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The U.S. middle class is no longer the world’s richest. Recent analysis shows that while wealthy Americans still outpace their peers in other advanced countries, our middle class is falling behind. That news comes at a time when nearly 40 percent of our nation’s unemployed have been out of work for six months or more. And a federal minimum wage law — which many say would indirectly benefit higher wage earners — has stalled. Some economists believe once the U.S. economy takes off again, the middle class will make a recovery. But others are not as optimistic. Diane and her guests discuss the plight of the middle class in a post-recession job market.
- Annie Lowrey economic policy reporter, The New York Times.
- Jeff Faux founding president and distinguished fellow at the Economic Policy Institute; author of "The Servant Economy."
- David Wessel director, Hutchins Center on Fiscal & Monetary Policy at the Brookings Institution; contributing correspondent, The Wall Street Journal; author of "Red Ink: Inside the High-Stakes Politics of the Federal Budget."
- Stephen Moore chief economist, The Heritage Foundation.
MS. DIANE REHMThanks for joining us. I'm Diane Rehm. The short-term economic forecast for America's middle class is not promising. Nearly 40 percent of the unemployed have been out of work for six months or more. The U.S. economy stalled in the first quarter, and yesterday Senate Democrats failed to advance a federal minimum wage hike, which some economists say would've indirectly boosted higher wage earners.
MS. DIANE REHMJoining me to talk about these issues and whether the long-term picture looks any brighter for the middle class, David Wessel of the Brookings Institution, Annie Lowry of the New York Times, Jeff Faux of the Economic Policy Institute, and Stephen Moore of the Heritage Foundation. I'm sure many of you will want to weigh in. Give us a call at 800-433-8850. Send us an email to email@example.com. Follow us on Facebook or Twitter. Thank you all for being here.
MR. DAVID WESSELGood to be with you.
MS. ANNIE LOWREYThank you.
MR. JEFF FAUXThank you.
REHMGood to see you. David Wessel, tell us what the short-term and the long-term outlook is for the middle class.
WESSELWell, I think that it's important that -- I'm glad you distinguish between short term and long term. We had a horrible recession. We are recovering. Like a patient who got out of the intensive care unit, we're still not back to normal. We still have 6.7 percent unemployment, and there are about 17 percent of men between ages 25 to 54 are not working. Either they're not looking for jobs, or they're looking for jobs and can't find them.
WESSELSo the short-term outlook is steady recovery, but at a very, very slow pace. We won't be back to full employment, most economists say, for another couple of years. But there were issues with the middle class before the Great Recession, and those issues have remained. There's a dearth of good middle class jobs. There's big dislocation in the workforce as either the forces of globalization or technology have changed companies, changed the nature of work faster than people can adapt.
WESSELAnd there's a growth, a widening of the gap between winners and losers in our economy, so that growth that we do have has disproportionately gone to people at the top. And that spells a troubled outlook, I'd say, for the middle class.
REHMAnnie Lowry, you have written this morning that, despite improved living standards, the poor have fallen further behind the middle class.
LOWREYYeah. It's very complicated to determine who is poor. Being poor in America is a lot better than it used to be, but nevertheless a lot of things are unattainable for poor working families. In some cases, they remain reliant on government programs. And a lot of jobs, we just haven't seen very much wage growth at the bottom, all the way up through the middle. And so I think that if you're looking basically from, let's say, the 70th income percentile on down, the story kind of gets worse and worse the lower that you go.
LOWREYAnd it's worth pointing out that we have seen some pretty decent jobs growth in some industries that we prefer to, you know, perhaps see people graduating out of the jobs at places like fast food restaurants. So, yeah, being poor is better, but nevertheless the poor have also kind of fallen further behind.
REHMDavid Wessel, the definition of the middle class seems to have changed over the years. What is it?
WESSELI'm not sure it's changed over the years. I think it's always been somewhat flexible. I sometimes joke that members of Congress define the middle class as anybody who makes less than a member of Congress. And if you ask Americans about the middle class, pretty much everybody either aspires to be in it or thinks they're in it and you'd think that we didn't have any division at all.
WESSELI would say that the typical family in America, the one in the middle of the middle, makes about $55,000 a year. And when I think about it, I think of the middle class as people who are somewhere between 50,000 and, say, 100,000, 110,000. That's just my rough approximation. Of course, it depends where you live. In high-cost cities like San Francisco and Washington D.C., that's not enough money to really live a middle class life.
