Book Reviews

Half Measures

The diagnosis of trickle-down as the problem is spot-on. The cure falls woefully short. Why are liberals afraid to be liberal?

By Bruce Bartlett

Tagged LiberalismMiddle Class

Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class By David Madland • University of California Press • 2015 • 272 pages • $27.95

David Madland is the director of the American Worker Project at the Center for American Progress (CAP), a progressive think tank often considered the principal source of Hillary Clinton’s ideas. Among progressive think tanks, CAP has been especially concerned with the plight of the middle class and declining upward mobility. Even without CAP’s connection to Clinton, however, it would have been reasonable to assume that her presidential campaign would be heavily focused on the economic problems of the middle class. That is, after all, where the votes are; the poor don’t vote and the wealthy are too few for their votes to matter (their money is another matter).

Madland has written a brief on why the weakness of the middle class is at the root of America’s economic malaise. As someone with a Ph.D. in government, he has focused on some issues related to the middle class’s economic stagnation usually overlooked by economists: among others, a decline in social trust, the worsening quality of national governance, and the deterioration of human capital, which he defines broadly to include education, training, health, income mobility, and entrepreneurship.

The most unambiguously “economic” chapter in Hollowed Out relates how the deterioration of the income and wealth of the middle class has had important macroeconomic implications. With consumption being the key driver of short-run economic growth, any decline in consumption by the middle class is necessarily going to slow aggregate economic growth. Consumption is, of course, vitally linked to income, and income is largely a function of employment. Thus, unemployment reduces income, which reduces consumption, which reduces economic growth, which raises unemployment, and so on.

This is the central problem the economist John Maynard Keynes identified as the root cause of the Great Depression. But while Madland notes this fact, he seems oddly reluctant to embrace the Keynesian remedy, which would involve deficit spending on government purchases of goods and services to create jobs and incomes. As newly employed workers spend their wages, this spending would create additional economic activity in the consumer sector, while the government purchases themselves would stimulate investment and profits in the industrial sector. Accommodated by an easy money policy, Keynesian stimulus would get the economy moving onto a path of self-sustaining growth.

Instead of revitalizing this admittedly well-worn macroeconomic policy prescription—perhaps because it would be futile in an era when both President Obama and the Republican Congress are determined to reduce the budget deficit—Madland focuses more on microeconomic measures such as improving early childhood education, raising the minimum wage, and rejuvenating labor unions. Tax policy seems oddly underemphasized in his list of policy prescriptions.

It’s not that there is anything wrong with these and other microeconomic policies—it’s just that the scale of the problems confronting the middle class is so great that such small-bore initiatives are unlikely to accomplish much. Moreover, most progressives understand that higher revenues are going to be necessary, both to redress rising income inequality and to provide the resources for a meaningful package of policies—student debt relief, government jobs, higher Social Security benefits, among others—to truly revitalize the middle class.

Madland is at his most interesting and persuasive on the subject of social trust, which is the kind of issue economists generally ignore. In terms of “trust,” he is concerned that rising income inequality has led to geographical isolation of different income classes from each other, thus making the middle class less sensitive to the plight of the poor, and the wealthy more self-absorbed. As Madland writes:

As people’s income levels move further and further apart, they tend to live in different neighborhoods, shop at different stores, drive different cars, send their kids to different schools, vacation in different ways, and have different relationships to work, different concerns, and different lives. They do not relate to one another on as many levels as they did when income levels were more similar and, critically, they think that others are different from them.

The decline in trust, owing to less day-to-day interaction among economic classes, which fosters racial and ethnic isolation as well, has led to social and economic actions that have their own negative consequences, Madland believes. These include the increasing and detrimental role of lawyers in economic transactions that used to be done with a handshake; the proliferation of private police forces in the form of security guards, which is a pure deadweight cost to the economy; and the short-term focus of corporate strategy, which often trades long-term investments in R&D, worker training, and even maintenance for higher near-term cash flow to pay executive bonuses and finance share buybacks. [See William A. Galston & Elaine C. Kamarck, “Against Short-Termism,”.]

