Chapter 2: The Middle Class in the New Economy

WHO IS THE MIDDLE CLASS?

Since WWII, membership in the middle class in America has increasingly opened to anyone, regardless of status or social station. Money is no longer the primary thing that determines who is in—it’s the only thing.

For those who wonder where they rank in terms of socioeconomic strata, here are a few broad strokes. Those in the upper-middle class have enough savings to last a year or so if the head of the household loses his or her job; live in upscale housing with modern amenities; have access to quality medical and dental care under generous health insurance programs; educate their children at private schools from K-12, possibly even through graduate school; regularly attend cultural and sporting events; take regular vacations; enjoy a comfortable retirement; and are generally well-educated.

By contrast, those in the lower middle class are generally not well-educated; typically live from paycheck to paycheck; rent marginal housing; drive junkers (or own no car); frequently rely on fast food for meals; have no savings; see doctors only in the emergency room; go to an occasional dollar movie for entertainment; enroll their children at public schools; don’t pay for their children’s educations beyond high school; and will struggle with a subsistence retirement.

While most members of the lower-middle class today own big-screen TVs and live in air-conditioned dwellings (luxuries that would be envied by the upper-middle class of 50 years ago), these basic amenities are not a measuring stick for contentment. We judge ourselves according to how the people around us are doing now, not how we are doing compared to people who lived centuries or even decades ago. Fortunately, any member of the lower-middle class with the ability to learn and the willingness to apply it, coupled with a fair amount of effort and good luck, can still move into the upper-middle class. In fact, any member of the lower-middle class with exceptional skill and effort (or great luck) can even become rich.

However, for the vast majority of Americans, whatever success their parents may have had no longer guarantees their children’s success. Although the children of the upper-middle class will have a head start on the children of the lower-middle class due to better access to higher education and a better grubstake to start life on their own, very few are immune to failure if they do not learn to produce on their own. Mom and dad cannot fight the way through the economic jungle for them. Success for the lower-middle class is especially precarious. For the 25% or so who make anywhere from $25,000 to $50,000 a year, the loss of a job, or a streak of bad luck, could plunge them into poverty.

In economic terms, income data provides a snapshot of who is in the middle class and how much money they have. Three government agencies—the BEA, the Census, and the IRS—measure income. The BEA tracks “personal income,” which includes almost all types of income, but excludes, among other things, gain or loss on the sale of assets. The Census tracks “household money income,” which includes most types of income, except it excludes, among other things, both the employer contributions to social insurance programs and the social insurance benefits provided to recipients in kind, such as food stamps and those relating to health care. The IRS tracks “adjusted gross income,” which includes only those types of income that the politicians choose to tax, and which excludes, among other things, certain government transfer payments to individuals, employer contributions to pension and insurance funds, investment income retained by life insurance and pension plans, state and local bond interest, and various other types of income exempted by law. In measuring and tracing income, the BEA relies on data gathered from a wide variety of economic sources; the Census relies on data gathered through surveys of households; and the IRS relies on data obtained from tax returns.

Personal income, as tracked by the BEA, applies only to the national economy and is not broken down among households by income level. The Census and the IRS do, however, break down income among households based on income levels. Underscoring that personal income is the most comprehensive measure of income—in 2010, adjusted gross income amounted to only 65% of personal income, and household money income amounted to only 66% on a per capita basis of personal income. For tax purposes, the amount by which personal income exceeds adjusted gross income represents the income that the politicians have chosen not to tax (it is about one-third of what could be taxed and one-half of what is taxed).

Other government agencies, such as the CBO, Congressional committees, the OMB, and the SSA Chief Actuary, use income data compiled from the BEA, Census, and IRS in preparing their studies and reports. National averages regarding income and what it will buy in terms of a standard of living must be considered carefully—after all, what a dollar will buy in small-town America differs dramatically from what it will buy in the Big Apple. Therefore, statistics regarding income based on data from the BEA, the Census, and the IRS should not be taken as anything other than reasonable approximations of reality.

Census data breaks down annual income among households (which may include one or more individuals) as shown in Table II-1. Tables II-1 through II-4 show that about 20-25% of all Americans live in or close to poverty and less than 5% make up the upper-middle class and above, leaving the other 75% or so falling somewhere in between.

IRS data breaks down Adjusted Gross Income (AGI), among taxpayers, as shown in Table II-2.

Census data measures poverty as shown in Table II-3.

Table II-4 compares Census data and IRS data by selected income group.

Sifting through this data, the median annual income nationally for a family of four is somewhere around $55,000, and the poverty level is about $23,000. These income and poverty numbers vary significantly depending on location. Families who earn a median wage live on a tight budget and do not have much, if any, savings. In fact, the loss of a job can send a median-wage family into poverty within a few months or less. Therefore, for most median-wage families, chronic economic insecurity and anxiety are just a normal part of life.

