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Home > Social Issues
The Death of the Middle Class
by Bob Powell, 11/3/07
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This is a response to the commentary by DLC Democrat Stephen J. Rose on The Myth of Middle-Class Job Loss in the Wall Street Journal on October 24, 2007. Mr. Rose is sufficiently misguided that he should surrender his economic credentials. Here is why, followed by data and graphs.

Documents in Word (449K) & PDF (415K) formats contain the detailed data and graphs. I've added links to make it easy to jump around within the documents. It may be better to right-click and download these files than try to open them in your browser.

These files now include

  • Comments from Mr. Rose and responses to those comments. A summary follows his commentary below. Go to Word and PDF documents for his e-mail as sent and my detailed response.
  • An Incoherent Libertarian Objection and my response. He says eliminating the Federal Reserve will eliminate the "trade deficit." Not so. I explain why not.
  • A link to a fascinating and important talk by Professor Larry Lessig on Corruption ... the influence of money on the media and government. I include a brief overview. It's as relevant to the influence of money on the PPI/DLC as it is on other right-wing think tanks.
  • A section on: Fighting communism with "free trade" to reduce inflation and reduce wages.

Jump to Rose's Commentary below.
Jump to Summary of Rose's E-mail Comment & My Response below.


The Death of the Middle Class and the U.S. Economy

Stephen J. Rose in his commentary on The Myth of Middle-Class Job Loss is in denial. Mr. Rose's assertion that "there is no convincing, data-driven proof that trade has led to any overall job loss during the last 30 years" is a red herring.

It's true that the U.S. would have to add another 4.7 million jobs to have kept up with population growth (see graph), but that's because Federal Reserve policy controls the number of jobs. Trade policy affects the quality and pay of jobs. See a later graph here ... it's only gotten worse ... as of Oct 09 the gap was 14.9M jobs!

Employment's has not kept up with population growth

He classifies valid arguments that there's a major problem as "populist dogma." But the opposite of populism is government controlled by corporations and the wealthy. That's fascism. We oppose fascism. 

Until around 1980 employee compensation tracked productivity. Since then productivity has continued to climb, but the compensation of the lowest 80 percent of the workforce has stagnated (see graph). Had the previous trend continued, compensation would have been 68% higher in 2004. With higher wages, we wouldn't need cheap, unsafe products from China.

Productivity Up, Compensation Lagging. Analysis by Jared Bernstein of U.S. Bureau of Labor Statistics and U.S. Bureau of Economic Analysis data. Compensation of the bottom 80 percent of the U.S. workforce has lagged productivity since the mid-1970s.

Note 8/4/10: A Sin and a Shame By BOB HERBERT, 7/30/10

... Productivity tells the story. Increases in the productivity of American workers are supposed to go hand in hand with improvements in their standard of living. That’s how capitalism is supposed to work. That’s how the economic pie expands, and we’re all supposed to have a fair share of that expansion.

Corporations have now said the hell with that. Economists believe the nation may have emerged, technically, from the recession early in the summer of 2009. As Professor Sum writes in a new study for the labor market center, this period of economic recovery “has seen the most lopsided gains in corporate profits relative to real wages and salaries in our history.”

Worker productivity has increased dramatically, but the workers themselves have seen no gains from their increased production. It has all gone to corporate profits. This is unprecedented in the postwar years, and it is wrong. ...

Note 5/7/08: Relationship among supply & productivity, demand & wages, and debt

Ravi Batra has observed that supply comes from productivity and demand comes from wages. When wages fall behind productivity, there is insufficient demand for the available supply. To pump up lagging demand, increased debt has been encouraged by government (fiscal & trade debt by way of tax cuts, Iraq occupation spending, and rebate checks) and the Fed (consumer & mortgage debt by way of low interest rates and jacked-up money supply).

Stagnant wages are therefore why consumers (consumer & mortgage debt), government (fiscal debt), and the nation (trade debt) are is such distress. Former Bush Treasury Secretary Paul H. O'Neill has quoted Cheney as once saying, "Reagan proved deficits don't matter."

Greenspan observed that this became part of Republican rhetoric. He argued that uncontrolled government spending and borrowing can produce high inflation "and economic devastation." Well, we're on the verge of that very devastation. Greenspan evidently forgot his criticism of deficits when he colluded in getting Bush's tax cuts passed.

