Uneasy in the Middle
The American middle class is worried-and with reason. Middle-class workers have long been the foundation of American society. In recent decades, they have seemed more prosperously buoyant than ever, living in bigger houses with a panoply of utilities, gadgets, and entertainment systems. So why the angst?
The roots are primarily economic. Even in these boom times, anxiety levels rival those of the early Reagan recession years. In particular, people have great and growing fear about losing their jobs. And we are at one of the rare points in our history when Americans have stopped dreaming of a better life for their children. Now the hope is negative: that their children won't be forced into a lower standard of living. Americans used to feel sure each generation would do better than the last—but someone has run away with the ladder. Now the middle class lives with the same uncertainties that dog the poor. So close do many feel to the economic margin that they fear they're but one illness or one job loss away from catastrophe.
The paranoia is not idle. In the 1970s, a family had a roughly 7 percent chance of its income dropping by half or more. Today the odds are 17 percent. Almost two thirds of workers believe that it is harder to earn a decent living now than it was 20 or 30 years ago, according to the Pew Research Center. Workers with fewer years of formal education feel it most, as earnings of the college educated have about doubled compared with high school graduates. Yet the public education system, once the great equalizer, is perceived to be deteriorating, even as it has become dramatically harder to finance a college education.
Fairness. The economy as a whole is performing well, but most people are not sharing in it. In 2005, the average income of those in the "bottom" 90 percent of the economy dipped from the year before. That's just one broad indicator of the problems confronting many of the groups within that 90 percent—no college education, single parent, minority. Meanwhile, at the top end of the economic spectrum, the gains have been spectacular. Just look at CEO pay, for example, which has risen in the past decade at triple the rate of the median worker's pay.
What is clear is that our richest 10 percent have gained the most. That top slice now receives 44 percent of pretax income, the highest since the 1920s and 1930s, and up from 32 percent between 1945 and 1980. The richest 1 percent has done even better, with pretax income growing from 8 percent of national income in 1980 to 17 percent in 2005. Another way to look at it is that the richest 1 percent of Americans took in 21.8 percent of all recorded income in 2005—double their share in 1980. This means that the 300,000 Americans at the top made almost as much money as the 150 million Americans at the bottom.
Along with sluggish median earnings, these 150 million are having to meet rising healthcare costs no longer funded by government and employers. Even Americans who went to college are now experiencing the kind of income instability high school dropouts faced in the 1970s. And many fewer can count on the fixed-benefit plans provided by larger firms: Fewer than about a third provide such benefits today, compared with 80 percent 30 years ago. Millions of people are now on their own to ride the economic roller coaster.
Fiscal policy has been no help. Over a 20-year period, government has been taking more from the middle class in taxes than it has given back in benefits. This is the underlying cause of the Democratic capture of the middle-class vote in the past election.
What to do? The rise in the minimum wage will help, as it did in the 1990s. There remain three imperatives:
1. Help workers change jobs. It should be much easier than it is now to transfer health and pension benefits.
2. Boost our national investment in education and training. We have to reduce inequality while expanding economic opportunity. We must have an education system that a much larger proportion of the middle class can afford. It has to equip Americans with the skills to make them mobile and give them greater economic security.
3. Make taxation fairer. Expand the earned income tax credit, and make the whole system more progressive. Average tax rates on the richest one-hundredth of Americans have been cut in half since 1970, while taxes on the middle class have risen. Other income for the wealthy, such as dividends and capital gains, is now taxed at lower rates than the wage income of most middle-class families.
I am not arguing that gifted managers and entrepreneurs should be taxed more. Given the changes in the global economy, there is a more competitive market for top talent, and that should properly manifest itself in higher pay. But that necessity does not warrant obvious injustice.
The alternative is dangerous as well as inequitable. The gulf between what top managers receive and what they pay workers is increasing tensions. The longer this goes on, the more our social fabric is at risk.
This story appears in the June 11, 2007 print edition of U.S. News & World Report.