A growing middle class offers hope for those who have not made it there to get in—and makes those who are already there feel more secure. Both this hope and the feeling of security contribute to a healthy set of political beliefs, which is at the core of a society’s internal strength. However, with two generations of growing national wealth accompanied by increasing income inequality, many low-income Americans are losing hope. Unfortunately, the road to the American Dream is narrowing.

THE RISING COST OF RARE SKILLS

In the early 1960s, a high-school graduate could make a decent living selling American-made TVs at Sears. Today, that same high-school graduate can barely earn a minimum wage selling foreign-made TVs at Best Buy. The causes for the widening income gap are complex but come down to the convergence of well-documented forces: globalization, technological innovation, the increasing cost of education and healthcare, and stagnating wages.

Beginning in the 1970s and continuing at an accelerating rate, many of the jobs and small businesses that made and preserved the middle class have faded into history, never to return. The new jobs and new types of businesses that succeeded them have created a new economy that disfavors the ordinary, favors the extraordinary, and richly rewards capital. During this same period, commerce also expanded from being predominantly regional and national to becoming predominantly national and international. American capital now roams all over the world and can be invested in almost any business anywhere that offers the highest return. For example, a 15% return on a manufacturing business in Communist China’s Shanghai beats an 8% return on an apartment building in Dallas.

With globalization, almost all goods and services produced by American businesses compete with those produced by businesses all over the world. To win this competition, American workers and businesses must compete with an intensity not known before. At the same time, digitization and automation have eliminated millions of jobs of ordinary workers engaged in activities relating to the processing, analysis, and transmission of information, as has the robotization of manufacturing and assembly line work.

While entrepreneurship is alive and well in America, most workers displaced by globalization and technology cannot reasonably be expected to transition into running a profitable small business. Not everyone is an entrepreneur. Once upon a time, ordinary entrepreneurial Americans could start up and make work any number of viable small businesses like cafes, barbershops, TV repair shops, gas stations, bookkeeping firms, corner grocery stores, used car dealerships, local real estate brokerage firms, hardware stores, bakeries, and other similar types of businesses. However, the competitive landscape has changed dramatically as big business, big-box stores, national chains, and international business organizations have forced many small businesses out of business.

Today, each ordinary job and small business that becomes obsolete leaves those who are displaced with the choice of either getting an extraordinary skill, or joining a growing pool of ordinary workers who compete for fewer and fewer ordinary jobs—a downward spiral. As politicians and policymakers ponder solutions to these complex problems, individuals who want to stay in the middle class might focus on one thing they can control: getting a rare skill.

A rare skill does not mean a skill required to become a brain surgeon or an astronaut, but it does mean getting trained for a job that cannot be automated, outsourced, or off-shored. Unfortunately, the cost of getting a rare skill has been increasing. Table II-5 shows that since at least 1982, the cost of post-secondary education at colleges and universities has increased much more than other categories that make up the total cost of living.

From 1984 to 2011, the overall Consumer Price Index doubled while the costs of college more than tripled, making college far less affordable now than it was a generation ago. So, just as ordinary workers have come under more pressure to get extraordinary skills, the cost of getting those skills has risen at least three times faster than their income.

As the cost of education continues to soar, wages for most workers have been largely static, or falling, for over a generation. In the new post-1980 American economy, workers possessing rare skills prized by labor markets have been steadily widening their wage advantage over ordinary workers. An increase in the wages of the relatively few extraordinary workers raises the average wage while static and falling wages of the many ordinary workers depresses the median wage (50% of all workers earn more than the median wage, and 50% earn less), and the resulting gap reflects the disparity between the relative values of rare skills compared with common skills.

Graph II-1 shows how steady the trend of the median wage lagging the average wage has been over the last 23 years.

Graph II-1 Average Wage and Median Comparison

Source: Data extracted from Table II-6, below.

The greater the spread between the average wage and the median wage the less prized the ordinary workers become. To appreciate the difference between the average wage and median wage, imagine three workers: a CEO who makes $2 million per year, and two employees, one who makes $25,000 per year, and the other who makes $15,000 per year. Here, the average wage is $680,000, the median wage is only $25,000. Statistics can both reveal and mislead, depending on the care devoted to understanding them.

Labor markets, like capital markets, ruthlessly reward return. In the economy of the 21^st century, American workers compete with workers all over the world. Being an American does not entitle the worker to a higher wage than a competing foreign worker. Since business and sentimentality do not mix, foreign workers with better skills will get work that American workers will not get. So, many non-competitive American workers will lose out in the contest for better jobs. This leads to a more crowded low-skill labor market that further depresses the median wage.

