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Posted at 10:00 AM ET, 02/ 3/2011

How to think about rebuilding the middle class

By Derek Thompson

The demise of our middle class might be the most compelling problem in U.S. economics. It lives at the heart of our debates about income inequality, U.S. competitiveness, tax policy, Social Security and so much more. Each of these debates have their distinct orbits, but drawing them together is the question of how we give average Americans a chance to elevate their standard of living, work for decent pay and retire in dignity.

You don't need more words on the 30-year stagnation of median wages (CliffNotes version: They're really, truly stagnating). What might be more useful is a frame for thinking about how Washington can thaw the middle-class freeze. As I see it, there are four categories of intervention.

The first category is Weak Intervention. This is the classic laissez-faire approach that says stable taxes and smart, lax regulations are the best way to let private-sector wages grow themselves. The second category is Income Intervention, using a progressive tax code to take wealth from the top and send it below in the form of tax credits or services. The third category is Education Intervention, where government actively supports schools, especially at the post-secondary level, by investing in colleges and helping students attend them. The fourth category is Industrial Intervention, where government backs certain industries implicitly (e.g. with a carbon tax) or explicitly (e.g. with solar energy subsidies).

The question facing Washington isn't whether to intervene in the economy. We've already answered in the affirmative, with tax credits for the poor, student loans and university research grants, and fossil fuel subsidies. The question is how to intervene better to promote middle-class wages without sacrificing the overall dynamism of the economy. Democrats don't want to pull back regulation and tax rates. Republicans don't want to expand our industrial policy into green energy.

With income and industrial intervention facing gridlock, it's no wonder Washington is paying serious attention to bucket No. 3: education reform. In particular the president has called out the promise of community colleges. Yes, they suffer from vertiginous drop-out rates. But yes, they can really make a difference. According to the Bureau of Labor Statistics, jobs that require two-year associate degrees are projected to rise by 19 percent in the next 10 years, faster than jobs at the doctoral, master's or any other level. Even better, an associate degree confers up to a 66 percent bonus over high school graduates' wages.

Conservatives might balk at additional investment in low-income schools with unproven track records, but the administration could back its investment in community colleges by adopting Bridget Terry Long's idea (pdf) to have each accredited college produce the equivalent of a fact sheet. This is a deceptively simple idea with big implications. The fact sheet available to each applicant would include stats like the school's loan default rate, average debt after graduation, employment rate after six months, and an employer survey on satisfaction with graduates by industry.

Putting key financial and employment information in front of students would give focus to their education, showing the light at the end of the tunnel and pointing to the deepest potholes. With a better understanding of the risks and benefits of each college, students might be more likely to choose a program that suits their skills and less likely to drop out.

Barring some unforeseen miracle, the middle class will continue to struggle without new industries to support their skills or new skills attained by more education and training. The temperature of Washington is not suitable to growing bold new industrial policy at the moment. The main theater in the war to save the middle class is education.

Derek Thompson is an associate editor at the Atlantic, where he writes about economics, business and technology.

By Derek Thompson  | February 3, 2011; 10:00 AM ET
Categories:  Economy  
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Do we have stats on median "total compensation," including health care benefits, etc. I'm curious how much of the stagnation of wages has to do with increased benefits, and how much has to do with other factors.

Posted by: jduptonma | February 3, 2011 10:24 AM | Report abuse

Graduation rates are a statistic with problems. Many CC students don't care about graduating, they only care about getting the courses they need in their current work environment. That may be some kind of certification for example, but not a degree. Alternatively, they may take 6 years to complete a 2-year degree because they're working full-time at the same time. Or maybe they get the credits they need to transfer to a 4-year school and don't complete the requirements at the community college. This is very common and hard to measure because the students just stop coming when they have what they need.

The 4-year mental model typically defines higher education as having a beginning and an end with a graduation at the end, but life-long learners could and should keep coming back for the education that they need, when they need it for decades, regardless of meeting the requirements for "graduating".

In other words, at a Community College, success as defined by the students does not necessarily correspond with graduation. You need more subtle and comprehensive measures.

