How Washington Orthodoxy Fails the Middle Class

Revitalizing the American middle class in a transformed global economy is a staggeringly complex task. And neither Democratic nor Republican alone is the answer.

Reuters

On Tuesday, Barack Obama declared the debate over how to restore growth, balance, and fairness to the American economy the "defining issue of our time." "This is a make-or-break moment for the middle class," he said in a Kansas speech, "and for all those who are fighting to get into the middle class."

The following day, Republican front-runner New Gingrich said Mr. Obama "represents a hard left radicalism" and is "opposed to capitalism and everything that made America great." The best way to help the middle class, the former House Speaker argued, was slashing the size of the federal government and cutting taxes.

The arrival of the middle class at the center of the American political debate is a long overdue step forward, but Obama and Gingrich steered clear of an ugly truth. Revitalizing the American middle class in a transformed global economy is a staggeringly complex task. And neither Democratic nor Republican orthodoxy alone is the answer.

The Republican right, oddly enough, has become more doctrinaire, utopian and out-of-touch with global realities than the "Marxist" Obama administration.

A recent study by MIT professors Frank Levy and Thomas Kochan lays out the staggering task that revitalizing the middle class represents. Rising blue-collar employment after World War II allowed the United States to create what Obama called "the largest middle class and the strongest economy that the world has ever known." Now that those factories have moved en mass overseas, the U. S. faces a far more arduous undertaking. Levy and Kochan argue for a new "social compact" that includes a public-private partnership where the United States' unparalleled venture capital and research university systems create high-end design, production, marketing and distribution jobs. Reforming profit sharing, unions, higher education, on-the-job training and tax law would create higher-skilled American workers who benefit from company performance along with senior executives. They cite the training, innovation and profit-sharing practices of Wegman's, Cisco and Google as examples.

By contrast, Obama's most specific legislative proposal in his speech was a payroll tax cut funded by a surtax on millionaires. Economists say the cut is a helpful short-term stimulus, but the key to strengthening the middle class over the long-term is the difficult task of creating stable, well-paying jobs.

The United States is not alone. Developed economies around the world are experiencing the same income disparity and stagnation in middle class wages. The reasons for the change - and the potential solutions to America's economic woes - lie in the American middle class reinventing its place in a rapidly changing global economy. Sweeping technological innovations over the last twenty years have altered traditional economic dynamics. The Internet has created network effects in extreme, with hundreds of millions of worldwide users making Amazon, Facebook and other companies extraordinarily valuable in extremely short periods. At the same time, global, computer-driven financial markets produce staggering profits and losses at unprecedented speed.

A study released Monday by the Organization for Economic Cooperation and Development found that the primary cause of income disparity in the U.S. and its 33 other members was technological change. A historic integration of financial and trade markets, fueled by technology, created an unprecedented worldwide demand for highly skilled workers in those fields. As a result, a select group of CEOs, traders and others - the so-called one percent - became fabulously rich fantastically quickly.

At the same time, technology is dividing the middle class. A November study by researchers at Stanford and Brown found that the number of middle class neighborhoods in the United States has dwindled as income disparity has widened.

To the dismay of the middle class, technological innovation is sending jobs overseas but not reducing costs at home.  Education and health expenses in the United States, for example, continue to steeply rise. As The Economist recently noted, the middle class is squeezed from two sides, with wages dropping and living costs rising.

Our tired, polarized politics have not caught up with these changes. The Democratic party's failure to dramatically reform Medicare and Social Security, for example, undermines its argument that government can be lean and effective. At the same time, the global elite's prosperity is not magically trickling down as supply-side Republicans predict.

Finding a way forward is not easy. No one, including me, knows how to reinvent the American middle class. The workings of a rapidly, evolving globalized economy remain poorly understood. And the challenges American society faces are generational.

Obama's goals and vision for the middle class, in general, are far more realistic and inventive than those of conservative Republicans. The Republican right, oddly enough, has become more doctrinaire, utopian and out-of-touch with global realities than the "Marxist" Obama administration. Criticism that the president glosses over the country's staggering fiscal problems, twists figures, and issues vague proposals are legitimate, but the conservative right too often offers simplistic, naive and ideological answers to enormously complex dynamics.

Over time, the American middle class can innovate, moderate and educate its way back to prosperity. Public-private partnerships can create high-quality schools and jobs. American made high-end goods and services can be exported to China and other growing economies.

Americans should not fear technological change or increasing global competition. Instead, we must forge a new politics at home and a new place in a transformed world economy.

This article available online at:

http://www.theatlantic.com/business/archive/2011/12/how-washington-orthodoxy-fails-the-middle-class/249709/