Table II-6 tracks the spread between the median wage of all wage earners and the average wage of all wage earners. As Table II-6 shows, from 1990 through 2013, the average wage increased by 113.31% while the median wage increased by only 93.3%, and the ratio of the median to the average wage fell from 71.88% to 65.13%.

Graph II-2 shows the extent to which the median income of wage earners fell behind the average wage earners during the period between 1990 and 2013.

Graph II-2 Comparison of the Median Wages and Average Wages of Workers from 1990 through 2013

Source: Data extracted from Table II-6.

The data contained in Tables II-1 through II-6 shows that high incomes are intensely concentrated in a very few with the overwhelming majority having much less. According to the SSA Chief Actuary, in 2013 about 67% of wage earners earned less than the average wage of $43,000, and only about 1% of wage earners earned wages of $200,000 or more.

Few Americans know that the top 1% of wage earners earn as much wage income as the lowest 54% of all wage earners combined. Over the 23-year period from 1990 through 2013, extraordinary wage earners put substantially more distance between themselves and ordinary workers in terms of share of total wages, and nothing on the horizon indicates any change in this trend. The lesson for those who want to make more money: learn a rare skill prized by the market, stay current in that skill, and work harder for a lower wage than competitors all over the world.

THE ORDINARY AND THE EXTRAORDINARY

Being average or below average in the amount of wages earned, not having any significant wealth, and being part of a group comprising over two-thirds of all wage earners, qualifies a person as being ordinary in their moneymaking and wealth accumulation ability. In the moneymaking and wealth accumulation aspect of life, most people are ordinary or everyone would have an exceptional income and be wealthy. Almost all the ordinary live paycheck to paycheck and accumulate no significant wealth.

Moneymaking ability, however, is only one aspect of life and ignores other aspects like character and how one gets along with others. For most Americans, once they have a decent standard of living and the ability to realize their potential, then quality of life matters more than accumulating more money. Many (although not all) Americans are willing to get the best job they can, but they would rather spend their non-working time with their families or in recreation than running a payroll. The ordinary are not consumed with getting the next promotion so much as with getting by in a job that pays the bills and offers some hope for the future, so long as they remain willing to work. Taking all of this into account, it is the ordinary who are the backbone of the middle class.

Meet the Middleton Family

Generalities about how the middle class live based on statistics are one thing, but the tough daily choices a middle-class family must make about money are quite another. No family typifies the middle class better than a family of four with a husband and wife who both work full-time, who have two preschoolers, and whose $65,000 annual income matches the median income for a household of four in their community. Consider such a family, the Middletons, who live in Dallas, Texas. The family includes Joe, a commuter college and trade school-educated computer IT tech in his mid-30s, his wife, Sue, a high-school graduate in her early 30s with an associate’s degree from a community college, their four-year-old son, Joey, and their two-year-old daughter, Suzy.

The Middletons live in a 1,850 square-foot house whose value is about 90% of the median value of a house in Dallas. Joe drives a five-year-old SUV, and Sue drives a four-year-old compact car. Sue sets the thermostat at 68 in the winter and 80 in the summer. The family buys their groceries and clothes at Walmart, the local dollar store, and garage sales. They get health insurance through Joe’s job. The family gets their childcare, when they can afford it, from a preschool at their church. When they cannot afford the church preschool, they rely on help from a neighbor or relatives. The Middletons watch TV for entertainment. On rare occasions, the family goes to the movies and eats out at modest restaurants for hamburgers and Tex-Mex. For recreation, Joe plays softball and basketball on his church’s team and Sue gardens. The family vacations once a year at Joe’s parents’ lake cabin.

The Middletons have no savings account and live paycheck to paycheck. Joe and Sue religiously pay their bills on time if they possibly can, but maintain a credit card with a $2,500 credit line for emergencies. Their monthly budget in the following chart shows how tough it is to make ends meet before they pay taxes.

If they are careful, the Middletons can make do from month to month. That is, until someone in the family must see the doctor or dentist, one of the cars breaks down, a washing machine or A/C needs fixing, or some similar woe arises. If the Middletons are beset by too many woes, they must resort to a skip, scrimp, and borrow strategy. Skipping means doing without, like taking their kids out of daycare, depending on neighbors and relatives, and not going to the doctor or dentist when someone is sick. Scrimping means eating more rice, potatoes, and beans, not eating out or going to any movies, and getting whatever clothes they have to have at garage sales. Borrowing means dipping into their credit card line. Each of these strategies carries a cost and inflicts instant and sometimes lasting pain.

If things go well, the Middletons can barely stay in the middle class, but if they encounter a little bad luck, they will fall to the lower edge of the middle class. If Joe or Sue were to lose a job and not replace it within a month or two, the Middletons would face the loss of their house and become dependent on food stamps, relatives, and charity. In fact, any minor catastrophe could propel the Middletons into instant poverty.

