SYNOPSIS: Now: With Bill Moyers interviews Krugman on increasing income inequality and insecurity of the middle class

ANNOUNCER: You're watching NOW WITH BILL MOYERS. With contributions from NPR news. This week on NOW... Is the American middle class becoming an endangered species?

KRUGMAN: The idea of job security for anybody, blue-collar workers, but also white-collar workers, is pretty much gone.

ANNOUNCER: The new dilemmas of the American dream, as the income gap keeps growing. And campaign finance reform. Now that it's the law of the land, the real fight begins.

MCCAIN: It's huge amounts of money contributed by a handful of Americans that are dictating the legislative agenda here in Congress.

ANNOUNCER: Senator John McCain on his battles with Washington and the White House over money in politics. A Bill Moyers interview. And Mark Hertsgaard on the long shadow cast by America around the globe, and what it means for the environment. All that, tonight on NOW.

ANNOUNCER: From our studios in New York, Bill Moyers.

MOYERS: Welcome to NOW. I didn't grow up in the middle class, but I thought I did. In a small town in east Texas, your parents could be poor and you could still do the things most other kids did. For most of my adult life, the middle class provided stability and vitality to the American economy and inspiration to the American dream. But the pressures on middle class wages have been relentless in recent years, and now people who thought they were secure in their station are feeling vulnerable. Just look at the shock and fear among the workers and managers of United Airlines whose bankruptcy will deprive them of the gains they've been making. Economists and social critics are now talking as if the shrinkage of the middle class is permanent. No one has been writing about this more provocatively than the economist and columnist for THE NEW YORK TIMES, Paul Krugman. His ideas on the dilemma of the middle class are the subject of our first report, produced by my colleague Bryan Myers.

DAVID WELLS: Hello, my name is David Wells, and I'm an IT executive and an entrepreneur and I have over twelve years of experience.

BRYAN MYERS, PRODUCER: David Wells didn't expect to be at a job search meeting for out-of-work executives. At age 44, he's got a degree in computer science and an MBA from Texas A&M University. Until last year, he was a senior manager at a big energy company in Houston, but then lost his job in a round of layoffs.

MYERS: When you were let go, how long did you think it would take before you found another job?

WELLS:I was estimating about three or four months.

MYERS: Instead, Wells has been out of work so long he's about to run out of unemployment benefits.

MYERS: Wells is one of over 800,000 Americans whose temporary benefits will end right after Christmas because Congress recently refused to approve an extension.

MYERS: How long has it been?

WELLS: It's been eleven months.

MYERS:And have you run thru your severance payments?

WELLS: I have.

MYERS:And have you run thru your unemployment payments?

WELLS:I have until the end of December for those.

WELLS: Must have PhD. That counts me out.

MYERS: David Wells' dilemma may sound like just another story about a guy out of work.

WELLS: Must have PhD. That counts me out.

MYERS: But there may be a lot more to it than meets the eye. Some say the broadly middle class society we used to take for granted has unraveled—unraveled to a point where America is no longer the land of widespread economic & social opportunity we believe it to be. Even for a guy like David Wells.

KRUGMAN: We had a society 20 years ago, 30 years ago, in which the center of gravity was with the middle class.

MYERS: Paul Krugman is a professor of economics at Princeton University and a columnist for the New York Times. Krugman recently caused a stir with this article "the end of middle class America." In it, he writes of the "tectonic shifts that have taken place in the distribution of wealth and income" in the U.S. He cites statistics which show most of the economic gain of recent years has gone not just to the wealthy, but to the very richest of the rich. From 1979 to 1997, the after-tax income of the top 1% of families rose 157%. That's compared to only a 10% gain for families in the middle fifth. And that's not all. Within that top one percent, most of the gains went to top 1/100th of a percent…a mere 13,000 families now have almost as much income as the bottom 20 million American families combined.

