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American Middle Class

Government Policies Built and Destroyed America’s Middle-Class & JCPenney

America’s middle class tries on used clothes to maintain their status.  When James Cash Penney founded JCPenney in 1902, the concept of the middle class was elusive.  Since then, the beloved company and America’s middle class have been declining. 

The deteriorating of America’s middle class and the companies that serve them have a common factor, which is federal government policies.  The purpose of this article is to outline how government policies created one of the wealthiest middle-class societies in the world and how that same government has been implementing policies that are detrimental to that same social class.

To transform itself, JCPenney announced on August 15, 2019, that it would partner with resale marketplace thredUp Inc to sell secondhand clothing and accessories in 30 of its stores. Macy’s announced a similar partnership with thredUp the same week.  JCPenney and Macys depend on a viable middle class; both companies have been struggling lately. 

At its peak, JCPenney had nearly 1500 stores, operated internationally, and was one of the go-to stores for America’s middle class.  As of this writing, JCPenney operates about 800 stores across the country.  Most of the remaining stores are experiencing lackluster sales; same-store sales were down nearly 6 percent in the second quarter of 2019.

According to Pew Research, fifty-two percent of American adults lived in middle-class households in 2016.  However, they have not gotten a raise in forty years, and 40 percent of them don’t have $400 in the bank for an emergency.

The American middle class does not have enough disposable income to spend at retailers like JCPenney, Macy’s, and Sears, the latter filed for bankruptcy earlier this year, that cater to them.

The GI Bill or the Servicemen’s Readjustment Act

The Middleton family, no relation with Prince William’s wife and her family, was fictionally depicted in a movie by the same title showing the family attending the 1939 New York World’s Fair and exploring futuristic middle-class gadgets.

While the Middleton Family at the New York World’s Fair defined the middle-class lifestyle for Americans, The GI Bill or the Servicemen’s Readjustment Act materialized it.

America had, at the time, a sizable middle-class.  Westinghouse Electric & Manufacturing Company sponsored the Middleton Family because of the visible growth of the middle class.  JCPenney was already a publicly-traded company and had about 1300 stores across the nation.

The GI Bill was instrumental in making the American Dream more concrete.  The bill made low-interest-rate mortgages, gave stipends to cover tuition and expenses for colleges, and handed close to $4 billion in unemployment compensations to nearly 9 million veterans.

The United States of America, through its GI Bill, created a majority wealthy middle-class society.  The American consumer culture that the Westinghouse Electric & Manufacturing Co saw back in 1939 came to life. Mega shopping malls, with JCPenney and Sears as anchored tenants, were born.  

Walmart, Stagflation, and Oil Embargo

Sam Walton launched Walmart in 1962 and introduced bargain shopping.  Coincidentally, it was around the same time the song Little Box was getting heavy rotation on the radio.  Peter Seeger sang, “And the people in the houses.  All went to the university, where they were put inboxes. And they came out all the same. And there’s doctors and lawyers, and business executives. And they’re all made out of the sticky tacky. And they all look just the same”

The appeal of bargain shopping from Walmart and Kmart and the popularity of Mr. Seeger’s song were first few insights into this new America, which is a country with absurd income and wealth inequalities.  Also, it was apparent that not every American was part of the wealthy middle-class society that the GI Bill created.

The late 1970’ s stagflation (outlandish inflation and negative economic growth), and the oil crisis started turning JCPenney’s middle-class consumers into Walmart’s customers.

1980 Reaganomics

Reaganomics kicked in the era of tax cuts for the rich.  President Ronald took office on January 20, 1981.  Six months later, he signed into law the Kemp-Roth tax, aka the Economic Recovery Tax Act of 1981, which was the most massive tax cuts in American history.

The Kemp-Roth tax cut the top marginal rate from 70 to 50 percent, the capital gains from 28 to 20 percent, and the bottom bracket from 14 to 11 percent.  Also, the law allowed higher estate exemptions, higher deductions on depreciation, and established Employee Stock Ownership Plans (ESOPs). 

The Kemp-Roth tax provided the best benefits and tax cuts to wealthy Americans.   The GI Bill built the middle class, and the Kemp -Roth provided tax relief to the wealthy so they could buy a second home in Palm Beach or a superyacht.  Two different laws with two different objectives, but both government spending.

By the time President Reagan left office, both the federal debt and poverty ballooned in America, and Walmart became the biggest retailer

Free Trades, Glass-Steagall, National Homeownership Strategy & Bush Tax cuts

The Reagan Administration’s focus on government spending, tax cuts, and deregulations benefited the wealthy and big business substantially, but those policies hurt the middle class.  The next five administrations have done equal damage to the middle class.  

President Clinton implicitly launched a triple assault on the middle class: NAFTA, repealing of Glass-Steagall, and the National Homeownership Strategy.  Twenty years later, the adverse effects from those policies and legislation on the middle class and companies that serve them are irreversible. 

