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The Dollarocracy is Coming

Posted on Friday, 12th August 2011 @ 08:23 PM by Text Size A | A | A

Can the Middle Class Be Saved?

The Great Recession has accelerated the hollowing-out
of the American middle class. And it has illuminated the widening divide
between most of America and the super-rich. Both developments herald
grave consequences. Here is how we can bridge the gap between us.

By Don Peck


Image
credit: Andy Reynolds/Wonderful Machine

In October 2005, three
Citigroup analysts released a report describing the pattern of growth
in the U.S. economy. To really understand the future of the economy and
the stock market, they wrote, you first needed to recognize that there
was “no such animal as the U.S. consumer,” and that concepts such as
“average” consumer debt and “average” consumer spending were highly
misleading.

In fact, they said, America was composed of two distinct groups: the
rich and the rest. And for the purposes of investment decisions, the
second group didn’t matter; tracking its spending habits or worrying
over its savings rate was a waste of time. All the action in the
American economy was at the top: the richest 1 percent of households
earned as much each year as the bottom 60 percent put together; they
possessed as much wealth as the bottom 90 percent; and with each passing
year, a greater share of the nation’s treasure was flowing through
their hands and into their pockets. It was this segment of the
population, almost exclusively, that held the key to future growth and
future returns. The analysts, Ajay Kapur, Niall Macleod, and Narendra
Singh, had coined a term for this state of affairs: plutonomy.

In a plutonomy, Kapur and his co-authors wrote, “economic growth is
powered by and largely consumed by the wealthy few.” America had been in
this state twice before, they noted—during the Gilded Age and the
Roaring Twenties. In each case, the concentration of wealth was the
result of rapid technological change, global integration, laissez-faire
government policy, and “creative financial innovation.” In 2005, the
rich were nearing the heights they’d reached in those previous eras, and
Citigroup saw no good reason to think that, this time around, they
wouldn’t keep on climbing. “The earth is being held up by the muscular
arms of its entrepreneur-plutocrats,” the report said. The “great
complexity” of a global economy in rapid transformation would be
“exploited best by the rich and educated” of our time.

The Great Recession and the Middle Class

Kapur and his co-authors were wrong in some of their specific
predictions about the plutonomy’s ramifications—they argued, for
instance, that since spending was dominated by the rich, and since the
rich had very healthy balance sheets, the odds of a stock-market
downturn were slight, despite the rising indebtedness of the “average”
U.S. consumer. And their division of America into only two classes is
ultimately too simple. Nonetheless, their overall characterization of
the economy remains resonant. According to Gallup, from May 2009 to May
2011, daily consumer spending rose by 16 percent among Americans earning
more than $90,000 a year; among all other Americans, spending was
completely flat. The consumer recovery, such as it is, appears to be
driven by the affluent, not by the masses. Three years after the crash
of 2008, the rich and well educated are putting the recession behind
them. The rest of America is stuck in neutral or reverse.

Income inequality usually shrinks during a recession, but in the
Great Recession, it didn’t. From 2007 to 2009, the most-recent years for
which data are available, it widened a little. The top 1 percent of
earners did see their incomes drop more than those of other Americans in
2008. But that fall was due almost entirely to the stock-market crash,
and with it a 50 percent reduction in realized capital gains. Excluding
capital gains, top earners saw their share of national income rise even
in 2008. And in any case, the stock market has since rallied. Corporate
profits have marched smartly upward, quarter after quarter, since the
beginning of 2009.

Even in the financial sector, high earners have come back strong. In
2009, the country’s top 25 hedge-fund managers earned $25 billion among
them—more than they had made in 2007, before the crash. And while the
crisis may have begun with mass layoffs on Wall Street, the financial
industry has remained well shielded compared with other sectors; from
the first quarter of 2007 to the first quarter of 2010, finance shed 8
percent of its jobs, compared with 27 percent in construction and 17
percent in manufacturing. Throughout the recession, the unemployment
rate in finance and insurance has been substantially below that of the
nation overall.

It’s hard to miss just how unevenly the Great Recession has affected
different classes of people in different places. From 2009 to 2010,
wages were essentially flat nationwide—but they grew by 11.9 percent in
Manhattan and 8.7 percent in Silicon Valley. In the Washington, D.C.,
and San Jose (Silicon Valley) metro areas—both primary habitats for
America’s meritocratic winners—job postings in February of this year
were almost as numerous as job candidates. In Miami and Detroit, by
contrast, for every job posting, six people were unemployed. In March,
the national unemployment rate was 12 percent for people with only a
high-school diploma, 4.5 percent for college grads, and 2 percent for
those with a professional degree.

Housing crashed hardest in the exurbs and in more-affordable, once
fast-growing areas like Phoenix, Las Vegas, and much of Florida—all
meccas for aspiring middle-class families with limited savings and
education. The professional class, clustered most densely in the closer
suburbs of expensive but resilient cities like San Francisco, Seattle,
Boston, and Chicago, has lost little in comparison. And indeed, because
the stock market has rebounded while housing values have not, the middle
class as a whole has seen more of its wealth erased than the rich, who
hold more-diverse portfolios. A 2010 Pew study showed that the typical
middle-class family had lost 23 percent of its wealth since the
recession began, versus just 12 percent in the upper class.

The ease with which the rich and well educated have shrugged off the
recession shouldn’t be surprising; strong winds have been at their backs
for many years. The recession, meanwhile, has restrained wage growth
and enabled faster restructuring and offshoring, leaving many
corporations with lower production costs and higher profits—and their
executives with higher pay.

Anthony Atkinson, an economist at Oxford University, has studied how
several recent financial crises affected income distribution—and found
that in their wake, the rich have usually strengthened their economic
position. Atkinson examined the financial crises that swept Asia in the
1990s as well as those that afflicted several Nordic countries in the
same decade. In most cases, he says, the middle class suffered depressed
income for a long time after the crisis, while the top 1 percent were
able to protect themselves—using their cash reserves to buy up assets
very cheaply once the market crashed, and emerging from crisis with a
significantly higher share of assets and income than they’d had before.
“I think we’ve seen the same thing, to some extent, in the United
States” since the 2008 crash, he told me. “Mr. Buffet has been
investing.”

