When the presidential primary campaign got underway in the United States last year, the Atlantic Sentinel was heartened that Democrats and Republicans were finally talking about the same problem. “Both parties recognize that life has become too hard for Middle America,” we reported at the time.
That was progress from the last presidential election when Republican Mitt Romney infamously dismissed the “47 percent” of Americans who pay no federal income tax as moochers while Democrats spent more time complaining what an out-of-touch plutocrat he was than challenging his laissez-faire policies.
“Whether it is the lack of job security, unaffordable higher education, a health care system that is similarly more expensive than it needs to be or the absence of real wage growth,” we wrote that “the defining question of the next election will likely be how to make life a little easier for those tens of millions of Americans who identify as middle class.”
That was before Donald Trump made the defining question of the next election whether or not America will surrender itself to an ignorant demagogue.
But even Trump, in his own, unhelpful way, is channeling the desperation of millions of Americans who grew up believing they could reach the middle class and didn’t.
First, some sobering statistics
The crisis of the middle class manifests itself in various ways:
- The richest 20 percent of Americans saw their average real household income rise from $109,000 in 1967 to $185,000 in 2013. The middle 40 percent saw their incomes rise from $52,000 to $68,000 in the same period, the equivalent of a $348-per-year raise.
- The gap between the average income of households with children in the top 20 percent and those with children in the middle has been growing for decades, Timothy Smeeding, a professor of public affairs and economics at the University of Wisconsin-Madison, has found — by as much as 147 percent.
- Federal Reserve data cited by Neal Gabler in The Atlantic reveals that nearly one in two Americans would need to borrow or sell something to pay for a $400 emergency. Some would not be able to come up with the money at all.
- Pew Charitable Trusts found that 55 percent of households don’t have enough liquid savings to replace even a month’s worth of lost income.
- Life is especially hard in metro areas. The Pew Research Center has found that the share of adults living in middle-income households has fallen in 203 out 229 metropolitan area since the turn of the century. The Financial Times reports that even in cities celebrated for their economic reinvention as centers of the so-called knowledge economy, like Raleigh, North Carolina and Austin, Texas, median incomes have been falling and the middle class has shrunk.
- Sean F. Reardon, a professor of education at Stanford, and Kendra Bischoff, a professor of sociology at Cornell, have found (PDF) that the percentage of families with children living in very affluent neighborhoods more than doubled from 1970 to 2012, from 6.6 percent to 15.7 percent. At the same time, the percentage of families with children living in traditional middle-class areas with median incomes between 80 and 125 percent of the surrounding metropolitan area fell from 64.7 percent in 1970 to 40.5 percent. In other words: fewer Americans are living in middle-class neighborhoods.
- The housing crisis accelerated this trend. The Washington Post reports that the recovery has been hugely uneven. “The bust was more severe in Stockton than San Francisco. The recovery was stronger in the District of Columbia than its suburbs. The pain of the bubble has lingered longer in African American neighborhoods of metro Atlanta than white neighborhoods.”
- The Economist has warned that a “hereditary meritocracy” is developing. Upper-class parents have more time and money to pay for babysitting, better education, private schooling and recreational activities. As a result, the chances of wealthy parents passing their advantages on to their children has increased.
- The Brookings Institutions’ Richard V. Reeves and Kimberly Howard have found (PDF) that close to half of those in the top two-fifths income bracket now owe their position to family background.
No jobs in the middle
Scholars don’t have a definitive answer yet to what caused this. There is probably no single factor to blame but rather a combination of economic trends and unhelpful public policy.
What clearly hasn’t helped is that there are fewer jobs that offer a way into the middle class.
In recent years, the American economy has added jobs to the top and the bottom of the wage scale while traditional middle-income positions are being outsourced or have been made redundant by mechanization.
Entrepreneurs have been unable to make up the difference. Economists from the University of Maryland found (PDF) that whereas startups created an average of nearly three million jobs per year from 1980 to 2010 — twice the average increase in employment — virtually all the change in employment since then has come from large, established firms.
Part of the reason is that it has become harder for small businesses to find financing. The Wall Street Journal reports that loans from the ten largest banks to small businesses fell 38 percent between 2006 and 2014, from $72.5 to $44.7 billion.
Any solution — and one that is grounded in the economy Americans have rather than based on a longing for the one they have lost — must involve making life easier for the entrepreneur.
Out of reach
Before we get to that, it’s helpful to understand what exactly “middle class” means.
A 2010 study for the Department of Commerce argued that Americans define middle class less by economic status than they do by their aspirations: owning a home, a car (preferably two), being able to afford health care for the whole family and a college education for their children, one vacation per year and a comfortable pension waiting at the end of working life.
That will sound familiar to most Westerners. What may shock non-Americans is just how out of reach such a lifestyle is to most.
USA Today calculated in 2014 that — taking into account only one car but throwing in several thousand dollars per year for entertainment and restaurants — a family of four would need to earn $130,000 per year to live a middle-class life.
Median family income that same year was half (!) that figure.
The American way
A big reason why middle-class life is cheaper in most other Western nations is that they have, in one way or another, collectivized college education, health care and retirement savings. Those three account for roughly $40,000 of an American family’s yearly spending, according to USA Today.
Of course, Americans also make more money on average than do Europeans or Canadians. Median household income in the United States is among the highest in the world, surpassed only by Luxembourg and a few Scandinavian countries. Americans have for decades accepted this tradeoff: weaker social protections and fewer public-sector provisions in return for higher income and the opportunity to get rich.
