Can the Middle Class Be Saved?

The Great Recession has accelerated the hollowing-out of the American middle class. And it has illuminated the widening divide between most of America and the super-rich. Both developments herald grave consequences. Here is how we can bridge the gap between us.
A Cultural Separation

In the March 2010 issue of this magazine, I discussed the wide-ranging social consequences of male economic problems, once they become chronic. Women tend not to marry (or stay married to) jobless or economically insecure men—though they do have children with them. And those children usually struggle when, as typically happens, their parents separate and their lives are unsettled. The Harvard sociologist William Julius Wilson has connected the loss of manufacturing jobs from inner cities in the 1970s—and the resulting economic struggles of inner-city men—to many of the social ills that cropped up afterward. Those social ills eventually became self-reinforcing, passing from one generation to the next. In less privileged parts of the country, a larger, predominantly male underclass may now be forming, and with it, more-widespread cultural problems.

What I didn’t emphasize in that story is the extent to which these sorts of social problems—the kind that can trap families and communities in a cycle of disarray and disappointment—have been seeping into the nonprofessional middle class. In a national study of the American family released late last year, the sociologist W. Bradford Wilcox wrote that among “Middle Americans”—people with a high-school diploma but not a college degree—an array of signals of family dysfunction have begun to blink red. “The family lives of today’s moderately educated Americans,” which in the 1970s closely resembled those of college graduates, now “increasingly resemble those of high-school dropouts, too often burdened by financial stress, partner conflict, single parenting, and troubled children.”

“The speed of change,” wrote Wilcox, “is astonishing.” By the late 1990s, 37 percent of moderately educated couples were divorcing or separating less than 10 years into their first marriage, roughly the same rate as among couples who didn’t finish high school and more than three times that of college graduates. By the 2000s, the percentage in “very happy” marriages—identical to that of college graduates in the 1970s—was also nearing that of high-school dropouts. Between 2006 and 2008, among moderately educated women, 44 percent of all births occurred outside marriage, not far off the rate (54 percent) among high-school dropouts; among college-educated women, that proportion was just 6 percent.

The same pattern—families of middle-class nonprofessionals now resembling those of high-school dropouts more than those of college graduates—emerges with norm after norm: the percentage of 14-year-old girls living with both their mother and father; the percentage of adolescents wanting to attend college “very much”; the percentage of adolescents who say they’d be embarrassed if they got (or got someone) pregnant; the percentage of never-married young adults using birth control all the time.

One stubborn stereotype in the United States is that religious roots are deepest in blue-collar communities and small towns, and, more generally, among Americans who do not have college degrees. That was true in the 1970s. Yet since then, attendance at religious services has plummeted among moderately educated Americans, and is now much more common among college grads. So, too, is participation in civic groups. High-school seniors from affluent households are more likely to volunteer, join groups, go to church, and have strong academic ambitions than seniors used to be, and are as trusting of other people as seniors a generation ago; their peers from less affluent households have become less engaged on each of those fronts. A cultural chasm—which did not exist 40 years ago and which was still relatively small 20 years ago—has developed between the traditional middle class and the top 30 percent of society.

The interplay of economic and cultural forces is complex, and changes in cultural norms cannot be ascribed exclusively to the economy. Wilcox has tried to statistically parse the causes of the changes he has documented, concluding that about a third of the class-based changes in marriage patterns, for instance, are directly attributable to wage stagnation, increased job insecurity, or bouts of unemployment; the rest he attributes to changes in civic and religious participation and broader changes in attitudes among the middle class.

In fact, all of these variables seem to reinforce each other. Nonetheless, some of the most significant cultural changes within the middle class have accelerated in the past decade, as the prospects of the nonprofessional middle class have dimmed. The number of couples who live together but are not married, for instance, has been rising briskly since the 1970s, but it really took off in the aughts—nearly doubling, from 3.8 million to 6.7 million, from 2000 to 2009. From 2009 to 2010, that number jumped by nearly a million more. In six out of 10 of the newly cohabitating couples, at least one person was not working, a much higher proportion than in the past.

Ultimately, the evolution of the meritocracy itself appears to be at least partly responsible for the growing cultural gulf between highly educated Americans and the rest of society. As the journalist Bill Bishop showed in his 2008 book, The Big Sort, American communities have become ever more finely sorted by affluence and educational attainment over the past 30 years, and this sorting has in turn reinforced the divergence in the personal habits and lifestyle of Americans who lack a college degree from those of Americans who have one. In highly educated communities, families are largely intact, educational ideals strong, and good role models abundant. None of those things is a given anymore in communities where college-degree attainment is low. The natural leaders of such communities—the meritocratic winners who do well in school, go off to selective colleges, and get their degrees—generally leave them for good in their early 20s.