Note that the Middletons are not poor. They are in the middle of the middle class. However, given their incomes and the cost of living, Joe and Sue can only fantasize about including in their regular budget amounts for emergencies, entertainment, and savings for retirement and college. Even before paying any taxes, the Middletons can make ends meet only by making scrimping a way of life.

To pay their taxes, the Middletons must up their scrimping game a few notches. Every tax dollar paid by the Middletons means that, among other things, they eat more beans and rice, depend more on their neighbors and relatives for child care, go without seeing the doctor when they are sick, have no hope of saving for their retirement or their kids’ college, and make do without repairing the A/C in the summer for weeks at a time. Serious scrimping and some skipping come at a high price in family stress over money, which pushes many couples toward divorce.

In terms of moneymaking and wealth accumulation ability, Joe and Sue are as ordinary as vanilla ice cream. Each works hard but at the end of the day, each goes home and leads a normal family life enjoying both recreation and social relationships ahead of plotting how to get ahead at work. However, if Joe and Sue could consider the future, they would see that their children have the potential to be extraordinary if they can get the proper education. Talent and drive, like other personal traits, often skip a generation or two. In most families, it is not unusual for the ordinary to sire and rear the extraordinary, and conversely, for the extraordinary to sire and rear the ordinary.

Displaced Workers

Ordinary workers now live with the risk of becoming displaced workers, which the BLS defines as “persons 20 years of age and older who lost or left jobs because their plant or company closed or moved, there was insufficient work for them to do, or their position or shift was abolished.” Workers have always been at risk of displacement because of the failure of an individual business or an economic recession, but as never before, the access to cheap foreign labor and the ability to substitute robots and computer programs for labor now cause much of displacement. Any worker whose work can be done by cheap foreign labor or whose work can be automated now lives under a growing threat of displacement.

On August 25, 2016, the BLS reported (for the period January 2011 to December 2013) the following facts:

• 7.44 million workers were displaced of which 3.2 million were long-tenured in that they had held the jobs for at least three years and 4.2 million were short-tenured in that they had held their jobs for less than three years.
• As shown in Table 8, 33.5% of all displaced workers were either unemployed or not in the labor force in January 2016.
• As shown in Table 7, only 16% of all long-tenured displaced workers were earning wages or salaries equal to or above the jobs from which they were displaced.
• As shown in Table 8, workers were displaced in all sectors of the economy with the most affected sectors being in manufacturing, wholesale and retail trade, and professional and business services.

For many workers, being displaced means not getting a job, or getting a job at lower wages than their prior job. Neither Joe Middleton, as an IT tech under the professional and business category, nor Sue Middleton, as a clerk under the wholesale and retail trade category, can take much comfort from the BLS report. They each know that they are at risk of losing their jobs, and if they do, may go quite a while before getting another job and maybe never getting another job that pays as well as the jobs they lost.

Put in its simplest form: Globalization + Automation = Increased Worker Anxiety.

In today’s workplace, simply working hard can still cut it for ordinary workers, but it is not nearly enough to be extraordinary. What separates most extraordinary workers from ordinary workers is personal drive and ambition. The extraordinary lead the middle class and are the exemplars of what it takes to get ahead.

To be extraordinary, a worker must consistently make above-average wages and be willing to do whatever is necessary to learn more to get ahead in whatever work they do—as with a salesman who wants to become sales manager, a bank clerk who wants to become branch manager, a chef who wants to own his own restaurant, a lawn care worker who wants to own his own lawn care business, a teacher who wants to become a principal, and many other similar examples. For those who want to get ahead, they must work harder and smarter than those around them and continuously learn new skills, almost always at the cost of their personal lives and family time.

In terms of income, the extraordinary earn above-average wages (over $43,000) but less than that which those in the top 1% earn (about $300,000 or more). Unlike the ordinary, the extraordinary can accumulate a little wealth, usually no more than about $100,000, primarily tied up in home equity. The more upwardly mobile have some mutual funds and some money for retirement saved in a 401k as well. Having a little wealth provides the extraordinary with a cushion if they face an emergency, so long as the emergency is not too serious and does not last too long.

While the moneymaking trajectory of the ordinary is at best flat, that of the extraordinary tilts slightly upward. All in all, the extraordinary are better off financially than the ordinary, but few can have a middle-class standard of living, pay for their own unsubsidized health care and retirement, and pay for their children’s post-secondary education. Even the extraordinary depend on government subsidies for more than a little of their health care and retirement and for the post-secondary education of their children.

THE SUPER EXTRAORDINARY

Paraphrasing F. Scott Fitzgerald’s observation about what separates the rich from everyone else, the “super extraordinary” are just like everyone else except they have more money, in fact much, much more money than the rest of us. But, apart from their moneymaking ability, the super extraordinary share most of the same human foibles that afflict everyone else.

