In March 2012, Republicans in the House of Representatives approved a budget that would cut $3.3 trillion from low-income programs over the subsequent decade, according to the nonpartisan Center on Budget and Policy Priorities. The biggest cuts would be in Medicaid, providing health care for the nation’s poor—forcing states to drop coverage for an estimated fourteen million to twenty-eight million low-income people. The Republican budget would also reduce food stamps for poor families by 17 percent ($133.5 billion) over the decade, leading to a significant increase in hunger—particularly among children. It would also reduce housing assistance, job training, and Pell grants for college tuition. In all, 62 percent of the budget cuts would come from low-income programs. Yet at the same time, the Republican budget would provide a substantial tax cut to the rich—who are already taking home an almost unprecedented share of the nation’s total income.
Mitt Romney, the Republican presidential candidate, said he was “very supportive” of the plan. “It’s a bold and exciting effort, an excellent piece of work, very much needed.… It’s very consistent with what I put out earlier.” Indeed. When the Center on Budget and Policy Priorities analyzed Romney’s plan, it found that it would throw ten million low-income people off the benefits rolls for food stamps or cut benefits by thousands of dollars a year, or both. “These cuts would primarily affect very low-income families with children, seniors and people with disabilities,” the center concluded. At the same time, Romney’s tax plan would boost the incomes of America’s wealthiest citizens. He would permanently extend George W. Bush’s tax cuts, reduce corporate income tax rates, and eliminate the estate tax. These tax reductions would increase the incomes of people earning more than $1 million a year by an average of $295,874 annually, according to the nonpartisan Tax Policy Center.
By reducing government revenues, Romney’s tax cuts would squeeze programs for the poor even further. Extending the Bush tax cuts would add $1.2 trillion to the nation’s budget deficit in just two years. Oh, did I say that Romney and other Republicans also want to repeal President Obama’s health-care law, thereby leaving fifty million Americans without health insurance?
Meanwhile, the nation has been cutting school budgets to shreds, even though the size of America’s school-age population keeps growing. By 2015, an additional two million kids are expected to show up in our schools. Yet in 2012, twenty-three states reduced education spending, on top of cuts in 2011 and 2010. Education is one of the biggest expenses in state budgets. But states can’t run deficits—almost every state constitution forbids it—and tax revenues during the prolonged downturn have not kept up. Nor has the federal government come to the aid of the states.
Arizona eliminated preschool for more than four thousand children and cut funding for books, computers, and other classroom supplies. California reduced kindergarten through twelfth grade aid to local school districts by billions of dollars and is cutting a variety of programs, including adult literacy instruction and help for high-needs students. Colorado and Georgia reduced public school spending nearly 5 percent from 2010; Illinois and Massachusetts, by 3 percent. Virginia’s $700 million in cuts included funding for class-size reduction in kindergarten through third grade. The state of Washington suspended a program to reduce class size. Pennsylvania squeezed local budgets: Philadelphia laid off fourteen hundred teachers and staff; Carlisle used sheep to trim its playing fields.
Local communities can’t make up the difference. As housing values declined, revenues from local property taxes plummeted. This has meant even less money for schools and local family services. So thirty or more children are squeezed into ever more crowded classrooms with reduced school hours and shorter school weeks. Prekindergarten programs are being cut. Schools have even started to charge families for textbooks and extracurricular activities.
Meanwhile, at least forty-three states have cut funding for public colleges and universities and have increased tuitions and fees. As a result, many qualified young people are not able to attend. For example, the University of California, where I teach, has increased tuition by 32 percent and reduced freshman enrollment by twenty-three hundred students; the California State University system cut enrollment by forty thousand students. The Arizona’ Board of Regents has approved in-state undergraduate tuition (tuition paid by students who are residents of the state) increases of between 9 and 20 percent as well as fee increases at the state’s three public universities. Florida’s public universities raised tuition 32 percent. New York’s state university system increased resident undergraduate tuition by 14 percent. Texas cut funding for higher education by 5 percent, or $73 million. Washington reduced state funding for the University of Washington by 26 percent.
Because of these state cuts and tuition hikes, families and young people are absorbing more of the cost of higher education. The total amount of outstanding student debt is staggering, reaching over $1 trillion in 2012. That was more than the total of outstanding credit-card debt. Almost a third of students graduating from college are burdened with these debts, averaging $25,000 each. Punitive laws enforce repayment, and it is almost impossible to shed student loans in bankruptcy. There is no statute of limitations for non-repayment. Why have we allowed this to happen? Our young people—their capacities to think, understand, investigate, and innovate—are America’s future. In the name of fiscal prudence we’re endangering that future.
In a 2011 survey of thirty-four advanced nations by the Organization for Economic Cooperation and Development, our kids came in twenty-fifth in math, seventeenth in science, and fourteenth in reading. The average fifteen-year-old American student can’t answer as many test questions correctly as the average fifteen-year-old student in Shanghai. America’s biggest corporations don’t seem to care about the deterioration of American education, because they’re getting the talent they need all over the world. Many of them now have research and development operations in Europe and China, for example. America’s wealthy and upper-middle-class families don’t seem particularly worried, either. They have enough money to send their kids to good private schools and to pay high tuitions at private universities. But the rest of the nation is imperiled.
I’m not one of those who believes the only way to fix what’s wrong with American education is to throw more money at it. We also need to make improvements in how we educate students. Judging teacher performance has to be squarely on the table, and teachers should be paid according to how well their students learn. We should experiment with vouchers whose worth is inversely related to family income. Universities have to tame their budgets for student amenities that have nothing to do with education. But nor can we educate our nation on the cheap. Considering the increases in our population of young people and their educational needs in the new global economy, more resources are surely necessary.
President Obama called this a “Sputnik moment,” referring to the wake-up call to America by the Soviet’s successful launch in the 1950s that resulted in the National Defense Education Act, training a whole generation of math and science teachers. Sadly, we’re heading in the opposite direction. The budget agreement of 2012 invites even more federal budget cuts in public education. Pell grants that allow young people from poor families to attend college are already squeezed.
No wonder so many Americans feel that no matter how hard they or their children try, they can no longer get ahead. The game seems rigged because, increasingly, it is. We’re losing public goods available to all, supported by taxes. In their place are private goods available mainly to the very rich. At the same time, the rich are paying less to support the public good. And more and more government expenditures are finding their way into bailouts, subsidies, and government contracts going to favored industries and their shareholders and executives.
There is something dreadfully wrong with this picture.
THE BROKEN BASIC BARGAIN
As I write this, jobs are starting to return, and America appears to be emerging from the deepest economic dow
nturn we’ve experienced since the Great Depression. But the pay of most Americans is not returning—and that is the longer-term and more disturbing story. For most of the last century, the basic bargain at the heart of the American economy was that employers paid their workers enough to buy what American employers were selling. That basic bargain created a virtuous cycle of higher living standards, more jobs, and better wages. But for the last thirty years that basic bargain has been coming apart.
In 1914, Henry Ford announced he was paying workers on his Model T assembly line $5 a day—three times what the typical factory employee earned at the time. The Wall Street Journal termed his action “an economic crime,” but Ford knew it was a cunning business move. The higher wage turned Ford’s autoworkers into customers who could afford to buy Model Ts. In two years Ford’s profits more than doubled.
That was then. Now Ford Motor Company is paying its new hires about half what it paid its new employees a decade ago. Ford’s newest workers earn about $14 an hour, in contrast to the $25 an hour earned by new Ford workers in 2002 (adjusted for inflation). Ford also gives today’s new recruits a maximum of four weeks of paid time off a year; Ford workers used to get five weeks. And instead of receiving a guaranteed $3,000-a-month pension when they retire at age sixty, new hires must build their own “personal retirement plans,” to which Ford contributes less than $2,000 a year.
It’s the same story across America. At GE, new hires earn $12 to $19 an hour, versus $21 to $32 an hour earned by workers who started at GE a decade or more ago. According to the Commerce Department, employee pay is down to the smallest share of the economy since the government began collecting wage and salary figures data in 1929. Meanwhile, corporate profits now constitute the largest share of the economy since 1929.
In case you forgot, 1929 was the year of the crash that ushered in the Great Depression. In the years leading up to that crash, most employers forgot Henry Ford’s example. The wages of most American workers remained stagnant. The gains of economic growth went mainly into corporate profits and into the pockets of the very rich. American families maintained their standard of living by going deeper into debt. In 1929 the debt bubble popped.
Sound familiar? It should. The same thing happened in the years leading up to the crash of 2008. And more recent data show the trends continuing. In other words, we still haven’t learned the essential lesson of the two big economic crashes of the last seventy-five years: when the economy becomes too lopsided—disproportionately benefiting corporate owners and top executives vis-à-vis average workers—it tips over.
The real reason the American economy tanked in 2008, and why we’re still struggling to recover, is that the basic bargain has been broken. The big economic news isn’t the slow return of jobs. It’s the continuing drop in pay. Most of the jobs we’ve gained since the Great Recession pay less than the jobs lost during it. An analysis from the National Employment Law Project shows that the biggest losses were in jobs paying between $19.05 and $31.40 an hour; the biggest increases have been in jobs paying an average of $9.03 to $12.91 an hour.
For several years now, conservative economists have blamed high unemployment on the purported fact that many Americans have priced themselves out of the global/high-tech jobs market. So if we want more jobs, they say, we’ll need to accept lower wages and benefits. That’s exactly what Americans have been doing. More and more Americans are retaining their jobs by settling for lower pay or going without cost-of-living increases. Or they’ve lost a higher-paying job and have taken one that pays less. Or they’ve joined the great army of contingent workers, self-employed “consultants,” temps, and contract workers—without health-care benefits, pensions, job security, or decent wages.
