Trying to solve the great wage slowdown

CAFCA | January 28, 2015 |

After almost 15 years of a disappointing economy, it’s easy to get pessimistic. Incomes for the middle class and poor have now been stagnating over a twoterm Republican presidency and well into a two­term Democratic one. The great wage slowdown of the 21st century has frustrated Americans, polls show, and raised serious questions about what kind of policies, if any, might change the situation. Yet if you look around the world, you can find reasons for hope. While wages and incomes have stagnated in the United States (as well as in Japan and large parts of Europe), they have not done so everywhere. In Canada, a broad measure of incomes has risen about 10 percent since 2000, even as it’s fallen here. In Australia, it’s up 30 percent. These aren’t just any countries, either.

They’re among those most similar to the United States: far­flung, once ruled by Britain, with a frontier culture and a commitment to capitalism. Though Australia and Canada obviously are not identical to the United States, it certainly seems worth asking what they’re doing differently. On Thursday, an all­star commission of economists and policy experts from several countries is publishing a detailed analysis of the great wage slowdown. It is a defining challenge of our time, the report argues, before offering a meaty list of possible solutions. “Today, the ability of free­market democracies to deliver widely shared increases in prosperity is in question as never before,” writes the group, which includes Judith Rodin, president of the Rockefeller Foundation? the economist Lawrence Summers? and leaders from Britain, Canada and Sweden. “This is an economic problem that threatens to become a problem for the political systems of these nations — and for the idea of democracy itself.”

In a clear reference to China, the report notes that “apologists for antidemocratic regimes” have used the stagnation of living standards in the West as a cudgel to argue that capitalist democracies are broken. Those democracies and China are now racing for influence across much of the world, especially in Africa and Asia. The report is meant to shape the political debate – both in this year’s British general election and the 2016 presidential campaign in the United States. Already, Democrats and Republicans have signaled that the wage slowdown will be at the center of their campaigns. Hillary Clinton often says, “It feels harder and harder to get ahead,” while Jeb Bush, in a nod to upward mobility, has named his fund­raising operation “Right to Rise.”

The report certainly includes ideas that can appeal to conservatives, including more employee ownership and profit­sharing at companies and a more rigorous approach to infrastructure financing. But it’s hard not to see the report partly as the first draft of an agenda for a presumptive campaign by Mrs. Clinton. The commission was created by the Center for American Progress, a Washington research group founded by Clinton allies a decade ago counterweight to influential conservative groups. The report also avoids a couple of topics that make many progressives uncomfortable (public­school accountability and the decline of two­parent families). Politics aside, it is a deeply serious document – one of the best overviews of income stagnation and inequality that I’ve read. Its central message is that the great wage slowdown is not inevitable. Yes, some unstoppable economic forces, namely technological change and globalization, have played a role in the slowdown. But those forces have also brought great benefits to billions of people. And some high­income countries have done a better job capturing the benefits of the modern economy while avoiding its downsides. “We should not be fatalistic,” said Neera Tanden, president of the Center for American Progress and a commission member. “There are things we can do. They may be hard things. But there being hard things you can do is very different from there being nothing to do.”

Two protagonists in this optimistic take are Australia and Canada. They too have suffered from slower economic growth in recent decades, and they too have rising income inequality. But the bottom 90 percent of earners are still faring better than the bottom 90 percent in the United States, the report shows. An Upshot analysis last year came to the same conclusion: America’s middle class, long the world’s richest, has fallen behind Canada’s. What are Canada and Australia doing differently? For starters, they are doing a better job with mass education. They have near­universal preschool, and they both do more to get low­income students through college. In Australia, college is free at the point of entry. “Increasingly,” the report says, “a college education is similar to the high school education of the past — necessary for a prosperous life.”

The efforts to create a more skilled work force in Canada and Australia (as well as Sweden and some other countries) have led to better jobs – and stronger pretax income growth. Beyond education, these other countries do more to intervene in the free market on behalf of the middle class and the poor. “It was a reasonable reading of history for a substantial time that the principal determinant of what happened to middle­class families was the overall rate of growth for the economy,” Mr. Summers told me. “Today, a substantial part of our success or failure in raising middle­class living standards will have to do not only with overall economic performance but also with the distribution of income.” O

ther countries, for instance, have more generous child care and family leave – and their share of women with jobs has surpassed the share in this country. Their tax policies demand relatively more of the affluent. Canada, in particular, appears to have stronger financial regulation. One theme is that the countries where the middle class has fared better are countries where workers have more power. The share in labor unions is higher, much as unionized workers in this country make more than otherwise similar workers. Some countries also have less formal “worker councils” that advise management – and can push back against some of the short­termism that afflicts corporate America.

A fascinating tidbit in the report is that privately held American companies devote more of their resources to long­term investments than publicly traded companies. The commission has proposed a long list of solutions, touching on many of the areas I’ve mentioned here. It also proposes a middle­class tax cut and fewer tax breaks for executive compensation. Whatever you think about any one of these, I’d argue that the crucial point is the broader one: Middle­class stagnation is not preordained. No country has found a magic bullet, but many are doing some things better than the United States – and have the better results to show for it. Three years ago, the economists Daron Acemoglu and James A. Robinson published an important book called “Why Nations Fail.” They argued that the defining features of national success were broadly shared prosperity and political participation. When countries are organized to deliver good, improving lives to the masses, they succeed. When they don’t, they decline.

The debate over how – and whether – to help the American middle class and poor certainly has its technocratic aspects, as any policy debate must. Ultimately, though, it’s a debate about the future of America’s global standing. Correction: January 15, 2015 An earlier version of this article referred imprecisely to the cost of college in Australia. Tuition is free at the point of entry, and then is repaid via the income tax system if income exceeds a threshold. College is not free in Australia