When Madland talks about “good governance,” he is simply defending government from relentless conservative attacks on its very legitimacy, as well as defending its capacity to improve people’s lives and raise economic growth through something other than tax cuts. Much of this chapter is historical in nature, discussing the role of government as an engine of growth especially in the North, which provided the resources to win the Civil War, among other things. It amazes me that Republicans continue to push, nationally, the same small-government policies the South has had for at least 150 years. From that period down to today, growth in the South has lagged that of the North, and it remains our poorest region.

The governance chapter is also where Madland discusses the growing power of the ultra-wealthy and the increasing political polarization that hobbles the ability of governments at all levels to do the basic jobs for which they exist. This has had the further effect, he writes, of discouraging civic engagement by average citizens, creating a vacuum that has been filled by lobbyists and professional activists, often funded by billionaires, to give the false impression that the public supports their agenda.

The decline in governance is most apparent, Madland says, in our crumbling infrastructure. Virtually every area of government “investment” has been starved for resources in recent years, including schools, libraries, public buildings, roads, bridges, and scientific research. Moreover, the economic value of what government investment remains is undermined by “rent-seeking,” in which special interests siphon off a growing share for themselves at the expense of the public good.

I have no objection to the issues Madland raises. But I fear that the focus of his book undermines rather than promotes his message. An economic agenda too fixated on the middle class is too easily co-opted by conservatives, who insist that their policies are also aimed at the middle class despite the reality that they overwhelmingly benefit the ultra-wealthy. They can get away with this because so many Americans identify as middle class.

An April Gallup poll found that 38 percent of Americans called themselves middle class, with another 13 percent saying that they belonged in the upper middle class and 33 percent to the working class. Only 15 percent identified themselves as lower class and just 1 percent said they were in the upper class. Tellingly, the middle-class figure was down from 48 percent in 2000, while the percentage of people calling themselves lower class has quintupled from 3 percent. (Other classes stayed about the same.)

Some problems of self-identification with a particular economic class have to do with perception, comparison to peers, age, marital status, and whether the measure is based on wealth or income, among other things. For example, someone with $500,000 in net wealth in her 20s would be considered very well-to-do indeed; with 40 years or so of compounding ahead of her, she could expect to have several million dollars by retirement. But a 65-year-old with the same savings may not have enough to sustain a middle-class retirement and would reasonably not consider herself to be rich at all. Financial planners typically tell middle-class couples they need $1 million to live comfortably in retirement, although few achieve this goal, obviously.

People are all over the map on what it means to be middle class. A 2013 Gallup poll asked Americans the minimum income a family of four needs “to get by” in their community. Seven percent said less than $30,000; 22 percent said $30,000 to $50,000; 39 percent said $50,000 to $75,000; 8 percent said $75,000 to $100,000; and 10 percent said more than $100,000. Tellingly, there was significant regional divergence, with those in the South needing only $50,300 on average, while those in the East required $68,900. Moreover, those in the suburbs said they needed $73,300 on average, while those in rural areas only required $50,100.

A 2011 Gallup poll asked about wealth. Thirteen percent of people thought that having a net worth, including real estate, of less than $100,000 would classify them as rich; 9 percent said $100,000; 6 percent said $100,000 to $300,000; 21 percent said $300,000 to $1 million; 24 percent said $1 million; 12 percent said $1 million to $5 million; and 14 percent said more than $5 million.

Even the wealthy have muddled definitions of middle class and rich. During the 2012 campaign, Ann Romney, wife of the Republican presidential nominee, whose wealth was commonly estimated at a quarter of a billion dollars and who owned multiple homes, asserted that she did not consider herself to be wealthy. “We can be poor in spirit, and I don’t even consider myself wealthy,” she told Fox News. She said, disingenuously, that her wealth could be here today and gone tomorrow. More recently, New Jersey Governor Chris Christie, who reported $698,838 of income on his 2013 tax return (and who, according to reports, has a net worth of at least $3.8 million), replied, “We don’t have nearly that much money,” when asked if he and his investment-banker wife were wealthy. Both income and net worth figures put them well into the top 1 percent.