“The rich seem to be on the road to recovery,” says Emmanuel Saez, an
economist at Berkeley, while those in the middle, especially those
who’ve lost their jobs, “might be permanently hit.” Coming out of the
deep recession of the early 1980s, Saez notes, “you saw an increase in
inequality … as the rich bounced back, and unionized labor never again
found jobs that paid as well as the ones they’d had. And now I fear
we’re going to see the same phenomenon, but more dramatic.”
Middle-paying jobs in the U.S., in which some workers have been overpaid
relative to the cost of labor overseas or technological substitution,
“are being wiped out. And what will be left is a hard and a pure
market,” with the many paid less than before, and the few paid even
better—a plutonomy strengthened in the crucible of the post-crash years.

 

The Culling
of the Middle Class

One of the most salient features of severe downturns is that they
tend to accelerate deep economic shifts that are already under way.
Declining industries and companies fail, spurring workers and capital
toward rising sectors; declining cities shrink faster, leaving blight;
workers whose roles have been partly usurped by technology are pushed
out en masse and never asked to return. Some economists have argued that
in one sense, periods like these do nations a service by clearing the
way for new innovation, more-efficient production, and faster growth.
Whether or not that’s true, they typically allow us to see, with rare
and brutal clarity, where society is heading—and what sorts of people
and places it is leaving behind.

Arguably, the most important economic trend in the United States over
the past couple of generations has been the ever more distinct sorting
of Americans into winners and losers, and the slow hollowing-out of the
middle class. Median incomes declined outright from 1999 to 2009. For
most of the aughts, that trend was masked by the housing bubble, which
allowed working-class and middle-class families to raise their standard
of living despite income stagnation or downward job mobility. But that
fig leaf has since blown away. And the recession has pressed hard on the
broad center of American society.

“The Great Recession has quantitatively but not qualitatively changed
the trend toward employment polarization” in the United States, wrote
the MIT economist David Autor in a 2010 white paper. Job losses have
been “far more severe in middle-skilled white- and blue-collar jobs than
in either high-skill, white-collar jobs or in low-skill service
occupations.” Indeed, from 2007 through 2009, total employment in
professional, managerial, and highly skilled technical positions was
essentially unchanged. Jobs in low-skill service occupations such as
food preparation, personal care, and house cleaning were also fairly
stable. Overwhelmingly, the recession has destroyed the jobs in between.
Almost one of every 12 white-collar jobs in sales, administrative
support, and nonmanagerial office work vanished in the first two years
of the recession; one of every six blue-collar jobs in production,
craft, repair, and machine operation did the same.

Autor isolates the winnowing of middle-skill, middle-class jobs as
one of several labor-market developments that are profoundly reshaping
U.S. society. The others are rising pay at the top, falling wages for
the less educated, and “lagging labor market gains for males.” “All,” he
writes, “predate the Great Recession. But the available data suggest
that the Great Recession has reinforced these trends.”

For more than 30 years, the American economy has been in the midst of
a sea change, shifting from industry to services and information, and
integrating itself far more tightly into a single, global market for
goods, labor, and capital. To some degree, this transformation has felt
disruptive all along. But the pace of the change has quickened since the
turn of the millennium, and even more so since the crash. Companies
have figured out how to harness exponential increases in computing power
better and faster. Global supply chains, meanwhile, have grown both
tighter and more supple since the late 1990s—the result of improving
information technology and of freer trade—making routine work easier to
relocate. And of course China, India, and other developing countries
have fully emerged as economic powerhouses, capable of producing large
volumes of high-value goods and services.

Some parts of America’s transformation may now be nearing completion.
For decades, manufacturing has become continually less important to the
economy, as other business sectors have grown. But the popular
narrative—rapid decline in the 1970s and ’80s, followed by slow erosion
thereafter—isn’t quite right, at least as far as employment goes. In
fact, the total number of people employed in industry remained quite
stable from the late 1960s through about 2000, at roughly 17 million to
19 million. To be sure, manufacturing wasn’t providing many new jobs for
a growing population, but for decades, rising output essentially offset
the impact of labor-saving technology and offshoring.

But since 2000, U.S. manufacturing has shed about a third of its
jobs. Some of that decline reflects losses to China. Still, industry
isn’t about to vanish from America, any more than agriculture did as the
number of farm workers plummeted during the 20th century. As of 2010,
the United States was the second-largest manufacturer in the world, and
the No. 3 agricultural nation. But agriculture is now so mechanized that
only about 2 percent of American workers make a living as farmers.
American manufacturing looks to be heading down the same path.

Meanwhile, another phase of the economy’s transformation—one more
squarely involving the white-collar workforce—is really just beginning.
“The thing about information technology,” Autor told me, “is that it’s
extremely broadly applicable, it’s getting cheaper all the time, and
we’re getting better and better at it.” Computer software can now do
boilerplate legal work, for instance, and make a first pass at reading
X-rays and other medical scans. Likewise, thanks to technology, we can
now easily have those scans read and interpreted by professionals half a
world away.

In 2007, the economist Alan Blinder, a former vice chairman of the
Federal Reserve, estimated that between 22 and 29 percent of all jobs in
the United States had the potential to be moved overseas within the
next couple of decades. With the recession, the offshoring of jobs only
seems to have gained steam. The financial crisis of 2008 was global, but
job losses hit America especially hard. According to the International
Monetary Fund, one of every four jobs lost worldwide was lost in the
United States. And while unemployment remains high in America, it has
come back down to (or below) pre-recession levels in countries like
China and Brazil.

 

Anxiety
Creeps Upward

Over time, both trade and technology have increased the number of
low-cost substitutes for American workers with only moderate cognitive
or manual skills—people who perform routine tasks such as product
assembly, process monitoring, record keeping, basic information
brokering, simple software coding, and so on. As machines and low-paid
foreign workers have taken on these functions, the skills associated
with them have become less valuable, and workers lacking higher
education have suffered.