WESSELIf you live in Birmingham, Ala., you can live pretty well on 120,000, so it's hard to talk about. But I think what we mean is -- and I think also, a lot of it has to do with things other than money. I mean, one of the things that Annie talked about in her story today on what it's like to be poor in America is pretty much everybody in America thinks they should have a cell phone, right?
WESSELThat's almost like having flush toilet now. And so a lot of this has to do with aspirations, and I think that when I think of the middle class, I think of working people who hope they can own a house, send their kids to college and their kids will live better than they will. And there's a lot of doubt in the minds of many middle class people whether that's possible.
REHMJeff Faux, what about middle class wages, how stagnate have they been, what do you see coming?
FAUXWell, this has been going on for a long time, as David said. Somewhere the late 1970s what we had assumed that would happen forever and that is wages would rise as the productivity or efficiency of workers rose, started to change. So wages have been flat since then, real wages in terms of what people can buy with their paycheck, while the productivity of workers continued to rise.
FAUXAnd the result of that, in short, has been an upward distribution of income. If you look at the prospect for wages in the United States, I think they're pretty grim. There's nothing that has changed recently to suggest that the stagnation of wages for the average worker is going to change and that it's going to go up and so this long, long period of slow growth, and I think it's going to last longer than David does, when I look at the projections that the administration gives and the administration has to want to be optimistic about these things, it seems to me we're not, on their own projections, we're not going to get to anything close to full employment for another 10 years.
FAUXAnd that means a lot of increased misery for the middle class. It's interesting that self-identification of the middle class has gone down. In 2007, something like 55 percent of Americans thought they were middle class, and that was down from the decades before. Now, 40 percent of Americans think they're middle class.
REHMAnd to you, Stephen Moore, the unemployment rate has certainly been coming down, but 40 percent of the unemployed have been out of work for six months or more. So how many of those would you count as part of the middle class?
MR. STEPHEN MOOREWell, if you're unemployed, you probably don't count yourself as part of the middle class anymore 'cause you don't have much income. I think that this conversation is a little too dire for me. I mean, we've lived through this before. I disagree with Jeff. I think the story of the '80s and '90s was a real story of upward economic mobility in this country.
MR. STEPHEN MOOREIf you look at overall compensation to middle class workers, their living standards grew by about a third in 25 years. That's a big increase in living standards. It's true, as David said, something happened, not at the end of the 1970s, something happened actually in their early 2000s that have turned things about. We created 44 million jobs from 1980 to 2000, and we've created something like 5 million jobs in the last decade.
MR. STEPHEN MOORESo something seriously has gone wrong with the economy. I would say a big -- you know, my take on this is that almost everything we have done since the recession began was the wrong thing to do. Almost -- I can't think of too many things we've done right. I think the $830 billion stimulus plan was a huge waste of money that's just weighed us down with debt.
MR. STEPHEN MOOREWe had Obamacare, which I think everyone agrees is having a negative effect on employers' willingness to hire more workers. We had Cash for Clunkers. We've had a big tax increase that took place in 2013, which I think was a big mistake. And one thing that worries me as I listened to some of colleagues on the left, I mean, all I'm hearing is things like raise the minimum wage, which I think would be a disaster with the high unemployment rate we have right now.
MR. STEPHEN MOOREI think we'd put more people out of work. And there's even discussion now, which I find really disturbing, about raising tax rates 50, 60, 70 even -- there's a new book out that says let's raise tax rates to 80 percent. I mean, if we did that, I think we would have a second Great Depression. Just one last point I would make. You know, we know how to get out of this. If we did what we did in the early '80s, the last time we had a really severe recession, if you look at -- let me put it like this.
MR. STEPHEN MOOREIf the economy had grown as fast over the last five years in this post-recession period as it had in the Reagan eras, we would have $2 trillion more GDP. That's a huge number. That means we would have -- if you distributed that equally to every family in America, they would have $17,000 more income. So there's been a lost opportunity, but I think these things are very fixable.
REHMStephen Moore, he's chief economist at the Heritage Foundation, co-author of the new book titled "The Wealth of States." Jeff Faux is founding president, distinguished fellow at the Economic Policy Institute. His latest book is titled "The Servant Economy." Annie Lowry is economic policy reporter for the New York Times. David Wessel, he's at the Brookings Institution and author of "Red Ink: Inside the High Stakes Politics of the Federal Budget."
