Past Insights

In September, Don Peck, writing in The Atlantic, provided an exceptionally thoughtful and detailed analysis of the fate of the middle class. What has contributed to its emergence as the economic and political foundation of American life? What has transpired to put its well-being at such great peril?

Why is the future of the middle class in question? The numbers tell the story.

• The richest 1% of households earn as much per year as the bottom 60%.
• The number of Americans living below the official poverty line, 46.2 million people, was the highest number in the 52 years the bureau has been publishing figures on it.
• 1 out of every 7 Americans now rely on food stamps
• 25 million children are homeless
• Since 1993, more than half of the nation’s income growth has been captured by the top 1% of earners, and from 2002 to 2007, out of every three dollars of national income growth, the top 1% of earners captured two.

Today, a high school education only ensures that you’re more likely to be unemployed than the average American. A college degree is essential to climb out of statistics that are likely to condemn you to a life that ensures you will live a less affluent life than your parents.

Consider that:

• The national unemployment rate is 12% for people with only a high-school diploma, as compared to the national average of 9%, but only 4.5% for college grads, and 2% for those with a professional degree.
• In 1967, 97% of 30-to-50-year-old American men with only a high-school diploma were working; in 2010, just 76% were.

Peck notes that a 2010 Pew study showed that the typical middle-class family had lost 23% of its wealth since the recession began, versus just 12% in the upper class.

Back in 2007, Alan Blinder, an economist and the former vice chairman of the Federal Reserve, predicted that somewhere between 22 and 29 percent of all jobs in the United States had the potential to be moved overseas within the next couple of decades. Those jobs were not low-paying service sector jobs, but primarily middle class jobs paying closer to $20 or more an hour.

Peck also called attention to a more recent 2010 study by the McKinsey Global Institute, which detailed “just how mighty America’s multinational companies are—and how essential they have become to the U.S. economy. Multinationals headquartered in the U.S. employed 19 percent of all private-sector workers in 2007, earned 25 percent of gross private-sector profits, and paid out 25 percent of all private-sector wages. They also accounted for nearly three-quarters of the nation’s private-sector R&D spending. Since 1990, they’ve been responsible for 31 percent of the growth in real GDP. Yet for all their outsize presence, multinationals have been puny as engines of job creation. Over the past 20 years, they have accounted for just 11 percent of private-sector job gains. And in the latter half of that period, the picture grew uglier: according to the economist Martin Sullivan, from 1999 through 2008, U.S. multinationals actually shrank their domestic workforce by about 1.9 million people, while increasing foreign employment by about 2.4 million.”

So how do we change the trajectory of these dangerous trends? Peck has a number of important suggestions.

1. We need to better harness the pace of innovation, in part by putting a much higher national priority on investment—rather than consumption. That means, among other things, substantially raising and broadening both national and private investment in basic scientific progress and in later-stage R&D—through a combination of more federal investment in scientific research, perhaps bigger tax breaks for private R&D spending, and a much lower corporate tax rate (and a simpler corporate tax code) overall.
2. Edmund Phelps and Leo Tilman, professors at Columbia University, have proposed the creation of a National Innovation Bank that would invest in, or lend to, innovative start-ups—bringing more money to bear than venture-capital funds could, and at a lower cost of capital, which would promote more investment and enable the funding of somewhat riskier ventures.
3. As we strive toward faster innovation, we also need to keep the production of new, high-value goods within American borders for a longer period of time.
4. Grants, loans, and tax credits to undergraduate and graduate students total roughly —an inflation-adjusted decline of about 75 percent since 1978. More funds need to be available.

The middle class can be saved – we need to innovate to do so.