How to rebuild the middle class

The COVID-19 pandemic and the related economic shutdowns and fallout has greatly exposed the deep class divisions in our country. The divisions have been there for decades of course. The “hollowing out” of the middle class has been occurring in waves throughout the long period of economic transformation that began in the early 1970s, as the industrial age gave way to the information age. For most of this period, the hollowing out has been explained away by many as the natural forces of economics at work. The pandemic, on the other hand, is a true “Black Swan”, an event exogenous from the economic system, shining a light on our society from a completely different angle than usual.

The vast iniquities are now on full display. The majority of those in the upper reaches of our economic system work from home and home school on broadband connections with adequate savings to stock up on supplies; large businesses serve us via ecommerce and delivery. The fate of the working class is laid bare for all to see: lack of savings, reliance on school for day care and meals, poor access to health care, no sick leave, high fixed costs tied to rent and debt service, jobs that don’t provide benefits even when employed, the risk of bankruptcy in the event of a personal or health crisis. The small proprietor faces many of the same challenges, with the risk of starting a business so high that entrepreneurship in the United States is a record low levels as a percent of the population.

Yes, these issues have been there for a generation or more, but when endogenous to the economic system the meritocratic elite of the country attributes the disparity to a natural outcome of personal choices and talent in the free market for labor. When the trigger is an exogenous shock like COVID-19, the random nature of fate reveals itself to the fortunate as well.

The U.S. government’s historical role in promoting the middle class

The Founders believed that the fate of the Republic lay in the hands of a virtuous middle class (even though that term was not used at the time). From the Founding forward the government of the United States has usually had a program to promote the middle classes. In the beginning the debate was between Alexander Hamilton’s “American System” of protective tariffs, a central bank and funding of internal improvements and Thomas Jefferson’s vision of an agrarian republic built by yeoman farmers. Both systems had influence over the early republic, with Jefferson’s vision having the upper hand through the Civil War and its aftermath. Eventually, when the Republicans took power following the Civil War, Hamilton’s vision won out, with high protective tariffs, the promotion of railroads and industrial development and eventually restrictive immigration to protect workmen’s wages.

During the Great Depression, Franklin Roosevelt’s New Deal promoted unionization for the working class and the beginning of a social safety net in the form of Social Security, supports for farmers, banking regulation, promotion of single family housing and culminating with Medicare under Lyndon Johnson’s Great Society. The economy was dominated by big manufacturing and consumer products companies that, through a quirk of law and history, became the providers of employee benefits: pensions, health insurance, sick leave, paid vacation, etc. Industries tended to be consolidated into a small number of large companies with strong unions and what was effectively regulated or managed competition.

Today’s hybrid system

In the late 1960’s and early 1970’s the New Deal system became harder to maintain. Why this happened is beyond the scope of this essay, but in the effort to advance our economy in the face of competition from our NATO allies and Japan, the government began deregulating industries, finance and the labor markets. As a share of the economy, manufacturing began to decline, and the service industries began to rise. Many of the larger service businesses, particularly those in higher margin industries like finance, technology and entertainment could afford to maintain the old system of company-provided benefits. But many smaller businesses and those in lower margin sectors like retail, hospitality and restaurants could not, especially as benefits like health insurance became more expensive. The post Cold War period of globalization and high levels of low skill immigration brought many benefits but also accelerated the pressure on the U.S. working class.

During the period from the 1970’s to the 2010’s we have maintained the basics of the New Deal system of employer-provided benefits plus certain universal benefits like Social Security, Medicare and unemployment insurance. Many social safety net programs added in the late 1960’s and later, on the other hand, have been non-universal benefits to support those that fall out of the employer-provided benefit system like Medicaid, welfare and food stamps. Because these programs would benefit only subsegments of the population, they have been easy to scapegoat as political payoff for the undeserving and have therefore never been particularly popular among the general public. Hence the relatively low popularity of the Affordable Care Act, while theoretically available to all, is also seen as benefitting only a few at the expense of many.

