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The Economic Case for Saving America’s Middle Class

Fin - Daily Ticker - US

It seems like week after week there is new evidence highlighting the decline of America's middle class.

The latest is a report by the Employment Policy Research Network which found that over the last thirty years, American workers have increased labor productivity by 78 percent, while wages for many have fallen or have remained stagnant.

Here are some examples:

  • The median compensation of 35 to 44 year-old male high school graduates (with no college) declined by 10 percent.
  • The median compensation of 35 to 44 year-old male college graduates (without graduate degrees) grew by 32 percent, less than one half as much as overall productivity growth.
  • Only the median compensation of 35 to 44 year-old men with post-graduate training came close to labor productivity growth increasing by 49 percent.

Earlier this month The Daily Ticker featured another set of stunning facts published by the New America Foundation. (See: America's Middle Class Crisis: The Sobering Facts)

This hollowing out of the middle class obviously did not happen overnight. The income gap has been widening since the late 1970s. But fast forward to today, there's a big concern from some economists who say a vibrant middle class is much more than just a social issue -- it is critical to the stability of the U.S. economy.

Heather Boushey, senior economist at The Center for American Progress, is one of those who is very concerned, especially since this problem was exacerbated over the last few years by the 2008 financial crisis.

"Families put more and more workers into the labor force in the 1980s and 1990s and in then in the 2000s they began taking on more and more debt," Boushey tells Aaron in the interview above. "A key factor was the lack of regulation on Wall Street, but also…you had millions of homeowners who were underwater partially because they had taken on too much debt because their incomes were not keeping up."

From a purely economic perspective, here is why she says this is not good news for the recovery. Consumer consumption accounts for 70 percent of GDP. And according to Citigroup, the top 20 percent of earners spend more than bottom 60 percent.

"Small businesses report that their single-largest concern is poor sales. They say this is more of a problem than regulations, taxes, inflation, or the cost of labor," Boushey recently told a Senate panel. "And herein lies the crux of the issue: Supply alone does not create growth; it must be balanced by demand. Supply-side policies have led us to where we are today: unbalanced growth and a crisis-prone economy."

So, if middle class Americans continue to struggle and do not have the financial resources to spend, small-and medium-sized businesses are going to continue to suffer as well.

How We G0t Here: The Financialization of America

A major cause of the unwinding of America's middle class has a lot to do with the 'financialization' of America, says Boushey. "We've created incentives, in terms of policy for companies to be more focused on their finances and financial profits, rather than actually producing stuff of value."

"Last year corporate profits reached 9.4 cents per dollar of national income. That's 47% too high by historic standards," reports SmartMoney.com.

Corporate America and Wall Street need to get back to investing in this country's, says Boushey. "Ideally, for America's middle class, we want Wall Street to put its money in investing in the productive capacity of America: creating good jobs for all of us and creating stuff of value."

What Congress Can Do Now

Boushey identifies two key policies lawmakers can focus on to help middle class families:

  • Enforce Dodd-Frank and re-regulate financial markets
  • Level the playing field for organized labor

Her bottom line: "Policies that focus on building, supporting, and expanding opportunity for the middle class will not only be good for families but good for our businesses and our economy overall as well."

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