Middle Class Dreams: Can They Be Achieved?

Includes: AAPL, AZN, KR, WMT
by: Martin Lowy

The American middle class is troubled. Indeed, it is not even clear that it is middle class in the 21st century.

The American Dream is alive, but for much of the white middle class (as well as many others), it is asleep.

The key to revival is jobs. Job-friendly policies would include repeal of corporate income tax, universal health care, and other policies to unburden hiring and promote business success.

To enable all children to compete educationally, education should be enhanced, both early in life and after high school.

Culture matters, too. People who want good jobs may have to adapt.

Kevin Wilson and Gil Weinreich have published two interesting, thoughtful, and provocative posts here at S.A. on the status of the American middle class. Both find the American middle class to be in decline, and both have offered prescriptions about what to do about that. Wilson started the conversation and laid out the basic data on which their judgment is based. My 2015 book, The Education Solution, explored many of the same subjects and came to similar conclusions. You can find the citations to my data at www.the-education-solution.com. I am in basic agreement that the American middle class has not kept up economically. And I would aver in addition that its discontent has resulted in the election of the current President and in much of the gridlock in Washington.

Weinreich’s proposed solution is for Americans to have more children. A falling population, he reasons, not only makes it statistically difficult to create GDP growth but also makes it psychologically less likely that people will have the drive and optimism that have made America the envy of the world. It is a logical solution, but one that, you will see, I do not agree with.

Wilson summarizes the causes of the middle class problem this way:

Summarizing, then, it would appear that the major drivers of middle class decline have been: 1) Actual worker displacement due to globalization; 2) the steady decline of purchasing power due to inflation; 3) inequality resulting from the economic impact of the returns to labor declining as the returns to capital have climbed; and 4) distributional divergences as asymmetric rewards (“winner take all” trends) have grown, driven by educational and occupational differences between different groups. There may be some worker displacement due to automation and other technological advances, but it does not yet appear to be a major driving force in spite of popular wisdom to the contrary.

To redress these causes, Wilson argues for a number of policies, including more retraining of workers who lose their jobs, a national service program for young people to help them pay for education, and, if I read him right, higher labor rates and costs.

I also would note an irony in Wilson’s article in that he concludes by advising investors not to buy companies that are labor-intensive but to concentrate instead on those that have fewer workers. I think his investment advice is right. Company growth is more likely to come from Amazons (AZN) (fewer workers, more technology) than from Krogers (KR) (more workers, less technology). (To take an extreme example, Apple (AAPL) has about 80 times the market cap per employee as Wal-Mart (WMT).) The problem that large employers have in competing and attracting capital makes it very difficult for them to raise wages more than they have to in order to attract the talent they need — although perhaps they underestimate the quality of talent they need and would be better off paying more for better workers. Cf. here for a contrary view of employer responsibilities.

Regardless of whether Wilson and Weinreich have the right solutions, I salute them for setting the stage to discuss the fundamental question: What is government for at this point in 21st century America? Neither political party does a very good job of addressing that fundamental issue — but perhaps we should not expect coherent political science from such large aggregates of people who have constantly to compromise to keep their flocks more or less together.

The status of The American Dream

The fundamental role of American government today is to facilitate people’s ability to achieve The American Dream.

Sparing you the definitional history of The American Dream, I will simply assert that it is the opportunity of every American man and woman to achieve a comfortable lifestyle through hard work and to pass along that opportunity to their children. For many, it includes owning one’s own home or sending their children to college or living in a particular kind of neighborhood or attending a house of worship of their choice. For all, it means freedom from unnecessary coercion. Great wealth is not a necessary part of living the American Dream.

The Dream is not fundamentally comparative. It is not about keeping up with the Joneses. You do not have to be in the top X percent economically to achieve The Dream. But The Dream does change in substance over time. In 1939, the year of my birth, a television set was not a requirement. No one had one. By 1970, of course, it was a requirement. And being a materialistic society, requirements have kept pace with technological development. In that sense, The Dream is not static, even though I would argue that the basic premise has remained constant.