REHMWe are going to be taking your calls, your comments, questions. Send your email to firstname.lastname@example.org. Follow us on Facebook or send us a tweet. I look forward to hearing from you.
REHMAnd in this hour we're talking about the question of what's happened to the middle class. Just before the break, you heard Stephen Moore saying that he believes that raising the minimum wage would be disastrous. David Wessel, Democrats -- as you put it this morning, Annie Lowrey, Democrats have argued addressing the minimum wage, providing extending unemployment insurance benefits, Medicaid, all that would help the middle class. Stephen Moore, Republicans argue proposed reducing government regulations overhauling existing programs to encourage more work.
REHMSo you've got Democrats definitely on one side, Republicans definitely on the other. Stephen says we're one election away from solving the problem. What do you think?
WESSELWow. So you want a one-word answer to that?
WESSELSo I don't agree with Steve that everything that was done since the recession was counterproductive, but we can discuss that later. Let me just take the minimum wage thing because...
WESSEL...it is hot in the news. So, look, here's the deal on the minimum wage. When you raise the minimum wage, like when you raise the price of anything, there's going to be less of it. So it's hard to believe that raising the minimum wage wouldn't cost some jobs. But for a lot of people at the minimum wage or near the minimum wage they would make more money.
WESSELAnd the argument, the serious argument really is about that balance. And the Congressional Budget Office did this very detailed study.
WESSELAnd the Republicans look at it with one eye, and the Democrats look at it with the other eye. And so I think that at best we can say there's a good argument there. There's evidence on both sides. There are a lot of states that have minimum wages well above the federal minimum wage and some of them, California and Connecticut...
WESSEL...have already -- they're going to go ahead to raise it above $10 anyways. I think the -- when I look at it is I think it's become symbolic out of proportion to its economic importance.
WESSELYou know, getting America -- getting the American middle class back on track, rising productivity, as Jeff says, having wages raised productivity, helping people so that they get raises rather than pay more for health care and don't get more for it, all those things -- helping people get the education they need to get good jobs, fewer people dropping out of high school, fewer people starting community colleges that don't finish, all those things are much more important to the prosperity of the middle class jobs -- to the middle class than raising the minimum wage.
WESSELBut the politicians have chosen this as an argument. And it's pretty clear. I think the Democrats are very open about this. It polls well. And they really can't do anything about all these long-run problems so they want to talk about something tangible and they've landed on this. And the Republican have taken the other side.
REHMWhat do we know about how raising the minimum wage in states like California -- Seattle apparently is thinking about raising its to $15 an hour. Well, what are those states reporting, Annie Lowrey?
LOWREYI think that David put it really well. When you have sizeable increases in the minimum wage, you're probably going to have some jobs trade off. You know, the smaller the increase in the minimum wage the less the effect you expect to see. But raising the minimum wage at the local level especially is very different than raising it at the federal level, right.
LOWREYYou have some issues where it could hurt some small businesses. It's also an issue about, you know, if you are looking about putting a business in a city or right outside of a city, you know, might the minimum wage sort of change your decision about where to locate your business, that kind of thing. Where you wouldn't get that with the federal minimum.
LOWREYWith that said I would note that we've seen really a lot of states thinking about or actually raising their minimum wages. I think that there's currently something like 30 states that are considering doing so. So you're looking at like a not inconsiderable number of Americans who could be affected by this. It ends up being an almost -- you know, not a national policy but a very big one.
MOOREDiane, the average wage in the United States...
MOORE...according to the new Bureau of Labor Statistics numbers that came out last week were -- I'm trying to remember -- I think 22, $23 an hour, so way, way -- you know, three times what the minimum wage is. So I think David's point is right on. I mean, the minimum wage affects maybe 4 percent of workers. And, by the way, we know from all the data people who are on the minimum wage, two-thirds of them within six months get a raise increase. And we also know the vast majority of people who get the minimum wage are in the restaurant business. They work for McDonald's, Burger King, you know, Wendy's, Red Lobster.
MOOREThe minimum-wage job is a starter job in America. And the reason I object to raising the minimum wage, I think the worst thing you can do is eliminate even if it's just some of those starter jobs because the best way to climb the ladder is to get a first job. I mean, my first job -- I'm going to tell you how old I am -- my first job was $2.30 an hour working in a warehouse in Chicago. But, you know, that first job I ever received is one of the most -- and I think most people agree with this -- the first job you ever have is one of the most important jobs you ever have.
FAUXBut those were days when the minimum wage was a lot higher in real terms and relative to the rest of the economy. I mean, we have this theory about minimum wages, that they will destroy jobs, but most of the evidence, the actual in ground experience is that it doesn't. But leaving aside the minimum wage for the moment, the problem here is that the panoply of services and protections that workers had during the golden years of America's middle class prosperity are gone. And the middle class was -- the minimum wage was high in days when the middle class was prosperous.
FAUXAnd I think what's happened now is, it's true, the minimum wage has been seized upon by people who are desperate to find something to do about the situation. But I think you've got to step back and say, what is the difference now between what's going on with middle wage or middle class America now than it was 30 years from now.
FAUXAnd I just want to -- and the difference is then we had public policies, we had government that was -- felt itself responsible...
FAUX...for making sure that people who got to work every day and, you know, did their job were rewarded.
WESSELI think there's one thing that's important to remember...
WESSEL...and people who have low-wage jobs need to be reminded is that when Steve was working in that warehouse we didn't have this thing called the earned income tax credit, which is a kind of clunky name. But basically it's the government's largest antipoverty program. And what it does is, if you have a low-wage job and you qualify you get some money from the government. It can offset your taxes. And if you get more -- if you -- if that's enough to offset all your taxes you actually get a check in the mail.
WESSELAnd millions of American families get this but it's kind of partly because of the name and because it comes in your tax return and no one can ever figure out what's going on in their taxes, it's often overlooked. Overtime -- it’s been criticized by a number of Republicans lately but overtime it's had bipartisan support. Marco Rubio has talked about changing it to make it more generous for single people. So I think it's important to remember that we do have things other than the minimum wage to help these workers.
LOWREYAnd it's also important to note that the EITC, which I agree, they need to think of some other name for it because it's enormously...
WESSELWe're going to call it Annie.
LOWREYYeah, Annie. And also with the minimum wage, you're only helping people who are working. And it remains true that, you know, cyclically the economy remains in a kind of crummy state. And probably the starkest dividing line between people who are sort of succeeding in the economy and those who aren't is whether they're employed or not.
LOWREYI mean, your chances of falling below the poverty line are like one in three if you're not looking, whereas if you're working it's very -- it's actually a very small chance.
REHMAll right. Now what about the U.S. middle class as opposed to that of other developed countries, Jeff Faux?
FAUXWell yeah, first I think it's important not to have the conversation just concentrate on a small percentage of the population getting the minimum wage. The problem is much wider than that.
FAUXWhen people self-identify as middle class or when that's diminishing dramatically the way it is, there's something else going on. In terms of how the United States middle class works versus Europe, for example, I think the evidence is quite clear. The United States has had better growth than Europe and yet the middle class in Europe has held its own much better than the middle class in the United States. And that's -- there's nothing -- there's no secret about that.
FAUXWhen you have health care, when you have, you know, what we call a reasonable welfare state, when you have government services, when you have strong labor unions, when you have a culture in which the CEO doesn't get 250 times what the guy on the production line gets you're going to have a cushion for the middle class.
REHMWhat about taxes?
FAUXWell, sure. You pay higher taxes. And we're actually paying lower taxes in the United States, especially at the top.
REHMIs that also contributing to the difficulties the middle class is experiencing?
FAUXWell, I think in the sense that government revenues have been squeezed because taxes have been lowered. And the culture of providing protections for workers and protections for people, a safety net, that safety net has been shredded. So yeah, there's a fiscal problem here. We're not generating enough revenue. But I think the problem goes deeper than that.
FAUXOver the last 30 years we've retreated from the formula that allowed the middle class and the poor to benefit from rising economic growth. That has been disconnected by a series of policies. And unless we get back to that notion that there's a public responsibility for the distribution of income in America we're going to see this thing deteriorate for as far (unintelligible).
MOOREWell, Diane, as you were despairing during our break that we couldn't find any agreement, but I actually think there is an important left right agreement on what we talked about before, which is the earned income tax credit and right, it's a terrible name. I would support -- President Obama says anybody who works 40 hours a week should have -- you know, should not be living in poverty. I completely agree with that. We're a rich nation. We can do that.
MOOREAnd we can do that by making the -- what the earned credit is, it's a supplement to your wage that the government sends to you if you're working a full time job. And I'm in complete agreement with that, especially if it's a family with kids. What we ought to do is -- you know, my plan would be eliminate almost all other welfare programs and then have a very, very generous earned income credit for people who are working.
