DOING LESS WITH MORE
Economists don’t even broadly agree on who is in the middle class. Some say it’s anyone within a 50-percentile ring around the U.S. median income. As good a general definition as you’ll find comes in a new paper summarizing the economic case for how the middle class spurs economic growth from economists Heather Boushey and Adam Hersh of the liberal Center for American Progress. “A middle-class family has some economic security,” they write, “be that a good job with health insurance and a retirement plan, or some savings in the bank to tide them over in an emergency or to send a child to college or even float a family member who wants to start up a business.”
By any definition, the middle class is eroding. Real median household incomes basically flatlined over the past 30 years. Each of the last three recessions has vaporized huge numbers of the middle-skilled jobs that used to pay a good family wage, on factory assembly lines or in customer-service centers or, most recently, in classrooms and city halls. This has led to what the MIT economist David Autor calls the “hollowing out” of American jobs, with a few middle-skill workers finding training for high-skilled, higher-paying careers, and the rest shoved downward into low-wage, low-skilled jobs or onto the unemployment rolls.
If the decline continues, this is what research suggests the U.S. will look like in the years ahead: Roads and bridges will fall into disrepair. Public schools will struggle to graduate students prepared for the job market. Consumer spending will tumble. Small businesses will close, and fewer and fewer new ones will spring up to take their place. Corporations like Amazon and Apple will scrounge the country to cope with chronic engineering shortages. Rich guys like Hanauer will find themselves with fewer customers, fewer potential employees, and many more worries about the swelling ranks of the have-nots breaking out their pitchforks.
The timing couldn’t be worse. The United States was first a resource economy, then a production economy, then a full-fledged industrial economy. In the past two decades, globalization turned the nation into a consumption economy—we bought things from other countries and from one another, increasingly with borrowed money. That model collapsed in the financial crisis.
What comes next, economists often tell us, is the innovation economy. Our international trading partners will boast cheaper labor, laxer business regulation, lower taxes, more abundant resources, and, in the case of China and India, faster-growing flocks of new consumers.
“I do keep dreaming of the apartment I had when I was a teacher, full of plants and beautiful things.”—Courtney Carbone, who continues to search for another teaching job
We’ll still have the best ideas. We’ll keep coming up with the best new products before anyone else does, and everyone else will be forced to buy them from us. That’s our comparative advantage.
Research suggests that this advantage flows directly from the strength of the American middle class, starting with its spending power. The super-rich don’t pay enough people to do enough things for them, or at least not enough to drive the economy. Middle-class families do. That’s the core of Hanauer’s argument, and research from the Census Bureau and the Brookings Institution, among others, support it. Middle-class families have more disposable income than low-income families, who largely buy only necessities, and they’re more likely to spend their disposable income than wealthy families are.
As Hanauer puts it, he and his rich friends, for all their lavish parties and jet-away vacations, don’t buy enough shirts, cars, and restaurant meals to match the spending that would occur if, say, their wealth was divided up among thousands of poor families. Studies on what economists call “marginal propensity to consume” bear out this idea.
Hence Hanauer’s claim that middle-class consumers, not innovators, create jobs. Amazon didn’t create a new group of book buyers; it just peddled a more convenient way to buy books. Its success created lots of jobs in Seattle, Amazon’s hometown, but it also killed lots of jobs in strip malls across the country. Increasing the number of book buyers would boost sales and jobs in the industry, with no downside.
Middle-class families buy more than books. They invest heavily in two of the most important drivers of economic growth: infrastructure and human capital. The middle class demands the highways and the schools that boost the overall functioning of the economy. Unlike the Hanauers, those families can’t afford to bypass the nation’s air-transit system with a private jet, or to send their children to elite private schools. (Hanauer raises this point with his 12-year-old son, Cole, after picking him up from just such a school in the family’s Audi. Cole objects. “Cindy’s kids go to public school,” he says. Nick nods. Cindy Crawford, he explains. The model. Their neighbor in Cabo.)