Why Is The Middle Class Really Bogging Down?Rudi Dornbusch
The battle for 1996 is on: President Clinton is fighting for survival by invoking divisive class prejudice, while the Republicans are no better in their promise to create prosperity out of thin air. The economy has been doing well, there has been growth, and there is full employment. But it is obvious from the political maneuvering that more is expected and promised than the economy can deliver. That is a dangerous route: Even a free-market economy cannot deliver equality and prosperity for all.
Today, the U.S. economy is operating at peak performance. Over the past decade, growth has been strong, averaging 3% a year including the last recession. Unemployment is as low as it can get before inflation becomes the dominant issue. So why does the average American feel left out, even betrayed?
During the 1950-73 period, median family income doubled. That has been the American model--every generation gets ahead of the previous one, with the postwar decades representing a giant advance from the Depression years. But since the early 1970s, the economy has failed to deliver broad-based income gains. Even though the economy has grown steadily, the average American family is basically where it was 20 years ago. Poverty rates have increased, and the economic foundation of the middle class is being eroded.
COSTLY MINIMUM. There is no single explanation for the middle class bogging down. A list of contributing factors would include fewer unions and monopolies on which they can feast, more competition within the country and across borders, immigration, deregulation, and labor-saving technology. More broadly, the shift to an immensely competitive environment, where the norm is cost-cutting and paying no more than the bare minimum, has been ruinous to the middle class.
Over the past decade, much of the success in cost-cutting has not come from raising output per worker hour. It has come from reducing labor costs by shifting work outside the company or across borders. It's no surprise if companies have photocopies made at the minimum-wage-paying shop across the street rather than in-house at middle-class wages. And advances in transportation, communication, and information technology have created one vast world labor market, making a leveling inevitable.
What to do about all this? One answer is to roll back progress, making competition in all its forms the enemy. That is impossible. Even Europe is finding that its proclivity for a protectionist welfare state that shelters workers and wages from market pressures has become a costly aberration--and undesirable. Without competition and progress, there is no assurance that real income will grow at all. Even if income grows, what to do about rising inequality? The common-sense answer must be that more growth provides a bigger pie, and this must remain the priority. There are three ways to create more growth, none of them new and all of them hard work: better education for the middle class, freer trade to empower high-wage industries, and a far higher rate of investment.
MALIGNANT NEGLECT. The safest way to get investment up is to cut the deficit, and there is no better time to do so than at full employment. Much of the political debate is fought around the status quo: shifting tax burdens and expenditure benefits around like furniture while neglecting potential prime budget-savers that have so far been protected by Congress. Robert J. Shapiro of the Progressive Policy Institute has identified spending and tax reforms that would result in total five-year savings of $225 billion. That is a good downpayment for tax cuts and deficit reduction.
There is also an important political message in a key Clinton Administration mistake that some have lauded as a great political ploy. With characteristic skill, White House spinmeisters repeatedly acclaim "working-class families who play by the rules." The argument runs like this: If the economy is going ahead and most people are not, someone must be making off with the money. Today, corporations are routinely pictured as greedy, unfair, and exploitative, and the middle class is portrayed as getting the shaft. The notion that corporations should make profits is no longer acknowledged.
The Administration's rhetoric only incites class warfare. In the context of inequality, too little is said of individual responsibility for education and skills and too much of how the system is flawed. It undermines the basic American expectation that anyone who tries hard enough can get ahead. To declare that basic premise null and void creates a social pessimism that opens the door to questioning a free, competitive society.