The Future of the Middle Class

Perhaps the most important questions for the America economy are: Why did the middle class meltdown happen, and can we fix it?

The story of the middle class is a story of promise and paralysis. In the 30 years after World War II, the country's real median income doubled, allowing average Americans to fulfill the American Dream of achieving a better life than their parents and passing it on to their children. That was the promise.

In the last 30 years, however, the American Dream has been in peril. Production jobs went to robots, while administrative jobs went to Bangalore. Manufacturing employment lost half its share of the economy. Union participation plummeted. Real median income rose by only a fifth and actually fell in the last decade. That is the paralysis.

Perhaps the most important questions for the American economy are: Why did the middle class meltdown happen, and can we fix it? The short answer to both questions is, We don't know for sure. But here's our best thinking.

What Happened?

In the 1970s, something changed.

For most of the 20th century, wages in the financial industry tracked the rest of the economy. In the 1970s, finance left other sectors in the dust. For most of the 20th century, productivity grew hand-in-hand with income. In the 1970s, productivity growth left wages in the dust.

Blame it on greedy corporate executives who care more about juicing earnings reports than paying a decent wage. Blame it on deregulation. Blame it on robot arms replacing human arms, or Shenzhen replacing Detroit, or health care benefits replacing wages. Choose your own culprit, but the outcome is the same: The middle class has been thoroughly hollowed out. Low-paying jobs in food service and home health aides are growing. High-paying jobs in finance and management are growing. But the middle class that was once our core now resembles a valley.

The Future of the Middle Class

No article published in 2011 is going to perfectly forecast the job economy of 2021. But one prediction feels safe: Health care will consume a larger and larger share of the labor force for three reasons.

First, the graying of America will increase demand for medicine and treatment for seniors. Second, an outsized portion of our research and development (up to a third, according to economist Mike Mandel) already goes to biosciences and medicine. That's key, because today's investment presages tomorrow's growing industries.

Third, U.S. subsidies for health care -- from tax-free employer insurance to generous Medicare coverage -- automatically inflates the demand for health services. That's bad for middle class consumers facing out-of-control prices, but it's good for middle class job seekers who are willing to work in health care. According to the Bureau of Labor Statistics, six of the top eight jobs with the fastest projected growth are in the health care or medical science industries. Three of the top five jobs with the largest projected growth are in health care, as well.

But just as few journalists in the early 1990s predicted that this thing called "internet" would transform their decade, any projection of the next decade's job growth has to glimpse into the unseen potential of the U.S. economy. What will be the next surprising engine of growth?

Follow the president's words, and you might choose green energy. Demand for energy will explode in the 21st century, as China, India, Brazil, and Indonesia join the global middle class, buy cars and light suburban homes. At the same time, fossil fuels are scarce and dirty. The economies that create, license, build and monitor cheap and clean alternative technologies will thrive in the 21st century. A green energy economy would include manufacturers, sales people, on-site installation, IT personnel, and more positions that match middle class skills.

Follow the money, and you'd put your bet on bioscience. The United States is the world leader in bioscience R&D funding, providing 70 percent of the developed world's health and science research investment. Although drug production has fallen by half in the last 15 years, innovation experts like Mandel bet that we've seen a pause rather than a full stop in the biotech revolution.

Follow the headlines, and you'd bet on another Internet revolution. The imminent public offerings of Groupon, Facebook, LinkedIn and other online service companies making serious cash suggest that we really could be in the midst of another tech boom, where mobile edges its way into the service economy and the United States leads another global IT revolution.

How Can Washington Help?

Understanding that there are no quick fixes, what can government do to help the middle class return from paralysis to promise?

First, we can aim small. The United States could accept that a modern competitive economy naturally creates income inequality and the most reasonable path forward is to share the wealth. A pro-growth and progressive tax system with stable regulations would allow the economy to function with minimal interference, while the government moved income from the top to the middle and bottom. If the jobs won't pay, maybe government should.

Second, we can aim to educate. A knowledge-based economy requires knowledgeable workers -- but at what price for the workers? The bonus from a college education (see graph) for men and women has doubled in 30 years. But over the same time, the cost of a four-year college education has more than doubled. Student loan debt is near $900 billion, more than credit card debt. What's Washington to do? The U.S. can continue to "split the check" with college students by giving more grants and loans. It can push colleges to be more transparent about their costs and benefits. Or perhaps it can expand cheaper accreditation programs that offer college skills at non-college prices.

Third, we could embrace a new industrial policy. The U.S. government has long catalyzed American tech breakthroughs. Defense spending helped develop and popularize the Internet, the computer and the microchip. Federal research contracts helped to establish our edge in aviation and nuclear power. Why shouldn't the United States be strategic about building the bedrock for the middle class' resurgence with a carbon tax to boost clean energy, a public-private pharma bank to boost biosciences, or an aggressive export strategy to help American innovation penetrate emerging markets?

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The solutions to the middle class stagnation are controversial. Liberals reject the stand-back-and-wait strategy, conservatives veto more government intervention and libertarians balk at industrial policy. We don't know the right medicine for what ails middle America.

What we know is that the economy is growing on two levels: high-paying jobs that require lots of expensive education, and low-wage local service jobs that don't. Middle class workers are becoming a commodity replaceable by technology or off-shoring. Without new industries to support their skills or new skills attained by more training, there's no reason to expect the hollowing out of the middle class to end.