All told, the decade starting in 2001 was the worst decade for American workers in a century. According to Commerce Department data, private sector wage gains even lagged behind wage gains during the decade of the Great Depression (4 percent between 2001 and 2011, adjusted for inflation, versus 5 percent from 1929 to 1939). Conservatives say that’s still not enough, which is why unions have to be busted—and why Republican governors and legislators are trying to pass so-called right-to-work laws banning employment contracts requiring employees to join a union and pay union dues. Without such a requirement there’s no reason for any particular worker to join a union, because he can get the bargaining advantages of unionization without paying for them—which in turn destroys unions, exactly the point. In 2012, Indiana enacted the nation’s first right-to-work law in more than a decade and the first ever in the heavily unionized upper Midwest.
The current attack on public sector workers logically follows. As the pay and benefits of workers in the private sector continue to drop, Republicans claim public sector workers now take home more generous pay and benefits packages than private sector workers. It’s not true on the wage side if you control for level of education, but it wasn’t even true on the benefits side until private sector benefits fell off a cliff. Meanwhile, all across America, public sector workers are being “furloughed,” which is a nice word for not collecting any pay for weeks at a time.
It’s no great feat to create lots of lousy jobs. A few years ago the Republican congresswoman Michele Bachmann remarked that if the minimum wage were repealed, “we could potentially virtually wipe out unemployment completely because we would be able to offer jobs at whatever level.” If you accept her logic, why stop there? After all, slavery was a full-employment system.
Conservative economists have it wrong. The underlying problem isn’t that most Americans have priced themselves out of the global/high-tech labor market. It’s that most Americans are receiving a smaller share of the American pie. This not only is bad for the majority but also hobbles the economy. Lower incomes mean less overall demand for goods and services, which translates into lower wages in the future. The basic bargain once recognized that average workers are also consumers and that their paychecks keep the economy going. We can’t have a full-fledged recovery and we can’t sustain a healthy economy until that bargain is restored.
What happened to America? Why and how did we come apart?
WHAT WENT WRONG
It’s estimated the economy would grow by 2 percent in 2012, which is peanuts. The deeper the economic hole we’ve been in, the faster we need to grow in order to get back on track. Given the depth of the hole we fell into in 2008, we would need the economy to be growing by 4–6 percent in 2012 and at least that fast in 2013. Consider that in 1934, when the economy began emerging from the bottom of the Great Depression, it grew 7.7 percent. The next year it grew more than 8 percent. In 1936 it grew a whopping 14.1 percent.
The U.S. economy won’t really bounce back until America’s surge toward inequality is reversed. When so much income goes to the top, the middle class doesn’t have enough purchasing power to keep the economy going without sinking ever more deeply into debt—which, as we’ve seen, ends badly. No economy can run mainly on the spending of the very wealthy. The richest 5 percent of Americans spend only about half of what they earn, which isn’t surprising. Being rich means you’ve got just about everything you want and need. The 5 percent of Americans with the highest incomes accounted for 37 percent of all consumer purchases in 2012, according to Moody’s Analytics. Yet the spending of the richest 5 percent alone will not lead to that virtuous cycle of more jobs and higher living standards. Nor can we rely on exports to fill the gap. It is impossible for every large economy, including that of the United States, to become a net exporter. An economy so dependent on the spending of a few is also prone to great booms and busts. The rich splurge and speculate when their savings are doing well, but they pull back when the values of their assets tumble. Sound familiar?
Even if by some chance Washington enacts another big stimulus while the Federal Reserve keeps interest rates near zero, these policies can’t work without a middle class capable of spending. Pump priming helps only when a well contains enough water.
Look back over
the last hundred years and you’ll see the pattern. During periods when the very rich took home a much smaller proportion of total income—as in the Great Prosperity between 1947 and 1977—the nation as a whole grew faster, and median wages surged. The basic bargain ensured that the pay of American workers coincided with their output. In effect, the vast middle class received an increasing share of the benefits of economic growth. America created that virtuous cycle in which an ever-growing middle class had the ability to consume more goods and services, which created more and better jobs, thereby stoking demand. The rising tide did in fact lift all boats. On the other hand, during periods when the very rich took home a larger proportion—as between 1918 and 1933, and in the Great Regression from 1981 to the present day—growth slowed, median wages stagnated, and the nation suffered giant downturns.
It’s no mere coincidence that over the last century the top earners’ share of the nation’s total income peaked twice, in 1928 and 2007—the two years just preceding the biggest downturns.
In the late 1970s, the middle class began to weaken. The two lines began to diverge: Output per hour—a measure of productivity—continued to rise. But real hourly compensation was left in the dust. This was mainly because new technologies—container ships, satellite communications, eventually computers and the Internet—started to undermine any American job that could be automated or done more cheaply abroad. Factories remaining in the United States have shed workers as they automated. So has the service sector. But contrary to popular mythology, trade and technology have not reduced the overall number of American jobs; their more profound effect has been on pay. As I noted, jobs slowly returned from the depths of the Great Recession, but in order to get them, many workers had to accept lower pay than before.
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