As the economy began recovering from the COVID-19 pandemic, journalists and economists began to notice a “K” shape to the recovery. Some sectors in the economy were doing well, while the rest of the economy was still in recession. The pattern of our current recovery highlights what many have suspected for a long time, the United States, while one country, is evolving into two separate economies.
This concept of a dual economy was proposed by W. Arthur Lewis, who stated that a dual economy existed when two sectors were divided by levels of development, technology and patterns of demand. Lewis’ model was of a developing economy and the division he had in mind was between urban and rural, where urban employers paid as little as possible to get rural workers to move to urban areas.
As Peter Temin, economist and the author of The Vanishing Middle Class, sees it, our move toward a dual economy is not the result of unintended consequences, rather by design, a design driven by what Temin calls the finance, technology, and electronics (FTE) sector. In Temin’s opinion, the FTE sector uses their economic power to persuade Congress to pass legislation that, over time, has benefited them, and reduced the middle classes’ share of income by 30 percent.
Whether by design or not, economic progress for those not in the FTE sector ceased in the early 1970s. Congress raised the minimum wage so infrequently that real wages have stagnated since 1973. Lax enforcement of labor laws has allowed wage theft to be rampant in the food service industry. Companies eliminated pensions in favor of 401(k) plans, thus shifting the risk associated with retirement from the firm to the individual, a disaster for low wage workers.
Effective retirement hinges on savings, pensions and Social Security. Stagnant wages killed savings; if you’re low income, a 401(k) is not an adequate replacement for a pension; and we saw repeated proposals to privatize Social Security. What we do know is that half of the retirees in the coming years will depend solely on Social Security, where the average check is less than $1,500 per month.
The negative aspects of this dual economy are not limited to the income side of the ledger. Education is key to economic advancement. Unfortunately educational quality fell victim to residential segregation. Residential zoning and redlining were designed to keep minorities and public housing out of the suburbs. The suburbs had new facilities, large tax bases and the financial wherewithal to hire the best teachers.
Inner city schools had deteriorating facilities, a declining tax base and a diminished fiscal ability to compete with the suburbs for the services of the best teachers. The result was two school systems, one wealthy, one poor, one with families who could afford to augment their children’s education in numerous ways, another who could not.
At one time in the late 1960s, states provided 70 percent of the funding for state colleges. Today, because of anti-tax attitudes, state funding has dropped below 50 percent, forcing students to take on significant levels of debt. Unfortunately, the changing structure of our economy, due to automation and artificial intelligence, has led to a drastic decline in entry level management jobs in manufacturing and elsewhere. This makes the move into management more difficult with many students being left out, while still being stuck with debt levels in excess of $30,000.
Since the early ’70s the FTE sector has captured the entirety of productivity gains in the U.S., but that’s not the only way they benefited. Changes in our bankruptcy laws prevented households from discharging mortgage or student loan debt, a benefit to banks and loan servicing companies. Congress, at the behest of the pharmaceutical industry, prevented Medicare from negotiating for lower drug prices. At the behest of Wall Street we now allow corporations to buy back stock, a practice once considered stock manipulation, but now a prime driver of stock prices, 84 percent of which is owned by the top 10 percent of income earners.
Many companies subcontract services to low wage firms and use contract labor in an effort to reduce benefits and to lower their wage bill. You may clean the offices of the richest company in America, but you probably work for a company that pays little more than the minimum wage.
Our economic problems stem from the overwhelming influence of money and pressure on our political system. Washington has 10 lobbyists for every legislator, and campaign finance needs lead to undue influence with politicians. Ending our dual economy hinges on better economic policies, which in turn hinge on campaign finance, and election reforms that return America to the concept of one man, one vote.