About that Middle Class thing...

Since I now spend most of my days (and nights) studying economics, I'd like to expand on my thoughts regarding that big political problem that's been sharing the headlines with the Iraq war - stagnant wages.

We're in an unusual situation. Usually, when the economy grows, productivity grows, meaning each worker can do more work per hour. And then, workers become more valuable, so they get higher wages. But, as this report by the think tank NDN shows, that hasn't happened this time around. Why? NDN's answer is basically the same as my answer - globalization has led to a glut of cheap foreign labor (mostly from China) that has made labor in general cheaper. That also explains why corporate profits are at record highs - corporations are the ones who benefit the most from cheaper labor.

The question is, what do we do about this? Progressives are just starting to come up with answers. One of these is Stirling Newberry, who writes for TPMCafe. He's a principal at a private equity fund firm, so he should know a thing or two about economics (at least, more than this first-year grad student). What's Newberry's answer to the wage problem?

Americans need to import less, and export more, they need to spend less on domestic consumption, and more on international production. There isn't really a choice here. You participate in globalization every time you fill up your car or truck...Americans need higher wages, and they need to compete globally. Both of these come attached to the need to get control of how money is invested again. And to get control of that investment future means adhering to a very old school belief in responsibility and discipline.

Well, I'm not sure if by "Americans need higher wages, and they need to compete globally" part he means that the former will result from the latter - it seems to me that competing globally is what's keeping American wages down. All those productivity gains represent what we've been doing to try to stay ahead of the Chinese - that productivity growth has at least saved our jobs.

But he's right - we really have no other choice but to compete in the global marketplace. Walling ourselves off behind tariffs or re-unionizing ourselves would come at a steep price. To a certain extent, that's been Europe's response, but it hasn't worked too well - not only do they have stangnant wages as well, but slow growth and high unemployment to boot.

And Newberry is right that investment and saving are the way to do it. Saving more would require a lot of Americans to make painful cutbacks in our lifestyles. The apparent wealth gap - the differnce between what rich people have and what middle-class people have - would increase, as the middle class stops burning the furniture just to look rich. And the higher taxes required to close the deficit, though they would fall mostly on the wealthy, would be more noticeable to the rest of us.

But this belt-tightening would pay off. Reducing household and government debt would give us a bigger pool of savings - consumption may be what drives the economy today, but investment is what drives the economy of tomorrow. The beneficial effects of higher saving would be felt in lower long-term interest rates (which allows companies to borrow money, some of which will be used to raise workers' wages), not to mention greater financial security.

In my opinion, this is what must form the core of a new progressive economics. The goal of progressivism is to create and sustain a middle class - but in the end, that middle class has to sustain itself, and that means saving money and working for the future. This basic idea - "Work towards the future, don't cash out" - is what I believe must become the progressive mantra. This is in stark contrast to what has become the conservative philosophy - deficits don't matter, looking rich is what's important, "save the economy" by going shopping.

And, in case you were wondering, I do believe government has a big role to play. Reforming the health care system, making college more affordable, improving public education, and developing alternative energy sources will help the middle class deal with their biggest unavoidable costs (health care, college, and gas), giving people the freedom to choose what to do with their money. But that will only yield lasting results if people save a sizeable portion of that money instead of spending it on cheap crap at Wal-Mart.

There is a reason that the word "progressive" contains the word "progress." The idea of a better tomorrow is deeply intertwined with the idea of a middle class. Globalization has put tremendous pressure on American workers, and we can no longer ignore those pressures by maxing out our credit cards. Newberry is right - it's time for a progressive economic policy that emphasizes savings, investment, hard work, and looking to the future, both for the government and for America's middle class. Higher wages and better, more sustainable standards of living will follow in due course.