A political earthquake might be the most apt metaphor for the 2016 U.S. presidential election. Not only because the result was unexpected and rattling, but because the deep divisions of class and race that influenced it resemble the realigning of tectonic plates—slow shifts that eventually produce a tremendous release of energy along well-established fault lines.
The dynamics of these underlying fault lines in American life are presciently detailed in the work of the MIT economic historian Peter Temin, who has documented the rise of America’s “Dual Economy.” (Temin is developing his original essay into a book on The Vanishing Middle Class, to be published this coming March by MIT Press.)
The story goes something like this: Over the past several decades, the once sturdy middle-class economy of opportunity and the American Dream has been eviscerated. In its place stands a new and highly segmented dual economy. This dual economy is distinguished by a small core of high-paying opportunities and jobs on Wall Street and Silicon Valley, which Temin calls the FTE economy (for finance, technology, and electronics). These are capitalists who own businesses, or highly paid professionals; people who have access to the best neighborhoods with the most opportunities and the best schools for their children. Initially, Temin saw this core as encompassing roughly 30 percent of the labor force and economy, but in an email to me, he said he believes it is actually closer to just 20 percent.
At the bottom is a much larger periphery of insecure low-wage service jobs, in which 70 to 80 percent of Americans exist. He notes that the median American worker earns only $40,000 and many workers make much less. These figures are similar to my own division of the economy into a privileged third of knowledge, professional, and creative workers versus the 66 percent who toil in lower-wage, often precarious service jobs. “The United States has come apart,” Temin writes, ”with the rich getting richer and workers not advancing at all.”
Ideally, the dual economy helps rural and urban workers
Temin draws his model of the dual economy from the work of W. Arthur Lewis, an economist of Caribbean descent who won the Nobel Prize in 1979. Lewis introduced his original model back in 1954 in a classic paper on “Economic Development with Unlimited Supplies of Labor,” in which he aimed to describe the economic trap faced by many developing economies.
Lewis draws a distinction between two key economic sectors—the advantaged “capitalist sector” and the disadvantaged “subsistence sector.” Later economists dubbed these the urban and rural sectors. As the capitalist sector grows, it attracts labor from the countryside to the city. When the system is working well to promote balanced economic development, some rural workers are attracted to the higher wages offered in the capitalistic city, perhaps going to school to train for a job there. But this also helps the rural economy.
The Lewis Model, shown in the graph below, demonstrates how the city wage increase also produces a wage increase in the rural sector. As workers leave for the city, it relieves the downward pressure that an excess supply of labor exerts on wages in rural areas.
The Lewis Model
What Temin is warning us about is what happens when this basic economic relationship breaks. As the capitalist or urban sector grows, it can become encapsulated in a series of isolated islands that greatly outdistance the larger subsistence or rural sector. Sound familiar?
If those productivity increases do not translate to an effective increase in wages for city workers—whether hampered by a higher cost of living, lower levels of employment, or a simple lack of pay—the advantage of living in the city disappears and the excess supply of labor returns to the rural economy, driving down wages again.
Out of balance, the dual economy compounds disadvantage
Temin sees America’s economy today as a modern-day analog of Lewis’s original dual economy. Just as the members of Lewis’s capitalist sector inhabited their own isolated islands of city life, the members of today’s dual economy live and work in separate geographic spaces. And just as in Lewis’s original model, these two sectors are practically locked in place, with little mobility between them.
The reason for this lock-in—or the “missing link” between these two sectors—is education. In today’s economy, sizable obstacles keep a large majority of the population from obtaining both the formal education and the networks and social capital required to move up and into the advantaged core. “The result is that education, which was once a force for the homogenization of the labor force,” Temin argues, “has become a barrier reinforcing the dual economy.”
This class divide is strongly overlaid with race. In contrast to the prevailing meme of a hard-suffering white working class, Temin’s argues that the advantages of America’s economic core accrue largely to whites, while concentrated urban poverty, access to under-funded schools, higher rates of incarceration and other factors keep large numbers of blacks and other minority groups trapped in the less advantaged sector of the economy.
That said, whites also suffer in the sagging part of the dual economy. Temin presciently argues that even though blacks are “a minority in the low-wage sector, there prominence in public and political discussions helps to obscure the problems of low-wage whites.” This is exactly the kind of recognition that fueled the unexpected rise of Trump and Trumpism.
America’s history produced inequality in the dual economy
The rise and reinforcement of America’s dual economy is the product of many interacting historical factors spanning the economy, technology, class, race and gender, of which these five stand out.
- The sweeping deregulation of the economy and the financial markets that started way back in 1971 under the Nixon administration, which ultimately enabled the rise of finance as the dominant sector of the economy.
- Globalization and automation, which combined to undermine once high-paying middle class manufacturing jobs.
- The decline of unions and deep cuts in the social safety net, which helped to erode the wages and well-being of the middle class.
- Rampant suburbanization, which created increasingly unequal neighborhoods and even more so compounded unequal access to education by class and race.
- Mass incarceration as a mechanism for social control, evident for example in the shift from the War on Poverty to the War on Drugs, which has fallen far more heavily on blacks, especially young black men.
Ultimately, the persistence of America’s dual economy reflects the outsize political clout, as well as the economic power, of the advantaged core. Despite their numerical smaller size, the members of the core have the resources required to shape political parties and candidates and shape electoral and governing outcomes.
The deeper tragedy is that Trumponomics is an extension and acceleration of the core policies that have warped the dual economy—heightened deregulation, the continued hegemony of high finance, tax cuts for the wealthy, and deeper cuts in what’s left of the safety net, along with incantations of protecting factory jobs and intermittent lashing out toward China or Mexico.
Trumpism ultimately pits the members of the white working class against the even less advantaged members of the black and Hispanic service class, setting the stage for the underlying causes of the dual economy to go unaddressed and America’s class and racial divides to grow ever deeper.