MOOREThe problem -- and you really nailed it -- the problem is you have so many people not working. And, you know, one of the biggest cancer cells in our economy right now as we've seen over the last seven or eight years, a steady decline in what we call the workforce participation. And look, if you're not working, if you don't have a job there is just no way to escape poverty. So I think that would be a good thing.
MOOREBy the way, I just have to disagree with Jeff. We haven't tattered or shattered the safety net. I mean, my god, we're spending more money -- I mean, we've got one in seven Americans on food stamps, we've got huge increases in disability. Medicaid roles are up as high as they've ever been. And we've actually made them more generous. And I would actually make the case that the increase in welfare payments is actually paying people not to work in a kind of destructive way. We've got to get back to the welfare reforms we had in the mid '90s that required people to work for benefits.
REHMStephen Moore, and you're listening to "The Diane Rehm Show." Jeff, you have talked about a bleak future for the middle class even if the U.S. gets back to full employment, which I gather would be around 5 percent. Is that correct?
FAUXYeah. I'd like to see it even lower than that, but this is the point. In a market economy, if nobody spends, nobody works. And the problem here is not that people suddenly in the last few years decided they didn't want to work. The problem is not people got lazier. The problem is that we're not generating enough jobs. And it's not just jobs at the low end. We're not generating enough jobs for college graduates. Look at the data on wages -- entry wages for people who just graduated from college, people in their 20s and early 30s.
FAUXThose real wages have gone down over the last decade so that people who have gone to college, people who have, you know, gone into debt big time thinking that, all right, this investment in their own, you know, human skills is going to be worth it, now find themselves driving cabs, waiting on tables. Yeah, I mean, those -- you don't have to go to college in order to get those kinds of jobs.
WESSELSo you asked a question that neither Steve nor Jeff answered about how do we compare to the rest of the world. And I think it's a good question because it allows you to ask yourself, so where would I rather be? In what country would I rather be if not this one, for all our problems and for all our advantages? So it is true that if you're unemployed you're much better off being in Europe than the United States. I mean, they have just an enormously thick safety net.
WESSELPersonally it doesn't look to me like it's going to last very long. You know, maybe Germany can afford it but the rest of them are having trouble paying the bills. And I'd rather be an American than in Spain where there's 25 percent unemployment.
WESSELI think Annie's colleague David Leonhardt did an interesting story the other day talking about how when you look at the numbers you can see that the Canadian -- the middle-income Canadians -- the median-income Canadian appears to have surpassed the middle-income American. And I think that's kind of -- it kind of hurts our national pride. And there's a lesson there that maybe there are things we could learn from Canada...
WESSELWell, some people like the Canadian health care system. I think the Canadian health care system is showing some signs of cracks because it turns out that when people get older and you get more health care technology it gets expensive. And they choose to have a different system than we do, but it's not without problems. They have avoided some of the inequality that we have.
WESSELAnd I think the big thing that Leonhardt's story pointed out is for a given amount of growth, more of it went to people in the middle. That suggests to me a better education system on one hand, although they do have a much smaller population than we do and somewhat less diverse, and a different culture, that the people at the top don't live that much well above the other people.
WESSELBut Japan, I mean, Japan's been struggling for 20 years. China is an economic miracle. And man, I would like to be one of those zillionaires in China who rakes in all that money and drives around in BMWs. And ordinary Chinese are doing better than their parents have. But the ordinary Chinese worker does not have nearly what the ordinary American worker does.
REHMAnd China is apparently going to surpass the U.S. in terms of being the global economic leader, Annie.
LOWREYYeah, there was just a reweighting of how we measure these economies. So on paper I think China will surpass the United States this year. But I think that what David said is really important. I know that people get very worried about China and China's rise. You would vastly rather be the poorest person in America, I think, than a middle-income person in China. I mean, maybe that's going too far but it's still a much, much poorer country. It's a developing economy and in a lot of ways it's very hard to compare it to the U.S.
LOWREYThe only other point I'd make about Canada is that they never had a housing bubble like we did, but there's some evidence that they might have one now. So I think we'll look in a couple years to see how that's affected the middle there.
REHMAnnie Lowrey of the New York Times. Short break here. When we come back, it's time to open the phones. Want to hear what you think. Stay with us.
REHMAnd first question coming from William, in Rochester, N.Y., "Has the decline in union power contributed to the economic decline of the middle class?" Jeff Faux?