In their 2009 book, Creating an Opportunity Society, Ron Haskins and Isabel Sawhill write that while most Americans believe that opportunity is widespread in the United States, and that success is primarily a matter of individual intelligence and skill, the reality is more complicated. In recent decades, people born into the middle class have indeed moved up and down the class ladder readily. Near the turn of the millennium, for instance, middle-aged people who’d been born to middle-class parents had widely varied incomes. But class was stickier among those born to parents who were either rich or poor. Thirty-nine percent of children born to parents in the top fifth of earners stayed in that same bracket as adults. Likewise, 42 percent of those whose parents were in the bottom fifth remained there themselves. Only 6 percent reached the top fifth: rags-to-riches stories were extremely rare.

A thinner middle class, in itself, means fewer stepping stones available to people born into low-income families. If the economic and cultural trends under way continue unabated, class mobility will likely decrease in the future, and class divides may eventually grow beyond our ability to bridge them.

What is most worrying is that all of the most powerful forces pushing on the nonprofessional middle class—economic and cultural—seem to be pushing in the same direction. We cannot know the future, and over time, some of these forces may dissipate of their own accord. Further advances in technology may be less punishing to middle-skill workers than recent advances have been; men may adapt better to a post-industrial economy, as the alternative to doing so becomes more stark; nonprofessional families may find a new stability as they accommodate themselves to changing norms of work, income, and parental roles. Yet such changes are unlikely to occur overnight, if they happen at all. Momentum alone suggests years of trouble for the middle class.

Changing the Path of the American Economy

True recovery from the Great Recession is not simply a matter of jolting the economy back onto its former path; it’s about changing the path. No single action or policy prescription can fix the varied problems facing the middle class today, but through a combination of approaches—some aimed at increasing the growth rate of the economy itself, and some at ensuring that more people are able to benefit from that growth—we can ameliorate them. Many of the deepest economic trends that the recession has highlighted and temporarily sped up will take decades to fully play out. We can adapt, but we have to start now.

The rest of this article suggests how we might do so. The measures that I propose are not comprehensive, nor are they without drawbacks. But they are emblematic of the types of proposals we will need to weigh in the coming years, and of the nature of the national conversation we need to have. That conversation must begin with a reassessment of how globalization is affecting American society, and of what it will take for the U.S. to thrive in a rapidly changing world.

In 2010, the McKinsey Global Institute released a report detailing just how mighty America’s multinational companies are—and how essential they have become to the U.S. economy. Multinationals headquartered in the U.S. employed 19 percent of all private-sector workers in 2007, earned 25 percent of gross private-sector profits, and paid out 25 percent of all private-sector wages. They also accounted for nearly three-quarters of the nation’s private-sector R&D spending. Since 1990, they’ve been responsible for 31 percent of the growth in real GDP.

Yet for all their outsize presence, multinationals have been puny as engines of job creation. Over the past 20 years, they have accounted for 41 percent of all gains in U.S. labor productivity—but just 11 percent of private-sector job gains. And in the latter half of that period, the picture grew uglier: according to the economist Martin Sullivan, from 1999 through 2008, U.S. multinationals actually shrank their domestic workforce by about 1.9 million people, while increasing foreign employment by about 2.4 million.

The heavy footprint of multinational companies is merely one sign of how inseparable the U.S. economy has become from the larger global economy—and these figures neatly illustrate two larger points. First, we can’t wish away globalization or turn our backs on trade; to try to do so would be crippling and impoverishing. And second, although American prosperity is tied to globalization, something has nonetheless gone wrong with the way America’s economy has evolved in response to increasingly dense global connections.

Particularly since the 1970s, the United States has placed its bets on continuous innovation, accepting the rapid transfer of production to other countries as soon as goods mature and their manufacture becomes routine, all with the idea that the creation of even newer products and services at home will more than make up for that outflow. At times, this strategy has paid off big. Rapid innovation in the 1990s allowed the economy to grow quickly and create good, new jobs up and down the ladder to replace those that were becoming obsolete or moving overseas, and enabled strong income growth for most Americans. Yet in recent years, that process has broken down.

One reason, writes the economist Michael Mandel, is that America no longer enjoys the economic fruits of its innovations for as long as it used to. Knowledge, R&D, and business know-how depreciate more quickly now than they did even 15 years ago, because global communication is faster, connections are more seamless, and human capital is more broadly diffused than in the past.

As a result, domestic production booms have ended sooner than they used to. IT-hardware production, for instance, which in 1999 the Bureau of Labor Statistics projected would create about 155,000 new jobs in the U.S. over the following decade, actually shrank by nearly 500,000 jobs in that time. Jobs in data processing also fell, presumably as a result of both offshoring and technological advance. Because innovations now depreciate faster, we need more of them than we used to in order to sustain the same rate of economic growth.

Yet in the aughts, as an array of prominent economists and entrepreneurs have recently pointed out, the rate of big innovations actually slowed considerably; with the housing bubble fueling easy growth for much of that time, we just didn’t notice. This slowdown may have been merely the result of bad luck—big breakthroughs of the sort that create whole categories of products or services are difficult to predict, and long droughts are not unknown. Overregulation in certain areas may also have played a role. The economist Tyler Cowen, in his recent book, The Great Stagnation, argues that the scientific frontier itself—or at least that portion of it leading to commercial innovation—has been moving outward more slowly, and requiring ever more resources to do so, for many decades.

