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Commentary :: Labor
The Next Middle Class
13 Jan 2004
In their own ways, Jefferson, Lincoln, and Roosevelt, provided the institutional frameworks for middle-class growth. Now, radical ideas are necessary to prevent a return to feudalism.
(from "Are We Still a Middle-Class Nation?")

If we reject both a new feudalism (under which most Americans provide personal services for the rich few) and a regime of protectionism and immigration restriction (which would benefit some workers at the expense of others), then some system of redistribution will be necessary to ensure that the middle-class majority benefits from long-term productivity growth. This can take two forms: redistributing income and encouraging the widespread ownership of income-producing assets.

The most obvious way to share the gains from technological progress is to tax the owners of high-productivity industries at high levels and spend the proceeds on the rest of the population. To varying degrees in different countries--more so in Sweden, less so in the United States--this is the system that now exists.

This "social wage" can take different forms. Some Americans prefer that the government provide universal services such as public schools and public health care. Others prefer voucher systems that permit a degree of individual choice. The social wage can likewise be either a supplement to incomes or a subsidy for goods. The earned-income tax credit, which has bipartisan support, supplements the incomes of low-wage workers to lift them out of poverty, and provides an alternative to raising the minimum wage. But there is also bipartisan support for tax breaks for homeowners, and for other subsidies on middle-class consumption.

In their groundbreaking book The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke, Elizabeth Warren, of Harvard Law School, and her daughter Amelia Warren Tyagi demonstrate that fixed costs for the typical American middle-class family--home-mortgage payments, car payments, health insurance, child care, education, and taxes--have risen more rapidly than income over the past thirty years, eating up many of the gains from having two parents in the work force. According to the authors' analysis of government data, even when a two-earner family today brings in almost twice the income of a one-earner family in the 1970s (in inflation-adjusted constant dollars), the 1970s family had more discretionary income than today's.

If middle-class income does not grow as rapidly as middle-class costs, then one option is to further subsidize the rising relative costs of labor-intensive goods and services that are necessary to a middle-class lifestyle, such as education, child care, and health care. And the government will certainly be pressured to provide such subsidies. But taxing fewer and fewer rich people to subsidize more and more middle-class people would increase incentives for the rich to avoid taxation or even to leave the country. An alternative is to increase the number of people who own income-producing assets.

"Universal capitalism," the idea that everyone should own income-producing financial assets, was originally championed by Thomas Paine, in the eighteenth century, and variants of the idea have been proposed in more recent years by Louis Kelso, Mortimer Adler, Jeffrey Gates, and Bruce Ackerman. Today about half of American households, and roughly 70 percent of registered voters, own stock through pension funds and similar vehicles. But money set aside for retirement does no good during one's working life.

Proposals for government-funded savings accounts for all children that would be restricted to a few purposes, such as college education or a first-home purchase, have been made by the Washington University professor Michael Sherraden and the former IRS commissioner Fred T. Goldberg Jr. Ray Boshara, of the New America Foundation, has proposed a similar system of American Stakeholder Accounts. And last April, British Prime Minister Tony Blair announced the establishment of child trust funds in the United Kingdom.

Like retirement savings invested in the stock market, child trust funds would be earmarked for particular purposes. But it is possible to imagine a future in which middle-class Americans would receive part of the returns on their investments during their working lives (a small part at first, but more with each generation), which they would be free to save or to spend without any restrictions. Of course, a nation that confiscated private financial wealth and redistributed it among its citizens would wreck its economy and send not only capital but also capitalists fleeing across its borders. Thus any plausible program of universal capitalism must start small, by planting seeds capable of growing along with the economy over time.

For example, one can imagine a means-tested program of private, regulated investment accounts in which the government matched the contributions of low-income workers. The seed money might come from spending cuts elsewhere, or from new taxes. Alternatively, citizens could all begin receiving modest amounts of money from the sale or lease of the airwaves and other public assets. In this way, even though most new middle-class jobs would not contribute to productivity growth in the way that farm and factory labor did in the past, universal capitalism could ensure that the fourth American middle class, like its predecessors, would be able to share directly in the long-term growth of the nation's economy.

This may seem a radical change. But only in recent generations have Americans begun to receive most of their income in the form of wages. The yeoman farmer didn't rely on wages. And only in the twentieth century did the New Deal add the social wage to the market wage. In the course of the twenty-first century what may be called the "capital wage" could be added to these, so that middle-class Americans--not merely an affluent minority--might derive income from three sources rather than just two.

In their own ways, with methods appropriate to their own times, Thomas Jefferson, Abraham Lincoln, Franklin Roosevelt, and their allies provided the institutional frameworks that permitted successive versions of middle-class America to grow and flourish. Their success set a high standard for the leaders of today. Every presidential candidate claims to want to help middle-class Americans. The challenge, though, is not to repair the current American middle class but to create a new one.

Michael Lind is the Whitehead Senior Fellow at the New America Foundation and Director of its American Strategy Project. Author of numerous books, Mr. Lind has also been an editor or staff writer for The New Yorker, Harper's Magazine, and The New Republic. From 1991-94 he was executive editor of The National Interest.

He has also been a guest lecturer at Harvard Law School. He has written for The Atlantic Monthly, Prospect, The New York Times Magazine, The Washington Post, the Los Angeles Times, The Financial Times, and other leading publications, and has appeared on Crossfire, C-SPAN, National Public Radio, and The News Hour with Jim Lehrer.
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