Does ‘Middle Class Economics’ Really Work?


An article in yesterday’s Wall Street Journal, “What Clever Robots Mean for Jobs,”  illustrates the stark fact that “automation is commandeering much middle-class work such as clerk and bookkeeper, while creating jobs at the high- and low-end of the market.  This is one reason the labor market has polarized and wages have stagnated over the past 15 years.”
CaptureThe above chart shows the divergence between productivity growth and payrolls beginning in the year 2000.  It is a vivid portrayal of the “hollowing out” of the middle class which is causing so much grief.
Now let’s turn to a column in today’s New York Times, “What Is Middle-Class Economics,” by the journalist, Josh Barro.  The term, of course, refers to the policies by which President Obama hopes to appeal to the millions of middle-class families with stagnant incomes. According to Mr. Barro, the President’s policy proposals have three facets:

  • Tax and regulatory provisions such as tax credits for childcare, college tuition and a second earner in households where both parents work. Employers would be required to provide paid sick leave and the minimum wage would be raised.
  • Make workers more productive by expanding access to community college.
  • Increase overall economic growth with increased infrastructure spending and new trade agreements.

The problem, as Mr. Barro points out, is that such policies would have only a small effect on the taxes of a middle-income family, amounting to a cut of no more than $150 per year on average.  This is much less than the average family will save from falling gasoline prices.
On the other hand, it is generally understood that stagnant middle-class wages will not rise very much until the labor market becomes tighter as a result of falling unemployment.  Mr. Barro suggests that the government can help this process along in two ways:

  • By the Federal Reserve holding down interest rates, or at least letting them increase only very slowly.
  • With policies to make it easier to work less. The Affordable Care Act does this by decoupling health insurance from full time work. The surge in disability insurance recipients takes people out of the labor market. The rapid retirement of baby-boomers does the same thing.

Unfortunately there are many negative effects from both the Federal Reserve’s easy money policy as well as a shrinking labor participation rate.  I will return to this issue soon!

Income Inequality and Rising Health-Care Costs


There seems to be a general consensus on the reality of increasing income inequality in the U.S. and even some agreement on its two main causes: globalization and the rapid spread of technology. The slow growth of the economy since the end of the recession has made the inequality problem that much worse.
CaptureNot surprisingly, slow economic growth in the past five years has led to stagnant wages for many workers.  My last post addressed this problem.  The above chart from the New York Times shows that incomes for top wage earners have been rising in recent years while they have been stagnant for middle- and lower-income workers.
But there is more to it than this.  In yesterday’s Wall Street Journal, Mark Warshawsky and Andrew Biggs point out that, “Income Inequality and Rising Health-Care Costs,” in the years 1999 – 2006, total pay and benefits for low income workers rose by 41% while wages rose by only 28%, barely outpacing inflation.  For workers making $250,000 or more total compensation rose by a lesser 36% while wages grew by a greater 35%.  This apparent anomaly is explained by the fact that health insurance costs are relatively flat across all income categories, thus comprising a much larger percentage of the total pay package of low-income workers than for high-income workers.
Capture1In fact, the Kaiser Foundation has shown that low-wage workers tend to pay higher health insurance premiums, as well as receiving lower insurance benefits, than higher paid workers (see the above chart).
Overall, what this means is that employer provided healthcare is taking a huge chunk out of the earnings of low-income workers which makes income inequality much worse than it would be otherwise. Of course, the cost of healthcare is a huge burden for the entire U.S. economy, currently eating up 17.3% of GDP, twice as much as for any other developed country.
For both of these reasons it is an urgent matter for the U.S. to get healthcare costs under control.  Avik Roy of the Manhattan Institute has an excellent plan to do just this as I have discussed in several recent posts.