Dispatch October 2008

Inequality Bites

Why wage stagnation hasn't led to a political revolt—until now.

Barbara Snodgrass, one of the voters George Packer profiles in his report on Ohio's white working class, is a woman of some political sophistication. She works two jobs, barely stays ahead of the mounting costs of her house, her commute, and other basics like groceries. Yet Snodgrass's political analysis beats that of most professional pundits. The next president should take heed.

After dismissing McCain as essentially Bush-like, Snodgrass questions the political realism of Barack Obama's domestic policy. Can Obama raise taxes only on Americans making over $250,000, she asks? And will he raise taxes on someone like her? Packer notes that the two percent of Americans who earn over $250,000 account for more than a tenth of national income, and he suggests that Snodgrass's fears are misguided. But the state of the budget, the cost of Obama's core proposals, and a political landscape in which affluent anti-AMT Democrats will have considerable influence, suggests that Snodgrass is right to distrust Obama's promises, not to mention John McCain's, which are even more unmoored from reality. Instead, Snodgrass wants to hear concrete proposals that address "your daily life, your daily day, job, family, what you do that keeps you from robbing the video store down the street." She has shown how to understand America's angry and anxious electorate.

Until recently, many observers, most of them on the left, have puzzled over why rising inequality hasn't sparked an outright political revolt. Well, here's why. Real income matters less than quality of life. And for the last two decades, a delicate Consumption Compromise has tamped down economic discontent among working-class voters by driving down the cost of living—we've been living in the era of cheap food, cheap gas, cheap credit, and, of course, cheap Chinese-made goods.

From 2000 to 2005, mean real money earnings rose for the four percent of the U.S. electorate that has professional graduate degrees and doctorates; all other groups saw a decrease. That's right: college graduates saw their mean real money earnings decline, and there was even sharper backsliding among those with less education. At the same time, the democratization of finance allowed consumption smoothing—spend tomorrow's money today—and the quality of consumer goods improved. Granted, this was small solace, but it gave a large number of Americans the sense that they were making economic progress.

During the same period, better-off workers—those in the top tenth—were hit by a spike in the cost of living. Two University of Chicago economists, Christian Broda and John Romalis, have looked at the inflation rates of consumer goods for the top tenth and the bottom tenth of American households. Because poor families spend a larger share of their income on tradable goods —think of the imported goods you find at Wal-Mart or Target— they've profited tremendously from free trade. Rich families spend a bigger share of their income on non-tradable services—hiring help, eating out, etc. As a result, the rich experienced a much higher effective inflation rate than the poor between 1994 and 2005. If ever you wonder why the populism of Al Gore or John Edwards resonated with affluent voters more than with the working class, look for the beginnings of an answer right there.

Since 2005, working-class voters' wages haven't improved. But thanks to a combination of the housing bust, ethanol subsidies, a bottleneck in refining capacity, low-sulfur regulations, and the collapse of the dollar, the Consumption Compromise has come undone. The outrage over gas prices was the beginning. The Republican right promises to "Drill Here, Drill Now" to lower your gas prices. But what will they do to address skyrocketing food prices and healthcare premiums, or access to consumer credit? They can't do very much, at least not yet. And as for the Democrats, they can promise redistribution or a more equitable tax code. But can an increased flow of transfers keep up with the rising cost of a middle-class life without choking off economic growth? And there is the drive to price carbon, an effort many believe to be essential to human survival— yet one that will, by necessity, cut against our highly mobile way of life.

Can the Consumption Compromise be revived? Probably not. The Compromise rested on American financial hegemony, and those days have ended. The right and the left will have to do nothing less than rethink our way of life.

Presented by

Reihan Salam is an Atlantic associate editor and the co-author of Grand New Party: How Republicans Can Win the Working Class and Save the American Dream (2008).

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