Wednesday, June 30, 2004

The Fate of the Middle Class

While I was traveling overseas I had little access to current news and events. I did, however, find a cache of magazines that had been left in the apartment in France when my aunt was last there in January. There were some interesting and relevant articles in them, particularly in the Jan/Feb issue of the Atlantic Monthly. One of them, Are We Still a Middle Class Nation by Michael Lind, is a frank and wide-ranging discussion of the history and current challenges of America's middle class (which as you may know, is a favorite pet topic of mine).

Lind tracks the middle class across three distinct phases: the early land-owning farmers, industrial workers, and the modern professionals. He notes the critical role of government policies in fostering each group. Lind moves on to cover the current challenges faced by the middle class. While he mentions the role of globalization in reducing the bargaining power of middle class workers, he places most of the focus on automation and mechanization. Lind cites economist William J. Baumol who theorized that a disparity between the rate of productivity growth in mechanized sectors and the growth rate in human service jobs will increase the relative cost of labor-intensive services. The problem emerges here, Lind asserts, that while productivity surges in the mechanized sectors, employment drops and the labor market becomes flooded in those sectors, so the large gains in profit created by the increased productivity are reaped by the small class of owners and managers. Labor then is pushed into sectors where long term productivity gains are relatively small, and will suffer as a result.

I'm not entirely sure that I buy this position. I agree with Baumol's thesis regarding the effect of varying rates of productivity between automated and non-automated sectors, and I concus with Lind that a relatively small number of people will benefit from the increased profits generated by the automation. However, if wages generally fall while automation makes many sectors more productive, wouldn't much of the benefit of the automation have to be realized through lower prices of goods and services in order to be able to sell them to our now lower paid middle class? It may become a sort of deflationary cycle where prices drop, but lag behind falling income... I don't really know, this is reaching beyond my meager knowledge of economics, but it seems like a more complicated and dynamic situation than what Lind depicts.

In any case, Lind finds solid numbers to back up his theory that the middle class is losing ground, regardless of what is ultimately the cause. Lind also finds that public policy, which once aided the middle class, now appears to be favoring the upper class at the expense of the middle class. Lind considers the options for restoring the balance of wealth and income and discusses frankly the need for a system of redistribution. He discusses the obvious option of increasing taxes on the wealthy and using the revenue to subsize the rising costs of education, child care, and health care for the middle class. But Lind worries about the potential for increased tax evasion or emmigration by the wealthy.

Instead Lind suggests "universal capitalism". While much more modest in its approach, this "universal capitalism" sounds strikingly like Marxism, in that the basic ideal is to the restore the balance of income between the capitalists and labor by making the labor the owners of the capital. It also sounds strikingly like some of the market-based personal retirement accounts championed by many conservatives as a replacement for the social security program. Lind proposes that child trust funds, invested in the stock market, be established by the government for all children. People would be able to save or spend the money in these accounts without restrictions. These accounts would be funded by tax revenues, but only in small amounts, as Lind puts it, "planting seeds capable of growing along with the economy over time". He suggests a system where the government matches contributions of low income workers to the account.

I have a hard time buying into this idea. The basic idea is sound: If increasing automation results in most of the benefits being delivered to the ownership class, then the public can best benefit by making everyone a part of the ownership class. However, I am not sure this would play out as intended, particularly as Lind proposes it. For example, it would obviously not work if there are no access restrictions on this account, and the government is willing to match contributions (I would assume only up to some limit) into the account. A single dollar could quickly be multiplied (by repeatedly depositing to and withdrawing from the account) into the government matching limit. Clearly there will need to be limits on access to the account. And given our obvious problems with intelligently handling credit, debt, and savings, I'm not sure how successful a program dependent on individuals (particularly individuals who are already strapped for cash) contributing to a saving account can be. Perhaps there are behavioral remedies...

Overall, I was not thrilled with the article, but it did introduce some new ideas to chew on. Baumol's theories on the impact of automation may be worth further investigation. Additionally, Lind mentions that Britain has recently introduced a system of child funds somewhat in line with the universal capitalism concept. I would be curious to learn more about how exactly that works.

No comments: