by Don Peck
“Middle-skill” jobs are not about to vanish altogether. Many construction jobs and some manufacturing jobs will return. And there are many, many occupations—from EMTs, lower-level nurses, and X-ray technicians to plumbers and home remodelers—that trade and technology cannot readily replace, and these fields are likely to grow. A more highly skilled workforce will allow faster, more efficient growth; produce better quality; and earn higher pay.
All that said, the overall pattern of change in the U.S. labor market suggests that in the next decade or more, a larger proportion of Americans may need to take work in occupations that have traditionally required little skill and that have historically paid low wages. Analysis by David Autor indicates that from 1999 to 2007, low-skill jobs grew substantially as a share of all jobs in the United States. And while the lion’s share of jobs lost during the recession were middle-skill jobs, job growth since then has been tilted steeply toward the bottom of the economy; according to a survey by the National Employment Law Project, three-quarters of American job growth in 2010 came within industries paying less than $15 an hour on average. One of the largest challenges that the United States will face in the coming years will be adjusting to this reality and doing what we can to make the jobs that have traditionally been near the bottom of the economy better, more secure, and more fulfilling—more like middle-class jobs, in other words.
As Richard Florida writes in The Great Reset, part of that process may be under way already, due to the actions of individual companies. A growing number of companies have been rethinking retail workforce development, to improve productivity and enhance the customer experience, leading to more-enjoyable jobs and, in some cases, higher pay. Whole Foods Markets, for instance, one of Fortune magazine’s best companies to work for, organizes its workers into teams and gives them substantial freedom as to how they go about their work; after a new worker has been on the job for thirty days, the team members vote on whether the new employee has embraced the job and the culture, and hence whether he or she should be kept on. Best Buy actively encourages all of its employees to suggest improvements to the company’s work processes, much as Toyota does, and favors promotion from within. Trader Joe’s requires that full-time employees earn at least a median income within their community; store captains, most of them promoted from within, can earn six figures.
The natural evolution of the economy will surely make some service jobs—even in retail—more productive, independent, and enjoyable over time. Yet even in the best case imaginable, productivity improvements at the bottom of the economy seem unlikely to be an adequate answer to the economic problems of the lower and middle classes, at least for the foreseeable future. Indeed, the relative decline of middle-skill jobs combined with slow increases in college completion suggests a larger pool of workers chasing jobs in retail, food preparation, security, and the like—and hence downward pressure on wages.
Whatever the unemployment rate over the next several years, the long-term problem facing American society is not that employers will literally run out of work for people to do—it’s that the market value of much low-skill and some middle-skill work, and hence the wages employers can offer, may be so low that many American workers will not strongly commit to that work. Bad jobs at rock-bottom wages are a primary reason why so many people at the lower end of the economy drift in and out of work, which in turn creates highly toxic social and family problems. With little economic security and low prospects for advancement, ambivalence toward low-wage work is common, and resentments can come easily to the surface, leading to serial job loss and financial instability.
American economists on both the right and the left have long advocated the subsidization of low-wage work as a means of social inclusion—offering an economic compact with everyone who embraces work, no matter their level of skill. The Earned Income Tax Credit, begun in 1975 and expanded several times since then, does just that, and has been the country’s best anti-poverty program. Yet by and large, the EITC helps only families with children. In 2008, it provided a maximum credit of nearly $5,000 to families with two children, with the credit slowly phasing out for incomes above around $16,000 and disappearing altogether at roughly $39,000. The maximum credit for workers without children (or without custody of children) was only $438. We should at least moderately increase both the level of support offered to families by the EITC and the maximum income to which it applies. Perhaps more important, we should offer much fuller support for workers without custody of children. That’s a matter of basic fairness. But it’s also a measure that would directly target some of the biggest budding social problems in the United States today. A stronger reward for work would encourage young, less skilled workers—men in particular—to develop solid, early connections to the workforce, improving their life prospects. And better financial footing for young, less skilled workers would increase their marriageability.
Finally, we should take steps to open the country’s most dynamic cities and affluent communities to more middle- and working-class Americans. The geographic segregation of society by income and education is unhealthy in any number of ways. Within dynamic major cities, we should loosen zoning requirements, allow taller buildings, and take other measures to promote greater density and more housing supply—a strategy that would promote growth as well as reduce the price premium on housing in these areas. Around them, we should improve public transit, to make faster, cheaper commutes available. And in affluent communities that are still being built out, we should seriously consider requiring the construction of some number of low-cost housing options, as contentious as that may be, to promote more class mixing, better economic opportunities, and better access to good schools.
A continued push for better schooling, the creation of clearer paths into careers for people who don’t immediately go to college, better access to affluent communities and dynamic cities, and stronger support for low-wage workers—together, these measures can help mitigate the economic cleavage of U.S. society, strengthening the middle. Combined with wage insurance and the recently passed health-care bill, which sought to make portable, continuous coverage available to everyone, these measures would help bring greater stability to most Americans in an otherwise unstable era. They would hardly solve all of society’s problems, but they would create the conditions for more predictable and comfortable lives—all harnessed to continuing rewards for work and education. These, ultimately, are the most critical preconditions for middle-class life and a healthy society.
THE LIMITS OF MERITOCRACY
The panic of 1893, the crash of 1929, and the meltdown of 2008 all share a common antecedent: inequality, in the run-up to each of those disasters, was exceedingly high. Recent research has shown that this is a common pattern; highly unequal societies seem more vulnerable to financial crisis. The reasons are murky. Perhaps the middle class extends itself too much as it chases the status objects of the rich; perhaps spending by the rich on some goods, like housing, forces overspending by middle-class families who wish to live in dynamic city-regions or good school districts. Or perhaps too much money sloshing into elite investment accounts itself creates bubbles and busts (the rich save more of their money than the middle class, and invest more of those savings in high-risk instruments; when too much money is chasing limited investment opportunities, investing standards decline).
Up to a point, inequality creates incentives for education, hard work, and entrepreneurialism, and speeds economic growth. And at a more basic level, the ideal of “social justice” cuts both ways; people should of course be allowed to enjoy the fruits of their honest labor. As a society, we should be far more concerned about whether most Americans are getting ahead than about the size of the gains at the top.
Yet extreme income inequality causes a cultural separation in society that is unhealthy on its face and corrosive over time. Ultimately, it is prone to reaction, particularly when much of society is struggling.
The rich have not become that way while livin
g in a vacuum. Technological advances, freer trade, and wider markets—along with the policies that promote them—always benefit some people and harm others. Economic theory is quite clear that the winners gain more than the losers lose—the people who suffer as a result of these forces, it is often said, can be fully compensated for their losses; society as a whole still gains. This precept has guided U.S. government policy for thirty years. Yet in practice, the losers are seldom compensated, not fully and not for long. And while many of the gains from trade and technological progress are widely spread among consumers, the pressures on wages that result from these same forces have been felt very differently by different classes of Americans. Income statistics don’t fully capture the improvement in living standards brought about by technological advance (the Internet, of course, did not exist in 1970). At a minimum, however, the income gains powered by these forces have been extraordinarily lopsided for several decades. In the aughts, incomes grew only at the top of the pyramid.
What’s more, some of the policies that have most benefited the rich have little to do with greater competition or economic efficiency. Fortunes on Wall Street have grown so large in part because of implicit government protection against catastrophic losses, combined with the steady elimination of government measures to limit excessive risk taking, from the 1980s right on through the crash of 2008.
Over time, the United States has expected less and less of its elite, even as society has oriented itself in a way that is most likely to maximize their income. The top income-tax rate was 91 percent in 1960, 70 percent in 1980, 50 percent in 1986, 39.6 percent in 2000, and is now 35 percent. Income from investments is taxed at a rate as low as 15 percent. The mortgage-interest tax deduction is most generous, of course, to the affluent, and while it’s small potatoes to anyone who makes a good income, so, too, is the savings incentive provided by 401(k) plans. The estate tax, meanwhile, has been gutted.
As the winners have been separated more cleanly from the losers, the idea of compensating the latter out of the pockets of the former has run into stiff resistance: that would run afoul of a different economic theory, dulling the winners’ incentives, dispelling their entrepreneurial spirit, and punishing them for their success; some might even leave the country. And so, in a neat and perhaps unconscious two-step, some elites have pushed policies that benefit them by touting theoretical gains to society, then ruled out measures that would distribute those gains widely.
What will become of American society if these trends keep up? Even as we continue to strive to perfect the meritocracy—for of course family background still matters greatly today—signs that things may be moving in the other direction are proliferating. The increasing segregation of Americans by education and income, and the widening cultural divide between families with college-educated parents and those without them, suggests that built-in advantages and disadvantages may be growing. And the concentration of wealth in relatively few hands opens the possibility that much of the next generation’s elite might achieve their status through inheritance, not hard work.
Soaking the rich is not the answer to America’s problems. Holding all else equal, we would need to raise the top two tax rates to roughly 90 percent, then unrealistically assume no change in the work habits of the people in those brackets, merely to bring the deficit down to 2 percent of GDP in a typical year. Even with strong budget discipline and a reduction in the growth of Medicare costs, somewhat higher taxes for most Americans—in one form or another—seem inevitable. While we can and should cut spending in many areas, we also need to increase our national investment in infrastructure and innovation, and to provide some assistance to an increasing number of people who are falling out of the middle class. The professional middle class in particular should not expect exemption from tax increases.
But high earners should pay considerably more than they do now. Top tax rates of 50 percent for incomes in the seven-figure range would be considerably lower than their level throughout much of the postwar era, and should not be out of the question—nor should an estate-tax rate, for large estates, of similar size. Investment income should be taxed at ordinary income-tax rates (especially as the corporate tax is reduced).
We should not nourish the mercenary tendencies within today’s elite. America remains a magnet for talent, for reasons that go beyond the tax code, and by international standards, none of the tax changes recommended here would create an excessive tax burden on high earners. And while we should continue to celebrate people who make great accomplishments in their work, we should also seek to inculcate a sense of social and civic responsibility among today’s meritocratic winners—one that’s been lost, to some extent, in recent generations. If certain financiers choose to decamp for some small island-state in search of the smallest possible tax bill, we should wish them good luck.
We need to diminish the extraordinary power held by the rich over American government. Most Americans have little problem with high earnings won on a level playing field. But wealth always brings influence, and the self-reinforcing relationship between the two can lead to policies that are unfair, anticompetitive, and bad for the economy. Nowhere is this clearer than in the financial industry, which concentrates gains in the hands of a few and—because of its relationship to the government—distributes losses among the broader public. Lax regulation of finance combined with an implicit government guarantee against failure has inspired much mischief, made many fortunes, and left the country poorer. The specifics of financial reform to limit moral hazard and rent-seeking are beyond the scope of this book (I recommend 13 Bankers, by Simon Johnson and James Kwak, as a starting place for interested readers). But these problems remain enormous; the financial reforms undertaken since the crash have not solved them.
To the extent possible, we should keep money out of politics. Strict restrictions on campaign contributions and issue advertising, along with lobbying reform, would make our democracy healthier. The Supreme Court has struck down some measures that were designed to achieve these goals, saying they unconstitutionally violate free speech. Those decisions should be reconsidered. The former labor secretary Robert Reich has argued that all campaign contributions should go through “blind trusts” so that political candidates and office-holders cannot know who contributed to their campaigns, or how much they contributed. “The quid,” he writes, “would be severed from the quo.”
ONE CULTURE
Economic tumult has frayed the social fabric; if we remain in a period of slow growth and high unemployment, many aspects of public life and social relations could become more bilious than they are today. And even once employment rises back to more-normal levels again, the most-powerful economic forces of our times will remain fundamentally divisive, concentrating wealth at the top of society and putting more pressure on the middle. The great challenge of our times is adapting to and ameliorating these forces.
Politics will not be easy in the coming years, in part because the problems we face have no easy, painless political solutions. As Tyler Cowen wrote in The Great Stagnation, we should not pretend that they do—and we should resist the tendency to reflexively demonize those who disagree with us, rather than trying, where possible, to find common ground.
Many of the ideas presented in this chapter would help decrease the social distance that has grown between different American cliques and classes, a crucial charge if the United States is to retain a common culture. A society in which the different classes jostle more frequently alongside one another—living in the same communities and cities, harboring the same hopes and expectations for their children—is inherently healthier than one in which they are segregated physically and split by cultural norms. Broader exposure to one another would foster the ideals of civic equality and equal opportunity that are our cultural bedrock.
The information age—individualistic, experimental, boundary-breaking—has eroded other once-common virtues, ones that we do not associate as strongly with a distinctly American character,
but that are nonetheless essential to a cohesive, successful society: from family commitment rooted in marriage, to civic responsibility. The Great Recession has merely cast light on the extent of that erosion. The past is not a hallowed place, and we would not want to return to it even if we could. But we do need to sow those virtues again as we move forward—through education and through our own private actions and expectations.
As with the end of the nineteenth century, the Great Depression, and the 1970s, when we look back on this period, we will see it as a time when much that was familiar came to an end. But we will also see many new beginnings. After years of profligacy, the crash and its aftermath may mark a generational turning toward thrift and personal responsibility, changes that would serve the country well for decades. We will likely remember the Great Recession not only as a time when women first became a majority of the workforce, but also more broadly as a transition from a male-centered economy to one built more around women. The end of the housing-construction boom—and the financial sector’s preoccupation with housing—will surely clear the way for growth in other industries, and for the rise of new ones.
The most-important legacies of this period are, of course, unknowable today. Will education take another leap forward, as it has during the major economic transitions of the past? Will the long trend toward the concentration of income be altered—and in what manner? Will the middle class retain its optimism and its sense of unbounded opportunity?