Rebuilding the middle class

JOEL KOTKIN is an Irvine senior fellow at the New America Foundation and the author of "The City: A Global History." DAVID FRIEDMAN is also a senior fellow at the foundation.

OVER THE LAST 20 years, the United States has regressed into what one economist calls a "plutonomy" -- a society in which the largest economic gains flow to an ever smaller portion of the population. According to recent economic statistics, from 1999 to 2004, the inflation-adjusted income of the bottom 90% of all U.S. households grew by 2%, compared with a 57% jump for the richest 10%. Incomes rose by more than 87% for households annually making $1 million and more than doubled for those that take home about $20 million a year.

Most disturbingly, workers losing the most economic ground are not the uneducated and unskilled but those with high school, community college and even four-year degrees. Overall, the middle class, in relative if not absolute terms, has lost purchasing power, especially in big coastal cities where the highest earners and the super-rich have driven up prices for housing and the cost of living. Globalization and automation have not only hurt manufacturing workers but also mid-level managers, engineers and software programmers. Despite enormous media and stock market hype, for instance, the U.S. has lost more than 700,000 information industry jobs since early 2001.

Is there any way to restore the prospects of middle- and working-class Americans? A comprehensive program to rebuild the nation's highways and bridges, upgrade its ports, construct and expand its energy lifelines and enlarge its public transportation systems could generate hundreds of thousands of good-paying jobs. Admittedly, this back-to-basics strategy is not glamorous. But it has helped narrow economic inequality in the past by producing more balanced economic growth.

During the 1930s, for instance, the government sought to narrow the enormous wealth disparities caused by the Depression by putting people to work on an unprecedented number of infrastructure improvements. About 3 million workers, many of them unemployed, were organized to build roads, bridges and dams. They planted millions of trees in middle America to prevent soil erosion. They built transportation networks that helped cities increase their industrial productivity. Rural electrification programs lifted sections of the Midwest and South out of darkness.

In the 1950s, under the Eisenhower administration, construction began on an interstate highway system that, when completed, reduced travel times and made the economy more efficient. By promoting suburban development, the new roads also sparked an unprecedented growth in homeownership for working- and middle-class families.

The result was one of the most balanced periods of prosperity in U.S. history. As ordinary Americans prospered, the share of the nation's wealth controlled by the top 10% of the population fell from nearly 50% in the 1930s to about 30% in the 1960s. Yes, the super-rich did quite well. But coupled with such government programs as the GI Bill and housing for veterans, the infrastructure projects helped give more Americans access to higher education and homeownership.

Both Democrats and Republicans have largely abandoned policies that led to balanced economic expansion. Liberals tend to favor social programs that redistribute income to the less privileged, while conservatives resist nonmilitary spending. As a result, since the mid-1960s, spending on public infrastructure has fallen from more than 3% of gross domestic product to about 2.5%. As the quality of roads, bridges, schools, sanitation and healthcare fell, wealth shifted away from the middle and working classes. Measures of income inequality skyrocketed from relatively low levels in the 1950-1970 period to postwar highs in the late 1990s.

Of course, lack of infrastructure spending was not the only culprit. But minimal investment in public projects that boost the economy's productivity certainly has not helped. By contrast, countries such as China, Japan, Singapore, South Korea and Taiwan have poured billions of dollars into upgrading airports, transit systems, schools and roads, and their economies have benefited.

The scale of today's economic inequality in the U.S. can be eye-popping. Since 1980, for instance, Manhattan's inequality rate has risen from 17th to first among all U.S. counties. The richest 20% in the borough now earns 52 times what the lowest fifth does, a disparity roughly comparable with Namibia. Last month, just as Wall Street hailed record bonuses of more than $25 billion, thousands of New Yorkers lined up for 185 jobs -- 65 of them full time -- at the M&M;'s World theme store in Times Square. The starting salary was $10.75 an hour, though the benefits package was generous by comparison with most entry-level jobs.

Similar wealth concentration is occurring throughout the country. California is home to one of the world's highest number of billionaires and multimillionaires, but one in five children live in poverty here. A 2000 study by the California legislative analyst's office showed that 20% of San Francisco's population took home more than 60% of the Bay Area's income, the worst inequality in the state. In Los Angeles County, 20% of the population pocketed about 55% of the region's income.

The current favored policy proposals will do little to change economic disparity. The Republican package of high-end tax cuts, pork-barrel spending projects such as the bridge to nowhere in Alaska and near-total neglect of the country's industrial base by generally ignoring unfair trade practices constitutes a veritable formula for continued inequality. That's one reason why the party lost power in the November midterm elections despite overall solid economic growth and a record-breaking stock market.

Democrats also have few answers. Many focus on increasing the U.S. minimum wage or expanding the "living wage" movement that has taken hold in Los Angeles and San Francisco. But the chief beneficiaries of these policies are younger part-time workers, not primary household wage-earners. One study by the Public Policy Institute of California shows that such measures, while boosting the wages of those affected by them, also reduce overall regional employment by as much as 6% to 8% among lower-skilled workers.

Others push for higher taxes on the "rich," a strategy that would have little effect on multimillionaires and billionaires, who can afford legal and financial advisors who protect their wealth. Most Democrats don't want to restrict wealthy people's use of private environmental trusts or activist foundations to dodge taxes because many of these entities are among their most fervent supporters. Instead, it's those in the $100,000-to-$300,000-a-year range who would feel the pinch of higher taxes, many of whom are small-business owners and professionals who create jobs in costly urban areas.

Indeed, the net result of decades of liberal urban policy -- mixed-price residential developments, high taxes on professionals and small businesses, environmental and business regulation and mandated wage rates -- has been to drive more and more middle-class workers out of urban areas. A recent Brookings Institution report showed that heavily Democratic regions such as Boston, Los Angeles, New York and San Francisco are precisely the places where middle-class neighborhoods are most endangered.

The best way to reverse these trends is to return to those policies that produced a vibrant, economically well-balanced society: creating jobs by investing in infrastructure and promoting people's technical skills. According to the American Society of Civil Engineers, $1.6 trillion worth of infrastructure projects are required but yet to be started.

Thousands of production jobs go begging in this nation not because of foreign competition but because of a lack of skilled workers willing or able to obtain basic machinery training. As one Houston factory manager, echoing findings across the country, remarked recently, it is easier to find an engineer than an experienced machinist or welder.

Gov. Arnold Schwarzenegger's rebuilding project for California, an estimated $43-billion effort that could generate more than 700,000 jobs, is a step in the right direction. There also are alternatives to public debt. Today, many needed public investments can be -- and in some places are -- privately financed. By steering capital -- through tax breaks and incentives -- now flowing to speculative Internet stocks and luxury condominiums toward roads, bridges and electricity lines that can carry surplus power from the heartland to urban consumers, productivity can be enhanced and large numbers of blue- and white-collar jobs created.

To be sure, a back-to-basics economic growth strategy would conflict with certain deeply held but flawed political nostrums. Most Republicans would resist any notion that government should have a larger role in promoting the aspirations of Americans, although precisely this belief animated the Eisenhower administration's interstate highway system. Many upscale liberals probably would be hesitant to embrace a full-blown program to rebuild the infrastructure because of its possibly harmful effects on the environment. Others claim that training for "knowledge" jobs should take precedence over that for manufacturing or trade occupations.

All of the essentials -- capital, a willingness to work and a undeniable need to rebuild our infrastructure and expand worker skills -- for a program that would directly address our steadily worsening class divide are already in place. All we lack now is the political willingness to embrace this opportunity.

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