By William A. Galston
I agree with much of this memo. The Democrats do have a big problem with middle-class Americans, starting (but not ending) with white voters. Optimism sells better than pessimism. America does have large underlying economic strengths on which to draw in coming decades. Many progressives do have a distorted idea of what the middle class is and what it wants. Many signature Democratic ideas focus on those aspiring to enter the middle class, not those already there and seeking to move forward.
That said, I have two problems with the approach the authors advocate. First, optimistic policies need to be based on a realistic analysis of where we now stand. In my judgment, the American economy is experiencing structural problems that will hold most Americans back if left unaddressed–problems that middle-class tax breaks, no matter how well targeted, leave untouched. Second, as the authors know very well, the structural changes are reducing most Americans’ economic security, generating legitimate concerns that an opportunity agenda by itself cannot alleviate.
Structural problems. For most of the past century, wages and productivity have moved in tandem. As has been widely reported, however, the large productivity gains of the past five years have not been translated into gains for most workers. Wages are at their lowest share of GDP on record, falling almost 5 percentage points from their pre-recession peak. Median hourly pay adjusted for inflation is down, and even higher education has not served as an antidote. Hourly pay fell by 3.5 percent for female college graduates, and by more than 7 percent for male college graduates. Total compensation has also fallen sharply. Not surprisingly, the real median income of households headed by working-age adults has fallen by more than 5 percent since 2000. Virtually all income gains have accrued to the top 10 percent of earners, and also to retirees drawing higher-than-average shares of their income from investments.
With only 38 percent of Americans reporting an increase in take-home pay after deductions, rising prices for the basics–gasoline, utilities, property taxes, education, and out-of-pocket health care—have hit them hard. Caught in the squeeze between falling incomes and rising prices, personal savings have disappeared, actually entering negative territory in 2005 for the first time since the Great Depression. (For households headed by young adults under 35, the dissavings rate was a remarkable minus 16 percent!) These developments have become so obtrusive that even President Bush’s new Treasury Secretary has been forced to acknowledge them.
While the administration’s economic policies have done nothing to halt these trends and in some respects have worsened them, it would be unfair to blame the President and his advisors for everything that is going wrong. Between the late 1980s and mid-1990s, for example, the percentage of Americans covered by employer-based health insurance declined sharply. After a modest improvement during Clinton’s second term, the decline resumed, bringing the 2005 figure down to a level last seen in 1996. The wage picture requires an even longer view. Between John Kennedy’s election and Richard Nixon’s resignation, median earning of full-time male workers, adjusted for inflation, rose by roughly 40 percent, from nearly $31 thousand to about $42 thousand (in 2005 dollars). Since then, with modest ups and downs, they haven’t budged. Median male earnings were no higher in 2005 than in 1973. By contrast, median female wages rose by only 25 percent between 1961 and 1973 but then rose an additional 32 percent during the next three decades.
But to put these figures in perspective, consider that a household headed by two median-wage full-time workers, one male, the other female would have earned $66,683 in 1973 but only 9 percent more–$73,244–in 2005, a rate of annual increase so small as to be imperceptible. Real median household income has increased much faster, of course, but only because so many more women are working full-time than was the case in the early 1970s. Since 1973, the share of household income commanded by each of the bottom four quintiles-that is, the bottom 80 percent of households-has fallen significantly. Only the top 20 percent have registered gains, and most of those gains have been clustered in the top 10 percent. The economic escalator of the immediate postwar decade has been replaced by something more like an economic treadmill, except for those at or near the very top.
