The millions of today want, and have a right to, the same security their forefathers sought—the assurance that with health and the willingness to work they will find a place for themselves in the social and economic system of the time.
—President Franklin D. Roosevelt, 1938
Many American adults can remember a time when economic life seemed to make better sense. For the Yale political scientist Jacob Hacker, that moment was boyhood in Eugene, Oregon in the early 1980’s. In his new book, The Great Risk Shift, he recalls cruising around his old neighborhood on a red Raleigh bicycle.1 Shifting gears and pedaling forward, he saw around him the security of an American middle class that had yet to confront downsizing, outsourcing, or any of the other challenges of our globalized economy. In those days, more manufacturers were headquartered in the U.S. (or, as with Hacker’s beloved Raleigh, in cousinly places like Britain), and technology was less intimidating. People were laid off from time to time, but most workers did not expect to be fired forever.
Hacker is hardly alone in having a red Raleigh in his past—or some other sort of economic Rosebud. And large numbers of Americans certainly share his concerns. In Michigan, the slow-motion decline of the old automakers is seen as the symbol of a more general defeat, as though nothing as big as the Big Three could ever happen there again. Further east, in Rochester, New York, old Kodak hands look back to the days when companies like “Big Yellow” provided in-house health programs, profit-sharing, and company housing, not to mention generous pensions.
Of course, anxiety about the economy is nothing new. Since the days of FDR—indeed, since the early days of the country’s industrialization—economic downturns have caused Americans to wax nostalgic about the older, more secure ways of life on the farm. Roosevelt himself often evoked the rural past, especially as he went about building support for the establishment of Social Security. At other times, the country has seemed almost to luxuriate in its troubles. In the 1970’s, policymakers created the “misery index,” a figure combining the inflation and unemployment rates, to monitor the country’s economic suffering from month to month.
What is most striking about today’s anxiety is that it has emerged despite a robust economy. Americans have worried in times of 8- or 10-percent unemployment, but why at 5 percent or less? Even with the recent jump in oil prices, today’s misery index is at a docile low. Yet a Gallup survey published in March 2006 reported that “Americans continue to resist giving the nation’s economy positive ratings.” Data from ISR, a research firm, suggest that in 2005 three times as many Americans were afraid they would lose their jobs as had similar fears during the ugly downturn of the early Reagan years.
As a political matter, feelings of economic insecurity helped to fuel the Democratic victory in last November’s midterm elections. In the highly contested state of Ohio, nearly half of the respondents in a New York Times poll chose the economy and jobs as their most important issue. The related issue of health care came in second. In Washington, unsurprisingly, the new Congress is eager to address these worries. Congressman Barney Frank, a Massachusetts Democrat, plans hearings on the subject of “sharing overall economic growth with the average worker.” Members of the new majority on Capitol Hill mock Republican talk of an “ownership society,” and have moved quickly to try to raise the minimum wage. Charles Rangel of New York, the new Democratic chairman of the House Ways and Means committee, attacked as “dangerous” a White House plan to move responsibility for health care from employers to individuals. Even some Republicans have gotten in on the act. John McCain has warned that “My children and their children will not receive the benefits we will enjoy. That is an inescapable fact, and any politician who tells you otherwise, Democrat or Republican, is lying.” In the 2008 race for the White House, class angst is sure to be a prominent theme—as John Edwards, among others, has already made clear in his early campaign rhetoric.
Economic populism, in short, is back with a vengeance. But is it justified by our economic circumstances? And do its noisiest proponents have viable answers to the concerns of working Americans?
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A number of new books have tried to give substance to the new economic populism. Hacker’s The Great Risk Shift is perhaps the most philosophical of them. As he sees it, Americans of middling means have been asked to shoulder too many of the difficult consequences of economic change. Over the past decade, Republicans have encouraged individual enterprise and launched what Hacker calls a “personal-responsibility crusade,” passing measures like Health Savings Accounts, which give families more discretion and responsibility in spending health-care dollars, and proposing the partial privatization of Social Security.