Mr. Rose makes a false analogy when he compares farm and manufacturing job trends. An article by Bill Hawkins, Senior Fellow in National Security Studies, at the United States Business and Industry Council (USBIC) on "Intellectual Deception Reveals Weakness of Free Trade Ideology," 2/5/04, explains the flaw in the argument that the decline in the number of people working in manufacturing should be no more troubling than the decline in the number of people working on the farm. The flaw is that product demand for farm commodities is relatively inelastic, but demand for manufacturing products is relatively elastic. Therefore, there is no reason why manufacturing employment should fall as farm employment has because of advances in technology.

Note 5/7/08.

For more on the inelasticity of supply and demand in agriculture see these from Daryll Ray, Agricultural Policy Analysis Center
at the University of Tennessee:
Subsidies and Demand
Other industries have the tools needed to manage excess capacity
Policy Impacts on Agriculture

Mr. Rose notes the loss of manufacturing jobs, but not the magnitude of the loss: 3.65 million nationally since the March 1998 peak or 20.7 percent. Colorado has lost 48,500 jobs since the April 1998 peak, 25.1 percent. Colorado Springs has lost 10,000 jobs since the January 2001 peak, 37.5 percent. Those were better than average paying jobs.

It's not just manufacturing jobs that have been lost. The nation lost 630 thousand information technology jobs since the March 2001 peak, 16.6 percent. Colorado's lost 37,400 IT jobs, 33 percent. Colorado Springs has lost 6,800 IT jobs, 46.9 percent! People retrained for those IT jobs when they lost their manufacturing jobs. For what are they to "reskill" now and how often will "reskilling" be required?

More important, the U.S. is rapidly losing not just low-value-added, simple manufacturing jobs. The "trade" balance in Advanced Technology Products (ATP) has gone from a $40 billion surplus in 1991 to a $48 billion deficit now. Rose cites a need "to help displaced men who lack post-secondary education," but more education and training are not the answer when high-tech jobs are also disappearing. (See graphs on the Mfg, IT and ATP.)

There's a choice for the U.S. economy: either more primary employers or an increasing and unsustainable trade deficit. Rose doesn't seem to understand that the exponentially-increasing U.S. trade deficit is an enormous problem; it will be 10 percent of GDP within a few years. Actually, "trade" should be in quotes because what's going on is "transfer of the factors of production," not trade.

Local economic development organizations emphasize the importance of "primary employers." They sell to outside the region and bring dollars in to circulate and recirculate to allow the economy to grow. 

Rose doesn't understand that primary employers are just as important for the national economy. The loss of manufacturing and ATP export jobs isn't simply a matter of losing jobs. The accompanying decline in the production of exportable goods is a national loss of primary employers means we're not �earning� enough dollars from outside the country. This requires ever-increasing and unsustainable borrowing that's undermining the U.S. economy and national sovereignty.

The problem is made worse by the proliferation of the polar opposite of primary employers: Wal-Mart-like companies. They don't produce exports. They displace local businesses that are more likely to spend dollars locally. And every night they send dollars back to their headquarters outside the region that might otherwise be available for circulation. Many Wal-Mart employees also shop at Wal-Mart, so much of their wages also immediately leave the community.

Losing primary employers and gaining Wal-Mart-like employers spells an economy in decline. The U.S. economy and the middle class are bleeding to death and "free traders" like Rose are wielding the knife.

Robert E. Powell, Ph.D., MBA     Ph. 719 599-0977   E-mail: scuba at usa.net

Rose's Commentary
COMMENTARY
The Myth of Middle-Class Job Loss By STEPHEN J. ROSE
October 24, 2007; Page A21

Economic change is a messy process. New technologies open up many opportunities for those prepared to take advantage of them. At the same time, old firms and their workers are displaced and forced to start over. In 1900, for example, 40% of the U.S. work force was involved in agriculture. Today, that figure is less than 2%, and no serious observer would argue that we are worse off as a result of this transformation.

Yet many of today's most prominent politicians and pundits are making an updated version of precisely this argument. They claim that the decline in the number of manufacturing jobs has led to the replacement of good middle-class jobs by low-skill, low-pay "hamburger-flipping" service jobs. 

This kind of populist dogma is bad politics and even worse economics. The assertion that the American middle-class is disappearing along with manufacturing jobs is, put simply, based on an outdated view of how the economy operates, and is empirically wrong. Nonetheless, the view that the economy has failed the middle class is widespread. The outsourcing of jobs to low-wage countries is, of course, the latest culprit. Polemicists from all sides find it irresistible to blame expanding trade for middle-class decline. But how widespread a problem is outsourcing, exactly?

