The great squeeze

Income inequality is the economic issue of our time—and the recession has only made a bad situation worse

Pinched: How the Great Recession Has Narrowed Our Futures and
What We Can do About It
By Don Peck
New York, Random House, 224 pages
reviewed by Mark Erlich

fifteen years ago , I borrowed a visual image from economist Bennett Harrison’s book Lean and Mean for a class I was teaching. Harrison divided the nation’s history into three eras. In the latter years of the 19th century, he suggested, society was organized like a pyramid, with a few wealthy individuals at the top and the bulk of the population near the bottom. During the post-World War II period, wealth and income distribution looked more like a diamond, with some rich people at the top, a declining number of the very poor, and an expanding middle class. And at the time of his book’s publication in 1994, Harrison argued that America had become a bottom heavy hourglass, with a larger wealthy population at the top, and an overwhelming number of people whose in­comes were stagnating or declining at the bottom, leaving a shrinking middle.

Don Peck’s Pinched: How the Great Recession Has Narrowed Our Futures and What We Can do About It is the latest in a long line of studies and books over the last 20 years documenting this growing economic inequality in the United States. Peck’s book is an expansion of a March 2010 Atlantic article in which he wrote: “We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come.”

The current downturn has been deeper and longer than initially forecast. The recession may have technically ended in 2009, but by the middle of 2010, a majority of American workers had either experienced the loss of a job, a reduction in work hours, a change from full-time to part-time status, or a pay cut. In July of this year, the share of Ameri­cans working or looking for work dropped below 64 percent, the lowest rate in 20 years. The average family’s net worth has plunged by 23 percent since 2007, shredded by the twin daggers of joblessness and declining home values.

The impact has been spread unevenly across in­come groups. During the anemic recovery that began 20 months ago, wages and salaries accounted for just 1 percent of the nation’s economic growth, compared to 88 percent from rising corporate profits. Despite the weak job market, the typical CEO of a major corporation earned 23 percent more last year than the year before. This is not a new development. The richest 1 percent of Americans received 56 percent of all income growth between 1989 and 2007. In July, Michael Cembalest, chief investment officer of J.P. Morgan Chase, reported that “US labor compensation is now at a 50-year low relative to both company sales and US GDP,” while profit margins are at their highest levels since the mid 1960s. “Strong winds have been at the backs of the rich for many years, and if anything, the recession only intensified them,” Em­manuel Saez, a University of California expert on income and wealth, tells Peck. “The market itself doesn’t impose a limit on inequality.”

According to the US Census Bureau, the wealthiest 5 percent of Americans have expanded their share of total income by 32 percent and in­equality has increased by 22 percent since 1980. During the same period, average family income climbed less than 1 percent a year, despite the growth of two wage earners in many families. The United States now ranks 31st out of the world’s 33 most advanced economies in terms of income in­equality, more unequal than Third World countries such as Guyana, Nicaragua, and Venezuela.

The recession has furthered the hollowing out of middle skill jobs. Total employment in professional, managerial, and high-skilled technical jobs has been largely unchanged, as have low-wage service jobs in food preparation, personal care, and house cleaning. However, blue-collar and mid-level white-collar jobs have been disappearing. Since much of the un­employment has been in manufacturing and construction, there has been a disproportionate impact on those traditionally male occupations. Men suffered three-quarters of the 8 million job losses in 2008-09. Minorities have been hit particularly hard. The recession, Memphis Mayor A.C. Wharton tells Peck, has “done more to set us back than anything since the beginning of the civil rights movement.”

Meanwhile, the housing bubble masked the effects of in­come stagnation for many Americans. Housing accounted for more than half the growth of private fixed assets bet­ween 1999 and 2009, so homeowners could ignore declining house­hold income during that decade. But housing values dropped by 31 percent from 2006 to 2010 nationwide. At the beginning of 2011, one in four houses was “underwater,” worth less than the outstanding principal on the mortgage.

Peck quotes a Nigerian software engineer in the Mid­west who blogs about putting all his savings into real estate hoping to achieve the immigrant dream. “It was difficult (horrendous even) to work an average of 75 hours a week for over a decade. It stings to realize that it was all for naught,” he writes. Peck talks with a family that bought into a 760-home planned Florida community built in 2005. At the closing, their purchase price was $350,000. Comp­ar­able homes sold for $550,000 a year later. Since the recession, 80 percent of the homes have been in foreclosure. Owner­ship has shifted to rentals with a high churn rate. The once-elegant streets are tagged with gang graffiti and a typical house was recently assessed at $179,000.

Long-term unemployment forms the basis of lasting changes in physical and mental health—depression, stress, substance abuse, domestic violence, and failing marriages —particularly on the current generation of young adults with less than a college education. Among 16-24 year olds, high school dropouts’ unemployment levels are more than triple that of college graduates. Military recruiters understand this economic divide, aiming their pitches at communities with limited prospects for good jobs or higher education. Children from upper income families are now 20 times more likely to have high incomes of their own than children from low income families.

Pinched combines a wealth of financial data, valuable research on the social and psychological impacts of the downturn, and a series of insightful personal interviews. The book is less successful when Peck attempts to explain the broader causes of inequality and how the current recession fits into American economic history.

Peck cites the standard explanations for increasing in­equality—the decline of manufacturing, the role of outsourcing, and technology innovation as contributors to the demise of middle skill jobs. But he gives relatively short shrift to other consequences of globalization and free trade, immigration policy, currency exchange manipulation, changes in tax and public policies, and, above all, the decrease in union density.

Peck’s attempts to provide an overarching historical theory are also unsatisfactory. He claims that today’s collapse is similar to the Panic of 1893, the Great Depression, and the oil-shock recessions of the 1970s, all periods characterized by “a slow buildup of social discord, a rise in racial antipathies and anti-immigrant sentiment, the corrosion of trust and, in general, the mobilization of efforts geared toward trying to recapture some past idyll rather than those that squarely confronted the future.” He focuses on the intolerance of the populists of the late 19th century to the exclusion of their democratic, anti-corruption, anti-monopoly traditions that prefigured the trust-busting of the Progressive era. Similarly, he minimizes the social cohesion provided by the activist intervention of New Deal federal agencies and the transformative effect of widespread labor organizing during the 1930s. It is too simplistic to claim that the responses to economic turmoil are only shaped by fear and a turning inward. Economic crises in our history have drawn out both the best and worst of the American spirit.

Peck’s solutions would be common sense in a less toxic political environment. He calls for retraining of displaced workers and investment in infrastructure, education, and research and development, proposals that would be helpful but do not address the deeper crisis. In any case, Congress is unlikely to enact meaningful job-creating legislation prior to the 2012 election. While there are occasional references to economic inequality in the political arena—as in President Obama’s inaugural address comment that “a nation cannot prosper long when it favors only the prosperous”—the very mention of the topic usually draws charges of “class warfare” and ends substantive discussion. According to the IRS, today’s wealthiest 400 Ameri­cans pay one-third less in taxes than their counterparts did in the prosperous 1950s, yet the prevailing congressional wisdom is that repeal of the Bush tax cuts would block any possible recovery.

Will the American success story of a broad middle class survive? Peck’s conclusion that “extreme income inequality causes a cultural separation in society that is unhealthy on its face and corrosive over time” is the central, and largely unspoken, issue of our times.  

Mark Erlich is the executive secretary-treasurer of the New England Regional Council of Carpenters.