The result of these initiatives, Hacker argues, has not been to give a beleaguered suburban class a greater sense of control but, rather, to add to the pressures generated by our turbulent economy. Yes, the country has experienced a housing boom, but home prices has fallen and may yet collapse. Stock prices may be at an historic high, but, since they are volatile, paper profits are difficult to enjoy. Where John F. Kennedy spoke of a rising tide that lifts all boats, Hacker sees a tide of fear, “a sense of ever-increasing financial risk,” exacerbated by Republican measures that result in still more insecurity.
At the core of Hacker’s argument is the question of income. Wages, he claims, are stagnant or even declining. As reported by the Bureau of Labor Statistics, average hourly earnings have declined by 3 percent over the past 30 years. The consequences of this drop in a widely respected indicator of worker well-being are visible in one of Hacker’s most dramatic charts, setting out average family income during this period. Running one’s finger over the negative numbers—between 2000 and 2002, for example, median post-tax family income dropped 38 percent—makes it easy to understand his bleakness.
Pensions also preoccupy Hacker. A few decades ago, more than 80 percent of larger firms provided defined-benefit plans—that is, traditional pensions. These days, less than a third do. When individuals are responsible for their own retirement, as most Americans are today, they confront the ups and downs of the economy on their own. Neither tax-advantaged plans nor company stocks are insured, and investors can lose nearly everything, as shareholders in Enron learned. Advocates of the ownership society often point out with pride that the average holding in a 401(k) account is $47,000. But, as Hacker notes, the median figure—that is, for the typical participant in such plans—is much less impressive, just around $13,000. To his mind, the 401(k) is little more than an elaborate bait-and-switch scheme. Believing they will eventually see high returns, citizens willingly accept the loss of their old pension guarantees.
The chief problem with 401(k) plans, according to Hacker, is that workers save too little, in large part because of the reality of other costs. As he quotes one human-resources manager as asking:
“Am I missing something? How am I supposed to get my workers to contribute more? A typical participant at my company is forty-five. . . . When I show him the fancy projections you’re telling me about, suggesting he needs a million to have anything like the life’s he’s living now, he just says ‘forget it.’”
For Hacker, the solution is an overall financial structure that encourages workers to save—and perhaps some measure of compulsion as well. “Workers forced to save, save,” he writes. “Workers not forced to save, don’t, or don’t save enough.” At retirement, citizens would then pool their 401(k) resources, trading today’s insecurity for old-fashioned government annuities. In the case of catastrophe, citizens would be covered by what Hacker calls “universal” insurance, though he is pretty vague about how it would be funded. The ownership society popularized by Republican sloganeers would give way, he writes, to a more reassuring, realistic “insurance and opportunity society.”
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A feistier effort in the same vein is A Country That Works: Getting America Back on Track by Andy Stern.2 Stern is the president of the Service Employees International Union (SEIU), and he recently led his union, the largest in the U.S. and Canada, in breaking away from the AFL-CIO. Together with the Teamsters, among other groups, SEIU has created “Change to Win,” a new labor coalition that is trying to revitalize the tired movement.
Stern’s themes are predictable enough—“something’s wrong with a country that helps the rich get richer while most Americans get the squeeze”—but he is no old-style union boss. He knows that change is afoot (a recent trip to China left him “stunned”), but still argues that the new economy has made life too “fast and merciless” for many Americans. The anxiety is not only unfair but (as Stern hastens to add) unproductive. “Two-thirds of Americans who work 40 hours per week report being stressed,” he writes, “leading to inefficiency and absenteeism costing America $300 billion a year.”
Like Hacker, Stern focuses intently on real wages, and holds up as a damning fact their failure to rise in recent decades. Pay for CEO’s, by contrast, has increased by leaps and bounds. Indeed, as he says in a neat polemical turn, if the minimum wage had increased at the same rate, the average production worker would earn $110,000 a year. To reduce such inequalities, Stern would start by raising income taxes, reversing the Bush administration’s cuts, and increasing the rates on capital gains and dividends as well. He also proposes removing the “cap” on the Social Security levy so that every dollar Americans earn (not just the first $94,200, as was the case in 2006) is subject to the full payroll-tax assessment. For higher earners, this last step would, by itself, suffice to reverse the Bush tax cuts.
