A lost decade, not a burst bubble

Published on Incomes and Inequality

From time to time we’ll be posting pieces from the USA and elsewhere to gain international insights on the plight of low-to-middle earners. Here Sophia Parker, a Research Associate of the Foundation, sets out the growing crisis facing low-and-middle income America and considers what it means for the Obama administration.

“The problem”, declares American academic Joan C. Williams, “is that Obama eats arugula.” For Williams, the President’s major problem is that his choice of food is a ‘class act’ – a kind of cultural symbol that associates him with a professional class and an urban elite who are disliked, resented and mistrusted by ‘ordinary folk’.

The culture gap is certainly part of Obama’s problem and it will make it harder for him to reach out to the hard working Americans whose support he will badly need in 2012. But if he has any hope of bridging this culture gap, he will need to make some serious progress in tackling the dramatic economic gap that has opened up between professionals and the ‘missing middle’ in recent years.

So what has been going on? The Economic Policy Institute christens the period since 2000 ‘America’s lost decade’, thanks to the stagnation – and in some cases declining – wages for average working Americans, despite ongoing growth at the national level. Taking a historical perspective, a man on the median wage today is earning 12 per cent less than his father did.

Even if 2000, rather than the late 1970s, is taken as the starting point, the picture looks bleak. While productivity increased by 19.8% between 2000 and 2007, the real median hourly wage for men went up by just 1.1%, with most of this growth occurring between 2000 and 2003.¹ For the first time on record, median income did not rise over the 2000-2007 business cycle: in fact, it fell slightly, to $51,965.

What’s more, the recession is accelerating the decline of average working-age incomes, with the latest figures for 2009 indicating that since 2007, median household income has dropped by 4.2%.² The Census Bureau notes that this drop would have been even more significant had it not been for very low inflation rates across 2009.

As well as accelerating the downward trend in wages, the recession has also undermined the coping strategies relied upon by low and moderate income households to maintain their standard of living in recent years, leaving them more exposed and reporting greater feelings of insecurity than any other part of the population:

• Families who simply worked longer hours in better times in order to maintain their standards of living are now being hit by underemployment. Simply restoring the pre-recession hours of those who have held on to their jobs is the equivalent of adding 1.6 million new jobs to the economy

• Where a second earner once brought in ‘pin money’, the growing reliance on two incomes to cover the basics means that any job loss can now precipitate a crisis.

• The income-debt ratio more than doubled between 1987 and 2007, with the steepest rises in the middle of the income distribution, suggesting that households were relying on easy access to cheap credit to bridge any gaps between income and outgoings.³ The credit market has contracted sharply since the onset of the recession.

So the story is the same for middle income America, whether your starting point is 1979, 2000 or 2007: in all three cases, those on low and moderate incomes are disproportionately losing out. The historic link between productivity and wages has been broken: a rising tide no longer lifts all boats.

How did America get here? Most agree that outsourcing, immigration, globalisation and technological change all have a part to play in explaining the increasingly polarised US labour market and the displacement of ‘routine’ workers.

Most also agree that public policy choices made during the Bush years – generous tax cuts for the rich and the steady erosion of collective insurance in favour of a ‘personal responsibility’ agenda – deliberately helped the rich at the cost of the poor. Even those who stop short of arguing it was an explicit strategy acknowledge the problem of policy ‘drift’. Trends in inequality are hard to ignore, as the chart below shows in frightening clarity. As Jacob Hacker recently arguedin The American Prospect:

‘The failure to update policy as the economic world evolves has in fact been central to the long-term American march toward a vastly more unequal society.’

Source: Lane Kenworthy, using data from the Congressional Budget Office, www.cbo.gov/publications/collections/ collections.cfm?collect=13.

So what should happen now? Joe Biden’s Middle Class Task Force looks rather like window dressing in the light of the crisis afflicting middle income America, but at least it shows that the White House is worrying about the right issues. Extending existing government interventions – for example, tax credits, or other kinds of work supports such as childcare – is certainly important, but difficult to deliver in a time of unprecedented fiscal constraint.

Rather than demanding a discrete set of policies, the crisis of everyday voters now needs to be the animating challenge and the driving force of Obama’s next two years. The fact that this crisis resembles a ‘lost decade’ more than a ‘burst bubble’ underlines the importance for the Democrats of focusing more aggressively on a long-term economic and industrial strategy. It must put decent jobs and broad-based prosperity – rather than growth alone – at its heart.

Which brings us back full circle to Obama’s rocket-eating, and the question of whether he can reach out and build the alliances he will need to address the crisis in middle income America. For the sake of low income Americans, let’s hope that he can do it.