I guess everyone has their own idea as to the key points of The American Dream. But I hope you agree on one basic point: The American Dream is a middle class idea that is fundamentally economic in that other aspects of The Dream are not achievable without sufficient income. As a corollary, for the vast majority of Americans, sufficient income requires a job, or combination of jobs among the family, that pay a sufficient amount to achieve the basic goals. Thus, the first major public policy objective has to be about jobs.

Perhaps nostalgically, many people think The Dream was achievable in about 1970. Perhaps for some people it was. But the equivalent income in the 21st century cannot be achieved by the same means as in 1970. The world of 1970 does not exist and cannot exist. The myth of its desirable return is part of the problem because it results in a yearning/demand for a mythical — as opposed to a real — middle class. If it is to achieve The Dream, the 21st century middle class has to be substantially more educated than the middle class of 1970.

This article will focus on two things: one, how public policy could furnish the foundation for more and better jobs, and two, how class culture holds many people back from making progress toward their goals.

Public Policy and pursuit of The Dream

Most basically, government has to combine getting out of the way of business with assisting business formation and success, while at the same time affording consumers protection from over-reaching. About 70% of the U.S. economy is still personal consumption, while about 63% of Americans work, so we are consumers as much as we are workers.

Regulations designed to protect the environment or safety or to prevent fraud and overreaching are never perfect. They always could be improved, and many could be eliminated, since many overlap or have become obsolete. However, I am not one who believes that great economic strides can be made by reducing regulation. It should be attempted, but it is not a fundamental part of the solution.

Cultural aspects of the white middle class plight

I also will discuss the most controversial aspect of the white middle class plight — cultural norms and the mythical class that the current victim class wishes to create. By unflinchingly discussing these cultural norms, many readers will think me disrespectful of a large group of people “who just want to work hard and get a fair chance in life.” I am not, however, disrespectful of the people. I am only disrespectful of cultures — be they white, black or anything else — that refuse to change despite the fact they cannot succeed in the world in which we live. Those cultures, as I will discuss later in this article, retard the ability of their adherents to take advantage of even the best public policies.

That such sticky cultural indicia exist is not unusual. They are a common source of human difficulties.

Ditch the corporate income tax

U.S. public policies in the form of taxes and employment-related burdens on employers do not come close to maximizing the possibility of good jobs.

By taxing corporations instead of their stockholders, public policy puts American workers at a disadvantage. If we taxed stockholders instead of corporations, corporations would have lower costs and therefore they would have lower prices and would attract more business both domestically and internationally. That would tend to create jobs, as well as making higher wages less painful to the employers.

There are some complications in eliminating the corporate income tax for business corporations, but the complications are quite surmountable, once we have the political will. (The basic mechanism would be to tax not only dividends but also assets — cash, securities, etc. — not invested in the business — with special rules for real estate and financial companies.)

The political will can come from understanding that it is American workers who suffer most from the corporate income tax. A corporation is a juridical person, but the real parties in interest are its stockholders, and it is they who should pay the taxes. The change could be close to revenue neutral, so long as the stockholders paid at ordinary income rates. That would be fair and would not deprive corporations of capital because tax incentives for investment are not needed.

Clearing away the corporate income tax will make American businesses stronger because they will finance themselves more with equity and less with debt, the two then being on a par from a tax point of view. Businesses go bankrupt by not repaying debt; they do not have to repay equity. And that will make a significant difference in the depth of recessions, which will be less burdened by bankruptcies and the layoffs that are attendant to them.

Democrats hate the idea of eliminating the corporate income tax. But it is the right thing to do for American workers. Democrats should get over that aspect of their catechism. (Something Republicans hate is coming up next. Both need to give up a part of their false beliefs.)

