Neera Tanden is President and CEO of the Center for American Progress. You may follow her on Twitter @neeratanden
THE United States is about to embark upon a great debate, one that will shape the future of our country and our public policy. As we prepare to enter a critical presidential election year, the question of how to reverse the trends of rising inequality and shrinking social mobility has gripped the nation and is permeating, in different forms, the debate in both political parties.
The vast majority of Americans believe the economy is no longer working for them—and they’re right. Most middle-income people in the United States, as in many other industrialized economies, are struggling. For several decades, rising inequality, coupled with slower growth, has eroded Americans’ confidence that working hard and playing by the rules will result in rising quality of life for themselves and their children.
A changing global economy presents unique challenges. Downward pressure on wages, stagnation of real household income, and the rising cost of the core components of a middle-class lifestyle, were a problem even before the Great Recession, and are not unique to the United States.
While the American economy has almost recovered at a macro level since the end of the Great Recession, most workers aren’t feeling those economic improvements. They face stagnant wages and greater competition for jobs. In the United States, unemployment remains stubbornly high among young adults, many of whom have crippling student loan debt. Although employment has risen overall, many of the good middle class jobs that disappeared during the Great Recession won’t be coming back. Meanwhile, the cost of essential services—from college to healthcare—have skyrocketed.
The Central Challenge
President Barack Obama has understood the challenge of rising inequality, calling it, “the central challenge of our time.” And he has proposed ideas to address it. He has called for an increase in the minimum wage, new investments in infrastructure, and new job creation—all of which have been stymied by the opposing party in the U.S. Congress.
So families in the United States continue to face a harmful combination of stuck wages and rising costs. A 2014 report by the Center for American Progress (CAP) showed that the median income for a married couple with two children in the United States was the same in 2012 as it was in 2000, after adjusting for overall inflation. Over the course of 12 years, such a family’s income has remained stagnant, while the cost of the basic pillars of middle-class security—education, healthcare, housing, and retirement—rose by more than 30 percent (again, adjusted for overall inflation). That family has seen healthcare costs alone rise by $4,000 in 12 years. Housing costs have increased by $2,800 and childcare costs by $2,300. These pillars of a middle-class lifestyle cost an ordinary American family of four $10,600 more today than they did 12 years ago.
Paradoxically, our economy’s productivity has continued to grow at the same time workers are struggling. While productivity grew by 30 percent between 2000 and 2012, it was firms and high-level executives that reaped the benefits. Almost none of the benefits of increased productivity have gone to the average worker, instead being captured by firms as shareholder profits, cash on corporate balance sheets, or salaries for a few high-paid employees.
Thus, new income has increasingly gone to those at the top of the ladder. During the recovery, 58 percent of our nation’s income gains went to the top one percent of earners, while wages for the rest of Americans stood still. Inequality between the richest of the rich and the rest of Americans has reached its highest level since 1928.
Before the Great Depression, the top one percent of families received 23.9 percent of all pre-tax income, while the bottom 90 percent received 50.7 percent. By 2014, the one percent were taking home 45.5 percent of all pre-tax income, while the bottom 90 percent took home just 30 percent.
It’s obvious why these problems matter to families: they’re working harder and getting by on less. But this trend also has great consequences for our economy as a whole.
The American middle class is the backbone of the American economy. A strong middle class promotes the development of human capital and the next generation of entrepreneurs, and creates stable demand for goods and services. Middle-class families are America’s core consumers, and when they fail to prosper, so do businesses and the economy as a whole.
Raising incomes for working Americans will create higher demand in the short term and sustained growth and increased opportunity in the long term. Ensuring middle-class families, share in economic prosperity is among our nation’s greatest responsibilities.
However, policymakers too often embrace a fatalism about wage stagnation in the United States. They accept wage stagnation and declining incomes for the middle class as just an inexorable result of technology and globalization. That key assumption is challenged and rejected by a major commission’s findings. CAP convened the Commission on Inclusive Prosperity—chaired by former U.S. Secretary of the Treasury and CAP Distinguished Senior Fellow Lawrence H. Summers and Ed Balls, a former Shadow Chancellor of the Exchequer in the UK Parliament—to examine the fortunes of the middle class across developed nations. It found that several countries were able to produce market wage increases for their middle classes despite technology and globalization. Therefore, it is a matter of policy choices.
