Posted on 11/16/2007 9:46:05 AM PST by cinives
It is already clear that one of the great 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 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. 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, their absolute earnings peaked in 1973 and have declined substantially since then. From 1973 to 1995, this appeared to be a 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 healthcare 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 healthcare benefits, benefits which 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.
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 as revealed in this column a few weeks ago 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 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 high-end skills into the workforce.
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 inevitable 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 still further 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. 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.
If a first world nation’s labor force is compelled to compete with a third world nation’s, the first world loses. This might even lead the first world nation to have increasingly corrupt officials, a devalued currency, a more authoritarian government and an isolated, extraordinarily wealthy ruling class.
Oh, goody.
Most of the new millionaires will, no doubt, vote Republican.
What does that have to do with anything in the post?
You are both wrong and arrogant to think “everyone has been moving up”. There is a very real squeeze on the “middle class” between inflationary trends in taxes, health care/health insurance, energy costs, food... the very basics, and any increases in income. Whether there are more millioinaires now has nothing to do with the fact that very many hard-working people continue to lose ground on their standard of living.
Perfect case in point right there up top . . .
For those with only high school qualifications or less, their absolute earnings peaked in 1973 and have declined substantially since then.
What the article doesn't tell you is that today's high school graduate has received what was probably the equivalent of a fourth-grade education in 1973.
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 inevitable 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.
I agree with the notion that mid-life education is an important part of anyone's career development and life skills. But the notion that anyone other than a person himself (or herself) is responsible for that education runs completely counter to my understanding of: (1) the basic concept of what a free country is all about, and (2) the definition of what constitutes an ADULT in this world.
I also take exception to the author's delusional idea that "stability" is either: (1) a normal part of the human condition, or (2) something to be desired in a free country.
What does anything in the article, have to do with anything in the article?
Technical editors get $60/hr around here, math tutors $100/hr.
Neither is a “good job”, according to the article - they don’t offer retirement or benefits for freelance work at $100/hr.
Color me sceptical.
Think again. Real incomes have not increased by much - what has gone up is our assets denominated by home ownership. And, that’s in the process of coming down.
It wouldn’t be so bad because of our productivity advantage - but we handicap ourselves by all our taxes, regulations, labor rules and so on.
I live in a town in which 90% of the other households, single head of family and married couples, work 2,3 or 4 different jobs to make what I make.
Times have changed.
I thank God everyday that my wife does not have to work.
Many people are not getting a fair share of the pie.
They are not lazy, selfish, or blame others. They work hard, too hard and love America.
Trickle down does not work.
Middle class also pays Social Security on every dime of their income while high income individuals pay Social Security on only a small portion. This almost equalizes the actual taxes paid by the wealthy and the middle class right there . . . without even factoring in the ability to hire accountants, move gains offshore, find deductions, etc. that the rich can afford to do . . .
utopian socialist ??? Where do you see that ?
I see a lot of common sense - look around you at your neighbors and friends. Ask any middle manager or IT/engineer person their thoughts after reading this commentary. I think you’d find it is spot on.
The author says nothing about government mandates or training programs or anything else. He says nothing that doesn’t imply private initiative. Point me to one sentence that involves government getting involved.
Where is “here” ? And would that include a very big tax and property state like NY, NJ, CA or the like ?
I can bet in Iowa the technical writers are not getting $60 per hour, for example.
Virginia.
I do not think the issue is about pay, but more about reasonable stability and understanding between the worker and employer. There are many well paid upper middle class office workers in this country who are not happy and secure despite the fact that they do more than forty hours a week. By the time they are forty five years old, they had changed jobs atleast five times because of mergers, outsourced, or just replaced by a younger worker. Life gets worst as they approach fifty. If they have not made it into the inner circle of executive management they are usually laid off due to age. At a time when their kids are in college, elderly parents need help because they are sick, and many companies will not hire them at their original salaries. Their whole career and pay path is best described as a saber tooth pattern. Loose job, get new job at less pay, prove themselves to management before they recover lost pay and just when they exceed it, they are laid off and the cycle begins all over again. Over time their net pay increase over time is just keeping up with inflation while their executive bosses never got laid off and their salaries doubled in the same time frame no matter if the company did well, merged or went into bankruptcy.
Except for some parts of the Eastern Shore of VA, I don’t know of any area in Virginia that doesn’t enjoy one of the highest standards of living anywhere in the US primarily because of all the tax money in Washington.
There was an article here on FR about the 6 counties surrounding DC having the highest per capita income in this country. I can’t find it now but if I can I’ll post it.
I think your experience is misleading. Go live in central PA, upstate NY, anywhere in flyover country, and life in very different.
Yep, that’s what I see too. The old IBM model, for better or worse, is nowhere found in this world. And anyone who believes age discrimination isn’t a big part of employment has their head stuck in a very dark place.
Here ya go . . .
"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."
Every item he mentions here involves either: (1) a government agency, or (2) a private entity being forced to incur costs to meet a government-imposed mandate.
More to the point, the author defines a “good job” as $17/hr, plus retirement and health insurance.
If you make $30/hr in Iowa, eg, but no benefits, that is a “bad job.”
BS.
Depressing, but true....
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