The super extraordinary include: (1) those with a special knack for making money like successful entrepreneurs and businessmen; (2) those who clawed their way into becoming big-time professionals, such as very successful lawyers, doctors, and architects; (3) those who used their inherited and acquired talent to succeed as entertainers, athletes, or media personalities; (3) those who have acquired and employed rare skills that enable them to consistently earn wages somewhere in or near the top 1% (about $350 thousand in 2012 dollars); and (4) those who won life’s lottery by either being born into wealth or winning the sweepstakes.

Unlike the ordinary and some extraordinary who suffer from chronic economic insecurity and anxiety, the super extraordinary do not. But like everyone else, they do suffer from the same non-economic insecurities and anxieties that plague the rest of humanity. What does distinguish the super extraordinary from everyone else is their exceptional self-motivation and ambition awarded to them by their genes and enhanced, in many instances, by an encouraging environment. These traits, when fused with imagination, ingenuity, intellect, effort, persistence, and talent, account for why the super extraordinary are the motive force that drives America’s economy.

Without the super extraordinary, America would not be America—a land where any person can soar as economically high as their talent, effort, and luck take them. Consistent with the principles of capitalism and democracy, nothing should be done to deter the super extraordinary from being as productive as their ability permits and reaping the financial rewards commensurate with their achievement. All others do better when the super extraordinary do best.

The ability of those with talent to rise from rags-to-riches is a core American value memorialized by the 19^th Century novelist, Horatio Alger. Although Alger’s many melodramatic tales of poor, yet industrious lads, making it to the top through hard work and persistence seem corny now, they still reflect what makes America great. Anyone of merit can make it.

But times have changed. About 30 years ago, the path of those who had all that was necessary to become economically super extraordinary (except skills only obtainable in post-secondary education) began to seriously narrow. With the developments in technology and globalization of markets, the path to becoming super extraordinary without a quality post-secondary education has narrowed considerably and is likely to narrow further.

In making money, one ascends from the mere extraordinary to the super extraordinary by making and/or accumulating much, much more money than the extraordinary. If making an above-average income qualifies one as extraordinary, then making an income in the top 1% should qualify one as super extraordinary. And, if having an investment portfolio worth in the range of $100-200 thousand qualifies one as extraordinary, then having a portfolio worth at least $3-$4 million (in about the top 1%) qualifies one as super extraordinary.

THE CAPITALISTS

Making a super extraordinary wage is great, but having a super extraordinary income without wages is even better. Having wealth, as opposed to merely having income, makes a person a capitalist. Except for wealth that is inherited or won in the lottery, most wealth comes from success in business as a result of shrewd investing (Warren Buffet who invests in companies of all kinds all over); cleverness in the trading of assets (Carl Icahn who trades companies, Jerry Jones who trades in pipeline companies and sports franchises, T. Boone Pickens who traded in energy commodities and companies, and George Soros who trades in currencies); entrepreneurial skill (Rupert Murdoch who built a media empire, Jay Z, Beyoncé, and Madonna who have pioneered in entertainment, and Arianna Huffington who has developed online publishing); and/or building a super profitable business (Jeff Bezos at Amazon, Steve Jobs at Apple, Bill Gates at Microsoft, and Mark Zuckerberg at Facebook).

For 30-plus years, America has increasingly rewarded its most successful capitalists. Table II-9 shows the concentration of wealth in the top 1% compared with the bottom 90% in 1978 and 2012.

As Table II-9 shows, the last 34 years have been generous to America’s capitalists relative to everyone else. In 1978, the bottom 90% owned about a third more wealth than the top 1%, but by 2012, the top 1% owned almost twice as much wealth as the bottom 90%. The economic health of America’s capitalists is not at risk, but the economic health of millions of ordinary Americans is.

The super extraordinary, America’s top earners of labor income, and the capitalists, as America’s top earners of capital income, lead the way in making America’s economy productive, and in financing business growth. Without the super extraordinary and the capitalists, the ordinary and extraordinary would have fewer jobs and less income. However, as important as the super extraordinary and capitalists are to the American economy, they should be mindful that without the ordinary and the extraordinary there would be too few consumers and an inadequate workforce to make America’s economy work. Another humbling fact is that many of the antecedents of the super extraordinary and capitalists were (and many of their descendants will be) ordinary.

THE IRON LAW OF WAGES

Joe and Sue Middleton have never heard of The Iron Law of Wages, yet it has imprisoned their standard of living for an indeterminate sentence. The Iron Law of Wages dictates that wages will be driven down to a subsistence level if the pool of available labor exceeds the demand (see classical economists, Adam Smith, and David Ricardo.) The twin forces of globalization and technological innovation have conspired to cut the demand for workers in that segment of the American labor market that applies to most workers with ordinary skills, while at the same time, inundating the market with more competing foreign workers and robots. Nothing hints at these forces losing their potency.