In countries such as the United States and the United Kingdom, the changing structure of the labor market has been a significant contributor to the slowdown in middle-class market income growth. The relationship between employers and employees is less stable than it was 40 years ago. Workers are significantly less likely to be members of a union and significantly more likely to be employed on contract. This has made it difficult for them to bargain for higher wages or even paid sick days, vacation, or pensions.
Developed countries with stronger union movements have not seen the kind of wage stagnation we have witnessed in the United States. Nations that have robust minimum wages, and that have recognized the value of unions, have not seen such a strong divergence between productivity and worker pay.
Throughout much of American history, the strength of the middle class has moved up and down in tandem with the strength of America’s unions. Today, U.S. workers simply have less bargaining power than ever. Unions, which ensure workers have a strong voice to negotiate for higher wages and benefits, played a strong role in building the American middle class in the first place. But unions have been in decline for decades—shrinking from a third of the workforce during the 1950s, a decade that was characterized by economic growth and broadly shared prosperity, to just 11-12 percent today.
Collective bargaining plays a significant role in reducing inequality. One study found that, over recent decades, a third of the growth in inequality among American men, and a fifth of the growth in inequality among American women, can be attributed to the decline of unions.
This challenge is not unique to the United States. Recent work by the International Monetary Fund (IMF) links the decline of unionization rates since 1980 to increasing inequality in developed nations. The IMF found that the decline in unionization explains about half of the increase in the income share going to the top 10 percent of earners. According to the IMF, “inequality has risen in many advanced economies since the 1980s, largely because of the concentration of incomes at the top of the distribution.” And the decline of unions is one factor that has led directly to that concentration of wealth.
Another factor has been the increasing short-term focus of corporate managers on maximizing share price and their own compensation. The ties that once bound corporations to their workforces and communities are weaker than ever, as they search for low wages and low taxes. Managers focus increasingly less on long-term value and more on financial engineering to report stronger quarterly earnings.
Instead of viewing workers as an investment, companies narrowly view labor as a cost. And as unions have declined, executives have harvested the gains in productivity for themselves and shareholders, rather than sharing them broadly. In 1965, CEOs at large companies made an average of 20 times more than the typical worker. In 2013, according to the Economic Policy Institute, CEOs at large companies made almost 300 times as much as the typical worker.
The deterioration of basic labor market institutions and the increasing short-term focus of public corporations—combined with technological change and globalization—have produced weak middle-class market income growth in some developed countries like the United States and the United Kingdom.
These issues are shared across advanced economies. Yet some nations have managed to create middle-class growth where the United States has failed. This is evidence that it is smart, progressive public policy that determines a country’s ability to provide broadly shared prosperity in otherwise economically similar nations.
It is clear that building a more equitable economy will require bold changes in policy, even at a time when Americans’ trust in government is low. But that lack of trust is nurtured by government’s failure to provide broadly shared prosperity.
So what kind of economic model fosters sustainable equity? And, in addition to the role of government, what role can corporations and citizens play in developing and maintaining this economic model?
CAP’s Inclusive Prosperity Commission, of which I was a member, examined several policy challenges holding back American families and put forth a number of innovative ideas to spur quality job growth, combat increasing economic inequality, and reinvigorate the middle class. Those policy recommendations are described in some detail below, and are available in full online in the Report of the Commission on Inclusive Prosperity.
The primary challenge is to raise wages and income. We can do that by encouraging firms to share profits with their employees through “inclusive capitalism.” Inclusive capitalism is a win-win for workers and firms, because it is often associated with higher pay, expanded benefits and greater job security, participation in decisionmaking, trust in the company and management, and better labor-management relations. For businesses, inclusive capitalism is often associated with increased productivity and profitability, and a greater likelihood of corporate survival. In addition, companies often benefit from greater worker loyalty and effort, lower turnover rates, and an increased willingness on the part of workers to suggest innovations.
Inclusive capitalism practices range from employee stock ownership plans and worker cooperatives—which allow workers an ownership stake in a company—to cash-based profit- and gain-sharing programs, which pay workers a portion of the capital-related income they helped generate without granting ownership.
There are several existing policies that could support inclusive capitalism. One is continuing to allow companies to deduct incentive-based pay as a business cost—as many do for executive pay packages—but only if they make the incentive programs sufficiently broad based to cover most of their workers. Second, estate tax relief should be provided to a retiring founder or owner who transfers a successful firm to an employee stock-ownership plan.