For the most part, these same forces have been a boon, so far, to
Americans who have a good education and exceptional creative talents or
analytic skills. Information technology has complemented the work of
people who do complex research, sophisticated analysis, high-end
deal-making, and many forms of design and artistic creation, rather than
replacing that work. And global integration has meant wider markets for
new American products and high-value services—and higher incomes for
the people who create or provide them.

The return on education has risen in recent decades, producing
more-severe income stratification. But even among the meritocratic
elite, the economy’s evolution has produced a startling divergence.
Since 1993, more than half of the nation’s income growth has been
captured by the top 1 percent of earners, and the gains have grown
larger over time: from 2002 to 2007, out of every three dollars of
national income growth, the top 1 percent of earners captured two.
Nearly 2 million people started college in 2002—1,630 of them at
Harvard—but among them only Mark Zuckerberg is worth more than $10
billion today; the rise of the super-elite is not a product of
educational differences. In part, it is a natural outcome of widening
markets and technological revolution, which are creating much bigger
winners much faster than ever before—a result that’s not even close to
being fully played out, and one reinforced strongly by the political
influence that great wealth brings.

Recently, as technology has improved and emerging-market countries
have sent more people to college, economic pressures have been moving up
the educational ladder in the United States. “It’s useful to make a
distinction between college and post-college,” Autor told me. “Among
people with professional and even doctoral [degrees], in general the job
market has been very good for a very long time, including recently. The
group of highly educated individuals who have not done so well recently
would be people who have a four-year college degree but nothing beyond
that. Opportunities have been less good, wage growth has been less good,
the recession has been more damaging. They’ve been displaced from
mid-managerial or organizational positions where they don’t have
extremely specialized, hard-to-find skills.”

College graduates may be losing some of their luster for reasons
beyond technology and trade. As more Americans have gone to college,
Autor notes, the quality of college education has become arguably more
inconsistent, and the signaling value of a degree from a nonselective
school has perhaps diminished. Whatever the causes, “a college degree is
not the kind of protection against job loss or wage loss that it used
to be.”

Without doubt, it is vastly better to have a college degree than to
lack one. Indeed, on a relative basis, the return on a four-year degree
is near its historic high. But that’s largely because the prospects
facing people without a college degree have been flat or falling.
Throughout the aughts, incomes for college graduates barely budged. In a
decade defined by setbacks, perhaps that should occasion a sort of wan
celebration. “College graduates aren’t doing badly,” says Timothy
Smeeding, an economist at the University of Wisconsin and an expert on
inequality. But “all the action in earnings is above the B.A. level.”

America’s classes are separating and changing. A tiny elite continues
to float up and away from everyone else. Below it, suspended, sits what
might be thought of as the professional middle class—unexceptional
college graduates for whom the arrow of fortune points mostly sideways,
and an upper tier of college graduates and postgraduates for whom it
points progressively upward, but not spectacularly so. The professional
middle class has grown anxious since the crash, and not without reason.
Yet these anxieties should not distract us from a second, more
important, cleavage in American society—the one between college
graduates and everyone else.

If you live and work in the professional communities of Boston or
Seattle or Washington, D.C., it is easy to forget that nationwide, even
among people ages 25 to 34, college graduates make up only about 30
percent of the population. And it is easy to forget that a family income
of $113,000 in 2009 would have put you in the 80th income percentile
nationally. The true center of American society has always been its
nonprofessionals—high-school graduates who didn’t go on to get a
bachelor’s degree make up 58 percent of the adult population. And as
manufacturing jobs and semiskilled office positions disappear, much of
this vast, nonprofessional middle class is drifting downward.

 

The Bottom 70
Percent 

The troubles of the nonprofessional middle class are inseparable from
the economic troubles of men. Consistently, men without higher
education have been the biggest losers in the economy’s long
transformation (according to Michael Greenstone, an economist at MIT,
real median wages of men have fallen by 32 percent since their peak in
1973, once you account for the men who have washed out of the workforce
altogether). And the struggles of men have amplified the many
problems—not just economic, but social and cultural—facing the country
today.

Just as the housing bubble papered over the troubles of the middle
class, it also hid, for a time, the declining prospects of many men.
According to the Harvard economist Lawrence Katz, since the mid-1980s,
the labor market has been placing a higher premium on creative,
analytic, and interpersonal skills, and the wages of men without a
college degree have been under particular pressure. “And I think this
downturn exacerbates” the problem, Katz told me. During the aughts,
construction provided an outlet for the young men who would have gone
into manufacturing a generation ago. Men without higher education
“didn’t do as badly as you might have expected, on long-run trends,
because of the housing bubble.” But it’s hard to imagine another such
construction boom coming to their rescue.

One of the great puzzles of the past 30 years has been the way that
men, as a group, have responded to the declining market for blue-collar
jobs. Opportunities have expanded for college graduates over that span,
and for nongraduates, jobs have proliferated within the service sector
(at wages ranging from rock-bottom to middling). Yet in the main, men
have pursued neither higher education nor service jobs. The proportion
of young men with a bachelor’s degree today is about the same as it was
in 1980. And as the sociologists Maria Charles and David Grusky noted in
their 2004 book, Occupational Ghettos, while men and women now
mix more easily on different rungs of the career ladder, many industries
and occupations have remained astonishingly segregated, with men
continuing to seek work in a dwindling number of manual jobs, and women
“crowding into nonmanual occupations that, on average, confer more pay
and prestige.”

As recently as 2001, U.S. manufacturing still employed about as many
people as did health and educational services combined (roughly 16
million). But since then, those latter, female-dominated sectors have
added about 4 million jobs, while manufacturing has lost about the same
number. Men made no inroads into health care or education during the
aughts; in 2009, they held only about one in four jobs in those rising
sectors, just as they had at the beginning of the decade. They did,
however, consolidate their hold on manufacturing—those dwindling jobs,
along with jobs in construction, transportation, and utilities, were
more heavily dominated by men in 2009 than they’d been nine years
earlier.