The tension between employer-provided benefits and non-universal benefits will continue to grow if the current trends are allowed to go on. Free-market conservatives have traditionally disliked non-universal benefits as they are perceived, with some justification, as paying people not to work. But in the highly-globalized, highly-competitive, free-market economy the pressure on margins, wages and benefits faced by businesses outside of technology, finance and certain large enterprises will continue. Couple this with the highest health care costs in the world and the trend toward service economy work and more people will be forced into the haphazard system of non-universal benefits or no benefits at all…a barbell system of a protected upper middle class, a dwindling cadre of manufacturing workers clinging to the Post World War II system in the middle and a growing class of unprotected service workers.

The way forward

To rebuild the middle class we need to both slow the decline of manufacturing work and make service work pay. The economy is going to keep transforming into a service economy whether we like it or not, and that does not mean that the only good jobs need to be in technology and information. There is no reason that we can’t set up a system to put pride and remuneration into service work, no reason we can’t build a solid middle class that includes not only manufacturing, government and health care workers but also waiters, fitness instructors, hairdressers, hospitality workers, retail and wholesale workers, sanitation workers and so on.

The policies needed to build this middle class are all on the table now and being debated individually, but not as a cohesive program. The program would basically be a fusionism between the policies of Trump and Obama:

  • Core protections for U.S. workers
    • Higher minimum wages, so those who work in service businesses make enough to not have to rely on non-universal benefits while employed;
    • Moderate tariff protection, to encourage more production in North America;
    • Restrict low-skill, particularly illegal, immigration, so there is less competition for low wage or off-the-books labor;
  • Encourage key areas of investment
    • Invest in basic infrastructure, to encourage more construction work and make our economy more productive;
    • Encourage more housing construction, particularly in cities and inner suburbs by reforming land use regulations that discourage construction, thereby keeping housing costs reasonable and encouraging construction work;
    • Create an industrial policy for key sectors to move production to the U.S., as the crisis has exposed the weakness that comes from reliance on global supply chains. There is no long-term economic reason that we can’t produce the medical devices, pharmaceuticals, semiconductors, communications equipment, defense goods, auto and aerospace parts, appliances, furniture, capital goods, aluminum and steel that we need in the U.S. or North America;
  • Beef up the social safety net to add universal, portable benefits
    • Build on the Affordable Care Act, mainly the exchanges, to create a system of universal health care that is portable and not employer-based. Health care premia should remain tax-deductible for all, so there is no disparity between employer-based and ACA policies. The Medicaid portion of the ACA should be reduced to encourage liquidity in the exchanges;
    • Build on the 401k system, to provide a universal system of portable savings accounts with policies that encourage savings among the general public;
    • Provide universal day care and pre-school, to reduce the stress on two-income households or single parents;
    • Create a policy of universal sick leave, to prevent workers from having to come to work sick (but being careful to not encourage abuse, which may be difficult) while also reforming the disability insurance system to discourage abuse;
  • Tackle two areas of extreme inflation that are a result of our hybrid system
    • Regulate health care costs, to rein in health care inflation since Americans already pay more for health care than any country in the world;
    • Reform and regulate higher education funding, to reduce indebtedness and rein in higher ed inflation, including adding training credits to the unemployment insurance system;

I have been a free market capitalist my whole life and am well aware of the economic arguments against the programs highlighted above. The economic transformation of the last 50 years has brought many great benefits, including technological innovation, cheaper consumer goods and a huge reduction in poverty around the world. I have also seen the negative side effects as we have created a winner-take-all economy where vast swaths of our country and people are left behind with declining towns, stagnant wages and soaring costs for necessities like health care and education.

How this get paid for will have to be the topic of another essay, but it should be noted that we are paying for most of these things already anyway, and in the case of health care are paying more than other countries that have universal health insurance. Universal social insurance taxes should be preferred, with subsidies from taxes on higher incomes as the secondary form of funding, rather than the other way around. Such a system, as is used in Europe and in the U.S. for Social Security and Medicare, has proven much more durable and popular than making one group of people pay for the other.

I am not calling for an end to the free market, or even globalism, but am calling for a shift in the balance between economic efficiency and looking out for our fellow countrymen. We should be focused on building a middle class for the information age, one based on remunerative work, healthy families and strong communities.

 

 

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