America's Disappearing Middle Class

The Bear's Lair: America's Disappearing Middle Class

By Martin Hutchinson | 14 November 2007

It is already clear that one of the great US election issues of 2008 will be the relative impoverishment of the American middle class, defined in the American rather than the British sense to include well established blue-collar workers with families and mortgages.

Republicans who ignore this problem will find themselves talking only to the economic 'winners', the top 1% in the income scale— laughably inadequate as an electoral base. Democrats who propound the usual socialist nostrums to cure it will find themselves ardent proponents of an economics that doesn’t work, being forced on an electorate who mostly don't believe in it. A new intellectual paradigm is required.

The declining share of low and moderate income workers in the American pie is undeniable; the relative share of such workers peaked as long ago as 1973. For those with only high school qualifications or less, absolute earnings peaked in 1973 and have declined substantially since then. From 1973 to 1995, this appeared to be simply a case of the rewards for skills increasing, with low skilled workers suffering increasingly in terms of earnings and job losses compared to those with a bachelor’s degree or better. Since 2000, however, the paradigm has changed, with all sectors of the workforce losing ground in absolute terms, except for the top 1% who have gained essentially all of the modest gains in employee incomes under the George W. Bush administration.

A Center for Economic and Policy Research study released this week shows that the share of "good jobs" in the US economy has fallen substantially during the 2001-07 business cycle, where a "good job" was defined as one that pays at least $17 an hour (the median wage rate in 1979) and offers employer-provided health insurance and a pension. While most of this deterioration has arisen from employers’ increasing failure to provide health care and a pension, the share of "bad jobs" with pay below $17 per hour and neither health care nor a pension has also increased in this business cycle, by 1.6 percentage points.

These statistics are pretty clear, and cannot be ignored, whatever one’s policy disagreements with the left-leaning CEPR. Blue-collar workers lost bargaining power catastrophically following the peak of the 1973 cycle, and since 2000 their failure has been accompanied by a more generalized loss of bargaining power by white-collar workers and all toilers below the level of top management. Employers no longer feel compelled to offer their workforce either a decent wage or the most basic of health care benefits, benefits that were considered sacrosanct in the social contract of 1945-73. The American dream, in which hard work can propel ordinary people into a comfortable even affluent lifestyle, is becoming ever more distant for all but a small fraction of the population.

[ Normxxx Here:  Let's hear it for the South American economic model!  ]

There appear to have been a number of causes of this. One is technological change, that old chestnut, which has not made production-line workers obsolete, as had been thought would happen, but instead has compelled their children to get jobs in the service sector of the economy, generally lower paid, since fewer of the employee’s skills are used. In the service sector itself, technology has de-skilled a number of routine tasks such as retail-level credit analysis, so that respectably paid lower level bank officers have been replaced with casual-labor clerks. A second cause is the increasing ease of world trade, and the new possibilities the Internet has brought of outsourcing to Third World countries where labor costs are a small fraction of those in the US. Overall, this has been a thoroughly benign development; it has brought new wealth to a number of poor countries. Equally important, it has demonstrated to poor countries with large populations that the way to new wealth is not through socialism or religious-driven hostility to the outside world but through openness to world trade and investment, in order that their surplus labor can be used to best effect in an increasingly integrated world economy.

Naturally, the increased access to the US economy of a much larger workforce with lower pay scales has had a depressing effect on US wage rates, particularly at the lower skill levels. The doctrine of comparative advantage, beloved by free trading economists as a rationale for opening borders, works much less well when the poorer country through opening to world trade can work itself up the value chain and expand its comparative advantage to an increasing proportion of the richer country’s business. The increasing salience of protectionism among the US electorate and the political classes is not an accident; it is a rational reaction to trends in US labor remuneration that are only dimly understood but are harshly felt.

Another cause of middle-class immiseration is unquestionably high immigration. Business lobbies want high immigration to reduce the bargaining power of their workforce. This puts pressure on workforce remuneration, particularly at the lower skill levels, since the glut of labor in the world economy is most intense at low levels of education and training. In a well ordered society, the workforce’s resistance to this demand would be entirely accepted by the politicians, since there are obvious economic consequences to allowing mass immigration. Even if there are economic gains to allowing in new workers to depress wage rates, they are entirely at the expense of the domestic workforce’s living standards, and responsible politicians would remember who votes for them. In the US currently, the question is bedeviled by accusations of racism which, whether or not valid, in some cases are used illegitimately to obscure the unquestionable economic rationale for voter resistance to immigration.

