I hadn’t kept up with the Joneses for awhile so I checked in on them and am happy to report that they are doing pretty well even if stretched a bit. Apparently many of you also lost track of them, so they wanted me to share their current situation.
Al is still an assistant manager at the same big box store and Betty is still a part-time substitute teacher. Their kids Caitlin and Dylan are now 12 and 14 – can you believe it – and are your average all-American kids. Al and Betty earn about $50,000 which puts them right in the middle of households nationally. Their spending is average too. They shared a recent (2010) budget with me, and it showed that they paid almost exactly what an average U.S. household spent out-of-pocket on such basics as clothing, food, housing and utilities, transportation, health, and retirement savings. For example, they spent $1,372 on clothing, and that’s what the Consumer Expenditure Survey reported as the national average for a household.
The year was a healthy one for the Joneses -- knock on wood -- and a busy one. They bought a new computer and a red Lab named Ginger, put $2,000 in a rainy day fund, finally traded in their old Ford for a new Chevy, took a family trip to Florida, paid their church dues…. In a word, the Joneses are living what they told me is “a comfortable middle class life.” Al reminded me that they have worked hard for this, and Betty chimed in, “We’re very lucky.”
“We’d be doing much better if Sam got off our backs and out of our pockets,” Al told me when Betty stepped into the kitchen for a moment. Sam is their – well, I suppose he’s your uncle too. Then, when Al took Ginger outside, Betty told me how bothered she was that some people go hungry in our rich country and how fortunate she feels to be doing well enough to help them. So, if you’ve been wondering, Al is still his conservative self and Betty’s the perennial liberal. Even so, they’ve managed to get along well because they agree that family is first and, as they said, “It’s not always easy – and it’s getting tougher -- but we manage and manage pretty well.”
This last statement was said so earnestly that I decided right then and there not to upset them with reality. I didn’t say, “Yes, you certainly are living a middle class life and deserve it, but you are not nearly paying for it. Your earnings don’t come close to paying for what you get.” Instead, I simply bit my tongue, gave them big hugs, and said my good-byes. After all, I’m not in the bubble-bursting business.
So, if I share some reality with you, I hope I can trust you not to tell the Joneses. And, truth be told, I’m even reluctant to level with you, because most Americans – and you may be among them -- feel pretty much like Al and Betty. They feel squeezed but proud to be managing on their own. Many feel like Al that they’d be doing a lot better if we cut back government drastically and returned people’s taxes. And many others feel like Betty, happy to help government help the less fortunate.
But none of this is real. It seems real because we are told it is and want it to be and can’t imagine it any other way. We believe that we can and ought to be self-sufficient and will do pretty well if we work hard, maybe spectacularly well. So, when we look around and see ourselves or other hard-working people stretched, we explain it by the liberal or conservative mantras that appear almost every day in the Monitor. Liberals cite the shrinking middle class and blame it on recent growth in inequality; and conservatives blame this shrinkage on taxes and government spending.
Nobody is leveling with us. No one is saying that market economies like ours may be powerful producers of wealth but are wholly unable to distribute that wealth in a way that results in a broad middle class. Markets have never produced a broad middle class – a large sector of households with enough earnings to afford even a modest, modern middle class standard of living -- and they are neither intended nor designed to do so (Part 2 will expand on this).
So, if we want a broad middle, market distribution has to be altered. We do much of this now, and the Joneses offer a good example. They live pretty well because their earnings are supplemented in two major ways. First, government mandates their employers to contribute to benefits (Social Security and Medicare) and to pay for Workers’ Compensation and Unemployment insurances. These mandates add about $5,000 to the Joneses income. In addition, tax incentives entice employers to offer pension and health care benefits, and these help the Joneses a great deal.
Government helps in a second major way. It taxes the Joneses far less than the value of services it provides. For example, the Joneses pay little if any federal income tax, but they get a full share of National Defense worth about $6,600 per household. Or again, the Joneses get about $25,000 worth of education per year for Caitlin and Dylan but only pay school taxes of $1,500 (the national household average). Even ignoring this education benefit, tax and expenditure advantages add about $20,000 in basics to the Joneses’ earned income. Without these major government interventions into market distribution, the Joneses would fall considerably short of enjoying even a modest middle class living standard.
A stark way of stating our reality, then, is this: We can have a market free of big government or we can have a broad middle class – but we can’t have both. Future parts will look more closely at why this is the case; what we can and must do and currently do to address it; and what momentous, societal implications arise from recognizing our reality.
In Part 1, we caught up with the Joneses and found that they were pretty average, a bit stretched financially, but enjoying a middle class standard of living by virtue of their earnings plus considerable help from government in the forms of mandated employer benefits and public services that far exceeded their taxes. Why can’t the Joneses do well on their own earnings alone?
