Buddha admonished his followers to minimize earthly possessions. How then, one wonders, would he react to the July 21 New York Times report that Target stores offer “no fewer than 10 Buddha items for sale,” including one in which the great sage apparently bears an unmistakable resemblance to Homer Simpson?
We are not, alas, a nation of Buddhists. We are a nation of consumers, and we are becoming more so. It has always been a mantra among economists that consumption represents two thirds of the economy. But that statistic is out of date. It has been climbing since the early 1980s and is nowcloser to 70 percent. That is why, when faced with the most devastating attack on our homeland in our history, our commander-in-chief did not emphasize shared sacrifice. He told us to get out to the malls and “down to Disney World.”
Do we over-consume? I find Warren and Tyagi’s arguments convincing. As they emphasize, most of the big-ticket items bought by middle-income families are necessities such as housing, health care, and child care. But I come not simply to agree with Warren and Tyagi, but to go further than they do to understand what is behind the middle-class squeeze that they so ably document. For example, they note that over the past generation “family income rose not because men are, on average, making more money (they are not) but because millions ofmothers decided to enter the work force.” Given this reality, isn’t a central explanation for the middle-class squeeze male wage stagnation?
Of course it is, and any set of solutions needs to deal with this growing disparity between economic growth and the living standards of middle-income families. Examining productivity growth in relation to the real income of the median family reveals a particularly dramatic picture of this divergence. Since productivity is, by definition, output per hour, an increase in productivity indicates that the U.S. work force is able to create more income per hour of work. Thus, another common mantra among economists asserts that productivity is the main determinant of living standards.
However, there is no guarantee that this added income will reach middle-income families, especially in periods of high unemployment and rising inequality. Between 1947 and 1973—a golden age of growth for both variables—productivity and real median family income more than doubled, each growing by precisely the same amount. Throughout this era, one that stands out starkly from today’s in Warren and Tyagi’s analysis, the nation’s productivity growth was broadly shared, and the median family reaped the benefits of the expanding economy. Starting in the mid-1970s, however, this virtuous relationship broke down.
From 1973 to 2003, median family income grew at less than one third of the rate of productivity. Relative to the earlier years, this was a period of growing income inequality, which served as a wedge between productivity and the living standards of the median family. Other factors were at play as well, including changes in family size and type, but the main factor was the wedge of inequality. While faster productivity growth led to a larger economic pie, growing inequality meant that the slices were divided such that some income classes—particularly those at the top of the income scale—claimed most of the income growth.
These conditions have certainly beene vident in the current business cycle as well, as productivity grew each year from 2000 to 2003, increasing by a total of 12 percent. Meanwhile, real median family income fell each of these years, declining by an overall three percent. By 2003, the gap between productivity growth and median family income had become the largest on record.
These developments—increased economic inequality andthe gap between productivity and earnings—are most responsible for the problems that Warren and Tyagi document. The resources exist to avoid many of these problems; the issue is really about distribution. But first, let me stress the importance of a theme that Warren and Tyagi raise in their discussion of the ideology behind theover-consumption myth: the politics of personal responsibility.
Almost every recent conservative initiative—not just the bankruptcy law—has been invoked under this banner. Tax cuts were sold under the pretence that the budget surplus (which turned out to be a mirage) was “your money.” No vision of the common good here, no consideration of how we might pool our resources to meet the housing, education, and health-care challenges facing thepoor and middle-class; just give the surplus back to tax payers and let them fight it out on their own. It’s the same idea with Social Security privatization and health-care reform.
We simply can’t meet the challenges of an increasingly global and technologically advanced economy this way. The risks—individual and collective—are too great. We are a country rich and productive enough that no one should be exposed to undue hardship because they get sick or divorced, or because ill fate befalls them that is not their fault. Our public-education system is not an across-the-board disaster; there are public schools to which we’d be happy to send our kids. But there are too few. There are jobs with Cadillac health and pension plans, and some of those same jobs pay a wage that buys quality housing in good neighborhoods with enough left over to pay for decent child care and maybe even save for college. But there are too few such jobs, and they seem to be fading fast, even for workers with college educations.
In this environment, we need collective responsibility. If middle-class families, with two working parents playing by the rules, are having difficulties making ends meet, then we need to take steps to reconnect such families to the prosperity generated by our economy. The stagnation of middle-income male wages is related to the hemorrhaging of manufacturing jobs, the declining power of labor unions, high average unemployment over most of the past 30 years (the tight labor market of the late 1990s was an exception, and note that incomes and productivity grew together during those years), and a shift in employment norms wherein firms have become much more comfortable with layoffs. Offshore competition is also an ongoing challenge with the potential to place significant downward pressure on the wage growth of white-collar workers who were formerly immune from such trade pressures.
Some of these pressure points can be addressed by policies that use government investment to incubate promising manufacturers; that reshape labor law to make it much easier to build unions; and that apply fiscal, monetary, and even direct job-creation policies to absorb labor slack when necessary. A comprehensive safety net, with wage and health insurancefor displaced workers, is needed to prevent the sharp decline inliving standards facing those laid off from middle-income jobs.
The same theme of collective responsibility leads to the types of ideas espoused by Warren and Tyagi. Universalizing some of the necessities responsible for the squeeze, such as health care and child care (e.g., universal pre-kindergarten), falls right out of their analysis, as does significant investment in public schools.Lower-income working families need other supports—including transportation, housing, and wage subsidies—to fill the gap between what they earn and what it takes to get by in America today.
This ambitious, costly agenda flies in the face of today’s social Darwinism. But at some point the pendulum is going to swing the other way, and those of us concerned about the issues raised by Warren and Tyagi had best be armed and ready with a policy agenda to restore some sanity and prosperity to middle-income America.
Jared Bernstein is senior economist at the Economic Policy Institute, a nonprofit, nopartisan think tank in Washington, D.C., that researches the economy’s effect on the working class.
If families are making more money than ever and are still in financial trouble, surely the critics are right: Americans are overborrowing. But the data tell a different story.
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