It is certainly true that many jobs in manufacturing clothing, steel, metal products and automobiles have gone overseas. Plant closures not only devastate the workers who are displaced, but they have also undermined the vitality of whole communities in North Carolina, Pennsylvania, New York, Michigan, Ohio and Wisconsin, to name just a few places. But while such communities are a clear sign of the decline in some sectors of the economy, there has been strong employment growth in many other sectors. In research just published by the Progressive Policy Institute, I show that incomes and employment have grown by substantial amounts in every state (even in the so-called Rust Belt) since the passage of the North American Free Trade Agreement in 1993.

In fact, there is no convincing, data-driven proof that trade has led to any overall job loss during the last 30 years. To the contrary, the economy has grown at a slow but steady rate (a few brief recessions notwithstanding) with trade and employment rising in tandem.

To prove that there has been substantial growth of middle-class jobs, I compare the situation that existed in 1979 with that of 2005. The base year is 1979 because it represents the last business-cycle peak before income inequality and the U.S. trade deficit began to grow quickly in the 1980s. To make the comparison fair, earnings in 1979 are increased by almost 150% to adjust for inflation.

Let us look at the distribution of earnings in 1979, compared with the distribution of earnings of the net new jobs created since that year. To begin with, it is necessary to assess the experiences of male and female workers separately. Unfortunately, it is still true that a large number of women are employed in occupational titles that are predominantly held by women -- e.g., teachers, nurses, and clerical workers.

Nevertheless, there has clearly been a sharp increase in female middle-class employment. As recently as 1979, 61% of female workers were in jobs that paid less than $25,000, and only 3% earned more than $50,000 a year. By contrast, more than 36% of new jobs that opened since 1979 for women pay more than $50,000 and only 17% pay less than $25,000.

Critics who bemoan the trajectory of the American economy over the past three decades somehow find it convenient to overlook or play down this historic improvement in the employment status and income levels of women. While women still lag in pay compared to men of similar educational attainment, the extraordinary rise in women's income since 1979 is a fact at odds with the notion of an overall decline in the American middle class.

For men, the change in employment since 1979 has not been quite as clear-cut, or as positive. There has been a tremendous growth in the number of men in high-paying jobs: In 1979, just 10% of male workers earned above $75,000, while fully 34% of new jobs since 1979 have paid this amount or more.

However, there was also growth in the share of male workers earning less than $25,000 a year, from 23% in 1979 to 36% by 2005. This rise of low-paying jobs hit less-educated men particularly hard. For those with just a high school diploma, 87% of the new jobs paid $25,000 or less.

Here's the bottom line: For three-quarters of the workforce (women and the top half of male earners), economic growth translated into earnings gains. But for male workers in the bottom half of the earnings distribution, the decline of unionized manufacturing employment has led to the drying up of some middle-class jobs for those with no post-secondary education.

For the clear majority of the workforce, then, the job market has become more welcoming, not less so. But where are these jobs?

Using a framework that I developed in the 1990s, I find that most of the employment gains over the last 30 years have been in business-management activities (administration, sales, finance and business services) as well as in professional services such as health care and education. While the percentage of U.S. jobs derived from manual work in agriculture, mining, timber and manufacturing has declined, the share of jobs related to low-skilled retail and personal/food services has remained steady.

Undeniably, some people have been left out of this middle-class workforce expansion and need help in making the transition to the new economy. In particular, the last six years have seen very little wage growth for the bottom 80% of the workforce. But we should bear in mind that real gross domestic product per person is up over 60% since 1979, and our goal for the job market should not be simply to keep pace with where things stood nearly three decades ago.

While the pessimists would have us go backward, we should be working today on expanding opportunities in the future. In particular, we have to address what we can do to help displaced men who lack post-secondary education. Higher levels of unionization and increasing the minimum wage would help, but they don't address the more basic need, which is to provide people with the necessary skills for the modern marketplace.

The economy can expand and provide more good jobs as long as workers have the education and training required to succeed. Talk of the "disappearance of the middle class" is actually counterproductive, because it distorts the real challenge. This is to make sure that our young men and women are better prepared to enter the workforce of the 21st century.

Mr. Rose is senior economic fellow at the Progressive Policy Institute, where he recently authored a report titled "The Truth About Middle Class Jobs." He has worked both for the Joint Economic Committee of Congress and as an adviser to former Secretary of Labor Robert Reich.

URL for this article:http://online.wsj.com/article/SB119318171973969059.html

 

 

Summary of Rose's E-mail Comment & My Response

 

I got a response for Mr. Rose the next day, which I appreciate. I promised I would post his comments and my response to them on my website. His e-mail comments as sent and my detailed response are in the Word (449K) & PDF (415K) format files. Right click to download.