“I’m deeply concerned” about the prospects of less-skilled men, says
Bruce Weinberg, an economist at Ohio State. In 1967, 97 percent of
30-to-50-year-old American men with only a high-school diploma were
working; in 2010, just 76 percent were. Declining male employment is not
unique to the United States. It’s been happening in almost all rich
nations, as they’ve put the industrial age behind them. Weinberg’s
research has shown that in occupations in which “people skills” are
becoming more important, jobs are skewing toward women. And that
category is large indeed. In his working paper “People People,” Weinberg
and two co-authors found that interpersonal skills typically become
more highly valued in occupations in which computer use is prevalent and
growing, and in which teamwork is important. Both computer use and
teamwork are becoming ever more central to the American workplace, of
course; the restructuring that accompanied the Great Recession has only
hastened that trend.

Needless to say, a great many men have excellent people skills, just
as a great many men do well in school. As a group, men still make more
money than women, in part due to lingering discrimination. And many of
the differences we observe between the genders may be the result of
culture rather than genetics. All of that notwithstanding, a meaningful
number of men have struggled badly as the economy has evolved, and have
shown few signs of successful adaptation. Men’s difficulties are hardly
evident in Silicon Valley or on Wall Street. But they’re hard to miss in
foundering blue-collar and low-end service communities across the
country. It is in these less affluent places that gender roles, family
dynamics, and community character are changing in the wake of the crash.

 

A Cultural
Separation

In the March 2010 issue of this magazine, I
discussed
the wide-ranging social consequences of male economic
problems, once they become chronic. Women tend not to marry (or stay
married to) jobless or economically insecure men—though they do have
children with them. And those children usually struggle when, as
typically happens, their parents separate and their lives are unsettled.
The Harvard sociologist William Julius Wilson has connected the loss of
manufacturing jobs from inner cities in the 1970s—and the resulting
economic struggles of inner-city men—to many of the social ills that
cropped up afterward. Those social ills eventually became
self-reinforcing, passing from one generation to the next. In less
privileged parts of the country, a larger, predominantly male underclass
may now be forming, and with it, more-widespread cultural problems.

What I didn’t emphasize in that story is the extent to which these
sorts of social problems—the kind that can trap families and communities
in a cycle of disarray and disappointment—have been seeping into the
nonprofessional middle class. In a national study of the American family
released late last year, the sociologist W. Bradford Wilcox wrote that
among “Middle Americans”—people with a high-school diploma but not a
college degree—an array of signals of family dysfunction have begun to
blink red. “The family lives of today’s moderately educated Americans,”
which in the 1970s closely resembled those of college graduates, now
“increasingly resemble those of high-school dropouts, too often burdened
by financial stress, partner conflict, single parenting, and troubled
children.”

“The speed of change,” wrote Wilcox, “is astonishing.” By the late
1990s, 37 percent of moderately educated couples were divorcing or
separating less than 10 years into their first marriage, roughly the
same rate as among couples who didn’t finish high school and more than
three times that of college graduates. By the 2000s, the percentage in
“very happy” marriages—identical to that of college graduates in the
1970s—was also nearing that of high-school dropouts. Between 2006 and
2008, among moderately educated women, 44 percent of all births occurred
outside marriage, not far off the rate (54 percent) among high-school
dropouts; among college-educated women, that proportion was just 6
percent.

The same pattern—families of middle-class nonprofessionals now
resembling those of high-school dropouts more than those of college
graduates—emerges with norm after norm: the percentage of 14-year-old
girls living with both their mother and father; the percentage of
adolescents wanting to attend college “very much”; the percentage of
adolescents who say they’d be embarrassed if they got (or got someone)
pregnant; the percentage of never-married young adults using birth
control all the time.

One stubborn stereotype in the United States is that religious roots
are deepest in blue-collar communities and small towns, and, more
generally, among Americans who do not have college degrees. That was
true in the 1970s. Yet since then, attendance at religious services has
plummeted among moderately educated Americans, and is now much more
common among college grads. So, too, is participation in civic groups.
High-school seniors from affluent households are more likely to
volunteer, join groups, go to church, and have strong academic ambitions
than seniors used to be, and are as trusting of other people as seniors
a generation ago; their peers from less affluent households have become
less engaged on each of those fronts. A cultural chasm—which did not
exist 40 years ago and which was still relatively small 20 years ago—has
developed between the traditional middle class and the top 30 percent
of society.

The interplay of economic and cultural forces is complex, and changes
in cultural norms cannot be ascribed exclusively to the economy. Wilcox
has tried to statistically parse the causes of the changes he has
documented, concluding that about a third of the class-based changes in
marriage patterns, for instance, are directly attributable to wage
stagnation, increased job insecurity, or bouts of unemployment; the rest
he attributes to changes in civic and religious participation and
broader changes in attitudes among the middle class.

In fact, all of these variables seem to reinforce each other.
Nonetheless, some of the most significant cultural changes within the
middle class have accelerated in the past decade, as the prospects of
the nonprofessional middle class have dimmed. The number of couples who
live together but are not married, for instance, has been rising briskly
since the 1970s, but it really took off in the aughts—nearly doubling,
from 3.8 million to 6.7 million, from 2000 to 2009. From 2009 to 2010,
that number jumped by nearly a million more. In six out of 10 of the
newly cohabitating couples, at least one person was not working, a much
higher proportion than in the past.

Ultimately, the evolution of the meritocracy itself appears to be at
least partly responsible for the growing cultural gulf between highly
educated Americans and the rest of society. As the journalist Bill
Bishop showed in his 2008 book, The Big Sort, American
communities have become ever more finely sorted by affluence and
educational attainment over the past 30 years, and this sorting has in
turn reinforced the divergence in the personal habits and lifestyle of
Americans who lack a college degree from those of Americans who have
one. In highly educated communities, families are largely intact,
educational ideals strong, and good role models abundant. None of those
things is a given anymore in communities where college-degree attainment
is low. The natural leaders of such communities—the meritocratic
winners who do well in school, go off to selective colleges, and get
their degrees—generally leave them for good in their early 20s.