The North American Free Trade Agreement (NAFTA) 

President Bill Clinton signed NAFTA into law in December 1993.  Sixty-one Republicans and 27 Democrats supported the bill in the Senate.

The three-country accord, America, Canada, and Mexico, removed most tariffs on products traded among the three countries.  Before the ink dried upon the agreement, big companies such as General Motors and Ford started opening factories, hiring Mexican workers for less, and buying from local suppliers.

Manufacturing workers, mostly those workers in the Rust Belt, had to compete with Mexican workers who were willing to work for less.  The 2007-09 financial recession exacerbated the problem.

Many abandoned places in America don’t even have a grocery store. For those towns, the last JCPenney probably closed 30-plus years ago.  Americans who live in those ghost towns are now more worried about their friends and family who are suffering and dying from diseases of despair.

The Glass-Steagall Act of 1933

The Glass-Steagall Act was put in place after the 1929 stock market crash.  Commercial banks used client funds to speculate.  When the stock market crashed, banks that had their clients’ funds invested in it all a sudden ran out of cash, which caused all bank clients to run and try to get their money out, which is a bank run. 

Many professionals believed that banks speculating with clients’ deposits caused the 1929 crash and, eventually, the great depression.  

To stop commercial banks from speculating with their clients’ money, Congress passed the Glass-Steagall Act of 1933, which said that commercial banks must do what commercial banks were designed to do, which is taking deposits and lending.

Congress passed, and President Bill Clinton signed the Gramm-Leach Bliley Act of 1999, which repealed the Glass-Steagall Act of 1933.  Once again, commercial banks were allowed to speculate on anything anywhere.

Nearly 11 million Americans, mostly middle class, lost their homes during the housing crisis of 2008, which was caused due in part to banks speculated on American households. 

 National Homeownership Strategy 

In 1995, President Clinton launched the National Homeownership Strategy: Partners in the American Dream.  The initiative called for Washington’s lawmakers to loosen lending standards and make it easier for the private sector to make home loans to middle-class Americans. 

The goal of the initiative was to generate up to 8 million additional homeowners from 1995 through the year 2000. President Bush carried forward the effort, and by 2006, the homeownership climbed to an all-time high at 69 percent.

The government wanted to open markets for homeownership, but its program did not have any consumer protection clauses.  Banks issued home loans to Americans and took side bets that those loans would go bad.  Nearly 11 million homeowners lost their homes to foreclosure during the 2007-2009 financial crisis.  A decade after the financial crisis, the middle class is still recovering.

Homeownership is a symbol of middle-class status.  Technically, JCPenney lost nearly 11 million potential customers. No company can lose that many customers and survive.

Bush & Trump Tax Cuts and Obama TPP

In 2003, Congress passed, and President George W Bush signed the Jobs and Growth Tax Relief Reconciliation Act, which reduced tax rates on long-term capital gains and dividends to 15 percent and lowered the maximum estate, gift, and generation-skipping transfer tax.

President Obama was a staunch supporter of trade agreements, and the Trans-Pacific Partnership (TPP) was no different.

In 2016, twelve countries that border the Pacific Ocean agreed to the TPP, which would reduce tariffs and promote trade amongst the members, including the United States.  

Congress passed, and President Trump signed the Tax Cuts and Jobs Act of 2017.  The Trump tax cuts reduced corporate tax rates from 35 to 20 percent, eliminated the estate tax, and allowed multinational companies to repatriate their profits at a lower tax rate. 

Based on the Tax Policy Center’s calculations, almost half of the tax cut benefits in the new plan would go to the top 5 percent of U.S. earners.

Tax cuts and free trades seem to be the two culprits in America’s middle-class decline and companies like JCPenney, Macy’s, and Sears that cater to them.  But yet, every administration since Ronald Reagan had cut taxes or signed new trade deals.

The Bottom Line

JCPenney is on the verge of bankruptcy, and America middle-class declining.  A robust middle class is a glue that holds a democratic government.

Perhaps when President Trump talks about “Making America Great Again,” he is referring to those twenty glorious years after the second world war.

The GI Bill, a government policy that provided all sorts of financial support to nearly 9 million veterans, birthed the middle class and allowed admired companies that are part of the fabric of American society to flourish in the process.

Tax policies that benefit the top U.S. earners and trade agreements that allow U.S. companies to ship operations elsewhere will continue to hurt and shrink the middle class.

There is a divergence going on in the retail industry where Neiman Marcus and TJ Maxx are thriving, but JCPenney and Macys are struggling. 

JCPenney’s announcement that it will start selling used clothes soon might be an implicit acceptance that America’s middle class is disappearing, and targeting them is not a viable commercial decision.  JCPenney had to choose to either be Neiman Marcus or TJ Maxx because federal government policies obliterate its middle-class market segment.

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