KRUGMAN: The pie is a certain size. You take a bigger slice for the people at the top, then there's less left over so yeah, I think the basic arithmetic is right. That if you ask ultimately why aren't middle class families doing better? The answer is, well, the growing economy is mainly going to the benefit of people who are not middle class.

MYERS: How that economic pie is divided has real consequences, says Krugman. Not only do we have more poverty than many other industrialized nations, we're also seeing increased uncertainty in the lives of ordinary Americans. In fact, Krugman believes the broad middle class society we assume is the norm may have been just a temporary aberration of the '50's and the 60's.

KRUGMAN: I guess the question you have to ask is, 'What kind of society do you want to live in?' Do you want to live in a society where most people are reasonably assured of a decent life? Or do you want to live in a society where bad luck can easily tumble someone who's worked hard and played by the rules into the economic abyss?

MYERS: Are we really seeing the end of middle class America? You can't trace the particular problems of any one family to the growing income gap. However, Krugman believes that, in general, families are showing the strains of that inequality. Tonight, you'll meet three families. The Wells, The Oradeis, and the Caputos.

MYERS: Spend a day with Ron Caputo, and you'll know the meaning of the word exhaustion. This day, he's up at three in the morning, in the car by 4:00, to make the daily commute from his home in Mt. Pocono, Pennsylvania to his job on New York's Long Island—some 125 miles away.

CAPUTO: I usually leave in between 4:00 and 4:30 in the morning. From my house to the Islip office is roughly three hours.

MYERS: It was the search for affordable housing that led Ron Caputo to Pennsylvania.

CAPUTO: I like to get home usually around by 10:00. So I'm getting a good solid five hours of sleep. You know, I get a little time to unwind with the wife. And then you just do it again.

MYERS: Do you get to spend as much time with your family as you'd like?

CAPUTO: No, spend a lot of that time on the road.

MYERS: That road is Interstate 80—across northern New Jersey, I-95 over the George Washington Bridge…

CAPUTO: Welcome to New York, brother.

MYERS: And onto the dangerous Cross Bronx Expressway.

CAPUTO: Man, this guy really! Riding the Cross Bronx where these trucks are so close together... my wife freaks out, she really doesn't like it.

JEANNINE CAPUTO: I think it's horrible. He says it's not that bad. He's so used to it now. It's been over a year.

MYERS: He never says, honey this is not, this ain't working, this commute, boy I'm...?

JEANNINE CAPUTO: He's never said it doesn't work. But he has come home very tired, but you gotta do what you gotta do. And right now, this is the best way for us.

MYERS: Ron and Jeannine Caputo were born and raised on New York's Long Island. And until a year ago, they, and their four children, still lived there. But when the house they were renting got sold, they had to move.

CAPUTO: When we looked around, I mean, the best we could do that I could ask her to live in with the children in a decent neighborhood was in the ballpark of $2500.

MYERS: A new rent of $2500 would have been two-thirds of their take-home pay. At the time, they were taking home what they thought was a respectable $3700 a month. Ron was a painter; Jeannine, a nurse's aide.

CAPUTO: Well, we were willing to go up to 15, 17...

JEANNINE CAPUTO: Yeah, you're paycheck to paycheck and you don't have any saving to lean on.

CAPUTO: You're not saving a penny. You're what you call...

JEANNINE CAPUTO: I want to have a little bit of savings. I don't need a huge savings. I'd like to have a little...

CAPUTO: You're what you call 'house poor.' That's what you are.

MYERS: The cost of many family basics, like housing, has skyrocketed in recent years. From the late 70's to the late 90's, the median home price in the U.S. has increased about 120%. Yet during that same period, wages for families in the middle increased only 10%. For the Caputos, it took moving to Pennsylvania, two states away, to find the right home they could afford.

CAPUTO: I was constantly struggling. The same wages I'm making now, if I lived on Long Island, we couldn't live the quality of life that we have here. There's no way.

MYERS: In Pennsylvania, they're paying $1150 a month to rent a new four bedroom home. So like millions of others, Ron now commutes to where wages are good, but lives where costs are low.