 

Here's a summary for those who don't want to wade through all the details. But please do look at the associated graphs in either the doc or the pdf file.

  • He maintains I "conclude that 4.7 million jobs were lost to trade."

    I did not; I do not. I said exactly the opposite. The number of jobs and unemployment are
    determined by Fed policy; the number of jobs has nothing to do with trade.

    There is a genuine and major problem with the number of jobs. Unemployment is more like 12% than 4.5%. This, along with "trade," is a major reason why wages are depressed. Anyone who believes even marginally in the power of supply and demand will understand that such an excess supply compared to demand will depress wages. And it depresses wages for U.S. workers to be in competition with workers in countries that pay their workers below poverty wages. 

  • Rose uses the word, "exploded," to describe the "trade" deficit.

    That's the only place he's correct. Since 1990 the increase is almost a perfect exponential. Exponential increases are explosions. Explosions do not end well. That's why the current situation is so dangerous. This explosion, like a real explosion, is leaving devastation in its wake. 

  •  He complains that I extrapolate the jobs needed to keep up with population growth from a peak in April 2000 and that had I "used data back to the 1980s or back to the 1950s, your trend line would have looked lots different."

    I chose that time because there was relatively low unemployment and relatively low inflation … relatively good times. There is no reason to choose another point in time when the Fed was unnecessarily holding down employment due to a fabricated fear of inflation. I quote Greenspan wondering how inflation can be low with relatively low official unemployment.

  • He says "all of those people going to college and graduate school did not get the message. Technological change means that it takes less labor to produce more physical goods, the days of manufacturing as king are over. Fortunately, the economy can grow with an ever smaller share of jobs being in direct production."

    They did get the message, the wrong message. They got the message that more education would solve their job problem. Unfortunately, it doesn't because we're losing high-tech as well as low-tech jobs. Manufacturing is no longer king because of U.S. policies that subsidize the offshoring of manufacturing; it wasn't an accident or inevitable. Sure the "economy can grow" for a time, based on borrowing. It can grow until it collapses due to losing primary employers, the increasing borrowing required, a resulting declining dollar … and a subsequent hyperinflationary depression.

  • He says "I cite some data on recent changes in employment to imply that trade is mainly responsible for changes in employment post 2001." Adding, I "selectively cite a few sectors but overall employment is up."

    He just can't comprehend that the number of jobs has nothing to do with "trade." I cite specific sectors that have lost jobs, Manufacturing and IT, because those are the kinds jobs that have been affected by "trade." I cite the Advanced Technology Products trade deficit as going from a $40 billion surplus in 1991 to a $48 billion deficit in 2005 as an indication that we're losing other high tech jobs as well. Yes, in Colorado mining jobs are primary jobs and have increased, but that gain of 13,200 jobs comes nowhere close to offsetting the loss of 48,500 manufacturing jobs. All other categories I saw that increased (government, education, financial services) were NOT primary jobs.

  • He says there's no gap in compensation relative to productivity when a "different inflation adjustment" is used. He does admit that "compensation and productivity and [have] diverged since [2001] with the rising share of profits.

    There no gap when the product price index is used. But that provides a false picture of what's happening because the consumer price index addresses the costs that confront consumers. Even using the CPI as the deflator understates the compensation gap because inflation is much, much higher than the official figures. The CPI is 3.4%, but inflation is really 10.8%. It's understated to rob Social Security recipients.

    On a "rising share" to profits: Johns Hopkins University economist Arnold Packer calculates that employees' share of the value added in the U.S. economy has fallen to its lowest point since records were first kept in 1947 -- and the rate of decline is accelerating. "The real damage is not the number of jobs, but their pay and quality." Exactly.

  • My final comment:

    There you have it: an inability to address the real issues. I don't know whether this is simply a mindset intent on refuting a red-herring, false-anyway relationship between "trade" and the "number of jobs" or willful dishonesty. It's almost as if Rose wears blinders that don't allow him to see what's really going on.

    Either way, this is a war, a war of ideas and policy. If this nation keeps going the way it is going, we will have an economic collapse greater than the Great Depression. For that reason alone, it's a fight worth making. 

  • I've added links to a lecture by lawyer-professor Lawrence Lessig at Stanford Law School on the issue of corruption and how money influences the media and Congress. The DLC and PPI are similarly affected. Go here for the audio with the slides visible.

URL: http://www.exponentialimprovement.com/cms/deathmidclass.shtml

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