Reclaiming Middle-Class America

"Middle class" is more than an income category. It's an image of a certain kind of society--a nation in which the gains of prosperity are broadly shared and those who work hard have a good shot at upward mobility and the security of a basic safety net.

Today, that image is badly tarnished. In a September 2010 ABC News/Yahoo! poll, only half of Americans agreed that "the American Dream--that if you work hard you'll get ahead--still holds true"; more than four in 10 said it no longer did. This dark mood undoubtedly reflects hard economic times, but middle-class discontent runs much deeper than the current downturn, and its roots are at least as much political as economic. To reclaim America as a middle-class nation, we need to understand what's gone wrong--and what can be done to fix it.

THE ERODING FOUNDATIONS OF MIDDLE-CLASS AMERICA

Like all ideals, the American dream is an aspiration, not a guarantee. Yet, for 30-odd years after World War II, the aspiration came remarkably close to reality. Thanks to the GI bill, millions gained college degrees or vocational training, bought a home, or started a business. Pressed by labor unions, employers provided decent wages and developed extensive health and pension benefits that provided security to workers and their families. Social Security and then Medicare transformed secure retirement into a mass experience.

Most important, earnings rose rapidly for workers at the bottom, the middle, and the top. This was no accident. It was grounded in an implicit social contract that emphasized joint economic gains and financial security. This contract, in turn, was grounded in broadly distributed power. Strong labor unions, cross-class civic organizations, and political institutions less inundated by and responsive to money--these were the foundations of what my co-author Paul Pierson and I call "middle-class democracy."

Under the midcentury social contract, workers received job security, guaranteed benefits, and good pay, and employers got loyal, productive workers who invested in skills specific to their jobs. Prosperity, mobility, and security were not just ideals espoused by politicians. They were lived realities for an increasing share of workers and their families.

That bargain has unraveled. In the middle of the earnings ladder, wages have risen only modestly over the last generation; below the middle, they have stagnated or fallen. Even a college-educated entry-level male worker earns barely more than his counterpart did a generation ago. The story of the last 40 years is of a huge divorce between aggregate productivity, which has continued to rise handsomely, and wages for most workers, which have stagnated or declined.

The 1990s economic boom temporarily reduced the pay-productivity gap. In the 2000s, however, the underlying gap returned with a vengeance. Indeed, the 2002-2007 expansion was the first on record in which median family incomes ended lower than they had at the close of the last expansion.

The other, closely linked story of the post-1970s economic reversal is the growing income divide between the rich and the rest. While wages in the middle stagnated, those at the top flourished. The richest 0.1 percent of Americans have seen their share of pre-tax national income rise from less than 3 percent in 1970 to more than 12 percent in 2007--the highest rate since the creation of the income tax in 1913. An ethic of shared prosperity has given way to one of winner-take-all.

As job security has eroded and gains have shifted toward the top, other pillars of the American dream have also weakened.

Education and Social Mobility. Class lines have hardened. American inequality is sky high; American social mobility is below the advanced industrial norm. The United States has gone from the world leader in college completion to a middling performer. More and more of skyrocketing college costs are financed through loans, burdening many students and their parents. Children of the rich, however, gain a huge head start.

Pensions and Social Insurance. America's job-based framework of economic security has gone from basic to broken. Defined, secure pensions--once the hallmark of a good job--are vanishing. Tax-deferred savings accounts such as 401(k)s aren't filling the gap. As medical costs continue to outstrip inflation, employment-based health-insurance benefits are becoming rarer and less protective.

Housing and Economic Assets. Besides their homes, most middle-class families have strikingly little in the way of private assets to cushion economic shocks or build their futures. And, of course, those homes look far less secure than they once did. The traditional strategy of gradually accumulating wealth through housing has taken a perhaps fatal hit, with implications for the economic security not just of the middle-aged but also of the young, aspiring middle class.

WHAT WENT WRONG

Who killed the old social contract? To some, the culprit is the unstoppable forces of technology and globalization. Computers and automation have reduced the rewards to routine skills and encouraged outsourcing and offshoring. The entry of hundreds of millions of literate, low-wage workers into the global workforce has undermined the earning power of less-educated Americans and elevated the well-educated. Compared with these vast tides, conventional wisdom suggests, American politics and policy have played only a bit role--and can only do a limited amount to reclaim the American dream.

Technological change and globalization matter immensely. But all rich countries have experienced their impact--most more so than the U.S.--yet few have seen anything like America's sharp upward shift of economic rewards, implosion of unions, or breakdown of social benefits. Moreover, in many nations where wage inequality has risen, policy-makers have pushed back through active labor-market policies, taxes, and public spending designed to reduce the remaining income gaps. Not so in the United States. Despite the Earned Income Tax Credit and expansion of Medicaid, low-wage workers have continued to fall behind. According to the Congressional Budget Office, even after all public and private benefits and federal taxes are included, almost 40 percent of all household income gains between 1979 and 2007 accrued to the richest 1 percent of Americans--more than received by the bottom 90 percent combined.

The recent tax-cut deal, extending huge tax cuts for the richest, highlighted the long-term role of our tax system in abetting inequality. Far more important and less recognized have been ways in which Washington has remade markets to advantage the top. Failure to enforce the Wagner Act has undermined labor unions as a force for good pay and benefits. Corporate-governance rules all but asked top executives to drive up their own earnings. Financial deregulation brought great riches for some while crashing the rest of the economy.