FAUXAbsolutely. I think this is one of the fundamental factors that explains what's going on. We've gone from something like 35 percent of the American workforce that was unionized to about 11 percent, 10 percent. And it's been declining. Labor unions were a huge foundation for middle class success. Not just for people who were in unions, but for everyone who worked. Because there's a -- everything's connected to everything else in most of these labor markets.
FAUXAnd where labor unions were able to maintain wages that went along with productivity, employers in non-union shops saw that and had to raise their wages as well. With the decline of the labor, you've had a decline in the bargaining power of American workers. And that is -- union and non-union -- and I think that's a major factor in what's happened.
MOORESo I was in Tennessee, in Chattanooga a number of times, speaking at these forums. Remember, they had this big debate about whether to unionize the Volkswagen plant there. And the argument we made to the workers there, which I think really resonated with them, is don't turn Chattanooga into Detroit. And people get that. They understand the impact that unions have had in terms of ruining places like Detroit, which used to be one of the most prosperous cities in America. And is now, you know, bankrupt and one of the poorest.
MOOREI think the evidence is pretty strong and in our book, "The Wealth of States," we show pretty overwhelming evidence that the growth of employment and the growth of wages in this country is in, what we call, right-to-work states, where they allow unions, you just can't force people to join unions.
MOOREAnd I talked to a lot of businessmen and women today, and they simply say -- and these are people who decide, you know, where new plants and equipment and factories will be built. They just don't open up in states that don't have right-to-work laws. So unions, I think, have been -- especially nowadays -- a kind of negative on the economy.
REHMDavid Wessel, weigh in on this.
WESSELWell, I don't think there's any question that workers have less bargaining power now and that workers have more bargaining power when more of them are unionized. Jeff gave the data and many of those unionized workers are in the public sector. So when you get to the private sector it's even lower. So I think that's the fact. Where Jeff and Steve disagree on is whether if labor had more bargaining power would that be bad for the economy or good for the economy.
WESSELAnd I do think that there's a problem, that labor's share of the national income has been shrinking and that some of the things that unions bargain for have -- the companies have taken -- have retreated. And so I come down on the side that unions -- we would have more -- a bigger middle class if we had stronger unions. But there's some costs to that. I don't think that you can blame the UAW for the entire decline of the American auto industry. I think the management of GM was, you know, determined…
MOOREThat's true. I agree.
WESSELMade a few mistakes on its own. So…
FAUXNor for the bankruptcy of Detroit.
MOOREThe public sector (unintelligible)…
WESSELI agree with that, but I think it doesn't matter.
WESSELThe private sector unions in America are toast and we have to find a different way to raise the middle class.
REHMAll right. Let's go to Scott, in Oklahoma City. You're on the air, Scott.
SCOTTHi, Diane. Hi. Thanks for taking for my call.
SCOTTI think that, you know, everybody's kind of taking all of this the wrong way. I don't really think that we should be focusing on the middle class. I think we should be focusing on the root of the problem, which is the government allowing for pork in legislation to allow corporations to take advantage of the businesses that hire individuals. For instance, the Obamacare that just got passed. Any individual who was working fulltime, a lot of them got their hours cut so their employers wouldn't have to provide them with healthcare.
SCOTTSo you have situations like that, that perpetuate and causes a cyclical event, to where lower-class citizens can never reach middle class. And last point, the individual who said that middle class is $55,000 to $110,000, I think you have your statistics and your numbers wrong. That's upper middle class. I mean, just -- I think that everybody's just not looking at it the right way. There are more Americans who are hurting because of the upper middle and upper class citizens then there are middle class citizens hurting.
SCOTTSo I think that's where the focus should be on.
REHMThanks for your call. Jeff Faux, Steve Moore made the point earlier that Obamacare is truly contributing to the difficulty the middle class is having. What's your thought?
FAUXYeah, well, I think that sure, there's no question that when you have these kinds of cutoffs businesses are going to cut people's hours so that they can get below that cutoff. But the problem is that -- is not with Obamacare's effort to improve healthcare access to the American people, it's that it hadn't gone far enough. And it didn't go far enough because of the opposition of Republicans.
FAUXIf we had -- now, I guess David doesn't agree with this, but if we had a Canadian system, for example, in which everyone was covered, in which you didn't have to worry about your employer, you were covered, and in which the healthcare took up much less portion of our GDP than they do in the United States, we'd all be better off and we wouldn't have these problems.
