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Originally published September 15, 2012 at 8:02 PM | Page modified September 21, 2012 at 11:45 AM

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How the middle class lost its place in the economy

Special to The Seattle Times

Book signings

Hedrick Smith will be making the following appearances

Thursday:

7 p.m., Third Place Books, 17171 Bothell Way N.E., Lake Forest Park

>

Friday:

7:30 p.m., Town Hall, Seattle

>

Saturday:

6:30 p.m., Darvill's Bookstore, 296 Main St., Eastsound, Orcas Island

>

Sunday:

2:30 p.m., Village Books, 1200 11th St., Bellingham

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.....the lap dogs of the uber wealthy crow up down and sideways about the "magic&q... MORE
this has been solidified by the disastrous Republican Citizens United ruling. ... MORE
Okay, let's follow the low-tax/slim-gov't argument to its ultimate conclusion: More... MORE

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Last week's dismal news on middle-class household income is no surprise to Hedrick Smith. How we arrived at this point, laid out in his important new book, "Who Stole the American Dream," may surprise plenty of people.

Some fine work has been done in explaining the mess we're in. Among the best are "The Price of Inequality," by Nobel laureate economist Joseph Stiglitz, and "The Betrayal of the American Dream," by investigative reporters Donald Barlett and James Steele.

But no book goes to the headwaters with the precision, detail and accessibility of Smith, a Pulitzer Prize-winning former reporter for The New York Times and Emmy-winning producer for PBS. He examined his own country like the foreign correspondent he once was, pulling together many strands to find the complete picture. It's not pretty.

"The plutocracy owns the place," he told me last week. Most Americans barely remember the zenith of the middle class, much less its political power. "If people believe they don't have power, they don't."

From the 1940s through the early 1970s, the nation enjoyed a "virtuous cycle of growth" where economic gains were widely shared. Unions acted as a counterweight to business, but the captains of industry themselves understood that their well-being depended on shared prosperity. This was backed by a broad bipartisan consensus.

In the famous "Kitchen Debate" of 1959, then Vice President Richard Nixon could accurately tell Soviet leader Nikita Khrushchev "the United States comes closest to the ideal of prosperity for all in a classless society."

Since the 1970s, the middle class has stagnated even though productivity has skyrocketed. Yet the superrich have amassed fortunes that would scandalize the robber barons of the 19th century.

Smith was unsatisfied with conventional explanations such as globalization and technology. After all, Germany has retained its middle class and social compact.

"I made a conscious decision to follow the story where it took me," he said. "This isn't the book I set out to write. I didn't have my mind made up. I had questions."

Indeed, the working title was "The Dream at Risk," and the broad areas of inquiry were how we could go from middle-class wealth and power, as well as bipartisanship in Washington, D.C., to today's starkly unequal democracy and corporate America dominant in our political life.

The biggest driver has been the rise of big business's control of politics, and as a result gaming policy against the middle class. If this is class warfare, average working Americans didn't start it. Many don't even realize it is a conscious enterprise.

And if you're now tempted to flee in anger to the Sports section, understand that today's inequality is a concern of many conservative thinkers, too. Wall Street power angers the tea party.

And Smith introduces us to many business leaders who are worried about it and the effect on the national interest.

Smith begins with the little-known memo written by influential corporate lawyer and future Supreme Court Justice Lewis Powell. It was a "call to arms" to business as the (Republican) Nixon administration was launching the Environmental Protection Agency, Occupational Safety and Health Administration, consumer protections and a tax on high-end earners.

The memo found a receptive audience. The old capitalist ethic was fading and a new, militant conservatism was on the rise.

In 1971, only 175 companies had lobbying offices in Washington, D.C. A decade later, the number was 2,445. The Business Roundtable was formed and remains a powerful political organization representing the elite of corporate America.

Many of the shifts to come were cloaked by the benign, even exciting term, The New Economy. But almost all worked against the interests of the middle class. Smith calls it "wedge economics."

Among them: Replacing secure pensions with unstable 401(k)s, offshoring, hollowing out the manufacturing economy and now high-end jobs, destroying unions, undermining consumer protections and the deregulated financial rackets that proved extremely costly to average Americans. Corporate chiefs such as Jack Welch were celebrated for mass firings.

Interestingly, the seeds were planted under President Carter and the forgotten 1977-78, Democratic-led Congress.

"The whole ballgame radically changed," Smith said. "It was done on purpose. The people at top decided to go get more power and wealth. Now it's self-reinforcing."

But it's not hopeless. Smith details a 10-step strategy to reclaim the middle-class dream. They include building new infrastructure to better compete, pushing research, fixing the tax code to make it fairer and promote job creation at home, and paring back the military-industrial complex and imperial overstretch.

In many cases, government will have to take a leading role as it has throughout U.S. history.

This will be a tough battle against the radical right's insistence on tax cuts, government spending reductions and laissez-faire. Still, the middle class once had considerable political power and, Smith argues, can reclaim it.

Anyway, America had better and fairer growth under the tax rates of Presidents Eisenhower and Kennedy, 92 and 77 percent, respectively, than under George W. Bush, who saw the weakest growth rate in seven decades before the Great Recession hit.

"It's a bogus argument," Smith said. "Tax rates have been low since the recession, and business is sitting on close to $2 trillion. They're using it to buyback stock. The problem isn't capital, it's growth."

And that ties back into the middle class. "Low pay means low growth means low demand." The evidence doesn't suit people with a lot of power who don't want people to know the facts.

Jon Talton: jtalton@seattletimes.com

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