Reduce the burden on employers hiring additional employees

Our laws burden employment with many things, including health care costs and unemployment insurance, both of which should be paid from more general taxes in order to make it more attractive to hire workers.

Get employers out of the health care business

The biggest non-wage cost of hiring is health care. Health care began to be paid by employers because it was deductible to them but not to employees. Obamacare exacerbated the situation by including the employer mandate for companies with over 50 employees.

“To keep up with the rising cost of health care in the U.S., employers doubled their spending on health care as a percentage of employees' pay, from 5.7 percent in 2001 to 11.5 percent in 2015,” Ben Steverman reported on Bloomberg.com. The private insurance system did not keep health care costs in line for employers, who have both the clout and the incentive to do so. We need a better system.

A solution begins to come into view when we remove deductibility for employers (if they pay no taxes, they have no deductions).

As an alternative, we could make health care deductible for everyone. But that would be regressive taxation and would exacerbate inequality. We should not go there. We could continue to rely on insurance companies and individual purchases, with subsidies for those who cannot afford a specified level of care. That is about what Obamacare did and what both the House and Senate bills of 2017 would do, and almost no one likes the way it works.

But what Obamacare has accomplished — and it is a signal accomplishment — is that it has shown the American people that health care — at least up to some point — should be available to every American. That is the reason that Republicans really have not proposed repeal and why even the tinkering with various ways to reduce health care subsidies has been unable to pass Congress.

The obvious solution — one that most Republicans hate but that is nevertheless the right solution for everyone — is a single payer system that provides coverage up to a specified set of points, with people free to purchase additional coverage to serve them beyond those specified points. That solution becomes clearer once we eliminate the tax differentials and recognize that the genie of universal coverage cannot put back into the bottle. It would be best to focus on how best to design the single payer system in order to provide incentives for providers to be efficient and for patients to not to seek unnecessary care.

Most importantly, a single payer system would be paid for by general taxation, not by employers. (The exact form of the tax is important but not necessary for this article’s purpose.)

Employers should not have to pay for unemployment insurance

In most states, unemployment insurance is paid for by employers on a per-employee basis. And in many states, unemployment insurance is experience-based. That is, employers pay for the insurance system based on the number of former employees who have received unemployment insurance. Although that system has a whiff of sense by seeking to dissuade employers from laying off people, it nevertheless is backwards. Employers employ people; they should be encouraged to do so, not threatened with costs for things that happen to every employer — especially to those that are struggling to make money. Unemployment insurance should come out of general tax revenues. It would eliminate a barrier to hiring and it might even result in higher wages.

American businesses have the capacity to grow

America has the best system of business finance the world has ever known. Many different types of well-funded intermediaries compete to invest in the most profitable projects and businesses. There almost literally is no limit to the amount of finance that is available for good ideas. The money will be available for private sector expansion, if the expansion can be profitable.

How many jobs would these policy changes create? I do not know. Would they be jobs that pay well enough to achieve the American Dream? I do not know.

The world evolves quickly. All public policy can do is make the playing field as attractive as possible for American companies to do business — and specifically to do business that uses employees. If we cut the costs of employers (1) by removing the corporate income tax, (2) by moving health care out of the cost structure, and (3) removing the unemployment insurance burden, then businesses will be able to do more business and will have greater incentives to do so by hiring more people — and paying them more. Reducing non-compensation costs is the best way to make American workers more competitive with workers from less affluent nations.

But the new jobs will require skills

The economic initiatives I have outlined are not, however, going to create large numbers of jobs for people without skills. Employers will still demand skills. Therefore, an additional set of policy changes has to be designed to enable Americans — particularly young Americans — to become sufficiently skilled that they will be in demand. (Infrastructure improvements that are needed may provide some jobs for people with lesser skills, but my guess is that even most of the jobs created by infrastructure projects are likely to require modern skills. Therefore, by all means build infrastructure that the economy needs, but we should not do so in order to create jobs.)