Perhaps the least visible policy changes were passive--aggressive--deliberate failures to address changing economic and social conditions, such as the need to balance work and family. Entire categories of support that have become essential to middle-class life, such as good child care, are not a public responsibility. Meanwhile, responsibilities once shouldered by corporations are shifting back to families. Uniquely among industrial nations, the U.S. came to rely on employers as mini welfare states, providing health insurance, pensions, and other benefits that elsewhere enjoyed state sponsorship. But as employers have pulled back, government has not filled the gap, leaving families more vulnerable.

Perhaps it's not surprising, then, that so many middle-class Americans feel abandoned. Asked in mid-2010 whom government had helped "a great deal" during the downturn, 53 percent of Americans said banks and financial institutions. Forty-four percent fingered large corporations. Just 2 percent thought economic policies had helped the middle class a great deal.

Americans are skeptical because government hasn't delivered. The great social-policy breakthrough of 2010, health reform, falls far short of a long-term vision for rebuilding the middle class. Emergency actions such as the stimulus package and bank bailout sought to stabilize the economy without challenging its imbalances. The recently enacted tax-cut deal means two more years of huge tax cuts for the richest. In return, the middle class received grudging extensions of unemployment insurance and a partial payroll tax holiday that will create few good jobs. While Americans say that their highest priority is to restart the economy and their most cherished programs are Social Security and Medicare, political leaders from the center and the right are embracing a deficit-reduction agenda that will threaten those two programs and preclude serious investment in the middle class to restore broadly shared prosperity.

UNEQUAL INCOME, UNEQUAL POWER

What explains this disconnect? The imbalance in organizational power and resources between the middle and the top is certainly a big part of the answer. In the late 1970s, corporate America organized on an unprecedented scale to influence government policy--not just through campaign giving but also through vast lobbying efforts. At the same time, with campaign costs skyrocketing, money has become a far more important resource for politicians--and, as we have seen, a far more unequally distributed resource in American society.

Another part of the answer, however, is the bitter fruit of this imbalance: an increasingly radicalized Republican Party, a divided Democratic Party, and powerful, growing currents of public hostility toward American government itself. For the contemporary GOP, the increased organizational might of business and influence of money--along with the party's success in locking down the conservative evangelical vote--have encouraged the party to shift ever rightward on economic issues. Democrats, by contrast, have been cross-pressured, torn between their historical commitment to the "little guy" and the pull of money from the big guys, including, for much of the 1990s and early 2000s, the ascendant titans of Wall Street. The result has been an increasingly polarized economic debate in which a significant faction of one party, the Democrats, has been willing to cut deals that undermine the middle class' standing.

For progressives, reclaiming the high political ground by addressing the bread-and-butter concerns of the middle class is the key to not just broadly shared prosperity but also long-term political success. As the last two years suggest, however, picking the ball back up won't be easy. Progressives will have to grapple with the decline of the organizations, like labor unions and broad-based civic associations, that informed Americans about what was at stake in political debates and helped them shape what government did. They will have to break the Democrats' unholy alliance with Wall Street. Above all, they will need to put forth a clear alternative to the anti-government mantra of tax cuts, deregulation, and programmatic cutbacks--one that is far more compelling than the grab bag of deficit reduction and modest new initiatives that defined the Democratic economic message for so much of the 1990s and 2000s.

Progressives will also have to confront an inconvenient truth: They are losing on economic issues not because Americans' judgments are clouded by social issues or racial animosity but because, battered by the economic trends just described and bombarded with mixed messages, many middle-class Americans are wondering whether progressives can really deliver a better economic life. And, perhaps most challenging, progressives are losing because the well of public trust in government has been so badly poisoned by the failures of government to deliver that life in the recent past.

It is a myth that Americans do not care about inequality or put unbridled faith in corporate America or believe they all will be rich one day. In fact, Americans are strikingly egalitarian in many respects (ask ordinary people how they feel about Wall Street) and relatively realistic about their own economic prospects. But one common presumption is true: Many Americans have lost their faith in government. A generation ago, the majority of Americans said they trusted public officials to do what was right. No more: In 2008, 69 percent of Americans agreed that "government is pretty much run by a few big interests looking out for themselves" rather than for "the benefit of all the people"; only 29 percent disagreed. In 1964--the first year this question was asked by the American National Election Studies--the numbers were reversed: 64 percent disagreed; 29 percent agreed. This loss of faith is the most destructive legacy of a cynical right that has torn down government to gain power and a feeble center that has too often gone along.

Today's anti-government tide is deeply corrosive. It feeds excess suspicion, fuels the disconnect between citizens and leaders, and pushes voters--who still overwhelmingly embrace current middle-class programs--toward tax cuts, spending cutbacks, and other policies that feed on anti-government sentiments. It is impossible to imagine a political movement centered on middle-class concerns that somehow avoids using activist government. Rebuilding the middle class requires rebuilding a sense that government can make a positive difference.

If progressives do not seize the moment, they will not only lose the votes of the middle class; they will also lose their chance to craft a governing philosophy that can shape the economic future of our nation.

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