In their 2009 book, Creating an Opportunity Society, Ron
Haskins and Isabel Sawhill write that while most Americans believe that
opportunity is widespread in the United States, and that success is
primarily a matter of individual intelligence and skill, the reality is
more complicated. In recent decades, people born into the middle class
have indeed moved up and down the class ladder readily. Near the turn of
the millennium, for instance, middle-aged people who’d been born to
middle-class parents had widely varied incomes. But class was stickier
among those born to parents who were either rich or poor. Thirty-nine
percent of children born to parents in the top fifth of earners stayed
in that same bracket as adults. Likewise, 42 percent of those whose
parents were in the bottom fifth remained there themselves. Only 6
percent reached the top fifth: rags-to-riches stories were extremely
rare.

A thinner middle class, in itself, means fewer stepping stones
available to people born into low-income families. If the economic and
cultural trends under way continue unabated, class mobility will likely
decrease in the future, and class divides may eventually grow beyond our
ability to bridge them.

What is most worrying is that all of the most powerful forces pushing
on the nonprofessional middle class—economic and cultural—seem to be
pushing in the same direction. We cannot know the future, and over time,
some of these forces may dissipate of their own accord. Further
advances in technology may be less punishing to middle-skill workers
than recent advances have been; men may adapt better to a
post-industrial economy, as the alternative to doing so becomes more
stark; nonprofessional families may find a new stability as they
accommodate themselves to changing norms of work, income, and parental
roles. Yet such changes are unlikely to occur overnight, if they happen
at all. Momentum alone suggests years of trouble for the middle class.

 

Changing the
Path of the American Economy

True recovery from the Great Recession is not simply a matter of
jolting the economy back onto its former path; it’s about changing the
path. No single action or policy prescription can fix the varied
problems facing the middle class today, but through a combination of
approaches—some aimed at increasing the growth rate of the economy
itself, and some at ensuring that more people are able to benefit from
that growth—we can ameliorate them. Many of the deepest economic trends
that the recession has highlighted and temporarily sped up will take
decades to fully play out. We can adapt, but we have to start now.

The rest of this article suggests how we might do so. The measures
that I propose are not comprehensive, nor are they without drawbacks.
But they are emblematic of the types of proposals we will need to weigh
in the coming years, and of the nature of the national conversation we
need to have. That conversation must begin with a reassessment of how
globalization is affecting American society, and of what it will take
for the U.S. to thrive in a rapidly changing world.

In 2010, the McKinsey Global Institute released a report detailing
just how mighty America’s multinational companies are—and how essential
they have become to the U.S. economy. Multinationals headquartered in
the U.S. employed 19 percent of all private-sector workers in 2007,
earned 25 percent of gross private-sector profits, and paid out 25
percent of all private-sector wages. They also accounted for nearly
three-quarters of the nation’s private-sector R&D spending. Since
1990, they’ve been responsible for 31 percent of the growth in real GDP.

Yet for all their outsize presence, multinationals have been puny as
engines of job creation. Over the past 20 years, they have accounted for
41 percent of all gains in U.S. labor productivity—but just 11 percent
of private-sector job gains. And in the latter half of that period, the
picture grew uglier: according to the economist Martin Sullivan, from
1999 through 2008, U.S. multinationals actually shrank their domestic
workforce by about 1.9 million people, while increasing foreign
employment by about 2.4 million.

The heavy footprint of multinational companies is merely one sign of
how inseparable the U.S. economy has become from the larger global
economy—and these figures neatly illustrate two larger points. First, we
can’t wish away globalization or turn our backs on trade; to try to do
so would be crippling and impoverishing. And second, although American
prosperity is tied to globalization, something has nonetheless gone
wrong with the way America’s economy has evolved in response to
increasingly dense global connections.

Particularly since the 1970s, the United States has placed its bets
on continuous innovation, accepting the rapid transfer of production to
other countries as soon as goods mature and their manufacture becomes
routine, all with the idea that the creation of even newer products and
services at home will more than make up for that outflow. At times, this
strategy has paid off big. Rapid innovation in the 1990s allowed the
economy to grow quickly and create good, new jobs up and down the ladder
to replace those that were becoming obsolete or moving overseas, and
enabled strong income growth for most Americans. Yet in recent years,
that process has broken down.

One reason, writes the economist Michael Mandel, is that America no
longer enjoys the economic fruits of its innovations for as long as it
used to. Knowledge, R&D, and business know-how depreciate more
quickly now than they did even 15 years ago, because global
communication is faster, connections are more seamless, and human
capital is more broadly diffused than in the past.

As a result, domestic production booms have ended sooner than they
used to. IT-hardware production, for instance, which in 1999 the Bureau
of Labor Statistics projected would create about 155,000 new jobs in the
U.S. over the following decade, actually shrank by nearly 500,000 jobs
in that time. Jobs in data processing also fell, presumably as a result
of both offshoring and technological advance. Because innovations now
depreciate faster, we need more of them than we used to in order to
sustain the same rate of economic growth.

Yet in the aughts, as an array of prominent economists and
entrepreneurs have recently pointed out, the rate of big innovations
actually slowed considerably; with the housing bubble fueling easy
growth for much of that time, we just didn’t notice. This slowdown may
have been merely the result of bad luck—big breakthroughs of the sort
that create whole categories of products or services are difficult to
predict, and long droughts are not unknown. Overregulation in certain
areas may also have played a role. The economist Tyler Cowen, in his
recent book, The Great Stagnation, argues that the scientific
frontier itself—or at least that portion of it leading to commercial
innovation—has been moving outward more slowly, and requiring ever more
resources to do so, for many decades.

Process innovation has been quite rapid in recent years. U.S.
multinationals and other companies are very good at continually
improving their operational efficiency by investing in information
technology, restructuring operations, and shifting work around the
globe. Some of these activities benefit some U.S. workers, by making the
jobs that stay in the country more productive. But absent big
breakthroughs that lead to new products or services—and given the vast
reserves of low-wage but increasingly educated labor in China, India,
and elsewhere—rising operational efficiency hasn’t been a recipe for
strong growth in either jobs or wages in the United States.

