Perhaps the most disturbing aspect of the nation's economic recovery is that it has not healed America's gaping financial inequalities. In fact, just the opposite. Our highly touted New Economy, abetted by a Congress with its thumb on the scales against average Americans, has actually widened the gulf between the 1 percent and the rest of us since the United States hit bottom in 2009.
That's bad news for everyone. Economic studies are unambiguous: U.S. economic growth is hurt when wealth is hyper-concentrated in a small super-rich elite. History shows that America grows best when income differences are smaller and the middle class gets a larger share of the nation's gains, as it once did.
The paradox of our current recovery is that the banks that nearly drove us all over a cliff and major U.S. corporations are now enjoying near-record profits, while 22 million Americans are either unemployed, working part time against their will or have given up and dropped out.
The contrasts are stunning. For four years in a row, corporate profits have risen by an average of 20.1 percent a year, while the household income of the average family has risen only 1.4 percent a year. Corporate CEOs have gotten an average pay raise of 40 percent since we hit bottom, but the average American is making less today than in 1999.
So Wall Street celebrates while Main Street stagnates. We are quite literally two Americas, and the fault lines that divide us are deepening.
The shock is that things are different elsewhere. While middle-class Americans were treading water, the middle class in other countries saw their incomes rise over the past decade in Australia, Germany, France, Denmark, Norway and even in Mexico, according to the Organization for Economic Development.
In America, large majorities feel hard-pressed. In the latest Washington Post poll, 90 percent said the economy is not doing well and 80 percent said jobs are hard to find. Seventy percent recently told the Pew Center for the People and the Press that the recovery has not yet reached them, and 44 percent see recovery a long way off.
In human terms, the picture is sobering. With the housing market still weak, more than 10 million families owe more on their home mortgages than the house is worth. Student debt tops $1 trillion, and a record number of young people are living with parents 21.6 million. Balances in 401(k) plans are recovering, but average family retirement accounts are still far below what people need. Experts say close to half of the baby boomer generation will face poverty in retirement.
Many people say they feel abandoned by both parties, as well they might. For the last couple of years, Washington's policies have largely tilted in favor of the elite and against average households.
The $700 billion taxpayer bailout was supposed to rescue an economy drowning in bad mortgage debt. Wall Street banks got bailed out, and now report soaring profits and $140 billion a year in banker bonuses. But homeowners have gotten precious little relief. The banks were supposed to use their own recovery to help out homeowners, but instead they mobilized the robo-foreclosure machine, riddled with wrongful evictions. Efforts to help homeowners refinance high-interest loans have been stymied in Congress.
Washington has also imposed a negative "fiscal drag" on growth. Federal Reserve Chairman Ben Bernanke told Congress last month its policies were creating "strong headwinds" slowing down the U.S. economy by 1.5 percent this year, costing about 750,000 jobs, mainly because of the 2 percent increase in the payroll tax last January and congressional across-the-board, robo-budget cuts. The federal cuts have caused large layoffs of teachers, police and firefighters across the country and widened the income gap.
Government spending on discretionary programs has been cut to a lower level, per capita, than 25 years ago. Yet House Republicans, driven by the tea party bloc most of whom are millionaires want more austerity. They have moved to defund President Barack Obama's health insurance program, slice programs like community development in half, whack 5 million poor people off food stamps, and approve more automatic robo-cuts.
"The disjunction between textbook economics and the choices being made in Washington is larger than any I've seen in my lifetime," Justin Wolfers, a University of Michigan economist, told The New York Times. "At a time of mass unemployment, it's clear: The economics textbooks tell us, that this is not the right time for fiscal retrenchment."
Clearly, there is a disconnect between Washington and Middle America. The country demands action. Washington answers with gridlock, and its inaction protects the status quo policies that benefit Wall Street banks, U.S. multinational corporations and the 1 percent.
Today's inequalities are stark, but they are not new. They have been building for three decades, caused by seismic political and economic changes that began in the late 1970s. Before that, the American middle class shared widely in the nation's rising prosperity. As the productivity of the U.S. workforce nearly doubled from the 1940s into the 1970s, so did the salaries and wages of average Americans.
