gains in productivity. Until the crash of 2008, which still inflicts an unaccustomed level of pain on the middle class and the working class, the crippling of American upward mobility was a phenomenon little noticed or swept under the rug. In the last year it has come out of hiding, a position it is likely to keep occupying over the next ten months.

That’s encouraging, because you can’t discuss income inequality without touching upon many of the other fundamental issues confronting the U.S. economy: how many jobs we create, and of what quality; how we should support the elderly, the young and the sick; and how we should invest in the future through infrastructure construction and improved access to higher education.

That all ties in to the dimming economic hopes of America’s youth — the college-educated and unskilled alike — which have perhaps the most profound long-term consequences for the nation’s economic health. If young people don’t get good jobs with good prospects, they put off marriage, they don’t buy homes, they don’t shop for appliances and furniture. In short, they reinforce the stagnation of the consumer economy.

Today’s economy may be far from the worst to confront an incumbent president and his challenger — signs of recovery, albeit still weak, have emerged in recent months — but seldom has a campaign begun with so many basic policy questions unresolved.

The “uncomfortably long” list of uncertainties outlined at a recent economic outlook conference by Richard Curtin, director of the University of Michigan’s consumer survey, includes whether Washington’s impasse over taxes and spending will be broken, whether tax cuts for the middle and working classes will be continued and the Bush tax cuts allowed to expire for the wealthy, and whether pump-priming to create jobs or deficit reduction and resulting austerity will be paramount. If voters don’t demand that the presidential contenders address these questions, we will have wasted the opportunity of our lifetimes.

There isn’t any question that income inequality has increased over the last three decades or so, despite a conservative campaign to discredit the notion. A straightforward description of the trend was issued in October by the bipartisan Congressional Budget Office, which determined that for the highest-income 1% of the population, average after-tax household income almost quadrupled from 1979 to 2007, while income for the 60% of Americans in the middle of the scale grew by just over one-third. (Both figures are adjusted for inflation; in 2007, that middle group comprised households with earnings between about $15,000 and $70,000.) As a consequence of this trend, the CBO says, the share of after-tax household income collected by the top 20% of income earners grew to 53% in 2007 from 43% in 1979. Everyone else fell.

Why did this happen? The agency points to a shift in the makeup of federal individual taxes away from the income tax, which is progressive — that is, a higher rate applies to higher levels of income — and toward less-progressive payroll taxes. The change reduced the effect of the tax system in helping to disperse income along the economic scale. The implication is clear: Changes in the income tax that disproportionately reduce rates on upper incomes — as most of the GOP presidential candidates’ tax proposals would do — will only exacerbate inequality.

In the coming political season, the discussion may turn not only to how government might moderate economic inequality, but more fundamentally whether it has the responsibility to do so.

It’s tempting to think of this question as one that has been on the table since the ‘30s, when the New Deal emerged as an answer to the consequences of an earlier period of ascendant plutocracy. In fact, it goes back much further — at least as far as the philosopher Jean-Jacques Rousseau.

In his 1754 Discourse on Inequality, Rousseau traced the birth of democracy itself to the necessity of keeping peace between the haves and the have-nots. (“The first man who, having enclosed a piece of ground, took it into his head to say, ‘This is mine,’ and found people simple enough to believe him, was the true founder of civil society.”)

Middle-class stagnation is the proper concern of government because of the damage it does to the social fabric as well as to economic growth. Economic analyst Jeff Madrick observed back in 1995 that in periods of steady growth “Americans tended to be more open to ideas about including everyone in the American dream.”

That era gave us Medicare and Medicaid, affirmative action and generous funding of public education. Today we’re told that the cost of these benefits is bankrupting America, although federal taxes today are, if anything, lower in relation to the overall economy (as measured by gross domestic product) than they were half a century ago.

Confidence in the essential fairness of American life, including confidence in the social and economic safety net, underlies the optimism that fuels consumer spending. That has ebbed in recent decades. As Michigan’s Curtin put it, “For the first time since the 1930s, consumers no longer think that jobs and wages will spring back anytime soon, that the value of their homes will rebound, or that their retirement funds will soon be fully restored.... Their worsening finances were mainly attributed to job losses, reduced hours, wage give-backs, and reduced bonuses.”

That’s a reminder that U.S. employers once provided workers with wages and benefits commensurate with those traditional middle-class aspirations mentioned by Obama in his Kansas speech — modest savings, home ownership and retirement security, along with college education for the children.

But as the wealth created by those workers began to flow disproportionately to corporate CEOs and their largest shareholders, the only way American workers could maintain their lifestyle was to sink deeper into debt.

The fall-off in consumer spending of the last few years results from the debt overhang, as reflected in the overleveraging of home mortgages and the brimming of credit card balances. Without jobs or wage growth, or confidence that these lie ahead, consumers won’t spend and robust economic growth won’t resume. Will the campaign turn on how to restore these traditional American values?

One message of the Occupy movement is that the trend to deliver wealth to those at the top of the economic pyramid undervalues the contributions made by everyone else. This is not merely an important cause of our economic malaise, but a moral and political failing too. The poet and playwright Bertolt Brecht put the issue in perspective in his 1935 poem “Questions from a worker who reads.” He wrote:

The young Alexander conquered India./ Was he alone?

Michael Hiltzik’s column appears Sundays and Wednesdays. His latest book is “The New Deal: A Modern History.” Reach him at [email protected], read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.