Finally, and most relevant to the increased post-2000 inequality, which has been of a different type to that of 1973-95, there is the interest rate policy of the Federal Reserve, which since 1995 has been persistently far too loose. This has allowed the benefits of the deflation that has naturally occurred due to the Internet to flow not to the living standards of the average US worker, but to asset values, concentrated at the top end of the income scale and the boom in which has provided jobs largely for the upper middle class.

The lack of an adequate process of "creative destruction" on Wall Street has allowed housing finance, for example, to be routed through a securitization mechanism that provides ample livings for Wall Street and the hyper-energized salesmen known as mortgage bankers, but has actually increased the relative cost of home mortgages to the consumer compared to the old savings and loans. The standard centrist and conservative response to inequality, that increased investment in education will solve the problem, is mostly tosh. A substantial percentage of the workforce, while perfectly capable of supporting themselves, are wholly unable to benefit from higher education at a sophisticated level, while "community college" higher education often provides them with skills that are either unmarketable or marketable for a few years at best. Thus, increased investment in education is likely to have little effect at the lower end, beyond perhaps a few rare cases of successful remediation, while delaying inordinately the entry of those with higher-end skills into the workforce (but, of course, this may be a deliberate policy ploy).

There is, however, a need for investment in mid-career education, as well as in adjustment of those mechanisms of finance and social cohesion that make it difficult for people to retrain in midlife. Most degrees obtained at 21-25 are of little use at 50, and will be even less use in late career if working life-spans are extended to 70 or beyond, as seems inevitably they must be. If the new globalization prevents the stability that the US employees of large companies used to enjoy, then mortgage companies, tax authorities, school districts and credit card companies will have to get used to gaps in payment, bearing some of the costs of that instability, as workers retrain themselves for the exciting new world of their second career.

A second essential is to reduce the pace of change, not of cutting-edge technological change, which in any case occurs relatively slowly most of the time, but of Schumpeteran "creative destruction" which destroys jobs and, more important, destroys the employee security brought by decades of experience in a particular function. In general, low interest rates accelerate destruction, as does a labor market open to immigrants from countries with much lower wage levels. A world in which money is tight, new projects are undertaken only when they clearly provide a clearly superior avenue to reward, and labor is secure against competition based solely on price, is a world in which careers can be built, seniority attained and workers at 55 can feel relatively secure that they will not be thrown onto the industrial scrapheap. There is no need whatever for additional government spending to achieve this; it simply requires tight control of the money supply and immigration.

Protectionism itself is not the answer. For one thing, as US and EU agriculture subsidies have amply demonstrated, it merely enables the lobbying rich to entrench themselves at a still further divide from their less affluent countrymen. Free trade provides a useful spur to competitive effort; at the same time its effect differs from that of free migration, because much of the economy is not readily transportable around the globe. Retailing, hotel and resort services, personal services, domestic transportation and construction are all substantial areas of the economy that require mostly labor of modest skill and, if protected from foreign immigration, are little if at all threatened by free trade. If labor in those sectors is allowed to attain a respectable degree of bargaining power, it will raise wages not only in those sectors but in the rest of the economy as well, allowing only the most overpriced operations to lose out to foreign competition.

A world of tight money, tight immigration controls and greater stability is unattractive to Wall Street, if only because it will tend to reduce the share of corporate profits in gross domestic product and the opportunities for creative (albeit in the long run destructive) financial juggling [[such as we've just 'enjoyed'— which greatly enriched a few at the cost to a great many : normxxx]]. However, corporate profits and the stock market are not an end in themselves, they are only a means to an end, by which investment is adequately remunerated and labor is permitted to improve its living standards over time with adequate protection from excessive turnover.

A world in which few if any have security in their livelihood is not conservative, it is anarchist. It is also deeply repugnant to the average voter. That will ensure that, if the noise and struggle of the free market is allowed to become too destructive, it will be replaced by the eternal silence of the socialist tomb.

Normxxx    
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