As for how to use this additional revenue, Stern, like Hacker, would interpose the federal government as the regulator, guarantor, or partner of a much more comprehensive program of social insurance. Americans and their employers would be obliged to pay more into the system, but the government, in turn, would guarantee lifetime benefits. When it comes to health care, Stern argues, the best option is to cover all Americans, even if that coverage comes from government. The real problem when it comes to benefits is policymakers’ timidity. “Why not Medicare for All?,” he asks.
To ease the anxiety of workers forced to move from job to job, Stern proposes a portable universal program that he calls “MyLife,” a sort of AARP and 401(k) combined, with a single package of health-care and pension benefits. Because of its massive scale, he contends, MyLife would be able to strike deals to hold down the program’s costs. As Stern sees it, competition is an overrated aspect of modern economic life. If we could learn to work together better, American society would be more innovative, efficient, and just.
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Still another call to arms comes in the bestselling War on the Middle Class: How the Government, Big Business, and Special Interest Groups Are Waging War on the American Dream and How to Fight Back by the long-time CNN host Lou Dobbs.3 Once a pin-striped advocate for Wall Street, Dobbs is now perhaps the country’s most recognizable spokesmen for those supposedly left behind by globalization.
Dobbs’s villains are familiar. Free-trade agreements like NAFTA have driven down wages in many areas, he argues, and outsourcing (or what he calls “exporting America”) has destroyed good jobs. Dobbs also worries about the Wal-Martization of the country (if not the world), pointing out that the discount-store chain now generates more economic activity than Sweden, Norway, and Austria combined. The chain not only depends on cheap imported goods, he laments, but also pays its own workers so little (sometimes without benefits) that many of them are forced to go on Medicaid. And Dobbs is a relentless hard-liner on immigration, depicting the status quo as a cynical policy to assure cheap labor for the country’s economic elites.
Dobbs’s solution is for the U.S. to turn inward and focus its economic energies on developing its own industries and workers. He would abolish the “fast-track” authority that Congress has given Presidents to facilitate trade deals; secure and control our borders, especially the one with Mexico; subject U.S. companies to tariffs for the goods they produce abroad; and mandate wage increases at the lower end of the pay scale to help Americans earn a living and reduce the demand for illegal immigrant labor. On top of this, Dobbs—like Hacker and Stern—would have the federal government adopt a far-reaching system of social benefits along the lines of those now available in a state like Vermont.
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There is no denying the mood to which Hacker, Stern, and Dobbs—to say nothing of the leaders of the Democratic party—are responding. Americans are more worried about their economic well-being, and the uncertainties we face are daunting. Many defined-contribution programs like 401(k)’s will indeed fall short when retirement arrives. And even at its healthiest, the economy will not be able to outgrow the budgetary challenge posed by Social Security. This problem, in turn, will be made worse by the expansive prescription-drug plan pushed through by President Bush and the Republican Congress.
At the cultural level, too, the new economy can be deeply disconcerting. Are the Goldman Sachs partners and employees who, last December, divvied up some $16.5 billion in bonuses really worth that much more than the rest of us? Then there is globalization, which, no matter what our social background, challenges us in both superficial and fundamental ways. A son cannot hope to work at the now-shuttered factory that once employed his father. A middle-class applicant to Princeton, the University of Michigan, or a local magnet school finds himself in competition with the children of Asian immigrants, who often perform significantly better on standardized math tests. Americans of an older generation now wonder if their success—and the country’s—owes something to the fact that the U.S. was a protected enclave for much of the postwar period. It is hard to discover that you are no longer the smartest person in the room.
Still, even such warranted concerns demand a reality check. A good place to start is with several of the crucial details in the populists’ indictment. Consider, for example, Hacker’s table of downward-plunging family income. To present a chart that consists only of such plunges, with no rises, may serve his point, but Hacker himself knows that this is not the full story—after all, one can only plunge from a height. Unfortunately, the reality of regular upturns in family income, which robs the chart of much of its polemical force, is neatly tucked away on a distant page.