America has huge advantages as an innovator. Places like Silicon
Valley, North Carolina’s Research Triangle, and the Massachusetts
high-tech corridor are difficult to replicate, and the United States has
many of them. Foreign students still flock here, and foreign engineers
and scientists who get their doctorates here have been staying on for
longer and longer over the past 15 years. When you compare apples to
apples, the United States still leads the world, handily, in the number
of skilled engineers, scientists, and business professionals in
residence.

But we need to better harness those advantages to speed the pace of
innovation, in part by putting a much higher national priority on
investment—rather than consumption—in the coming years. That means,
among other things, substantially raising and broadening both national
and private investment in basic scientific progress and in later-stage
R&D—through a combination of more federal investment in scientific
research, perhaps bigger tax breaks for private R&D spending, and a
much lower corporate tax rate (and a simpler corporate tax code)
overall.

Edmund Phelps and Leo Tilman, professors at Columbia University, have
proposed the creation of a National Innovation Bank that would invest
in, or lend to, innovative start-ups—bringing more money to bear than
venture-capital funds could, and at a lower cost of capital, which would
promote more investment and enable the funding of somewhat riskier
ventures. The broader idea behind such a bank is that because innovation
carries so many ambient benefits—from job creation to the experience
gained by even failed entrepreneurs and the people around them—we should
be willing to fund it more liberally as a society than private actors
would individually.

Removing bureaucratic obstacles to innovation is as important as
pushing more public funds toward it. As Wall Street has amply
demonstrated, not every industry was overregulated in the aughts.
Nonetheless, the decade did see the accretion of a number of regulatory
measures that may have chilled the investment climate (the
Sarbanes-Oxley accounting reforms and a proliferation of costly security
regulations following the creation of the Department of Homeland
Security are two prominent examples).

Regulatory balance is always difficult in practice, but Michael
Mandel has suggested a useful rule of thumb: where new and emerging
industries are concerned—industries that are at the forefront of the
economy and could provide big bursts of growth—our bias should be toward
light regulation, allowing creative experimentation and encouraging
fast growth. The rapid expansion of the Internet in the 1990s is a good
example of the benefit that can come from a light regulatory hand early
in an industry’s development; green technology, wireless platforms, and
social-networking technologies are perhaps worthy of similar treatment
today.

Any serious effort to accelerate innovation would mean taking many
other actions as well—from redoubling our commitment to improving U.S.
schools, to letting in a much larger number of creative, highly skilled
immigrants each year. Few such measures will be without costs or
drawbacks. Among other problems, a mandate of light regulation on
high-potential industries requires the government to “pick winners.”
Tilting government spending toward investment and innovation probably
means tilting it away from defense and programs aimed at senior
citizens. And because the benefits of innovation diffuse more quickly
now, the return on national investment in scientific research and
commercial innovation may be lower than it was in previous decades.
Despite these drawbacks and trade-offs, the alternative to heavier
investment and a higher priority on national innovation is dismal to
contemplate.

As we strive toward faster innovation, we also need to keep the
production of new, high-value goods within American borders for a longer
period of time. Protectionist measures are generally self-defeating,
and while vigilance against the theft of intellectual property and
strong sanctions when such theft is discovered are sensible, they are
unlikely to alter the basic trends of technological and knowledge
diffusion. (Much of that diffusion is entirely legal, and the long
history of industrialization and globalization suggests that attempts to
halt it will fail.) What can really matter is a fair exchange rate.
Throughout much of the aughts and continuing to the present day, China,
in particular, has taken extraordinary measures to keep its currency
undervalued relative to the dollar, and this has harmed U.S. industry.
We must press China on currency realignment, putting sanctions on the
table if necessary.

Given some of the workforce trends of the past decade, doubling down
on technology, innovation, and globalization may seem wrongheaded. And
indeed, this strategy is no cure-all. But without a vibrant, innovative
economy, all other prospects dim. For the professional middle class in
particular, an uptick in innovation and a return to faster economic
growth would solve many problems, and likely reignite income growth.
While technology is eating into the work that some college graduates do,
their general skills show little sign of losing value. Recent analysis
by the McKinsey Global Institute, for instance, indicates that demand
for college grads by American businesses is likely to grow quickly over
the next decade even if the economy grows very slowly; rapid economic
growth would cause demand for college grads to far exceed supply.

Still, even in boom times, many more people than we would care to
acknowledge won’t have the education, skills, or abilities to prosper in
a pure and globalized market, shaped by enormous labor reserves in
China, India, and other developing countries. Over the next decade or
more, even if national economic growth is strong, what we do to help and
support moderately educated Americans may well determine whether the
United States remains a middle-class country.

 

Filling the
Hole in the Middle Class

In The Race Between Education and Technology, the economists
Claudia Goldin and Lawrence Katz write that throughout roughly the first
three-quarters of the 20th century, most Americans prospered and
inequality fell because, although technological advance was rapid—and
mostly biased toward people with relatively high skills—educational
advance was faster still; the pool of people who could take advantage of
new technologies kept growing larger, while the pool of those who could
not stayed relatively small.

There would be no better tonic for the country’s recent ills than a
resumption of the rapid advance of skills and abilities throughout the
population. Clearly there is room for improvement. About 30 percent of
young adults finish college today, yet that figure is 50 percent among
those with affluent parents. It follows that with improvements in the
K–12 school system, more-stable home environments, and widespread
financial access to college, we eventually could move to a 50 percent
college graduation rate overall. And because IQ worldwide has been
slowly increasing from generation to generation—a somewhat mysterious
development known as the “Flynn effect”—higher rates still may
eventually come within reach.