Since the end of World War II, America has promoted free trade by entering into numerous international agreements. Promoting free trade has led to the American economy being flooded with goods produced by foreign labor which has made winners of American capitalists and American consumers at the cost of making losers out of many displaced workers lacking extraordinary skills. About a generation ago, American manufacturers started taking advantage of an ocean awash with cheap foreign labor, and moved their factories overseas. At about the same time, China and other Asian countries also rapidly developed their own manufacturing capacity based on the same seemingly limitless supply of cheap labor. These shifts cut millions of American manufacturing jobs, which had been filled by median-wage workers and left them to compete with low-wage workers in the low-skill labor market.

According to BLS data, there were almost 18 million manufacturing workers in 1967. By late 2011, there were fewer than 12 million. Not only were manufacturing jobs hit hard by technology and globalization, but many median-wage American service jobs were also cut. The internet has made it possible for any information or knowledge business to locate anywhere in the world. Many of these businesses have had no trouble finding low-wage skilled labor among foreign workers. (Consider the location of the call center that fixes your computer software problem or the location of the radiologist who interprets your X-ray.)

Although The Iron Law of Wages drives wages down, it also contributes to increasing business profits. Over at least the last generation, employee compensation (as a share of the GDP) has been falling, while after-tax corporate profits (as a share of the GDP) have been growing. By 2014, after-tax corporate profits (as a percentage of the GDP) had risen from about 5.2% in the 1980s to about 9.3%, representing an increase of almost 75%. Also by 2014, employee compensation (as a percentage of the GDP) has fallen from about 55.6% to about 53.2%, representing a decrease of almost 4.3%. The last generation has been kind to capital and unkind to labor.

So, Joe and Sue find themselves in a world in which technology has decreased the number of jobs available to median-wage workers while globalization has subjected both median-wage workers like Joe, and low-wage workers like Sue, to intense competition from comparably skilled workers all over the world. As a computer IT tech, there is nothing that Joe knows and nothing that he can do that is not known or could not be done over the internet by foreign workers in more than a dozen countries. There are plenty of skilled IT techs in China, India, the Philippines, Taiwan, Korea, etc. who can do what Joe does, and do it more cheaply.

Furthermore, a growing glut of able workers willing to work for less guarantees that Sue’s wages will stagnate, and she will be lucky to keep her job as a clerk. In fact, much of Sue’s competition for her job used to work in higher paying jobs like Joe’s, because they have been displaced by foreign workers. As long as surplus workers are available to Joe’s and Sue’s employers, The Iron Law of Wages ordains that Joe and Sue will be paid the least possible and their employers will pocket the difference. Such is the free market at work, and its continuation is inevitable.

CBO data bears out the effects of The Iron Law of Wages on workers with less than extraordinary skills, as shown in Table II-10.

Table II-10 shows that since at least 1979 there has been a slow but steady migration of pre-tax income to both the top 96^th – 99^th percentiles and the top 1 %. Outside of the top 5%, all other income groups have either barely kept up or fallen behind. Also, Graph II-1 and Table II-6 show the steady and widening gap between the average wage and the median wage, which indicates that above average-wage workers are prospering while median and low-wage workers are struggling. Stagnating and falling wages for below-average wage earners are products of The Iron Law of Wages.

Any worker who wants to escape from the effects of The Iron Law of Wages must acquire an extraordinary skill, which means a skill that is rare and in demand. To get a high paid job (one that is exempted from The Iron Law of Wages), a worker must, (1) find out what skills the labor market craves, (2) acquire and master those skills, (3) prove to a prospective employer that the worker can do the job better than any competitors, (4) do the job at a competitive wage, and (5) stay current on the evolving skills that are necessary for the worker to do the job.

THE MIDDLE-CLASS SQUEEZE

Together, the rising cost of getting rare skills and The Iron Law of Wages—forces over which ordinary workers have no control—will condemn ordinary, and increasingly extraordinary, workers to a standard of living based on static and/or declining real incomes. Only those workers who have exceptional abilities, fierce ambition, and the financial resources to get the post-secondary education needed to develop their abilities to the fullest will be able to acquire and employ extraordinary skills. Unfortunately, many American workers lack one or more of these traits, and so they are likely to spend their working lives imprisoned by The Iron Law of Wages—a natural (but sad) result of a free market. While the free market is fair, it is also brutal.

Changing an ordinary worker into a highly skilled worker requires that a worker have exceptional ability, and, unfortunately for most, exceptional ability is not an acquired trait. Most rare skills in today’s labor market require high-end academic skills which in turn require exceptional IQs or some other very special trait that the market happens to crave at the moment. The rejection rate for well-above-average applicants to high-end professional and graduate schools proves the futility of the average becoming academically exceptional.