Posted by: dctidb | February 3, 2011 10:56 AM | Report abuse

Income and wealth inequality are very difficult issues - especially as our underclass is growing so fast - 80% of our population qualify? . . . The reasonable answer is - benefits. . . Medicare for all - solid retirements - meaningful vacation time - low cost higher education - child care etc. . . .Yes, kind of like the Scandinavian countries.

Posted by: WisconsinReader | February 3, 2011 11:09 AM | Report abuse

I'm shocked that EFCA, unions and organizing workers is not mentioned with respect to the stagnation of the middle class (which is essentially the function where workers stopped getting a piece of productivity gains after 1980 or so, and where all of those gains went upwards).

I know the high-end liberals don't like labor, they aren't in your social circles, ect... But, look at union density and compare to the losses in the middle class (stagnant wages, loss of real pensions, health care cuts/cost sharing). It doesn't take an ivy league chart to see what is going on.

Distribution of wealth occurs based upon power. Take it away from workers, and you end up with more wealth up-top. It's really not that difficult to grasp.

But, we really need our high-end liberals to understand that being fashionable (I know being pro-organizied labor is so last year) is less important than being effective. Give workers the tools to do the work, and stop trying to give them the finished product. They will do the work!

Posted by: rat-raceparent | February 3, 2011 11:46 AM | Report abuse

jduptonma asked: "Do we have stats on median "total compensation," including health care benefits, etc. I'm curious how much of the stagnation of wages has to do with increased benefits, and how much has to do with other factors."

I have seen these figures and will give you my general impression... Obviously, health costs have increased much faster than wages. At the same time, more cost-sharing has taken place.

So, workers today pay for more of their health care while their employers do, too. Wages have been kept down in part do to the corporatization of health care (where hospitals are run by private profit-maximizing insitutions, instead of say churches). total comp has increased faster in wages, but the end effect on workers is not one of an improving condition.

So, a big part of the problem lies in wages being diverted to health costs -- which isn't to say that employers aren't paying for it. But, wages have still stagnated.

Pensions (real ones, not the savings accounts that many now get) are fading. The cost of funding retirment has been transferred from employers exclusively to mostly employees (a nice feature for employers, which wasn't advertised during most conversions). This is another form of compensation cut. It is difficult to tell the numbers though, because real pension funding was always highly-seasonal (with high contributions in down markets, and low contributions during booms). So, these numbers are often cooked by advocates comparing selected years that make their story seem real.

The end result is a 1980 wage level, where workers are now paying for a substantial portion of their retirement and health costs. But, the stats aren't adjusted for that -- which is the beauty of the theft!

Posted by: rat-raceparent | February 3, 2011 11:55 AM | Report abuse

rat-raceparent says "I'm shocked that EFCA, unions and organizing workers is not mentioned with respect to the stagnation of the middle class."

I'm disappointed by their being overlooked, but I stopped being surprised by such omissions awhile back.

Posted by: rt42 | February 3, 2011 1:04 PM | Report abuse

Education helps but isn't a magic bullet, and "income intervention" is essential. Boosting education is definitely needed but keep in mind wages are relative. If you educate all the burger flippers to be call-center workers then you have an abundance of call-center workers and their value goes down. It helps, but it's two steps forward one step back. And it's not enough, a whole host of wage-earner friendly policies is needed, and progressive taxes are essential.

Posted by: TomCantlon | February 3, 2011 2:25 PM | Report abuse

At dctidb : Yes, graduation rates are really a fuzzy concept for community colleges. It's difficult to figure out what the "denominator" is when calculating the percentage of students who earn a credential. Clearly you shouldn't count seniors who are just taking a pottery class for fun, or people taking a specific class for their job, but it gets a lot fuzzier as you get into the details.

However, there's already a committee, headed by Tom Bailey at the Community College Research Center, looking specifically about how to better measure student success at the community college level. See info about this Committee on Measures of Student Success here:

Posted by: madjoy | February 3, 2011 4:23 PM | Report abuse

There are some other less popular options that aren't mentioned.

Wage & labor intervention: Up the minimum wage and statutory benefits. Pass laws that make it easier for unions to organize. Consider a program like Germany's which pays companies not to lay workers off.

Protectionism: Increase costs of moving production abroad. This will boost employment at the expense of overall economic growth. But if we're focusing narrowly on inequality, this option should be on the table.

Posted by: zosima | February 4, 2011 2:24 AM | Report abuse

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