The Potterville-ization of America

It was a throwaway line in a throwaway feature on the making of "It's A Wonderful Life" in today's LA Times, and yet the line was so resonant, of the coldness of economic reality in the 21st century, and of the fictions we must tell ourselves to deny these realities.

(Frank) Capra shot much of the film on a specially constructed quaint-town set located at RKO's ranch in the San Fernando Valley — a site that has long been overtaken by property development.

Yes, good old Bedford Falls is now, literally, a Potterville - yet another paved-over, mini-mall-infested, sprawling addition to the Valley, which holds more citizens than all American cities save New York and Chicago.

There's nothing wrong with development in and of itself, when combined with effective mass transit and attention paid to population density. But the loss of Bedford Falls is more of a metaphorical one than a literal one. All over the country, small towns have become hollow shells, ghost towns that probably resemble that RKO backlot before it was bulldozed. Economic policies that favor big business interests over family-owned small business, that favor the wealthy over the middle class, have been hammering at the backbone of this country for the last 50 years. This November, we saw a backlash in the form of populist Democrats winning seats in Congress all over the nation. Maybe this was from some real belief that the economic policies of the recent past are not working for the vast majority of Americans. But I believe it was probably just a general uneasiness and a hope for something new. It's instructive to lay out exactly what has been done to Potter-ize America, and what can be done to stop it.

Paul Krugman, one of our nation's few high-profile progressive economists, does exactly that in the most recent issue of Rolling Stone. The first-order issue is wealth transfer, where corporate executive and the moneyed class gets ever richer while the middle class gets the squeeze. Mind you, only with a strong and vibrant middle class can countries sustain economic growth (somebody has to buy all this stuff to keep the economy going, after all).

America has never been an egalitarian society, but during the New Deal and the Second World War, government policies and organized labor combined to create a broad and solid middle class. The economic historians Claudia Goldin and Robert Margo call what happened between 1933 and 1945 the Great Compression: The rich got dramatically poorer while workers got considerably richer. Americans found themselves sharing broadly similar lifestyles in a way not seen since before the Civil War.

But in the 1970s, inequality began increasing again -- slowly at first, then more and more rapidly. You can see how much things have changed by comparing the state of affairs at America's largest employer, then and now. In 1969, General Motors was the country's largest corporation aside from AT&T, which enjoyed a government-guaranteed monopoly on phone service. GM paid its chief executive, James M. Roche, a salary of $795,000 -- the equivalent of $4.2 million today, adjusting for inflation. At the time, that was considered very high. But nobody denied that ordinary GM workers were paid pretty well. The average paycheck for production workers in the auto industry was almost $8,000 -- more than $45,000 today. GM workers, who also received excellent health and retirement benefits, were considered solidly in the middle class.

Today, Wal-Mart is America's largest corporation, with 1.3 million employees. H. Lee Scott, its chairman, is paid almost $23 million -- more than five times Roche's inflation-adjusted salary. Yet Scott's compensation excites relatively little comment, since it's not exceptional for the CEO of a large corporation these days. The wages paid to Wal-Mart's workers, on the other hand, do attract attention, because they are low even by current standards. On average, Wal-Mart's non-supervisory employees are paid $18,000 a year, far less than half what GM workers were paid thirty-five years ago, adjusted for inflation. And Wal-Mart is notorious both for how few of its workers receive health benefits and for the stinginess of those scarce benefits.

The broader picture is equally dismal. According to the federal Bureau of Labor Statistics, the hourly wage of the average American non-supervisory worker is actually lower, adjusted for inflation, than it was in 1970. Meanwhile, CEO pay has soared -- from less than thirty times the average wage to almost 300 times the typical worker's pay.

This doesn't only affect the middle class but the poor, particularly blacks and Hispanics, 1 in 5 of whom lack healthy food and about 1 in 16 of whom go hungry every day. Unemployment is low but what is never discussed are the QUALITY of those jobs - mostly those in the lower-wage sector, which is simply not a living wage in most parts of the country. Right-wing economic policies have dismantled most of the social safety net for those who are poor or struggling. In addition, they are indifferent to the real challenges of the middle class, like doing something about soaring health care and energy prices, while letting businesses get away without paying taxes and essentially destroying the regulatory oversight of the government, by placing industry lobbyists and executives to head those oversight agencies, for example.

As a parallel problem, the entire economy is built on smoke and mirrors. We have a current account deficit that is in the danger territory. We pay more in interest to the rest of the world than we take in from assets abroad. Practically every single dollar, then, is flowing out of the country, and 78% of our budget deficit is owned by foreign investors (I expect that number to rise). As a result, the dollar is at historic lows in buying power worldwide. Christian Weller explains the danger here.

