Nationalism And The Decline Of The Middle Class

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What Changed? The Post-Cold War Period

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The American political establishment still holds that free trade, multilateralism and American involvement in the world is the correct policy.1 Populists generally supported this policy until the Cold War ended. After the Cold War, the political establishment wanted to remain the global superpower, in part because it had led to world peace and in part because members of the political establishment have economically benefited from the policies of free trade, multilateralism and deregulation. The latter policy, deregulation, began with President Carter and was fully embraced by President Reagan.

Both left- and right-wing populists were less enamored with the Cold War policies. Deregulation and globalization removed job protections; firms were free to move production out of the U.S. or easily replace workers with automation. The hegemonic wars were seen as burdensome to the populist classes, although this perception isn’t necessarily supported by recent data.2 However, the combination of globalization and deregulation clearly played a role in wage stagnation and inequality.

This chart shows U.S. median family income. Note that the trend began to flatten as deregulation began in the late-1970s. This process has continued to the present.

This is not just a U.S. issue.

This chart measures real income growth for the world from 1988 to 2008. Income growth exceeded 50% from the 15th percentile to the 70th percentile and for the first percentile. Growth was either slower or negative from the 70th to the upper levels of income. This dip in the chart represents the Western middle class, which has borne the brunt of deregulation and globalization. In fact, the chart suggests that offshoring has probably been a key reason why the lower income percentiles have seen stronger income growth.
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