While America is exceptional, it is a relatively small percentage of Americans who are exceptional in their moneymaking ability. In this respect, most Americans are ordinary, and no one is more ordinary than the Middletons. As ordinary moneymakers, they face the reality that neither Joe nor Sue may ever develop extraordinary skills or become successful entrepreneurs. For America to remain exceptional, however, it must not shut out millions of ordinary, hardworking Americans, like the Middletons, from living the American Dream. For the Middletons, living the American Dream means that if they work hard at the best job they can get then they ought to have a decent standard of living, which includes adequate health care, a dignified retirement, and the ability of their children to get a quality post-secondary education without being buried in debt. Despite their willingness to work hard, the chances of the Middletons ever getting a job that will pay enough for them to live the American Dream ranges from very, very slim to none.

PETITIONING FOR RELIEF

Although the Middletons are not economists or political scientists, they are smart enough to know that there are not any simple solutions to preserving what remains to them of the American Dream. Before asking what can be done, they have been cautioned about things the government could do which would make things worse. The Middletons have come to understand that over the long term, their standard of living, and that of all ordinary workers, depends on increasing labor productivity—the per hour output of a worker. Producing more goods and services with less labor enriches the economy, and producing less goods and services with more labor impoverishes the economy. Common sense says that everyone is richer if 100 widgets can be produced with 10 workers instead of 20, but it also warns that something must be done with the 10 displaced workers if there are no jobs for them. The Middletons figure that they fit into the category of the 10 displaced workers who at best have iffy job prospects.

The Middletons know that any relief from the effects of The Iron Law of Wages that impedes labor productivity sooner or later will impoverish the economy and make everyone, including them, poorer. So, the Middletons want to know how best to make their life better without making anyone else’s life worse.

By just looking around, the Middletons are painfully aware that they are now in fierce competition with both foreign workers and displaced American workers, and that many ordinary workers are losing their jobs to automation. Not surprisingly, there is plenty of historical and recent examples of frightened workers trying to stop technology from killing jobs and international trade from increasing competition.

In 19^th century England, at the dawn of the Industrial Revolution, Ned Ludd led a band of disgruntled home loom operators, later referred to as “Luddites,” in a forlorn fight to ban the use of mechanical looms. Banning mechanical looms would have saved the home loom operators for a short while but at the cost of destroying the competitiveness of the English cloth industry. Lamentably for the Luddites, but fortunately for consumers and capitalists, Parliament ignored their plea and the Industrial Revolution trampled their cause. As a result, the world has vastly cheaper and more plentiful cloth.

More recently in America, Pat Buchanan, a populist, has championed the cause of a restrictive trade policy as means of shielding American workers from foreign competition. In the 2016 presidential campaign, Donald Trump adopted Buchanan’s cause by advocating a tough trade policy that would protect American workers. Making promises to protect American workers from foreign workers is easy, but keeping those promises is hard.

Trade Agreements—most notably the North American Free Trade Association (commonly known as NAFTA)—benefit consumers who buy cheaper and better foreign-made goods and services, workers in export industries, and capitalists who own businesses who profit from outsourcing part of their businesses to foreign producers. This only harms displaced workers. Restricting international trade would require changing treaties approved by Congress under which America (1) participates in the World Trade Organization, and (2) prescribes the terms of trade with individual countries. Any effort to change these treaties in a material way would encounter the opposition of those who have benefitted from them. In a political contest testing who has the most clout about keeping relatively free trade or junking it in favor of restrictive trade, it is by no means clear that displaced workers would win against consumers, workers in export businesses, and capitalists. So, a campaign promise to get tough on trade, when put to the test, is likely to suffer the same fate as a snowman on the first warm day after snowfall.

Even if it were possible to shield American workers from cheap foreign labor, it would ease life for American workers only for a short while, and at the cost of making American industry less competitive and inviting an international trade war. In a hyper-competitive world economy, loss of an economy’s edge dooms it to a slow death.

As Parliament rejected the pleas of the Luddites to throw out technology, and as Congress is likely to reject Buchananite trade restrictions, the middle class should look for practical solutions that make America’s economy grow as fast as possible.