Why is this bad? At some point foreigners will not want to lend us money at low interest rates, especially if an ever larger share of U.S. income is dedicated to interest payments on international debt and not on important investments, such as education or health care. Already, Japan — the largest foreign creditor of the U.S. government — has slowly been selling off its T-bills. If other countries follow suit, interest rates will go up to attract more money to the U.S. This means higher mortgage and credit card payments for families, but also less investment by firms, all of which spells less growth and fewer jobs.

Plus, not only do we spend more than we earn on a federal level, but we do the same on an individual level. As we've seen in the past (see: the 1920s), credit is a wonderful way to make people forget how to live within their means. And we have a federal government that encourages - nay, demands - shopping as a means to boost consumer spending to mask all of the structural problems with the economy (consumer spending is SEVENTY percent of GDP - the health and security of the nation rests on you buying an iPod - How scary is that?). Eventually, consumers will wise up the same way that foreign investors will, stopping the insanity and leading the country into recession or worse. This is the problem with living in a faith-based economic system: when everyone stops believing in it, they crumble.

So, what can we do about it? Krugman lays out some myths about the economy which I found important to recognize.

MYTH #1: INEQUALITY IS MAINLY A PROBLEM OF POVERTY.
According to this view, most Americans are sharing in the economy's growth, with only a small minority at the bottom left behind. That places the onus for change on middle-class Americans who -- so the story goes -- will have to sacrifice some of their prosperity if they want to see poverty alleviated.

But as our line illustrates, that's just plain wrong. It's not only the poor who have fallen behind -- the normal-size people in the middle of the line haven't grown much, either. The real divergence in fortunes is between the great majority of Americans and a very small, extremely wealthy minority at the far right of the line.

MYTH #2: INEQUALITY IS MAINLY A PROBLEM OF EDUCATION.
This view -- which I think of as the eighty-twenty fallacy -- is expressed by none other than Alan Greenspan, former chairman of the Federal Reserve. Last year, Greenspan testified that wage gains were going primarily to skilled professionals with college educations -- "essentially," he said, "the top twenty percent." The other eighty percent -- those with less education -- are stuck in routine jobs being replaced by computers or lost to imports. Inequality, Greenspan concluded, is ultimately "an education problem."

It's a good story with a comforting conclusion: Education is the answer. But it's all wrong. A closer look at our line of Americans reveals why. The richest twenty percent are those standing between 800 and 1,000. But even those standing between 800 and 950 -- Americans who earn between $80,000 and $120,000 a year -- have done only slightly better than everyone to their left. Almost all of the gains over the past thirty years have gone to the fifty people at the very end of the line. Being highly educated won't make you into a winner in today's U.S. economy. At best, it makes you somewhat less of a loser.

MYTH #3: INEQUALITY DOESN'T REALLY MATTER.
In this view, America is the land of opportunity, where a poor young man or woman can vault into the upper class. In fact, while modest moves up and down the economic ladder are common, true Horatio Alger stories are very rare. America actually has less social mobility than other advanced countries: These days, Horatio Alger has moved to Canada or Finland. It's easier for a poor child to make it into the upper-middle class in just about every other advanced country -- including famously class-conscious Britain -- than it is in the United States.

Not only can few Americans hope to join the ranks of the rich, no matter how well educated or hardworking they may be -- their opportunities to do so are actually shrinking. As best we can tell, pretax incomes are now as unequally distributed as they were in the 1920s -- wiping out virtually all of the gains made by the middle class during the Great Compression.

Krugman essentially talks about the things we need to rein in: CEO compensation (which is obscene), union-busting (unions themselves need to be held accountable, however, and focus on growth over consolidating their old constituencies) and anti-labor policies, and the "transformation into a permanently unequal society." It's going to be a difficult slog. Over the past 25 years the tools by which government rewards the rich and punishes the less fortunate have been honed to a fine edge. But the growing unease in the country is significant. We don't want to live in Pottervilles anymore, serving at the pleasure of a moneyed elite who doesn't share the same concerns for anyone but themselves. I don't mind a certain inequality based on merit and hard work, but not an inequality of opportunity, that is unacceptable and antithetical to our founding documents. Only by working together from the ground up can we press forward policies that benefit the greatest number rather than the privileged few. The new Congress provides an opportunity to talk about these issues for the first time in many years. It's important that the Democrats recognize the fundamental issues with our economy and seek ways to manage them.

No more Pottervilles. Give us a country where a Bedford Falls can still exist.