Other key numbers are also overlooked—or quickly shunted aside—by Hacker, Stern, and Dobbs. The first and most obvious is the unemployment rate. As it turns out, the supposedly moribund American economy is creating jobs at a very respectable clip. Since NAFTA went into effect in 1994, the “great sucking sound” pulling jobs south of the border, hysterically predicted by Ross Perot, has not been heard. Indeed, in the last decade, the U.S. has added a net average of two million new jobs a year. In the mid-1990’s, even conservative economists believed the “natural” rate of unemployment in the United States was about 6 percent. Since then the economy has proved that it can grow with relatively little inflation at 5- or even 4-percent unemployment. Despite the implication of Stern’s title, America today is, precisely, “a country that works.”
One can even argue that earnings in recent years have been strong as well. The damning real-wage figure that Hacker and Stern cite so frequently is itself questionable, as Diana Furchtgott-Roth, a former chief economist at the Labor Department, has shown. It excludes bonuses and benefits like health care, the addition of which yields a real increase instead of a decline. Moreover, the figure is only for non-supervisory posts, so it necessarily excludes those who move up in rank. Nor does the weekly real-wage measure take into account that a good share of those in the survey work less than full-time, thus dragging down the average. Finally, there are serious technical problems with how the real-wage figure is calculated. If one uses as a baseline the personal-consumption expenditure index favored by the Federal Reserve (as opposed to the consumer-price index), real wages have increased by 10 percent over the past three decades.
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Another crucial number is home ownership. In the mid-1990’s, 65 percent of American households owned their homes; today that figure has risen to 69 percent. Significantly, the increase holds for all age groups. Among households whose head is younger than thirty-five, 43 percent now own their homes, up from 39 percent in 1996. Black households have also made gains, and now stand close to the signal 50-percent mark. Nor has the trend been driven by lower interest rates alone. Back in 1965, the first year on the charts of the Census Bureau, interest rates were also low, but only 63 percent of households owned their own homes. Today, more Americans than ever before can point to this most basic emblem of economic security and independence.
Some of the credit for this economic progress goes to free trade—the great bogeyman of Lou Dobbs. Because a low-tariff regime leads to reduced prices for basic consumer goods, it disproportionately favors low-wage earners. Freer trade also raises the general standard of living by encouraging Americans to be more productive. From 1973 to 1995, output per worker increased an average of 1.4 percent a year. For the decade after NAFTA went into effect in 1994, the average increase in productivity more than doubled, to 2.9 percent a year. Nor has this improvement in material well-being been confined to the already wealthy. Today, a far greater share of even the poorest families possess consumer goods—central air-conditioning, color televisions, etc.—that used to be considered luxuries.
Some of the statistics that these authors decry are, in fact, signs of strength. Income mobility may be unnerving for those who experience its downward pull—a source of compelling anecdotes for Hacker, Stern, and Dobbs. But its upward pull is no less real; the churning of the job market is the principal reason for the abiding classlessness of American society. In research done for the Dallas Federal Reserve and in their book, Myths of Rich & Poor (1999), W. Michael Cox and Richard Alm showed that Americans climb up the income ladder as often as they slide down it. In the 1980’s and 90’s, for example, only 5 percent of those who were in the bottom fifth of the income distribution tables at a given point were still in that quintile after 16 years. Four out of five became middle-class or better, and minorities shared the gains.
As for the spectacle of great wealth, it too can be seen in a positive light. Today, American companies must compete for talent on a worldwide scale, offering an executive in New York not merely more than his counterpart in Cleveland but also more than the fellow in Hong Kong, Paris, or Singapore. Some may find these sky-rocketing salaries obscene, but capable corporate leadership translates into more jobs and greater productivity.
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The aim of these books is not simply to stoke middle-class rage. They also hope to encourage reform. But of what sort?