The market distributes wealth very unevenly. Since 1979, the Congressional Budget Office (CBO) has tracked this by looking at “market income” (income from all wages, salaries, and employee-paid benefits, as well as from investments such as interest on savings, stock dividends, and business income). In 2010, our total market income was $9.4 trillion, and about 78% of it went to the top two-fifths of households (ranked by income) while the remaining 22% was split among the lower three-fifths. Although the top share has risen over the years, in 1979 the top two-fifths got 71% of the pie, not drastically different from today.
Taxation is also very uneven. It often surprises liberals to hear that the rich pay a large portion of all taxes, particularly federal income taxes. A recent CBO report showed that the top two-fifths of households pay almost all of this tax (the middle fifth pays 4% of it and the bottom two-fifths actually get back money due to the Earned Income Tax Credit). Responding to the report, the American Enterprise Institute (AEI) asserted, “‘The rich’ don’t just pay their ‘fair share,’ they pay almost everybody’s share.” The result is less dramatic with most other taxes, but overall, the top two-fifths of households pay the large bulk of federal, state and local taxes.
Another foundation, the Tax Foundation, has been looking at how much families get back in public services for the taxes they pay. For 2010, it found that the top fifth of families got back much less than the taxes it paid and the second fifth broke even. But the middle fifth got back $10,000 more than it paid in taxes; the next-to-lowest, $18,000 more; and the lowest, $27,000 more.
Like AEI, the Tax Foundation used this information to defend the “tax-burdened” upper class. In so doing, both conservative foundations swerved right to avoid the larger reality. They might have revealed why this skewed taxation and redistribution of wealth occurs – markets simply distribute wealth so unevenly that few households can afford things like a full share of national defense, police, school, or health care without a bunch of help.
I did a related analysis. I created a Bundle of ten basics that seem vital to a modest, middle class living. The items are: Food, Clothing, Housing (and Utilities), Transportation, Education, Health, Retirement Savings, Employment Security, Public Safety, and National Defense. You might feel that I should have included additional items in the Bundle like child care, a governor or a court system, money for a vacation or birthday presents, public parks, or a computer. Then, using well-accepted data sources (primarily the Consumer Expenditure Survey and compilations of local, state, and federal government expenditures), I determined the average per-household cost of the ten items for 2010 (the most recent year with complete information when I did this analysis last year). For example, clothing cost $1,372; housing and utilities cost $12,954, and National Defense cost $6,622 (the average per household share of our $802 billion defense expenditure). The total Bundle cost almost $77,000.
How many households could afford this Bundle with only their market incomes (total earnings from work and investments PLUS all taxes they pay returned to them)? About one in three. The other two-thirds fell short and most by $20,000 to $50,000! This portrait is not simply a 2010 phenomenon. It is a reality that reaches back to the 1950s (according to comparable data recorded since then) and probably back at least to the burgeoning of industrial markets after the Civil War if we judge by early data and a basic sense of history.
The portrait of reality doesn’t depend on my particular approach or data, for the reality it reveals is so different from the one we imagine that any even-handed approach and fair selection of data will reveal it. In fact, it can be roughly understood without any major data analysis at all. First, stroll down Main Street, past the shoe repair shop, the pizza parlor, the sandwich shop, the movie theater, the gift shop, the tattoo parlor, the taxi company…. Each hires employees -- sales persons, bakers and cooks, assistants, wait persons, and so forth -- but few are likely to pay salaries that can buy the Bundle.
Small businesses are great because they are personal, offer autonomy to owners, provide jobs, build community, and so forth. But most don’t generate enough net revenue to pay workers, and often owners, enough to buy a middle class standard of living like my Bundle. We sense this from our stroll, and data confirms it. Nationally, there are over 30 million small businesses (defined by the Small Business Administration as having less than 500 employees). Two-thirds have no employees, about three-quarters have gross receipts of less than $50,000, and businesses with 1 – 20 employees pay, on average, about $38,000.
As we turn off of Main Street and continue to walk toward the big box stores on the Heights we know that they also don’t pay wages to line workers that nearly cover the Bundle, even though most have much more revenue than small businesses. Why? Here’s a hidden piece of the answer. These companies are structured like pyramids. The CEO sits at the top, line workers at the bottom, and high and low managers (vice-presidents, division heads…. to unit and team supervisors) in between. Each level has a pay scale with lower wages as you move down. On each level, some workers earn more than others (based perhaps on skill, responsibility, longevity, etc.) but less than workers one level up. And, typically line workers not only have the lowest wages, but the least bargaining power in wage negotiations.
So, given this familiar image, which worker (“M”) in the pyramid earns the median pay – half the workers make more than M and half less? We’d like to think it’s a middle manager hopefully making a middle class income, but M is actually a line worker on the pyramid’s base – and not the best-paid line worker by far. This is because of something called “span of control” which refers to the ideal number of workers a superior should supervise. This number varies, but a common figure is 8 or 9 workers. If the span is 9 and is used throughout, a five-tier corporation would have 1 CEO, 9 VPs, 81 Unit Heads, 729 Supervisors, and 6561 line workers or a total of 7381 employees. M, the number 3691 worker, is a line worker with slightly more than the average line worker salary. This rough corporate picture helps explain low overall wages even in big businesses like retail box stores.