Yet the past three decades of experience suggest that this upward
migration, even to, say, 40 percent, will be slow and difficult. (From
1979 to 2009, the percentage of people ages 25 to 29 with a four-year
college degree rose from 23.1 percent to 30.6 percent—or roughly 1
percentage point every four years.) And ultimately, of course, the
college graduation rate is likely to hit a substantially lower ceiling
than that for high school or elementary school. For a time, elementary
school was the answer to the question of how to build a broad middle
class in America. And for a time after that, the answer was high school.
College may never provide as comprehensive an answer. At the very
least, over the next decade or two, college education simply cannot be
the whole answer to the woes of the middle class, since even under the
rosiest of assumptions, most of the middle of society will not have a
four-year college degree.

Among the more pernicious aspects of the meritocracy as we now
understand it in the United States is the equation of merit with
test-taking success, and the corresponding belief that those who
struggle in the classroom should expect to achieve little outside it.
Progress along the meritocratic path has become measurable from a very
early age. This is a narrow way of looking at human potential, and it
badly underserves a large portion of the population. We have beaten the
drum so loudly and for so long about the centrality of a college
education that we should not be surprised when people who don’t attend
college—or those who start but do not finish—go adrift at age 18 or 20.
Grants, loans, and tax credits to undergraduate and graduate students
total roughly $160 billion each year; by contrast, in 2004, federal,
state, and local spending on employment and training programs (which
commonly assist people without a college education) totaled $7
billion—an inflation-adjusted decline of about 75 percent since 1978.

As we continue to push for better K–12 schooling and wider college
access, we also need to build more paths into the middle class that do
not depend on a four-year college degree. One promising approach, as
noted by Haskins and Sawhill, is the development of “career
academies”—schools of 100 to 150 students, within larger high schools,
offering a curriculum that mixes academic coursework with hands-on
technical courses designed to build work skills. Some 2,500 career
academies are already in operation nationwide. Students attend classes
together and have the same guidance counselors; local employers partner
with the academies and provide work experience while the students are
still in school.

“Vocational training” programs have a bad name in the United States,
in part because many people assume they close off the possibility of
higher education. But in fact, career-academy students go on to earn a
postsecondary credential at the same rate as other high-school students.
What’s more, they develop firmer roots in the job market, whether or
not they go on to college or community college. One recent major study
showed that on average, men who attended career academies were earning
significantly more than those who attended regular high schools, both
four and eight years after graduation. They were also 33 percent more
likely to be married and 36 percent less likely to be absentee fathers.

Career-academy programs should be expanded, as should apprenticeship
programs (often affiliated with community colleges) and other, similar
programs that are designed to build an ethic of hard work; to allow
young people to develop skills and achieve goals outside the traditional
classroom as well as inside it; and ultimately to provide more, clearer
pathways into real careers. By giving young people more information
about career possibilities and a tangible sense of where they can go in
life and what it takes to get there, these types of programs are likely
to lead to more-motivated learning, better career starts, and a more
highly skilled workforce. Their effect on boys in particular is highly
encouraging. And to the extent that they can expose boys to
opportunities within growing fields like health care (and also expose
them to male role models within those fields), these programs might even
help weaken the grip of the various stereotypes that seem to be keeping
some boys locked into declining parts of the economy.

Even in the worst of scenarios, “middle skill” jobs are not about to
vanish altogether. Many construction jobs and some manufacturing jobs
will return. And there are many, many middle-income occupations—from
EMTs, lower-level nurses, and X-ray technicians, to plumbers and home
remodelers—that trade and technology cannot readily replace, and these
fields are likely to grow. A more highly skilled workforce will allow
faster, more efficient growth; produce better-quality goods and
services; and earn higher pay.

All of that said, the overall pattern of change in the U.S. labor
market suggests that in the next decade or more, a larger proportion of
Americans may need to take work in occupations that have historically
required little skill and paid low wages. Analysis by David Autor
indicates that from 1999 to 2007, low-skill jobs grew substantially as a
share of all jobs in the United States. And while the lion’s share of
jobs lost during the recession were middle-skill jobs, job growth since
then has been tilted steeply toward the bottom of the economy; according
to a survey by the National Employment Law Project, three-quarters of
American job growth in 2010 came within industries paying, on average,
less than $15 an hour. One of the largest challenges that Americans will
face in the coming years will be doing what we can to make the jobs
that have traditionally been near the bottom of the economy better, more
secure, and more fulfilling—in other words, more like middle-class
jobs.

As the urban theorist Richard Florida writes in The Great Reset,
part of that process may be under way already. A growing number of
companies have been rethinking retail-workforce development, to improve
productivity and enhance the customer experience, leading to
more-enjoyable jobs and, in some cases, higher pay. Whole Foods Markets,
for instance, one of Fortune magazine’s “Best Companies to Work
For,” organizes its workers into teams and gives them substantial
freedom as to how they go about their work; after a new worker has been
on the job for 30 days, the team members vote on whether the new
employee has embraced the job and the culture, and hence whether he or
she should be kept on. Best Buy actively encourages all its employees to
suggest improvements to the company’s work processes, much as Toyota
does, and favors promotion from within. Trader Joe’s sets wages so that
full-time employees earn at least a median income within their
community; store captains, most of them promoted from within, can earn
six figures.

The natural evolution of the economy will surely make some service
jobs more productive, independent, and enjoyable over time. Yet
productivity improvements at the bottom of the economy seem unlikely to
be a sufficient answer to the problems of the lower and middle classes,
at least for the foreseeable future. Indeed, the relative decline of
middle-skill jobs, combined with slow increases in college completion,
suggests a larger pool of workers chasing jobs in retail, food
preparation, personal care, and the like—and hence downward pressure on
wages.

Whatever the unemployment rate over the next several years, the
long-term problem facing American society is not that employers will
literally run out of work for people to do—it’s that the market value of
much low-skill and some middle-skill work, and hence the wages
employers can offer, may be so low that few American workers will
strongly commit to that work. Bad jobs at rock-bottom wages are a
primary reason why so many people at the lower end of the economy drift
in and out of work, and this job instability in turn creates highly
toxic social and family problems.