What’s going on? Most economists now believe that globalization has shifted the balance of power between labor and capital. Alan Blinder, a former vice chairman of the Fed and no wild-eyed radical, recently published an article in Foreign Affairs arguing that one of the dimensions of globalization–offshore outsourcing–will produce a “quantitative change . . . so large that it brings about qualitative changes.” He warns that “We have barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering.”1
One of the consequences of this structural change is a shift of risk from the private sector to individuals. Unemployment now lasts much longer than it used to, and of workers displaced from full-time jobs since 2001, those who have found new full-time jobs have ended up earning, on average, 17 percent less than they did before. Not surprisingly, the probability that a family will experience an income drop of 20% or more has risen sharply in recent years. Since the end of the post-war boom in the early 1970s, in fact, income instability has increased much more rapidly than has income inequality.2 While fears of outright job loss have ebbed, after more than three years of statistical recovery from post-9/11 lows, 64 percent of Americans–including 56 percent of college graduates–continue to report that it is hard to find a good job where they live. Fifty-two percent of Americans rate their personal financial situation as only fair or poor, a figure that hasn’t budged since early 2002.3
Security. It would be strange if the increased risks of the globalized economy had not heightened anxiety and insecurity. In fact, they have. According to a Pew Research Center report issued at the end of August 2006, 62 percent of American workers say that workers enjoy less job security than they did 20 or 30 years ago. The decline of employee benefits such as health insurance and guaranteed pensions appears to be at the heart of their concerns.4
The authors of this memo are not unaware of these trends, as they acknowledge elsewhere. Let me quote from a longer report to which they refer:
Much of the social contract that served American workers so well during the 20th century is slowly eroding. Since World War II, employers have been the principal providers of health care, guaranteed lifetime pensions, and stable long-term employment for the middle class. But this is changing as health care costs steadily rise, life expectancies increase, and deregulation, technological change, globalization, and fierce international competition have led companies to boost productivity and rein in compensation costs. Today, fewer companies provide health insurance, many ask employees to pay a greater share for coverage, traditional pensions are becoming extinct, and long term, lifetime employment with a single employer is now an anomaly. This has led to a tectonic shift in risk from employer to employee that must be the center of new public policies that modernize the social contract.5
This paragraph is a clear, accurate summary of an argument many of us have been making for some time. If you add to it the mounting fiscal pressures on public sector programs such as Social Security, Medicare, and Medicaid, you see overall trends that are not likely to fulfill long-standing American expectations about their economic and social arrangements. This eroding social contract is not a side show; it is the central development shaping the opportunity of Americans to get ahead during their working lives and to enjoy a decent, reasonably stable retirement. Otherwise put: the effective pursuit of opportunity rests on a foundation of security.
The bottom line. While I agree with the authors that Democrats’ economic program must reflect optimism and offer opportunity, I believe that it would be a serious mistake–for reasons of both policy and politics–not to take economic security concerns seriously. Let me go further. I believe that the economy and Americans’ perception of it have changed since the 1990s in ways that require corresponding changes in our economic agenda and in the ways we talk about it. An understandable nostalgia for the Clinton years must not fool us into believing that we can succeed just by dusting off and updating Putting People First. Selective benefits for the middle class are at best a small piece of the answer. We must be prepared to take on the larger structural challenges that have emerged since the end of the Clinton administration.
We can argue about the best way of doing this. I am open to the possibility that framing insecurity as a threat to economic opportunity may offer the best rhetorical roadmap. (Someone should test this hypothesis against its competitors.) My core point is substantive, not rhetorical: In the circumstances we now face, the real “politics of opportunity” must begin by taking security seriously. A narrative with a new social contract at its core will prove far more compelling than will a list of targeted benefits. And if a new focus on 21st century security as the basis for a rebirth of opportunity helps unify the moderate and progressive wings of the Democratic Party, so much the better.
William Galston is a Senior Fellow in Governance Studies at the Brookings Institution and co-editor of The Democratic Strategist.
*Unless otherwise noted, all statistics are drawn from U.S. Census Bureau reports.
1Alan S. Blinder, “Offshoring: The Next Industrial Revolution?” Foreign Affairs, March/April 2006.
2For the analysis on which this paragraph is based, see Jacob Hacker, The Great Risk Shift (New York: Oxford, 2006).
3Pew Research Center, “Economy Now Seen Through Partisan Prism,” Washington, DC, January 24, 2006.
4Pew Research Center, “Public Says American Work Life Is Worsening, But Most Workers Remain Satisfied with Their Jobs,” Washington, DC, August 30, 2006.
5Anne Kim and Jim Kessler, “The Politics of Opportunity: The Case for a New Middle Class Economic Message,” Washington, DC: Third Way, May 4 2006, p. 15.