CAPUTO: A house painter by trade, Ron Caputo now works for his union as an organizer. Just as he's making the first stop of his work day, checking in on a job site, David Wells is making the first stop of his day—a 6:30 am breakfast meeting of "The Reveille Club," an alumni group of Texas A&M Aggies.

WELLS: So how's it going, man? I didn't see you here last week.

MYERS: The Reveille Club isn't just a chance to catch up on last week's game, it's a chance for David to make contacts. David's job search has become, almost in itself, a job.

MYERS: From here, it's straight to the offices of the Thomson DBM job search firm. This is where Wells now hangs his hat while he looks for work.

WELLS: Basically, this is an office away from home and I get to come here and do my e-mails and use fax services, and copy machines, and basically do my research for the job search.

WELLS: For me, it's all about momentum.

WELLS: Bill? David Wells. Fine. How are you doing sir?

MYERS: David says his former employer treated him right—gave him a good severance which paid a lot of the bills until it ran out. He credits both his family—his wife stays at home with their boys—and his religious faith for keeping him upbeat. But it can be hard.

WELLS: There are days when I get down. I mean, I'm human, you know? I think we all get down in some fashion like this. I think it will probably start affecting me the most when I have burned through all my savings and I don't have anything left to pull from.

MYERS: It will soon be a year since David was laid off. Since January of 2001, companies have cut over 3 million jobs, more than in the previous five years combined. And more and more, it's managers and professionals like Wells who are getting laid off—they're now the fastest growing segment of the unemployed, their numbers up 76% over the last two years. That's not the way it used to be.

KRUGMAN: You know, I don't want to romanticize too much, but there was a sense that workers, particularly long-time workers, were part of what you cared about. They were stakeholders. You had some incentive to protect them. Now, there's none of that. Workers are like raw materials. You hire them, you fire them, whatever. And the idea of job security for anybody, blue-collar workers, but also white-collar workers, is pretty much gone.

MYERS: David Wells has a different take.

WELLS: This is just life. Because of our expectations of the past, that's what we have to reference things. We bounce things up against the past. And we have to be willing to change that. We have to be. That's just life. It's just life. Things change.

KRUGMAN: I think people are accepting as inevitable a harshening, a coarsening of our society that we just don't have to have. It doesn't have to be like this given the underlying wealth of the country.

MYERS: Krugman says that coarsening of society is partially the result of corporate decisions that are shifting wealth away from the middle. Consider the plight of many retirees. Bruce Oradei spent a life working in education, his wife Marleen, as a nurse. They retired six years ago.

MYERS: Now, at age 67, Bruce has gone back to work, as a substitute teacher in the suburbs of Madison, Wisconsin.

WOMAN: Good Morning, Bruce, how are you today?

ORADEI: I'm fine.

WOMAN: Are you ready to go?

MYERS: All their lives, they assumed if they worked hard and played by the rules, it would afford them a comfortable retirement.

ORADEI: When we started retirement in '96, we were spending about $70,000, including property tax and income tax, okay? And right now, we're down to roughly $40,000.

MYERS: Like a lot of people, they had what's known as a "defined contribution" pension plan—along the lines of a 401K. Like a lot of people, they had a lot of stock. And like a lot of people, they lost a lot of money—about 30% of their nest egg.

ORADEI: Everybody was advising you that if you planned, did it right, that you could live for, as long as you lived another 20 years, or whatever it was gonna be on the kind of income you were spending…and then all of a sudden, the same folks that said, 'You can do all of this,' are now looking us in the eye and saying 'You did it all wrong.'

MYERS: Now Bruce is back to work because of all the money they lost. Defined contribution accounts, like 401K's, have become the rage in retirement savings. 27% of Americans aged 50 to 61 now rely solely on plans like 401K's for pension coverage. That's twice the number of a decade ago.