WESSELI didn't say -- I didn't -- I just wanted to point out it's not a perfect system. It is definitely an alternative, but Canadian (unintelligible) not perfect.
REHMOK. But let me just ask, isn't the fact that the growth in the first quarter has been largely in the healthcare area, Annie Lowery, because of the Affordable Care Act?
LOWREYI think two things are happening, two really big things are happening at once. And it's making it a little bit harder to see, you know, what's A and what's B. But, yeah, the economy is getting better and more people are getting covered, so that's going to lead to more healthcare spending. And then the Affordable Care Act is starting to cover a whole lot of people. And when you cover all those people they're going to use more health services.
LOWREYThe economists absolutely expected that to happen. It's worth noting that healthcare prices aren't really increasing very much. This is all about people getting covered and choosing to use more care. And, you know, I just -- I think that it's -- the Affordable Care Act is going to have a huge impact on the middle class. It's going to be very complicated. Right. You're going to have this jobs effect in which, yes, some people are going to get their hours cut, but it's also probably going to reduce things like medical bankruptcies.
LOWREYAnd at the heart of the law it's a redistributive law that takes money from rich people and gives it to a lot of poorer people, including a lot of middle class people.
REHMAnd, of course, that's what Europe does far, far more than we. Let's go to Peter in Plant City, Fla. Hi, you're on the air.
PETERHey, good morning. Interesting discussion.
PETERScary where I'm looking at it. I'm teaching my two boys that are very, very smart to learn Spanish and German because they may have to leave the country to find the darn American dream. I'll give you an example. You talked about the production line and the ability to generate jobs. Our free trade agreements that we have are pitting every high school graduate this year and 10 years ago against child and slave labor in Bangladesh, in Vietnam, in China.
PETERThe products come into the United States. South Carolina's a great example. That's a right-to-work state, but those textile workers wouldn't work for .38 cents an hour. They take the profits from the textile workers that are making .38 cents an hour, hopefully the buildings don't collapse on them. They offshore the profits in the Cayman Islands and are sitting with $2 trillion in offshore money. U.S. corporations no longer need the middle class. They're looking at is as a world market and we're being crushed daily.
PETERAnd the gentleman from The Heritage Foundation, you guys all push free trade. Bill Clinton signed it. It was bipartisanship. We're all getting screwed. There is no future for the young anymore.
MOOREWell, you know, first of all, we just live in a global economy today. And there's no putting that genie back in the bottle. American workers are going to have to compete against Chinese workers and Indian workers and Mexican workers.
REHMFor .39 cents an hour?
MOOREI don't know about that. All I'm saying is that it -- what we do know is that free trade has been a major contributor to holding down inflation. You know, import competition is something that has actually lowered prices. But we're not going to -- my point is, whether you like free trade or not, we're going to compete. Americans have to compete. They have to be the most skilled, the most educated, the most talented workers in the world.
MOOREWe've got to make sure that Americans produce more than people -- look, I always ask my students, "Why is it that the average American worker makes, you know, four to five to six times more than the average Mexican worker?" And it's because American workers are more productive. And we have to make sure we remain really productive.
FAUXYeah, I don't think that's true. In Mexico, there are plenty of places where the productivity of the workers are at the level of the United States. And the wages are 10 percent, 20 percent of the United States. So it's not -- again, the link between wages and productivity has been broken. And I think that's a very important thing for everyone to remember. On globalization, it's not like globalization came down from the heavens on us.
FAUXGlobalization is the result of policies. Free trade policies that were enacted by Republicans and Democrats and they have led to this kind of competition. Now, it may be that we can't go back, but I think we should learn from the past and understand that globalization is just not -- it's not an act of God. It's something that our leaders got us into without preparing the American labor force for it.
REHMDo you agree with that, David? I mean, you've had both Democrats and Republicans going for free trade agreements or globalization.
WESSELI believe the globalization is in the best interest of America and the American middle class on net. Globalization, like technology, creates winner and loser. And I particularly agree with the last phrase in Jeff's statement, which was that our leaders led us into these free trade pacts, some of which may not have been as free as they were trade pacts. I mean these things are lots of special deals to do here. And sometimes it's not clear in whose benefit they are. But whatever you think of that, we as a society did not prepare American workers well enough to engage in this competition.
