There is no modern precedent for America's stalled middle class -- or for the double detachment from work and marriage among low-earning men. So, what do we do now?
If the American economy were an automobile, you would say the transmission is failing. The engine works, but not all wheels are getting power. To put the matter less metaphorically: The economy no longer reliably and consistently transmits productivity gains to workers. The result is that many millions of Americans, in particular less-skilled men, are leaving the workforce, a phenomenon the country has never seen before on the present scale.
Well. That was a mouthful. It certainly bites off more than Washington's polarized politicians can handle at the moment. In the next few months, they need to worry about the so-called fiscal cliff, the round of automatic tax increases and spending cuts that, if not averted, might start a recession. Plus a politically vexing debt-limit bill, which will need to be passed early in 2013. Plus a recovery that, for many Americans, feels more like a recession. (The median family income fell as much during the first two years of the recovery as it did during the two years of the recession itself, according to the Pew Research Center.) Plus a debt crisis and downturn in Europe. Isn't that enough?
Sadly, no. The U.S. economy has weakened, and much needs fixing--beyond the fiscal cliff--if it's to regain its strength. A reelected President Obama and a still-divided Congress face a lengthy To Do list for the economy. We've chosen eight entries: innovation, jobs, rising health care costs, entitlement programs, college-completion rates, infrastructure, housing, and retirement security. None of them will be easy to fix.
But first, let's consider a nexus of troubling economic trends that seem to be driving and deepening many of the specific problems--and may prove to be the most intractable problem of all. If economic strength means anything, it is that the economy can make almost everyone better off, thereby strengthening the country's social fabric as well as its balance sheet. Such an economy unites rather than divides us.
Today's economy, by that standard, is struggling. Its ability to deliver rising living standards across the income spectrum is in decline, and perhaps also in question. "This is a fundamental problem," says Robert J. Shapiro, the chairman of Sonecom, an economic consultancy in Washington. "This is America's largest economic challenge. People can no longer depend on rising wages and salaries when the economy expands."
As other articles in this issue suggest, a number of policy responses are on the agenda already, such as creating jobs, helping more students finish college, and reducing wage-denuding health care inflation. Others, such as reforming the federal disability program, have yet to attract much notice. In truth, however, the extent of Washington's ability to repair the economy's gearbox is an open question, because the problem is complex. It implicates not just one slipped gear but many: disruptions in long-established connections between productivity and earnings, between labor and capital, between top earners and everyone else, between men and work, between men and marriage. Together, they are bringing the economy to a place where a large and growing group of people--indeed, whole communities--are isolated from work, marriage, and higher education. That place might look like today's America, only with a larger welfare state. But it might just as easily bring social unrest and class resentment of a magnitude the country hasn't known before.
Begin with Chart 1. It shows one of the most basic of all economic relationships, that between productivity and hourly compensation. Productivity measures the value of the output (brake pads, stock transactions) a worker produces in, say, a day; compensation is a measure of earnings that includes the value of benefits such as health insurance. The chart also shows compensation for all U.S. workers and specifically for workers in production and nonsupervisory jobs--blue-collar and clerical jobs, for example.
For decades, productivity and compensation rose in tandem. Their bond was the basis of the social compact between the economy and the public: If you work harder and better, you and your family will be better off. But in the past few decades, and especially during the past 10 years or so, the lines have diverged. This is slippage No. 1: Productivity is rising handsomely, but compensation of workers isn't keeping up.
True, compensation is still rising, on average. But the improvements are spotty. Production and nonsupervisory workers--factory, retail, and clerical workers, for example--saw productivity gains disappear from their paychecks much earlier and got hit harder than did supervisors and professionals. Over the past 30 years or so, their compensation has hardly risen at all.
"This is something that has been happening and building for years and is now really rooted in the economy, and it's vicious," said Lawrence Mishel, president of the Economic Policy Institute, a liberal think tank in Washington. "There's a remarkable disconnect. The problem isn't a lack of the economy producing sufficient income to make everybody's living standards improve--it's that the economy is structured so that the majority don't benefit." Or, to state the point more cautiously, the majority doesn't benefit from productivity gains very much--certainly, less than our parents and grandparents did.
Notice that recessions and expansions barely register in the trend lines. Long-term, gradual forces, rather than short-term jitters, are at work. Charts 2 and 3 hint at what those might be. Chart 2 shows how much wages (not compensation, this time) have grown for workers in different income brackets. The higher you stood on the income ladder, the better you did; the highest-paid 1 percent of earners soared above and away from everyone else, practically occupying an economy of their own. By contrast, the bottom 90 percent of earners--which is to say, almost everyone--saw barely any increase, and much of what they did see came in the boom years of the late 1990s.
So, productivity is rising, but it isn't being evenly allocated; the top is effectively disconnected from the rest of the spectrum--slippage No. 2. One reason, especially pronounced in the past decade or so, is that fewer of the productivity gains are flowing to workers, and more are flowing to investors. Chart 3 shows what happened. From the end of World War II through about 1980, almost two-thirds of every dollar of income generated by the economy flowed to workers in the form of wages and benefits. Beginning around 1980, workers' share began to slide and, in the past decade or so, has nose-dived, to about 58 percent. The difference went to shareholders and other investors--who provide capital rather than labor--in the form of higher returns on their holdings.
Why would workers be receiving a smaller share of output, and why would the share they do receive be skewed toward the top? No one is sure, but Sonecom's Shapiro tells a plausible story. First, globalization has reduced American companies' ability to raise prices, and thus to increase their workers' pay, without losing competitiveness against companies in, say, China and India. Second, a smaller share of the value that companies produce today comes from the physical goods made by people like factory workers, and a larger share comes from ideas and intangible innovations that people like software designers and marketers develop. Between the early 1980s and the mid-2000s, Shapiro says, the share of a big business's book value accounted for by its physical assets fell by half, from 75 percent to only 36 percent.