American economists on both the right and the left have long
advocated subsidizing low-wage work as a means of social
inclusion—offering an economic compact with everyone who embraces work,
no matter their level of skill. The Earned Income Tax Credit, begun in
1975 and expanded several times since then, does just that, and has been
the country’s best anti-poverty program. Yet by and large, the EITC
helps only families with children. In 2008, it provided a maximum credit
of nearly $5,000 to families with two children, with the credit slowly
phasing out for incomes above $15,740 and disappearing altogether at
$38,646. The maximum credit for workers without children (or without
custody of children) was only $438. We should at least moderately
increase both the level of support offered to families by the EITC and
the maximum income to which it applies. Perhaps more important, we
should offer much fuller support for workers without custody of
children. That’s a matter of basic fairness. But it’s also a measure
that would directly target some of the biggest budding social problems
in the United States today. A stronger reward for work would encourage
young, less-skilled workers—men in particular—to develop solid, early
connections to the workforce, improving their prospects. And better
financial footing for young, less-skilled workers would increase their
marriageability.

A continued push for better schooling, the creation of clearer paths
into careers for people who don’t immediately go to college, and
stronger support for low-wage workers—together, these measures can help
mitigate the economic cleavage of U.S. society, strengthening the
middle. They would hardly solve all of society’s problems, but they
would create the conditions for more-predictable and more-comfortable
lives—all harnessed to continuing rewards for work and education. These,
ultimately, are the most-critical preconditions for middle-class life
and a healthy society.

 

The Limits of
Meritocracy

As a society, we should be far more concerned about whether most
Americans are getting ahead than about the size of the gains at the top.
Yet extreme income inequality causes a cultural separation that is
unhealthy on its face and corrosive over time. And the most-powerful
economic forces of our times will likely continue to concentrate wealth
at the top of society and to put more pressure on the middle. It is hard
to imagine an adequate answer to the problems we face that doesn’t
involve greater redistribution of wealth.

Soaking the rich would hardly solve all of America’s problems.
Holding all else equal, we would need to raise the top two tax rates to
roughly 90 percent, then unrealistically assume no change in the work
habits of the people in those brackets, merely to bring the deficit in a
typical year down to 2 percent of GDP. But even with strong budget
discipline and a reduction in the growth of Medicare costs, somewhat
higher taxes for most Americans—in one form or another—seem inevitable.
If we aim to increase our national investment in innovation, and to
provide more assistance to people who are falling out of the middle
class (or who can’t step up into it), that’s even more true. The
professional middle class in particular should not expect exemption from
tax increases.

Over time, the United States has expected less and less of its elite,
even as society has oriented itself in a way that is most likely to
maximize their income. The top income-tax rate was 91 percent in 1960,
70 percent in 1980, 50 percent in 1986, and 39.6 percent in 2000, and is
now 35 percent. Income from investments is taxed at a rate of 15
percent. The estate tax has been gutted.

High earners should pay considerably more in taxes than they do now.
Top tax rates of even 50 percent for incomes in the seven-figure range
would still be considerably lower than their level throughout the boom
years of the post-war era, and should not be out of the question—nor
should an estate-tax rate of similar size, for large estates.

The rich have not become that way while living in a vacuum.
Technological advance, freer trade, and wider markets—along with the
policies that promote them—always benefit some people and harm others.
Economic theory is quite clear that the winners gain more than the
losers lose, and therefore the people who suffer as a result of these
forces can be fully compensated for their losses—society as a whole
still gains. This precept has guided U.S. government policy for 30
years. Yet in practice, the losers are seldom compensated, not fully and
not for long. And while many of the gains from trade and technological
progress are widely spread among consumers, the pressures on wages that
result from these same forces have been felt very differently by
different classes of Americans.

What’s more, some of the policies that have most benefited the rich
have little to do with greater competition or economic efficiency.
Fortunes on Wall Street have grown so large in part because of implicit
government protection against catastrophic losses, combined with the
steady elimination of government measures to limit excessive
risk-taking, from the 1980s right on through the crash of 2008.

As America’s winners have been separated more starkly from its
losers, the idea of compensating the latter out of the pockets of the
former has met stiff resistance: that would run afoul of another
economic theory, dulling the winners’ incentives and squashing their
entrepreneurial spirit; some, we are reminded, might even leave the
country. And so, in a neat and perhaps unconscious two-step, many elites
have pushed policies that benefit them, by touting theoretical gains to
society—then ruled out measures that would distribute those gains
widely.

Even as we continue to strive to perfect the meritocracy, signs that
things may be moving in the other direction are proliferating. The
increasing segregation of Americans by education and income, and the
widening cultural divide between families with college-educated parents
and those without them, suggests that built-in advantages and
disadvantages may be growing. And the concentration of wealth in
relatively few hands opens the possibility that much of the next
generation’s elite might achieve their status through inheritance, not
hard or innovative work.

America remains a magnet for talent, for reasons that go beyond the
tax code; and by international standards, none of the tax changes
recommended here would create an excessive tax burden on high earners.
If a few financiers choose to decamp for some small island-state in
search of the smallest possible tax bill, we should wish them good luck.

In political
speeches and in the media, the future of the middle class
is often used as a stand-in for the future of America. Yet of
course the two are not identical. The size of the middle class has waxed
and waned throughout U.S. history, as has income inequality. The
post-war decades of the 20th century were unusually hospitable to the
American middle class—the result of strong growth, rapid gains in
education, progressive tax policy, limited free agency at work, a
limited pool of competing workers overseas, and other supportive
factors. Such serendipity is anomalous in American history, and unlikely
to be repeated.

Yet if that period was unusually kind to the middle class, the one we
are now in the midst of appears unusually cruel. The strongest forces
of our time are naturally divisive; absent a wide-ranging effort to
constrain them, economic and cultural polarization will almost surely
continue. Perhaps the nonprofessional middle class is rich enough today
to absorb its blows with equanimity. Perhaps plutonomy, in the 21st
century, will prove stable over the long run.

But few Americans, no matter their class, will be eager for that
outcome.

This article available online at:

http://www.theatlantic.com/magazine/archive/2011/09/can-the-middle-class-be-saved/8600/

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