WESSELAnd that really is a much more important thing than, you know, the clause 16.27 in the South Korea/US Free Trade Agreement.
REHMI can remember having Robert Reich in here many, many times during the Clinton administration. And he was talking about education. He was talking about re-educating the labor force. It never happened.
WESSELNo. I don't think that's right. I think we did get better at it, but the demands of the global high-tech economy got tougher faster than improved our education.
MOORECan I just say one thing that I should have said (unintelligible) ? If you really care about poor people, not just in the United States, but around the world, I don't think there's any question about this. I mean, David said that he thought globalization was good for the American middle class. I generally agree with that. By far the biggest winners have been the poorest people around the world. I mean, we've moved, you know, half a billion people out of abject poverty in places like China and India and so on. And that's largely been driven by trade.
REHMAnd you're listening to "The Diane Rehm Show." And let's go to Grand Rapids, Mich. Hi, Chris, you're on the air.
CHRISHi. Thanks for taking my call.
CHRISThe point that I wanted to make is about minimum wage, earned income credit, all of these attempts to help the poor people, all kind of lose sight of the bigger picture, which is why they need to exist, is that the CEOs are taking a disproportionate amount of the profits that the businesses generate for themselves. So it leaves the workers behind and we end up with situations like the Walton family who has more wealth than 50 percent of Americans combined. Meanwhile, something like 80 percent of their workers are on social benefit programs.
LOWREYI think it's absolutely true that CEO pay has kind of taken off for the stratosphere in a kind of funny way. Corporate profits are really high. And those profits are very obviously not getting distributed to workers, especially not when you have a really high unemployment rate and when there just isn't a lot of pressure on businesses to raise wages. I'm not sure that there's such a straight line between how much the CEO gets paid and, you know, how much the average worker gets paid. I think it's a little bit more complicated than that, but…
REHMHas anybody done studies on that?
LOWREYYeah, there's actually a lot of research about CEO pay, but it seems that what happened was a little bit that perhaps boards haven't been exerting themselves, there's a bit of a competitive pay structure where CEO pay is not determined so much by what is happening within the company, as what other CEOs are getting paid. But again, I think it's more complicated than just the top executives soaking up all of the money.
REHMAll right. I want to use the last couple of minutes to ask each of you about your thoughts on long-term solutions. I'll start with you, Steve Moore.
MOOREWell, I guess I'm the optimist at the table because I am somewhat bullish on the U.S. economy. Ann is right, you know. If you look at American companies today -- and one of the most important trends is that over the last six or seven years, American companies have become incredibly productive and efficient. They laid off a lot of workers, their least efficient workers. They deleveraged. If you look at American balance sheets today, they're things of beauty.
MOOREI believe -- and this is something I don't think any of us said 5, 10, 20 years ago -- the best-run companies are American companies. So the question is why aren't American companies reinvesting that money in the economy? I think they will, if we get back to the kind of free market policies that worked in the '80s. And I do think we're one election away from a big, big recovery.
REHMBecause you're thinking…
WESSELYou think the Democrats are going to win, huh?
MOOREThat's not what I meant.
REHMSo you're thinking fewer regulations, lower taxes.
MOORELower tax rates, a new tax system, a new litigation system.
MOOREA new healthcare system, all those things.
REHMAnd Jeff Faux, to you.
FAUXYeah, I think what we've learned is that left to itself the market creates more inequality. And what the golden years of America did was we had public policies that created more equality, that through unions and through worker protections and through sensible trade policies. We don't have that anymore.
REHMSo what do we have to do?
FAUXAnd so we need to return to the notion that it is a government responsibility to make sure that everyone has a job who wants to work. And that decent jobs will return good living standards. Plus, one more thing, I think we've got to get money out of politics because when you have inequality of wealth and inequality of income, you're going to have an inequality of political power which leads to these policies.
WESSELThere is no one simple solution, but part of it has to lie in education. And if I had to pick two places it was to make sure that every kid whose parents wanted him or she to have a high quality pre-K education would get it. And that community colleges, the best community colleges would be strengthened.
REHMAnnie, do you want to weigh in?
LOWREYWell, I think I'll recuse myself from this, but I think we have a lot on the table. So…
REHMI think we do indeed. Annie Lowery of the New York Times, David Wessel of the Brookings Institution, Jeff Faux of the Economic Policy Institute and Stephen Moore at the Heritage Foundation. Thank you all so much.
REHMAnd thanks all for listening. I'm Diane Rehm.
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