Process innovation has been quite rapid in recent years. U.S. multinationals and other companies are very good at continually improving their operational efficiency by investing in information technology, restructuring operations, and shifting work around the globe. Some of these activities benefit some U.S. workers, by making the jobs that stay in the country more productive. But absent big breakthroughs that lead to new products or services—and given the vast reserves of low-wage but increasingly educated labor in China, India, and elsewhere—rising operational efficiency hasn’t been a recipe for strong growth in either jobs or wages in the United States.

America has huge advantages as an innovator. Places like Silicon Valley, North Carolina’s Research Triangle, and the Massachusetts high-tech corridor are difficult to replicate, and the United States has many of them. Foreign students still flock here, and foreign engineers and scientists who get their doctorates here have been staying on for longer and longer over the past 15 years. When you compare apples to apples, the United States still leads the world, handily, in the number of skilled engineers, scientists, and business professionals in residence.

But we need to better harness those advantages to speed the pace of innovation, in part by putting a much higher national priority on investment—rather than consumption—in the coming years. That means, among other things, substantially raising and broadening both national and private investment in basic scientific progress and in later-stage R&D—through a combination of more federal investment in scientific research, perhaps bigger tax breaks for private R&D spending, and a much lower corporate tax rate (and a simpler corporate tax code) overall.

Edmund Phelps and Leo Tilman, professors at Columbia University, have proposed the creation of a National Innovation Bank that would invest in, or lend to, innovative start-ups—bringing more money to bear than venture-capital funds could, and at a lower cost of capital, which would promote more investment and enable the funding of somewhat riskier ventures. The broader idea behind such a bank is that because innovation carries so many ambient benefits—from job creation to the experience gained by even failed entrepreneurs and the people around them—we should be willing to fund it more liberally as a society than private actors would individually.

Removing bureaucratic obstacles to innovation is as important as pushing more public funds toward it. As Wall Street has amply demonstrated, not every industry was overregulated in the aughts. Nonetheless, the decade did see the accretion of a number of regulatory measures that may have chilled the investment climate (the Sarbanes-Oxley accounting reforms and a proliferation of costly security regulations following the creation of the Department of Homeland Security are two prominent examples).

Regulatory balance is always difficult in practice, but Michael Mandel has suggested a useful rule of thumb: where new and emerging industries are concerned—industries that are at the forefront of the economy and could provide big bursts of growth—our bias should be toward light regulation, allowing creative experimentation and encouraging fast growth. The rapid expansion of the Internet in the 1990s is a good example of the benefit that can come from a light regulatory hand early in an industry’s development; green technology, wireless platforms, and social-networking technologies are perhaps worthy of similar treatment today.

Any serious effort to accelerate innovation would mean taking many other actions as well—from redoubling our commitment to improving U.S. schools, to letting in a much larger number of creative, highly skilled immigrants each year. Few such measures will be without costs or drawbacks. Among other problems, a mandate of light regulation on high-potential industries requires the government to “pick winners.” Tilting government spending toward investment and innovation probably means tilting it away from defense and programs aimed at senior citizens. And because the benefits of innovation diffuse more quickly now, the return on national investment in scientific research and commercial innovation may be lower than it was in previous decades. Despite these drawbacks and trade-offs, the alternative to heavier investment and a higher priority on national innovation is dismal to contemplate.

As we strive toward faster innovation, we also need to keep the production of new, high-value goods within American borders for a longer period of time. Protectionist measures are generally self-defeating, and while vigilance against the theft of intellectual property and strong sanctions when such theft is discovered are sensible, they are unlikely to alter the basic trends of technological and knowledge diffusion. (Much of that diffusion is entirely legal, and the long history of industrialization and globalization suggests that attempts to halt it will fail.) What can really matter is a fair exchange rate. Throughout much of the aughts and continuing to the present day, China, in particular, has taken extraordinary measures to keep its currency undervalued relative to the dollar, and this has harmed U.S. industry. We must press China on currency realignment, putting sanctions on the table if necessary.

Given some of the workforce trends of the past decade, doubling down on technology, innovation, and globalization may seem wrongheaded. And indeed, this strategy is no cure-all. But without a vibrant, innovative economy, all other prospects dim. For the professional middle class in particular, an uptick in innovation and a return to faster economic growth would solve many problems, and likely reignite income growth. While technology is eating into the work that some college graduates do, their general skills show little sign of losing value. Recent analysis by the McKinsey Global Institute, for instance, indicates that demand for college grads by American businesses is likely to grow quickly over the next decade even if the economy grows very slowly; rapid economic growth would cause demand for college grads to far exceed supply.

Still, even in boom times, many more people than we would care to acknowledge won’t have the education, skills, or abilities to prosper in a pure and globalized market, shaped by enormous labor reserves in China, India, and other developing countries. Over the next decade or more, even if national economic growth is strong, what we do to help and support moderately educated Americans may well determine whether the United States remains a middle-class country.

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