On America's Middle-Class Divide

Tyler Durden's picture

With both political parties having concluded their respective rah-rah-fests and each vehemntly proclaiming "The Other Side" as failing miserably; it appears, as Raghuram Rajan points out in his latest article that while America’s presidential election campaign is superficially a debate about health care and taxes; it is much more fundamentally about democracy and/or free enterprise. As he notes, democracy implies regarding individuals as equal and treating them as such, with every adult getting an equal vote, whereas free enterprise empowers individuals based on how much economic value they create and how much property they own.

What prevents the median voter in a democracy from voting to dispossess the rich and successful? And why do the latter not erode the political power of the former?

The answer relies upon the 'dream' (American or otherwise) of a level playing field and hard-work paying off; once that middle-class hope begins to fade then the self-reinforcing benefits of democracy and free-enterprise will become self-destructive (not helped by the current parties' actions to enrage the middle-class 'working rich' against those losing faith).

The United States needs to restore the possibility of achieving the American Dream for its middle class, even while it reaffirms the historically light regulation and relatively low tax burden that have allowed enterprise to flourish.

The Heart of the US Election (originally posted by Raghuram Rajun at Project Syndicate)

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What prevents the median voter in a democracy from voting to dispossess the rich and successful? And why do the latter not erode the political power of the former?

Echoes of such a tension are playing out as President Barack Obama tries to tap into middle-class anger, while former Massachusetts governor Mitt Romney appeals to disgruntled businesspeople.

 

One reason that the median voter rationally agrees to protect the property of the rich may be that she sees the rich as more efficient managers of that property. So, to the extent that the rich are self-made, and have come out winners in a fair, competitive, and transparent market, society may be better off allowing them to own and manage their wealth, while getting a reasonable share as taxes.

 

The more, however, that the rich are seen as idle or crooked – as having simply inherited or, worse, gained their wealth nefariously – the more the median voter should be willing to vote for tough regulations and punitive taxes on them.

Back, then, to America’s presidential election.

The recent crisis, followed by huge bailouts of financial institutions, has raised questions about how at least one segment of business – the bankers – make their money. As the misdeeds of “banksters” come to light, the system no longer seems fair.

 

Moreover, the American Dream seems to be slipping out of reach, in part because a good education, which seems to be the passport to prosperity, is increasingly unaffordable for many in the middle class.

So playing the 'disgruntled' middle-class against the 'working rich' seems like a win, but:

The middle class, however, is divided: some want to protect whatever entitlements and property they already have, while others want the government to give them a fairer chance.

As Rajun sums up so succinctly, this situation is untenable:

A free-enterprise system that is sustained only by the moneyed power of the successful is not stable, and unlikely to remain vibrant for long.

The United States needs to restore the possibility of achieving the American Dream for its middle class, even while it reaffirms the historically light regulation and relatively low tax burden that have allowed enterprise to flourish.

 

Source: Project-Syndicate