One reason I have gone through these data is that one won’t find them in Madland’s book. There is not a single table in the book, and just five figures. He seems to have simply assumed that everyone knows who is and who isn’t in the middle class. But if ultra-wealthy people like Ann Romney believe they belong to the middle class, then one can’t assume that the term is well understood.

Politically, this is important because some degree of redistribution from the ultra-wealthy is essential in order to improve the living standards of the poor and the true middle class. That means we need to create greater class consciousness among the vastly more numerous non-wealthy. Studies have shown that when people are given the facts about the maldistribution of income and wealth and their position in that maldistribution, their support for redistribution increases.

One of the key elements that Madland misses in his discussion of supply-side economics is how cleverly the supply-siders have conflated the interests of the middle class with those of the wealthy. Reviving the Horatio Alger myth, they have convinced many of those with no actual hope of improving their relative position in the U.S. income or wealth distribution that they could in fact do so if we just slashed tax rates and deregulated the economy. Unfortunately, the neoliberals who have dominated Democratic politics and economic thinking for the last quarter-century have essentially bought the supply-side argument, at least politically. They have internalized the ideas that taxes shouldn’t be used to soak the rich, that the budget deficit needs to be close to balanced, that the “era of big government is over,” and other ideas from the Clinton Administration that are far closer to Ronald Reagan’s worldview than FDR’s.

Neoliberals are deathly afraid of being accused of supporting redistribution except in the most modest possible way and are reluctant to push hard for higher taxes on the rich, even though such tax rates in no way deterred growth during the 1950s and 1960s. Madland writes, “[I]n the long run, more progressive taxation is good for the economy because it is necessary to pay for critical investments in preschool, for example, and to help reduce America’s extreme levels of inequality.” But this is a passing point at the very end of the book, rather than the central element of a progressive agenda to help the middle class. And the lack of public support cannot be blamed for this oversight. Polls have long shown majority support for higher taxes on the rich. A May New York Times/CBS News poll asked people whether taxes should be raised on those making $1 million or more per year and 68 percent, including a majority of Republicans, said yes, with only 30 percent saying no.

In the end, Hollowed Out is fine as far as it goes; it just doesn’t go very far. There is much more that needs to be said on the decline of the middle class and how to reverse it than can be said in just 167 pages of text. There is useful material buried in the endnotes, but it is doubtful that many readers will seek it out. There is a vast amount of statistical and poll data on this topic, as well as historical and analytical research, that readers will never know exists. Despite being published by a university press, Hollowed Out is insufficiently scholarly to interest scholars and insufficiently popular to engage average readers. Ultimately, the book lacks both an audience and a message that is likely to change the debate on the problem of rising inequality and the stagnating incomes of the true middle class.

To be sure, a new progressive agenda needs to accept that not everything that has harmed the poor or middle class can be blamed on supply-side economics or the Republican Party. Unfortunately, many of our economic problems are endemic to the nature of a twenty-first-century economy or resulted from a bipartisan consensus. The decline of labor unions, for example, owes far more to globalization than to explicit anti-union actions by Republicans. Preventing this from happening would have required trade-protection policies that had no political support in either party and were probably not feasible without capital controls to prohibit the free mobility of investment.

Another problem beyond the scope of government is automation and the trend toward jobs where every worker is classified as an independent contractor. Rather than trying to stop these things, it would be better to adapt to them by taxing some of the efficiency gains to pay for new income-support programs. I think the idea of a basic guaranteed income has the same potential on the left that tax cuts had for the right in the 1970s. Paying for such a program is a challenge, but the benefits are potentially so large that it is worth pursuing.

It is tempting for progressives to stick with relatively small ideas, like raising the minimum wage, that test well in polls and focus groups and don’t engender too much resistance on the right. That moves the ball forward, but will never change the game. The left needs the most critical thing the right got from supply-side economics: It was a Big Idea that had the potential to fundamentally change the terms of the debate and was something around which many different policies and coalitions could be built. In short, progressives need to think bigger if they hope to win.

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Bruce Bartlett is a regular contributor to the Economix blog of The New York Times, the Financial Times A-List, The Fiscal Times, and Tax Notes magazine.

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