EDITORS CORNER

PAUL DAVIDSON

Income inequality and hollowing out the

middle class
Abstract: This paper discusses the hollowing out of the middle class in the United
States since the late 1970s, and suggests that the latest threat to the remaining
middle class is automation.

President Obama has finally recognize a major fault of the U.S. economy
that began in the 1980s, namely, the increasing inequality of the U.S.
income distribution that has resulted in a hollowed-out middle class.
In my view, the growth of a prosperous middle class since World War
II could be traced to the full employment policies started by Roosevelt
and continued by both Democratic and Republican presidentsTruman,
Eisenhower, Kennedy, and Johnson.
In the period from the 1940s to the early 1970s, the growth of labor
union power, enshrined by government legislation, pursued the sharing
of monopoly rents and profits of corporations with their workers. There
was even a period of time in the early 1960s in which many blue-collar
unionized craftsmen such as plumbers earned as much, on average, as
college professors. By the 1970s, however, the seeds were being sown
for the beginning of the end of this middle-class prosperity.
In the 1980s, under President Reagan things changed dramatically.
With Reagans solution of the air traffic controllers strike (by firing
all civilian union air traffic controllers), it became socially popular
to see unions and labor demands as the villains of the economy and
therefore to reduce labor power significantly. This was quickly supplemented by U.S. firms outsourcing labor from U.S. factories to those
in foreign countries where an hour of labor was paid at a much lower
rate. This outsourcing movement was rationalized and supported by
government policies under the banner of free tradewhere many

Paul Davidson is editor of the Journal of Post Keynesian Economics.

Journal of Post Keynesian Economics/Winter 201314, Vol. 36, No. 2381
2014 M.E. Sharpe, Inc. All rights reserved. Permissions: www.copyright.com
ISSN 01603477 (print)/ISSN 15577821 (online)
DOI: 10.2753/PKE0160-3477360209

382 JOURNAL OF POST KEYNESIAN ECONOMICS

mainstream economists insisted that the result would be, under the law
of comparative advantage, an increase in prosperity for all Americans.
Nevertheless, it is obvious that by the first decade of the twenty-first
century American workers have not seen the promised prosperity of the
law of comparative advantage. Many blue-collar factory jobs and lowwage white-collar jobs (e.g., call centers) had migrated from the United
States to less developed nations. The American middle class had been
significantly hollowed out.
This should not have been a surprise to economists who were working
in the Keynespost Keynesian tradition. Keynes had recognized this
possibility in 1933, when he wrote:
A considerable degree of international specialization is necessary in a
rational world in all cases where it is indicated by wide differences in
climate [and] natural resources. . . . But over an increasingly wide range
of industrial products . . . I have become doubtful whether the economic
costs of self sufficiency are great enough to outweigh the other advantage
of gradually bringing the producer and consumer within the same ambit
of the same national economic and financial organisations [to ensure full
employment]. Experience accumulates to prove that most modern mass
production processed can be performed in most countries and climates
with equal efficiency. (Keynes, 1982, p. 238)

By the end of the twentieth century the evidence was clear in showing
how prophetic these words of Keynes were since the major U.S. working class consumer of mass production goods has been put in a separate
ambit from the production of U.S. firms! The inevitable result was the
hollowing out of the middle class. Since the 1980s, I have developed
an international schemethe International Monetary Clearing Union
organizationwhich would help rectify this outsourcing of the U.S.
middle-class prosperity.
But now, a new threat is growing that will further hollow out the middle
class and make an even more significant difference in the income distribution between the top 1 or 2 percent and the rest of society. This threat
is automationwhich may even be able to endanger service jobs that
are usually thought of as not capable of being outsourced or offshored.
The lead article in this issue of the Journal of Post Keynesian Economics,
titled Beyond Austerity and Stimulus: Democratizing Capital Acquisition
with the Earnings of Capital as a Means to Sustainable Growth, and
authored by Robert Ashford, exposes this threat and proposes a solution for reestablishing a strong progressive, prosperous labor-oriented
middle class.

income inequality and hollowing out the middle class 383

My hope, as editor of the Journal of Post Keynesian Economics, is that

Ashfords article will stimulate our readers to think about this automation
problem and threat to American workers and to try to provide us with
additional possible solutions.
REFERENCE
Keynes, J.M. National Self-Sufficiency. Reprinted in The Collected Writings of
John Maynard Keynes, vol. 21, ed. D. Moggridge. London: Macmillan, 1982.

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