JOHN STEELE GORDON - September 12, 2019
Impoverish the Middle Class?
Elizabeth Warren Has a Plan for That
Has she thought this through?
As the Democratic Party moves briskly off to the left, it more and more presents a distorted vision of both American society and the economy. It needs this vision in order to justify a massive transfer of power from individuals and the private economic sector to the government.
This distorted view is straight out of the late 19th Century, when progressivism was aborning. At that time, the United States was, to a considerable extent, a nation of haves and have nots. Millions lived in a degree of poverty that is almost unimaginable today. One census district in New York’s Lower East Side had a population of 50,000 and a total of only 500 bathtubs.
Meanwhile, almost all wealth was in the hands of a relatively small proportion of the population, while stocks and bonds were held almost exclusively by the very rich.
Even as late as the 1930s, Franklin Roosevelt, in his Second Inaugural Address, saw, “one-third of a nation ill-housed, ill-clad, ill-nourished.” The haunting photographs of Southern sharecroppers by Walker Evans in Let Us Now Praise Famous Men, published in 1941, testify to that truth.
But that world is today utterly gone. The 1944 GI Bill allowed millions to both get a higher education and become homeowners, thus accessing and accumulating wealth. The Wagner Act of 1935 greatly strengthened the labor movement and membership climbed rapidly, reaching about 35 percent of the workforce by the early 1950s. The unions negotiated for and often obtained pension provisions for workers.
Today, 72 percent of financial securities are not in the hands of the very rich. Instead, they are found in pension funds, 401(k), and IRA accounts of the middle class, and by the insurance companies that pay for annuities and death benefits, mostly to the middle class. Households aged between 65 and 74 now have an average net worth of $1,065,000. In other words, half of all seniors are now millionaires.
Far from being emptied, the middle class is getting richer and, thus, joining the high-income group. In 1967, 9 percent of households had an income of $100,000 or more (in 2018 dollars). Today 30.4 percent earn that much. In 1967, 37.2 percent earned $35,000 or less. Today, it’s only 27.9 percent. The middle class has gone from 53.8 percent of households to 41.7 percent. In other words, the lower-income and middle-income groups are shrinking as a percentage of households, while the upper-income group has more than tripled as a percentage of all households.
That’s why Elizabeth Warren’s proposed “Accountable Capitalism Act” would be such an unmitigated disaster for both the American economy and the net worth of tens of millions of American families.
The act would require that any economic entity with gross receipts of more than $1 billion would have to take a new federal charter and, instead of having a fiduciary duty to maximize the return on capital for owners, would have to serve the interests not only of the owners but also other “stakeholders.” That broad category includes “the workforce,” the community, the customers, local and global environments, and other “community and societal factors,” whatever that might mean.
The act would require that 40 percent of directors would have to be elected by the employees, devoted not to maximizing wealth creation but, undoubtedly, to higher pay and benefits. That would have the effect of making the company much less profitable and, thus, worth much less.
As the Gospel according to Matthew explained 2,000 years ago, “No one can serve two masters. Either you will hate the one and love the other, or you will be devoted to the one and despise the other.” Senator Warren wants private economic entities to serve at least seven masters.
Who would benefit from this act? Labor unions (who now represent less than 8 percent of the private workforce), and, of course, tort lawyers. Both, please note, are traditionally Democratic constituent groups. And the balance between the private sector and government would shift massively in favor of government.
Who would be financially decimated? The tens of millions of middle-class households. Investors would see their financial security demolished in a stock market crash of epic proportions as investors rushed to dump the stocks of companies that would become much less wealth-producing. Those investments would gravitate toward financial instruments like federal and state bonds, which would be less affected.
In 1900, this country was a country of haves and have-nots. Today it is, overwhelmingly, a country of haves and have-mores. Senator Warren wants to return to the past. Seniors have the highest voter turnout of any group in the electorate. If Senator Warren is the nominee, I doubt they’ll be voting for her.