Getting money back in circulation key to middle-class prosperity
The middle class is losing ground at a startling pace, posing a significant threat to all Americans.
Real-life stories abound. Paul, a sales clerk, earns $10.45 per hour. Over the past 25 years, his hourly pay in the service sector has declined in today's dollars from $11.30 to $10.45 now. Although Paul is 66, he cannot retire. Having raised three children on approximately $33,000 annually for the past two decades, he and his wife have been unable to save for retirement, yet Social Security, by itself, is too little to support them.
Paul has been far from alone in encountering flatlined pay. Despite large productivity gains, middle class pay and income have fallen seriously behind. During the past 40 years, while American workers' productivity nearly doubled, the top 10 percent of Americans enjoyed pay increases of over 100 percent. During the same time, pay for the average American worker has been stagnant.
Commentators have focused on the moral and ethical unfairness of the yawning income gap, but an equally serious, indeed urgent reason for protecting middle class fortunes is economic. As income has steadily become more concentrated at the top, going to those who spend the least of their income on consumption, it has delivered a staggering blow to overall consumption in the economy.
Consumption is an essential incentive in any market economy. Producers don't invest and grow the economy when overall demand is sluggish. Data from the Department of Labor's surveys reveal that the loss of demand caused by income amassing so heavily at the top now exceeds an astounding $1.2 trillion every year. That huge drag on consumption has seriously curtailed productive investment and job creation.
The shortage of consumption today is large enough to support 13-14 million new jobs for American workers averaging $22 per hour. Getting a full grip on the problem within the private sector would raise the yearly income of the average working family 40 percent, by more than $20,000.
The crippling effect of the loss of consumption on private investment and opportunity creation is so great that Standard and Poor 500 companies together now spend more than half their earnings not on investing in plant and equipment, research and development, job creation, or better wages but instead simply on purchasing back their own stock.
One way to boost middle class income and consumption more in tandem with productivity is through reforming corporate taxes - for example, aligning tax rates with the degree to which companies abide by broad guidelines regarding pay at the top relative to pay at the middle and below, and applying a reduced tax rate to complying companies and a higher rate to noncomplying companies.
Awarding government contracts and benefits to businesses abiding by similar criteria would reinforce the principle of restoring middle class prosperity.
Other initiatives for increasing middle class income and reducing the costs of necessities must also be pursued, for example: raising the minimum wage, making college more accessible, reducing health care costs and lowering child care and housing costs. All these policies would increase household purchasing power, bolster overall consumption in the economy, and enable most Americans to get much further ahead through work and personal responsibility - exactly what both the economy and ordinary American workers need.
Restoring middle class prosperity should not be viewed as a partisan, ideological or class issue. All Americans must rally to revive middle class financial success because all of our futures depend upon it.
John E. Schwarz is professor emeritus of public policy at The University of Arizona. S. Raja Krishnamoorthi, of Schaumburg, is president of Sivananthan Labs, a Bolingbrook high-tech incubator.