How to provide a fair chance at the American Dream

If we want to make progress, we have to analyze what prevents less affluent children from having a fair chance to compete with their better-off peers. (I assume you will grant that less affluent kids do not have a fair chance to compete with their better-off peers. The data are everywhere, but if you have doubts, take a look at The Education Solution or at Richard Reeves’ recent book, Dream Hoarders.) A fair chance to compete educationally is at the heart of redressing both the problems of the middle class and the growth of inequality.

The fair chance has to begin at birth because children born to less affluent families (especially single-parent families) often are at a disadvantage in language, health care and nourishment right from the start. Society therefore should embrace free early education that is designed to enable all children to have the opportunity to get to kindergarten at the same stage of educational and emotional development. The details of my plan are in The Education Solution. The benefits of early education also are detailed at Nobel laureate James Heckman’s website.

Some may protest that the middle class does not need this early education system. Middle class parents do a good enough job on their own, they may argue. Perhaps that is so in many cases. But statistically, it is not true of single-parent households (which is a substantial percentage of young, white middle class households — see data cited by Thomas B. Edsall later in this article) or households where the parents are not well educated. The job of public policy is to enable as many American children as possible to be in a position to pursue The American Dream.

My program also looks to address the needs of substantially all young people for post-secondary education. We should look at post-secondary education as a continuum of educational types that students may choose after completing high school. I want to emphasize that all young people should complete high school before selecting a type of vocational education. There are two important reasons for this: 1) if selection comes at an earlier stage, less affluent students are likely to be shunted into less promising careers; and 2) in the world that young people are going to inhabit, a range of abilities that they cannot anticipate as teenagers are going to be necessary in order to make the adjustments that a successful working life is likely to entail.

Once it is time to choose a post-secondary school, government should be prepared to make up to a specified amount (I say $10,000 per year of full-time study in current dollars) by way of loans. But those loans should not bear interest and should be repayable only as a percentage of income — and required amounts should be payable as part of the former student’s income tax bill. (No defaults, no ifs, ands or buts.) Instead of interest, payments at a reduced percentage of income would be payable for ten years after the original amount was repaid. The idea is that the government takes an equity interest in the student. The details of the program are spelled out in The Education Solution. Such a program is gathering more and more adherents over the last two years, including some prominent Senators.

I have modeled the education aspects of my proposed program, and they produce a substantial surplus for the government over a 30-year period, but a deficit in the first 10 years. That temporary deficit is inevitable, given that the children who start at age zero take more than two decades to begin to pay effective dividends. The projections are available for audit at www.the-education-solution.com. The major benefits are quite obvious, however: Educated people make more money than uneducated people, they commit fewer crimes, and they use the safety net to a far lesser extent. Thus, over a long period, the government collects a great deal more in taxes and pays a great deal less in safety-net benefits and for police, courts and jails. Education is a long-term public good.

Class in America (not Marxist style)

The myth of a classless society in the U.S. has died hard. But it has died, and in its place are the realities of how people form groups and attachments and how they use conduct, tastes, and linguistic differences to keep others away and to signal to each other what class they belong to. David Brooks of the New York Times recently wrote intelligently about how such class systems work. See here. Those who would improve their economic lot must either become entrepreneurs or conform to the cultural norms of the economic class they wish to join.

A person (of whatever color) who wants to move from her own class to a higher one economically usually has to learn (and adopt, at least to some extent) the ways and language of the higher class in order to move into the higher class and to become comfortable there. Most obviously, this includes dress, manners, and speech. People often are held back by this necessity — and they are held back even more often by family and peer pressure not to change or not to be uppity. Such cultural difficulties should not be glossed over. Indeed, some aspects of cultural change (manners and speech, in particular) have to become a part of what the educational system accomplishes, if the educational system is to be successful in preparing students for 21st century work.

As Thomas B. Edsall wrote for the New York Times recently,

There is no question that the communities where Trump received crucial backing — rural to small-city America — are, in many ways, on a downward trajectory.