KRUGMAN: It was a major shift of risk away from companies to the employees. It was also, quite cynically, used to prop up company stock. Too many 401K plans invested heavily in their own company's stock. And of course, as we've seen, that it's lead to widespread personal tragedy.

MYERS: If you're looking for a parable about inequality in America, look no further than scandals like Enron, says Krugman, where executives made millions while workers saw their life savings decimated.

MYERS: Despite the tough times, Bruce still keeps up with family rituals, like the yearly hunting trip with his sons. Don't worry about him and Marleen, he says. Worry about whether there'll be an American dream for his kids.

ORADEI: My son, one son's job, they're back to 1985 layoffs and he's worried about him getting laid off, and my other son works for the state and hasn't had a pay raise for three years. So you kind of look around and begin to wonder, you know, 'What happens to the next generation?'

MYERS: Families like the Oradeis, the Wells, and the Caputos, may be feeling the strains of an unequal society. But what's causing that inequality? The reasons are numerous according to Krugman. But he says, there's one big one—a government in Washington, DC that increasingly serves the interests of a privileged few at the expense of ordinary Americans.

KRUGMAN: The income disparity gives rise to disproportionate political influence for the upper tail of the income distribution. And the policies pursued because of that political influence do reinforce the inequality.

MYERS: So money buys not just boats and big homes and nice vacations, it buys political influence?

KRUGMAN: Yeah, it's not, you know, it's not really arguable.

MYERS: Remember that recent refusal by Congress to extend temporary unemployment benefits? A perfect example of the new mood in Washington, says Krugman.

KRUGMAN: And all of the money now is on the side of policies that are, you know, that minimize middle class benefits, and maximize tax cuts and other benefits for people at the top of the distribution.

MYERS: And that, he says, has left the middle class scrambling for solutions.

For Ron Caputo and his union, that means joining a campaign to lobby the government to invest in more affordable housing on Long Island.

CAPUTO: Right now, we are in Port Jeff Station, on Dayton Avenue. This is where we lived, my family and I live her for a little over three years.

CAPUTO: Uh, for me to come back to Long Island, I'd have to earn close to $200,000 combined income.

MYERS: How many painters do you know that are making $200,000 a year?

CAPUTO: None. None. We should be able to live where we work.

MYERS: Ron and Jeannine say not only can they afford a better home in Pennsylvania, everything seems cheaper. It reminds Jeannine of something she heard from her father as a teenager.

JEANNINE CAPUTO: He told me years ago, 'Go, leave Long Island. You're crazy if you want to stay.' It's going to be upper class and working poor, eventually. In 20 years, it's going to be upper class and working poor. That's what he told me. And it seems like where it's going.

CAPUTO: You know, their argument will be, well, nobody told you to be a painter and have so many kids. You know, you could have went to college, you could get grants, you could do this, you could do that. They're right, to an extent, okay? They are. But you know, look at the other aspect of it. Well, then who's going to do the painting?

MYERS: This day, it was around 8:30 before Ron left work to head home to Pennsylvania. Another three hours on the road, another three hours away from his family.

CAPUTO: Give everybody love and kisses. I'm loving you.

MYERS: At 11:20 p.m., Ron pulled up to the front door. Just another 19 ½ hour day in the life of Ron Caputo.

MOYERS: We turn now from money and the American economy to money and American politics. Faithful viewers of NOW know this is one of our favorite subjects. It's also a passion for my guest, Republican Senator John McCain of Arizona. He's just written a new book in which he honestly discusses how he got tripped up by too much money in politics, and about other subjects as well. It's called WORTH THE FIGHTING FOR. Well, he has a fight on his hands with the campaign finance law that was recently passed which he sponsored along with Democratic Senator Russell Feingold of Wisconsin. That law is being attacked from many sides: by the two political parties, by the Federal Election Commission, and in the courts. Welcome to NOW.

SENATOR JOHN MCCAIN: Thank you, Bill.

Originally aired, 12.13.02