Reasoning from the premise that things must not be made worse, Joe and Sue, with the help of a public advocate, have drafted on behalf of themselves and the entire middle class, a Petition for Relief from The Iron Law of Wages to their government, and plead the following:

FACTS

• America’s future depends on a thriving and growing middle class in which all working Americans can live the American Dream.
• Fundamental to the American Dream is the belief that all able-bodied Americans who work hard full time and apply themselves should have (1) an opportunity to rise as high as their talent and effort will take them, and (2) a decent standard of living, which includes a dignified retirement and adequate health care.
• In 21^st Century America in which the economy is driven by globalization and technological development, opportunity is an illusion unless all Americans can get a quality post-secondary education to enable them to realize their full potential.
• For 40-plus years, middle-class workers’ share in America’s prosperity has dwindled while the super extraordinary and capitalists have prospered.
• The super extraordinary and capitalists have profited from lagging middle-class wages far more than any other Americans because, (1) as capitalists, their businesses have reaped greater profits, and (2) as consumers they have benefitted from lower prices. Everyone except the ordinary worker benefits from cheap labor.
• The standard of living of the middle class has lagged the super extraordinary and capitalists not because of the lack of worker effort, but, in part, because of government trade policies that have lowered the wages of the middle class, and tax policies that have taxed the return on capital at lower rates than wages.
• Over at least the last 25 years, the cost of higher education has increased three times faster than middle-class wages, thereby making post-secondary education much less affordable to the middle class, and depriving many of their ability to realize their potential.

RELIEF

Ordinary workers petition the government for relief from the effects of:

• The effects of the free trade policies that have caused The Iron Law of Wages to depress their standard of living.
• The disproportionate tax cuts that have, (1) widened the after-tax income gap between them and the best-off, and (2) deprived the government of the resources necessary to invest in America.

As petitioners on behalf of the ordinary workers—the largest component of the middle class—the Middletons understand they and other ordinary workers must learn more about taxes and how they affect their lives so that they can make their case to the politicians. Even though the Middletons know little of politics, they know that for their petition to be taken seriously, its claims must be persuasive to the politicians who will decide what is to be done.

A STARK CHOICE

A dying economy will not save America’s median and low-wage workers. Technology and the broadest possible global competition for labor both lead to increased labor productivity, which in turn leads to a more productive economy. But both also lead to static and declining wages and job loss for many ordinary workers. Ordinary workers who can morph into high-skilled workers, highly sought-after celebrities, entertainers, or athletes, or ingenious entrepreneurs need not be troubled over either technology or globalization. However, for those workers who are stuck with being ordinary, they should be terrified about increases in labor productivity unless something is done to protect their interests.

A generation in which the cost of post-secondary education has risen far faster than inflation, coupled with the wages of ordinary Americans remaining static or falling, has resulted in only a minuscule number of Americans now being able to afford post-secondary education on their own. Imagine the tragedy of a person who has all the talent and ambition needed to become extraordinary or super extraordinary, but they do not have the money to get a quality post-secondary education. Not only does the individual suffer, but America also suffers from losing the talent needed for its workers to compete internationally for the best paying jobs.

The Middleton family illustrates the problem. Joe and Sue aren’t likely to ever find enough in their budget to both maintain a minimally middle-class standard of living and simultaneously save for their kids’ college. So, if the Middletons cannot pay for educating Joey and Suzy, then either the taxpayers will pay higher taxes to invest in their education, or their talent will be wasted. Wasted talent will deprive the economy of a productive workforce and demoralize those whose talent is wasted.

The more workers who develop and use extraordinary skills, the richer America will be. The more goods and services purchased by highly paid workers, the more jobs there will be for ordinary workers, and the more the economy will grow. So, America makes no better investment in the future than to spend whatever money is necessary to make it possible for every meritorious worker to get the best skills that they can get.

With economic opportunity now becoming increasingly dependent on getting a quality post-secondary education, America must find ways to help those of talent and drive to achieve it, and the help should they regard it as an investment in talent, not as a gift.

Although the economy has changed and now simultaneously heaps ever-greater rewards on the super extraordinary and capitalists while squeezing the ordinary, America’s tax system has not. In this new economy, the extraordinary need little help, and the super extraordinary and capitalists need no help under the tax laws, but the ordinary need plenty of help.

Comparing what it would mean in the daily lives of middle-class families like the very ordinary Middletons and the super extraordinary/capitalists like today’s crop of billionaires to shift more of the tax burden from one to the other, demonstrates the challenge of striking the right balance between taxing the middle class on the one hand and the super extraordinary and capitalists on the other hand. Taxing the super extraordinary and capitalists too much can rob them of their incentive to be productive and/or deprive them of their ability to make needed investments in the economy, but taxing them too little puts too much additional stress on a middle class already under stress. Striking the right balance between taxing the middle class and the super extraordinary and capitalists in a way that will best strengthen America requires wisdom of the highest order.

For America to have a growing and thriving middle class, America must change its tax system to accommodate new economic realities. Depending on what choices are made, the middle class will grow or shrink. Such a quandary demands considerable thought about the future, as well as a look at the past. Chapter 3 will cover how past societies have dealt with the divide between the rich and everyone else.