From 1990 to 2009, the percentage of births to single mothers among whites without high school diplomas grew from 21 to 51 percent; among those who completed high school, the percentage rose from 11 to 34 percent.

Along parallel lines, the percentage of intact marriages among white adults 25 to 60 years old without high school degrees fell from 70 percent in the 1970s to 36 percent in the 2000s. For those who finished, the percentage fell from 76 to 46 percent.

Almost literally, the mythical white middle class is falling apart, featuring early deaths due to opioid abuse and similar practices, failing marriages, and children preponderantly living with single parents. All these are, in the perception of the class that is being victimized, shameful indicia that they have been cheated at the expense of others, including blacks, immigrants and the upper middle class intelligentsia.

The joke on all of us, including members of the so-called middle class, is that the distressed middle class doesn’t want to be part of the real 21st century middle class. It wants to be members of a class that never existed except in myth. It wants to have good jobs without attaining education; it wants for wives not to have to work outside the household; it wants children to live in a Leave-It-To-Beaver neighborhood.

But to be members of the real 21st century middle class, people of the now-mythical middle class have to change culturally, and many of them do not want to do so. The background of this riddle is explained from different perspectives in Hillbilly Elegy by J.D. Vance and in White Trash by Nancy Isenberg, as well as in numerous other books and articles.

Here are some excerpts from the Introduction to Hillbilly Elegy, where J.D. Vance, who grew up in a blue-collar family in an Ohio steel town but managed to go to Yale Law School, has explained the cultural problem as simply and eloquently as anyone:

I want people to understand the American Dream as my family and I encountered it. (p. 2)

I nearly gave in to the deep anger and resentment harbored by everyone around me. (p. 2)

We do not like outsiders or people who are different from us, whether the difference lies in how they look, how they act, or, most important, how they talk. (p. 3)

From low social mobility to poverty to divorce and drug addiction, my home is a hub of misery. (p. 4)

We’re more socially isolated than ever, and we pass that isolation down to our children. (p. 4)

It’s about reacting to bad circumstances in the worst way possible. It’s about a culture that increasingly encourages social decay instead of counteracting it. (p. 7)

There is a lack of agency here — a feeling that you have little control over your life and a willingness to blame everyone but yourself. (p. 7)

Vance is describing the particular part of the white middle class that he came from — the part that came north (in his family’s case, to Ohio) from Appalachia to work in manufacturing. But the syndrome he describes is similar to what affects many other sub-groups in the areas of the Midwest where the hollowing out of manufacturing has left many people without jobs that they consider worth their efforts.

The mythical middle class (of which Vance’s family is a part) know the joke is on them. That is why they voted for Trump, who promised to create a world that never existed in which they could keep their cultural identity but succeed to real 21st century middle class economic status nevertheless. That cannot work, no matter what government does. And it is a very sad joke indeed because it appears that the same class of less educated people who live outside the coastal cities is at risk of further job losses through automation. See, e.g., James Pethokoukis of the American Enterprise Institute here.

Black Americans suffer from a similar cultural malady. Although the focus of this article is on the white middle class, one should note that black Americans also have created their own class that at the same time keeps others out and keeps its members down economically. That is not to say there is no discrimination against black Americans. There is plenty. But the interplay between the mythical white middle class and the black class has been a corrosive element of American life through the last 50 years that has held both sides back from accomplishing their economic goals and from achieving elements of The American Dream.

(One of the ways to reduce the enmity between the white middle class and the black community would be to do away with affirmative action. It generates too much resentment among whites — and at the same time, it makes its black beneficiaries wonder whether they really are any good at what they do. Affirmative action may have been a good idea in 1965, but we are over 50 years on, and it no longer benefits the nation. Instead, it drives a wedge not only between those who get the positions and those who believe they have been shut out of the positions despite better qualifications, but also between the entire classes of people who identify with the two sides.)

