Given the obsession with economic inequality, you might think it’s the main force squeezing the middle class. It isn’t. We have this not from some right-wing think tank but from President Obama’s top economists. The bigger culprit, they show, is the slow growth of productivity – that messy process by which the economy improves efficiency and living standards. Greater inequality is a distant second in assaulting middle-class incomes.
So concludes the annual report of the White House Council of Economic Advisers. The CEA, as it’s known, performed a fascinating “what if” exercise. Assume that the most favorable post-World War II trends had continued, it said. Specifically: Productivity maintained its rapid growth of the 1950s and 1960s; inequality stayed at lower levels; and labor-force participation didn’t drop.
What happens then to middle-class incomes?
Answer: They double. The income of the median household goes from roughly $50,000 to $100,000 after inflation. The biggest increase, about $30,000, would stem from faster productivity growth. Less economic inequality would account for $9,000 and higher labor force participation – more workers – for $3,000. (Yes, that’s only $42,000; the rest reflects the favorable interaction of the three trends.)
Just why this didn’t happen is a central economic story of our time. The CEA doesn’t offer a comprehensive theory. It merely divides the postwar era into three sub-periods based on the economy’s changed performance. For example, the years from 1948 to 1973 are labeled “The Age of Shared Growth,” because the economy grew rapidly and gains were widely distributed.
I’d tweak the CEA’s approach slightly. Here’s how I’d characterize the different phases of the postwar economy.
What this history teaches is that we have less control over our economic destiny than is often assumed. At every juncture in the chronology, people – including “experts” – did not foresee the next major change.
The same ignorance inhibits what we can do for the middle class. Government – aka, politicians – can address some middle-class wants by redistributing income from the rich through tax breaks and subsidies. But this approach has limits and not merely because the rich will resist.
We simply don’t know how to orchestrate predictable productivity increases. If it were easy, it would already have been done. Saving the middle class, though popular, is qualified by economic reality. Our ambitions often exceed our powers.