Taken as a whole, the wish list of Hacker, Stern, and Dobbs represents a plan to turn America inward. They would like to see higher taxes and mandated wages, stronger unions with international reach, and a range of new state-run entitlements. If this recipe for economic security looks familiar, it should: it is reminiscent of the platforms of, say, the old British Labor party or Germany’s Christian Democrats in the 1950’s. What the economic populists seek is management and redistribution from above. Reading their manifestoes, one forms a picture of gray-suited men arriving for quarterly meetings in national capitals, somberly calibrating over conference tables the rate and direction of economic growth.
The ideal held out by Hacker, Stern, and Dobbs is more dangerous than the galloping capitalism that they lament. Moving toward a social-democratic model would likely bring about the very sort of dire economic circumstances conjured up by their books. Raising the scale and scope of American government to a European level would deal a permanent blow to our competitiveness. It would, among other things, make the U.S. a far less interesting and dynamic place in which to work. Whatever Senator McCain’s worries about the future, younger Americans still expect to do well. They are not in the same position as the youth of France, to whom the Archbishop of Paris recently declared, “I do not believe that anybody can guarantee you this security, no more than [they can] guarantee that you will have a standard of living comparable to your parents.” It would be ironic indeed if, just as Europe is starting to come to grips with the crushing burden placed upon it by its statist policies, the U.S. were to adopt such arrangements wholesale.
But what, then, should be done in the face of today’s economic pressures and frustrations? A more constructive path would begin by reconsidering some of the government’s less necessary monopolies and regulations. Allocating some share of payroll taxes to private retirement accounts, for instance, would reduce the sense of futility that middle earners feel when they pay Social Security taxes. As for the projected Social Security shortfall, reformulating the basic benefit formula so that each cohort of retirees receives the same pension as its predecessor in real terms (as opposed to the automatic rate of increase in place today) would, by itself, address more than half of the long-term problem. Permitting true competition among health-care companies would introduce more diversity and choice into their offerings.
In his recent State of the Union address, President Bush himself came up with a fine rebuttal to the gloomsayers’ fears: more individual responsibility. In the health-care proposal so deplored by Congressman Rangel, he suggested treating health-insurance policies, even when they initially come from an employer, as income—and then giving families a large standard tax deduction to cover that cost. Bush would like to make the individual the buyer, not the employer. Policies would then become entirely portable, and losing a job would no longer mean losing insurance.4 While assuming control of their health care, Americans would lessen their vulnerability to arbitrary bosses and unpredictable corporations. Yet some Democrats quickly made it clear that the idea would not fly in this Congress. Andy Stern, for his part, put out a statement rejecting Bush’s proposal, asserting that it “won’t create the new American Dream.”
Other changes could also increase our economic well-being. Reducing, for instance, the most onerous aspects of the Sarbanes-Oxley law—the anti-corruption measure introduced in the wake of the Enron scandal—would do much to bring capital back to the U.S., where it can generate jobs.
All of this may sound naive in the current climate, and not merely because of the recent political shift. It is a fact of life that in the world of policy-making, war trumps economics, and also affects economic opinions. Some part of the country’s current economic discontent is undoubtedly a reflection of anxiety over the campaign in Iraq and the wider war on terror. And in wartime, people tend to turn to collective solutions. FDR, it should be recalled, set out his Four Freedoms in 1941, just before U.S. entry into World War II. “Freedom from want” may be no less tightly linked to “freedom from fear” in the thoughts of Americans today.
Nevertheless, in his recollections of his red Raleigh bicycle, Jacob Hacker may have a different and more pertinent lesson than he recognizes. Coasting along at a decent economic clip, we do indeed have the option, as he proposes, of squeezing the brakes suddenly. But for us the riders, the results could well be disastrous. Now as in the past, the best option for the country is to take heart and pedal forward.
1 The Great Risk Shift: The Assault on American Jobs, Health Care, and Retirement—And How You Can Fight Back Oxford, 240 pp. $26.00.
2 Free Press, 212 pp., $24.00.
4 For more on this point, see “Health Care in Three Acts” by Eric Cohen and Yuval Levin in the February COMMENTARY.