Cultural change

Most people who want 21st century jobs will have to conform to prevailing norms of manners, dress and speech in order to get them and to succeed at them. The people at the top are not going to change culturally, except as they choose to do so. Those coming up have to adapt to achieve their goals. This is not a new reality. When I — a Jewish kid from the Bronx — joined a Wall Street law firm in 1966, I understood the cultural rules and adapted.

People are entitled to their own cultural norms — it’s a free country, as the saying goes — but they/we have to accept the consequences of adhering to our cultural norms. There is a price, and each of us has to adapt or pay the price.

It is only by talking about the impact (which is taboo in many circles) that people can come to understand the consequences of cultural mores. No one has to change, but everyone should understand the choices and their consequences.

Middle class economics and GDP growth

You may have noted that I have not mentioned GDP growth or its components: population and productivity. The basic reason for that omission is that GDP growth in itself is not an economic good. The economic good is the ability of more people to achieve The American Dream. At the same time, adopting the policies that I have outlined above is almost certain to increase productivity (see my writing on productivity here and here) and GDP, regardless of whether it results in population growth.

Long-term goals for the survival of human life on this planet may even not be consistent with continued population growth. Humans — and even Americans — may have to learn to create economic prosperity without population growth. That means we will have to measure prosperity some other way than GDP — perhaps a way that more directly measures the success of people in achieving The American Dream. Such indicia might include, for example, median real income of a defined type of family. If everyone who wants one has a job that pays a wage sufficient to achieve The American Dream, then growth be damned, let’s all work hard and enjoy life.

The economic numbers can work with a slightly declining population so long as a larger proportion of that population is working and paying taxes, while a smaller proportion is receiving more than they are contributing. Basically, it is a question of “plus and minus” hockey players. Those we call plus are on the ice when their team is scoring more goals; those who are minus are on the ice more for other teams’ goals. A nation of plus hockey players need not worry about whether its population is growing or shrinking. (The impact of a static population on social security is outlined in The Education Solution.)

It is work — and the dignity of work — that creates a successful middle class. That is something that even those who resist cultural change can embrace. It is the saving grace that would enable a transition from yearning for a mythical time that never existed to a time when, through education and greater cultural homogeneity, vastly more Americans could become successful.

Positive results require a better understanding of the 21st century world

If you were hoping I had a magic bullet, well, obviously, I don’t have one. The U.S. emerged from WWII victorious, with millions of men coming home from war anxious to work and to make a life for themselves and their children. The rest of the world was on its back due to the fighting having taken place there, so the U.S. had little competition. And for 25 years or so we flourished in that environment. But many Americans did not notice that the world was changing. People in other nations were catching up, and the unity that the war had created was fraying, especially as government engaged in less popular wars. Technology changed apace, so the nature of work changed as well, but too many Americans did not notice that, either, or thought it did not apply to them or to their progeny. In that climate, the nation’s needs were misunderstood; the wrong changes were made; the wrong things allowed to stagnate. The nation continued to be the best place to live and the best place to thrive economically because of freedom and a spirit of entrepreneurship. But the rot in the middle grew. Now we need a different way of looking at things — not a Democrat way, not a Republican way, but a realistic way that discards the failed ideologies of both sides and substitutes policies that work to create more opportunity for a larger proportion of Americans.

Most of us share some of the blame for such a large part of the American population not having a fair opportunity to achieve The American Dream in the 21st century. Let’s try to re-imagine the spirit of unity that enabled the great middle class of the post-WWII years. We can have just as great a real 21st century middle class.

Again, my thanks to Kevin Wilson and Gil Weinreich for generating this conversation at seekingalpha.com. Seeking Alpha is devoted principally to our members’ investment success, but important more general conversations about economic subjects may have the largest impact on the success of our future investments, as well as on the lives of our children and grandchildren.

Disclosure: I am/we are long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.