Shared prosperity was rooted both in middle-class political power and in corporate leaders who believed their job was to balance the interests of all the stakeholders in American business workers, customers, suppliers and their home communities, as well as corporate owners. The heads of GM, GE and Standard Oil said so openly.
Middle America influenced Washington with organized people-power mass movements for civil rights, for women, for consumers, for labor and for the environment. In the 1960s, women won laws for more equal pay, the consumer movement gained greater product safety and more truth in packaging. In the 1970s, grass-roots activism pushed Congress to strengthen the Clean Air Act, and pass the Clean Water Act and other environmental bills. From the 1940s to the 1970s, the labor movement achieved steadily rising wages plus widespread health and retirement benefits for workers.
All that began to change in the late 1970s with a massive power shift in Washington that still affects us all today.
In the 1970s, reacting against middle-class political influence and responding to a "call to arms" from corporate attorney Lewis Powell and the U.S. Chamber of Commerce, American business leaders mobilized what some call "the bosses' revolt." They built an army of 9,000 registered lobbyists, 8,000 public relations specialists and 50,000 staffers for trade associations, and with that army, they changed the landscape of power and the direction of policy in Washington.
Watershed change came under President Jimmy Carter. Business interests blocked consumer and labor legislation, and passed their own pet laws lower taxes, deregulation, the 401(k) plan, a new corporate bankruptcy law that would favor management over unions. Tax cuts for the wealthy accelerated under President Ronald Reagan.
In the economy, a parallel transformation occurred the rise of "wedge economics." In place of share-the-wealth "stakeholder capitalism," the New Economy CEOs of the 1980s and '90s practiced winner-take-all "shareholder capitalism" delivering the maximum return to shareholders. Often that spelled wage freezes for employees, shipping U.S. jobs overseas and astronomical stock bonuses for CEOs.
Wedge economics created two Americas. The link was broken between corporate profits and the middle-class standard of living. The productivity of the U.S. workforce rose 80 percent from 1979 to 2011, but the middle class was cut out of those gains. Eighty-four percent of the nation's rise in market income from 1979 to 2011 went to the super rich 1 percent, according to economic analysis of tax returns. But, the Census Bureau reports, the average male worker made the same hourly wage and benefits in 2011 as in 1978, adjusted for inflation.
In short, the CEOs who run Wall Street banks and multinational corporations and hire lobbyists to influence Congress to write laws that favor business have structured a national economy in which the big companies and their bosses can thrive while the middle class crawls.
To generate a fairer, stronger economy, Obama has proposed jobs bills, a major push to make America's aging transportation network more globally competitive and to raise the minimum wage. But he has hit a congressional stone wall.
"His priorities are going nowhere," declared Rep. Harold Rogers of Kentucky, the Republican chairman of the House Appropriations Committee. In fact, when Congress returns in the fall, we face Act III of what comedian Bill Maher mocks as "temper tantrum politics" a paralyzing donnybrook over the budget and the national debt ceiling that risks a government shutdown and another squeeze on Middle America.
Washington is stuck in a rut. It won't change unless forced from the outside, unless intelligent, concerned middle-class Americans get engaged and reassert their political power, not just by voting but also by organizing mass movements as in the 1960s.
Ironically, the tea party has shown how how a citizen-based movement can come out of nowhere and exercise outsized policy influence. But backed by wealthy donors, the tea party in Congress has voted for policies that favor the rich.
So far no durable counter-movement has emerged on behalf of average homeowners, employees, students, seniors and consumers, and domestic manufacturers who need a policy boost and a fairer tax code.
Getting to economic fairness requires a rebirth of grass-roots civic activism. Middle-class America must mobilize if it wants economic fairness, campaign finance reform and a fix for the scandalous district gerrymandering that has distorted election results and polarized our politics. In short, change now depends on us We the People taking direct action.
Hedrick Smith, former Washington bureau chief of The New York Times, is author of "Who Stole the American Dream?" from which this article draws material.