We should also modernize employment laws around overtime pay, workers’ compensation, unemployment compensation, and other protections in order to recognize the changing nature of work and provide workers with basic economic security. This would include making contractors responsible for the behavior of subcontractors and encouraging new institutional forms to empower workers, such as work councils—elected bodies of employees with rights to information, consultation, and codetermination of employment conditions. States that have passed laws restricting collective bargaining by public employees—including Wisconsin, Michigan, and Indiana—should consider reversing these policies in order to restart robust wage growth.
Expanding the collective worker voice by making procedures governing collective bargaining fast and fair could remove the atmosphere of conflict that can surround representation elections and bargaining over initial contracts. And raising the minimum wage, and indexing that wage to the consumer price index, would reduce the share of workers trapped in low-wage work and raise millions of Americans out of poverty.
Markets must work in the public interest, rather than focusing only on short-term returns. Incentives should align with the goal of fostering productive capital investment and long-term profitability, rather than solely executive or shareholder profit.
In a world where technological change is increasing productivity and mechanizing jobs simultaneously, raising skill levels is also critical to increasing growth in the long term.
We should make public college education virtually free and ensure all high school graduates can afford college. Students and families should no longer have to come up with the funds to pay tuition and fees prior to enrolling at a community college or public four-year college or university. High school graduates should be entitled to financial support equivalent to tuition and fees at a public two or four-year college. Students who choose to attend private schools should receive support equivalent to tuition and fees at the student’s home-state school. Under this system, students would repay all or part of the support they received as a percentage of income earned over time. For students who are struggling economically, no payment should be required until their earnings are sufficient to make payments.
The American tax system is another tool to aid the middle class. However, while the American tax system is more progressive than those of most other Organisation for Economic Co-operation and Development (OECD) countries, spending in the U.S. is significantly less progressive than in other OECD countries. Tax reform could also make the tax code fairer over the long term by eliminating tax exemptions, deductions, and exclusions that overwhelmingly benefit high-income households and corporations, while lowering their effective tax rates.
A belief in government’s capacity to foster opportunity for all Americans is a core progressive value. So a defeatist attitude about our ability to address these challenges and influence worker outcomes not only flies in the face of international evidence that policy choices matter, it also mistakenly concedes to skepticism about government’s ability to enact positive change—despite proof to the contrary.
Without smart federal policies in place, unfettered markets will instead create greater inequality. This outcome is not only morally wrong, but also at fundamental odds with the American ideal of a democracy that offers everyone an equal chance to succeed. The question is not whether policy matters, but rather which policies will have a meaningful effect on the bottom 90 percent of households—and whether we have the political will to enact those policies.
The recent recovery has shown us that economic and productivity growth may be necessary, but are certainly not sufficient, to produce middle-class income growth. Our country’s political leadership must recognize that slow growth and stagnation are a choice, not the inevitable products of technological change and globalization. We must fashion a policy agenda that will produce inclusive prosperity.
Fortunately, the political reality is that a middle-out economic agenda has the overwhelming support of the American people. Americans from every end of the political spectrum agree that valuing families means modernizing our workplace to work for all families; improving educational outcomes with access to high quality early education and affordable higher education; investing in infrastructure and innovation; reducing poverty by increasing access to good jobs and wages and ensuring a robust social safety net; and expanding tax credits for low- and middle-income families.
These issues promise to be the centerpiece of the 2016 presidential election. Not only are these middle-out economic questions the challenge of our time, they are the marquee issues for an overwhelming majority of Americans. Americans consistently rank the economy as their single greatest concern.
The next year-and-a-half offers a unique opportunity to discuss big ideas, offer creative solutions to the problems that face our country, and push to make those proposals part of the 2016 debate. Candidates that offer a coherent economic message and policy agenda, and propose bigger, more innovative ideas to tackle the defining challenges of our time—especially growing economic inequality and a shrinking middle class—will define that debate.
There is a great deal at stake as the United States enters this election season—certainly more than the fate of any one candidate or political party. Indeed, our democracy’s ability to respond successfully to the concerns of its citizens and the challenges of a modern age depends upon a robust policy debate and resulting action to modernize key institutions.