The heart of the matter isn't the collapse in housing prices or even the frenetic rise in oil and food prices. These are contributing to the mess but they are not creating it directly. The basic reality is this: For most Americans, earnings have not kept up with the cost of living. This is not a new phenomenon but it has finally caught up with the pocketbooks of average people. If you look at the earnings of non-government workers, especially the hourly workers who comprise 80 percent of the workforce, you'll find they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago. Per-person productivity has grown considerably since then, but most Americans have not reaped the benefits of those productivity gains. They've gone largely to the top.With this Reich tells us two things. First, growing inequality is the product of stagnant wages for the middle class. Second, all Bush's tax cuts did was to provide the wealthy with more money to invest in the market.
Inequality on this scale is bad for many reasons but it is also bad for the economy. The wealthy devote a smaller percentage of their earnings to buying things than the rest of us because, after all, they’re rich. They already have most of what they want. Instead of buying, the very wealthy are more likely to invest their earnings wherever around the world they can get the highest return.
This helps us understand why we are seeing record debt among America's middle class. We've had to borrow and work more to stay afloat. It also explains increased wealth concentration in America. Asset inflation induced by more money chasing investments (which was also given a boost by Greenspan's cheap money program).
Hang on to your seats. With globalization and a backlash against unions, whoever is the next president is going to have one heck of a hole to dig America's middle class out of.