By Noah Smith
(Bloomberg View) --If you’re a middle-class American baby boomer or Gen Xer, you might have spent much of the past decade wondering what went wrong. If you’re a boomer, there’s a good chance you’re still working well after you thought you’d retire:
And if you’re part of Generation X, you’re probably less wealthy than your parents were at the same age. Meanwhile, all across the U.S., pension funds are underfunded and will almost certainly have to default on some of their obligations to retirees.
It wasn’t supposed to turn out this way. Back in the 1980s and 1990s, middle-class Americans looked forward to a future of wealth and leisure. If you were a small business owner, or an engineer, or a lawyer at a small firm, you might not have expected to be rolling in it, but you probably didn’t think things would go so badly awry.
Who’s responsible? Who took your prosperity? Donald Trump's trade adviser Peter Navarro might tell you it was China, while his political aide Steve Bannon might tell you it was immigrants. Free-market think-tank types might tell you it was government regulation, while conservative lawmakers might tell you it was single moms on welfare or lazy people on food stamps. But these answers are mostly or completely wrong.
One partially correct answer is that your prosperity was taken by the very people who promised to ensure and enhance it. The decades from 1980 through 2008 were the age of neoliberalism -- the ideology of the free market. Financial deregulation, tax cuts and a lax attitude toward consumer protection and antitrust were supposed to free the entrepreneurial potential of the American middle class. And to some degree it did -- those decades saw plenty of wealth creation, and the U.S. economy performed a bit better than most rich nations in Europe and East Asia.
But along with real productivity, the neoliberal age saw plenty of grift and middle-class wealth extraction. In the book, “Phishing for Phools: The Economics of Manipulation and Deception,” Nobel prize-winning economists George Akerlof and Robert Shiller said that all free-market economies are accompanied by some amount of consumer error, simply because sellers are always exploring every possible method of parting people from their money.
Writer Alex Pareene, in a recent article in Fusion, colorfully describes how vendors of all sorts cashed in on enthusiasm for conservative politicians:
[The conservative era] was a fantastic deal for…companies selling newly patented drugs designed to treat the various conditions of old age, authors of dubious investing newsletters, sellers of survival seeds, hawkers of poorly written conservative books, and a whole array of similar con artists and ethically compromised corporations and financial institutions.
But Pareene’s focus on conservative political appeal is much too narrow. The white middle-class that tended to support leaders like Ronald Reagan, Newt Gingrich and George W. Bush, lost huge percentages of their life’s savings because of excessive fees paid to actively managed mutual funds, financial advisers, stockbrokers, pension fund managers and the like. They also paid 6 percent real estate commissions even as people in most countries paid much less. They rejected the Clintons’ health-care plan in 1993, and ended up paying double what people in other countries pay for comparable treatment. They forked over more and more money in college tuition. They paid higher prices to companies that went on to monopolize markets after spending millions convincing the government to allow their megamergers. The spectacular rise of U.S. wealth inequality shows that trillions of dollars in middle-class assets were shifted up the socio-economic ladder into the hands of a relatively small and fantastically rich upper tier.QuickTake Income Inequality
Each of these little free-market failures was another slice off of the ham that was the wealth of the American middle class. The people who thought they were going to be the guests of honor at the feast ended up being the main course.
But this is only part of the answer. Much of middle-class Americans’ prosperity wasn’t stolen -- it was never there to begin with. Hidden fees and overpriced services took away real wealth, but unrealistic expectations created fantasies of future wealth whose evaporation is probably an even bigger source of disappointment.
Why did U.S. households save less and less during the neoliberal era?
Many hypotheses have been offered, but one simple explanation is that people expected their houses and pensions to do their saving for them. Much of the wealth of the U.S. middle class is tied up in real estate and retirement accounts; when it looked like housing and stock prices were heading up forever, people naturally developed rosy expectations about the future.
Those illusions ended in 2000 for stocks and in 2008 for houses. Both markets have recovered and are at or close to all-time highs, but the sunny projections of the 1990s and early 2000s won’t return anytime soon. If those trend extrapolations had held true, asset prices would be far higher now than they are.
That’s why there won’t be a quick fix for middle-class boomers and Gen Xers. You can’t get back what you never really had. Although the economy and technology will continue to progress, and the government may manage to give the middle class some relief, for the many who had expected much better, that will seem like a booby prize. The markets seemed to promise the moon, and it turned out to be just a reflection in a pond. It pains me greatly to say it, but some members of the older generation probably will be disappointed for the rest of their lives.
Instead of indulging in fantasies of getting it all back, U.S. leaders should focus on selling a more realistic vision of progress to younger generations. With the right policies, the U.S. government should be able to pull the country out of its sclerosis, curb many of the excesses of the neoliberal age and restore healthy growth in jobs and productivity. That will have to be good enough.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
To contact the author of this story: Noah Smith at [email protected] To contact the editor responsible for this story: James Greiff at [email protected]
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