Did Bankers Rob the Middle Class?

In the last decade, a greater share of money flowed to our banking system than almost any time in American history. Meanwhile, middle class wages continued their 30 year freeze. Are the two related? Are the banks robbing the middle class?

Kevin Drums suggests as much in a series of articles that accuse the new super-rich, which is disproportionately in the financial sector, of swindling the middle class. At one point, Drum quotes from a great essay on income inequality by Tyler Cowen: "It's as if the major banks have tapped a hole in the social till and they are drinking from it with a straw."

Great sentence ... but Cowen's analysis does not blame rich bankers for impoverishing the middle class. Instead, his theory is: Bankers squeeze money from volatile markets in the short term, and they rely on government bailouts in the long term. As a result, they make reckless bets at the casino knowing that Washington will always refill their chips if they go all in and lose. That's an argument for moral hazard, inefficient financial markets and the possibility of higher post-crash taxes. If it's also an explanation for stagnating wages for mid-level sales people, I don't see it.

Drum lists other policies that might be contributing to the middle class wages freeze, and he acknowledges that rising health care premiums might be stealing some middle class wages. But one word that doesn't appear in the article is education.

So let's talk about education. I've got two graphs I want to share: One on the cost of college and one on the value of college. The cost of college is rising about six percent a year, at some points even faster than overall health care spending. In the next decade, as states cut financing for public schools, tuition at public four- and two-year schools will rise even faster than they have in the last few decades. Here's what that looks like:


But just as college costs are rising faster than either inflation or middle class wages, the value of college has never been clearer. Here's an eye-opening graph on the education premium:

Every statistic tells the same story: If you want to earn more, learn more. Between 1973 and 2007, real wages fell 15 percent for non high-school grads; stayed flat for high school grads and workers with "some college"; and rose 18 percent for both college grads and advanced degree grads. Upshot: Just as the cost of college has become prohibitive for many families, the benefits of college have only increased.

One story you could tell about income inequality is that in the last 30 years, technology and globalization have commoditized lower-middle class jobs. Technology ate into manufacturing work that could be done by robots, while globalization nibbled into menial service jobs that could be done by cheaper countries. (Domestically, you could argue that immigration, free trade, and anti-union sentiment have also gutted middle income jobs.)

The bottom and middle floors of the labor market aren't as plush as they used to be, so workers need education to ride to the higher stories. And there's the Catch-22. Although getting on the elevator has never been more important, getting a college degree also never been more prohibitively expensive after 30 years of flat wages falling behind education inflation.

I'm with Matt Yglesias, who writes that it's hasty to blame the nation's financiers for literally stealing from the middle class' wages. It seems much more likely to me that a smorgasbord of both conscious public policy decisions (like outsourcing, free trade agreements, and low interest rates) and unintended phenomena (rising education and health care costs) combine to make the rich richer and the poor no richer.