This has had its advantages. It arguably gave Americans higher growth and allowed them to build a middle class that was larger and wider than existed in other countries. Unique among developed nations, Americans included skilled blue-collar workers in the middle class after the Second World War — which, in turn, staved off European-style class conflict.
Charles Homans writes in The New York Times Magazine that the confluence of these two groups — “a vision of insurance salesmen and machine operators, mowing the lawns of adjoining split-level ranches and talking about Sunday’s game — felt extraordinary even in its own time, seemingly incontrovertible proof that American capitalism worked.” Rather than overthrow the bourgeoisie, the proletariat joined it.
(If only the white proletariat. Blacks weren’t admitted to the middle class until decades later and that goes some way to explaining why class relations in the United States developed so differently from Europe.)
It’s not as though America had no social provisions at all. It provided health care to the elderly and the poor (Medicare and Medicaid) as well as public pensions (Social Security), food stamps and subsidized housing.
But many of the programs that were designed not to help the vulnerable but the middle class were predicated on a certain economic structure that has since come apart.
Walter Russell Mead, a Hudson Institute scholar and editor-at-large of The American Interest, has called this the blue social model. Rooted in the New Deal and postwar Keynesian economic policy, it involved such things as the G.I. Bill — which gave veterans free higher education — government-backed mortgages and employer-linked health insurance as well as pension schemes.
It was a system that promised a single family home for everyone, lifetime employment and a guaranteed retirement: the American Dream.
It was also a system based on monolithic (sometimes near-monopolistic) corporations and strong trade unions. When those two weakened, the “American Dream” became for many just that — a dream.
When half the country agrees with Donald Trump that “the system” is rigged, they’re not thinking about the Republican presidential nominating contest per se.
Only one in two Americans tell Gallups they consider themselves middle class anymore, down from 63 percent at the turn of the century.
Pundits have been too eager to find commonalities between Trump’s campaign and Bernie Sanders’ on the left, but if there is one thing that unites their supporters it’s the sense that they’ve been cheated out of something that’s rightfully theirs.
Sanders’ Scandinavian solutions are infeasible in America while Trump’s racial resentment makes his following suspect. But they’re not the only ones who feel let down. Reasonable, pragmatic voters in the center who are probably going to elect Hillary Clinton feel much the same way. And they’re the ones who hold the balance of power in America’s two-party system.
Americans with college, but not a postgraduate, degrees and household incomes between $50,000 and $100,000 per year are the country’s true swing vote. They elected Republicans Ronald Reagan and George W. Bush in the 1980s and Clinton’s husband, Bill, in the 1990s. In 2008, 50 percent of them voted for Barack Obama against 48 percent for John McCain.
Clinton knows this. It’s why she insists that if you “work hard and play by the rules,” you deserve at least a modest prosperity. It’s why her policies are so explicitly tailored to the struggling middle class, from raising wages to making childcare and college more affordable.
In search of a new model
Clinton, and indeed the Democratic Party, has a blindspot, though: the entrepreneur.
Their instinct is to protect the “blue social model” and see reform as retrogression. Consider President Barack Obama’s health reforms, which forced companies with fifty employees or more to purchase insurance for all their workers. Or consider Democrats’ resistance to so-called right-to-work legislation, which bans closed shops.
Attempts to give the blue model a new lease on life are fruitless at best. At worst, they backfire. The housing crisis, which did so much to accelerate the middle class’ decline, is a case in point. Its seeds were sown by a government manipulating the mortgage market so lower incomes could afford to buy homes.
The United States is better off finding a new model instead.
Mead suggests by starting with an appreciation of how the blue model came about. Just as the United States was the first country to achieve mass prosperity based on “Fordist” mass production and mass consumption, he argues that it is well placed to take full advantage of the information revolution.
The new economy is likely to involve more agents and small entrepreneurs, Mead believes. “For the price of a personal computer and an Internet link, an entrepreneur now has access to information and clients locally and worldwide that giant corporations couldn’t assemble in the 1960s.” But there is so much information available, and so much choice online, that consumers need reliable, trustworthy filters.
Most people can’t deal with the masses of data on the web; they need retailers who can package that information into something they can use.
Consider Booking.com, an online startup twenty years ago and now a multibillion dollar enterprise for booking hotel rooms. Or think of all the “Ubers for X” that use smartphone applications to help consumers navigate the myriad services that are available on- and offline.
American law generally smiles on such technology ventures, but it is less kind to the people who start them — or who are thinking of starting a company.
The payroll tax is especially burdensome. The self-employed pay both the employer and employee halves of Medicare and Social Security taxes, which can add up to a fifth of their income.
In addition, they don’t get health insurance through their employer and with all those extra costs it’s much harder for freelancers to set money aside for retirement.
It gets worse for small businessowners. All the regulations enacted after the financial crash, however sensible they might be on their merits, are too much to bear for small banks and discouraging big ones from making loans to struggling young companies.
Too often, legislation that was designed to spur competition or protect the consumer ends up entrenching established firms — to the detriment of both. A better approach would be to accept some instability and risk as the price to pay for innovation and growth.
We don’t have all the solutions. Expanding the middle class is going to take more than tax reform and smarter regulation. It will involve changes to higher education, to health care, to housing, to pensions. It will require Democrats and Republicans to find a middle ground, between the inclination to preserve entitlements and a hands-off approach that unduly favors the rich.
Here is a start, though: Stop thinking of businesspeople as being in a whole different category from workers. What’s going on in the economy makes that distinction less relevant. Public policy needs to catch up. It’s from the confluence of entrepreneur and employee that a new middle class may emerge.