Book Reviews

Book Reviews Finance & Development, December 2017, Vol. 54, No. 1

Reinventing the Past Peter Temin

The Vanishing Middle Class: Prejudice and Power in a Dual Economy

MIT Press, Cambridge, Massachusetts, 2017, 208 pp., $26.95 (hardcover).

Americans tend to assume that history marches forward and that their children will do better than they did. This is a fundamental tenet of the American Dream and a core deliverable of the economy over most of the course of the 20th century.

Sometimes, though, there are detours.

Even though over the past 40 years, the United States grew ever richer, the gains from this growth have not been shared. The US economy produced $18 trillion worth of goods and services in 2016, more than any other country that year—or any year on record. Data show that between 1980 and 2014 pretax income grew, on average, by 61 percent, yet most of these gains went to those at the very top. For the bottom 50 percent of the US population incomes grew only 1 percent; those in the top 1 percent snagged 205 percent income growth.

This is not the way the American Dream was expected to play out.

Explaining rising inequality in the United States is the aim of Peter Temin’s new book, The Vanishing Middle Class. Temin argues that the distribution of gains from economic growth today make the United States look like a developing economy. He builds on the dual sector model developed in the 1950s by W. Arthur Lewis. Looking at developing economies, Lewis proposed that economic growth and development did not conform to national boundaries. Within countries, he saw that “economic progress was not uniform, but spotty.” His model explains how development and lack of development progress side by side. One sector, which Lewis calls “capitalist,” is the home of modern production, where development is limited only by the amount of capital. The other sector, which he calls “subsistence,” is composed of poor farmers who supply a vast surplus of labor. In these two sectors’ symbiotic relationship the capitalist sector seeks to keep wages down to maintain an ongoing source of cheap labor.

Temin applies this framework to the United States today. He argues that “the vanishing middle class has left behind a dual economy.” His dual sectors are finance, technology, and electronics, or FTE—akin to Lewis’s capitalist sector—and low-skill work, akin to the subsistence sector, whose workers bear the brunt of the vagaries of globalization. The book lays out how...