Maybe this is fair and as it should be. That is what Part 3 explores.
In Part 2 we saw that markets distribute the wealth they produce so unequally that very few households can afford even a modest, middle class standard of living without considerable help. Is this market outcome fair? Yes according to market values. Wages are set when workers, seeking the highest wage they can negotiate, agree with employers, seeking to pay the lowest wage necessary to get the labor they need. Importantly, the final wage is based on relative bargaining power, not on the standard of living the wage permits.
In democracies, by contrast, bargained wages are not automatically fair. They are judged by core values of democracy, by mutual respect and equality. If people fulfill their democratic duty of contributing to an affluent society but are paid wages that can’t buy a decent standard of living, they and their contribution are demeaned. Al and Betty, for example, would feel horribly demeaned if they had to buy full shares of defense, medical insurance, retirement insurance… and had far too little left to buy an average house, car… let alone take a vacation or buy Ginger.
Of course, such people may be made to feel ashamed and may blame themselves for this outcome. They may feel inferior, convinced that their market value is somehow their real value as people. But this violates democratic values, and when large numbers of people -- in fact majorities – work hard and can’t buy even a modest, modern standard of living, it is clear that the problem is systemic, not personal.
These two value sets (market rules and democracy rules) create two very different yardsticks for measuring fairness. So, for example, it makes perfect market sense that the Fortune 500 CEOs who laid-off the most workers during the current recession got the largest bonuses, but it violates our democratic sense of fairness. Or again, employees of both the Department of Defense (DoD) and its largest contractor, Lockheed-Martin (L-M), are paid almost entirely by taxpayer dollars. Yet L-M’s CEO made $25 million in 2013 while the head of the Joint Chiefs of Staff made about $300,000. This isn’t because the CEO is 83 times more valuable than the Joint Chief. It is because her pay is determined by market rules and his by democracy rules. In order to make sure that all military personnel live pretty well (while giving credit for longevity, responsibility, achievement, etc.), Congress shaped a much more equal salary and benefits range for military personnel than markets usually would.
In The Future of Capitalism, Lester Thurow, economist and retired Dean of MIT’s prestigious School of Business, urged us not to be surprised by this contradiction in values between democracies and markets (capitalism). As he said, one system believes in equality, and the other in “the duty of the economically fit to drive the unfit out of business and into economic extinction (‘survival of the fittest’). He stated the contradiction even more bluntly: “Capitalism is perfectly compatible with slavery…. Democracy is not compatible with slavery.” By this he meant, if slaves (or child labor or foreign sweat shops or robots for that matter) are legal and can do a job cheaper, enterprises must use them or succumb to competitors who will.
Sometimes competitive markets produce attractive results such as greater efficiency, lower cost, and product innovation; but they also can produce problems such as skewed incomes that undermine democratic decency and prevent a broad middle class. So, the great challenge of a market democracy (in contrast to a market society) is to reconcile these contradictory views of fairness.
According to market values, we deserve what we earn. But if those earnings deny many workers a respectable portion of societal wealth, democratic values declare that those people deserve more. Providing more requires government intervention, in fact massive intervention, since market distributions are so top-heavy. As they get more top-heavy, they demand even more intervention.
Increasingly, for over a hundred years, government has intervened through employer mandates and tax incentives and through taxation and redistribution. Given our love-hate relationship with big government, how did this happen? Opponents of government often blame special interests such as labor, disability groups, or the housing lobby. But an unexpected voice from the Right helps us understand this better. David Stockman was President Reagan’s budget director. Like Reagan, he believed in cutting taxes and social spending, and he joined the “Reagan Revolution” to pursue this. When neither taxes nor spending were cut significantly during the Reagan years, he quit and later shared his reflections (The Triumph of Politics).
Stockman came to realize that most voters don’t oppose big spending as “the editorial pages of the Wall Street Journal” suggest, and that big spending isn’t “solely due to weak-kneed politicians or the nefarious grasping of special-interest groups.” Rather, “despite their often fuzzy rhetoric and twisted rationalizations, congressmen and senators ultimately deliver what their constituencies demand.” He realized that people want government help with retirement, education, health, and other basics, and that elected officials deliver it.
Though Stockman preferred a different policy, he accepted that this is “as it should be in a democracy.” But he wondered why so many people want government help. He sensed that, “The actual electorate … is interested in (government help) to compensate for a perceived disadvantage….” The disadvantage that mystified Stockman is obvious to many others: their paycheck simply can’t buy even a modest, average share of our prosperity.
Currently government help is massive. For example, public funds spent on the ten Bundle basics amount to about $4 trillion and serve all quintiles. But, because we fail to see or accept our reality, government programs are very piecemeal, uneven, partial, incremental, untargeted, and uncoordinated. If we acknowledged our reality and set a clear goal of rectifying it, we could shape assistance much more effectively and efficiently.
There is a long history of opposition to such government interventions as mandated wages and benefits, taxes such as income taxes, and redistribution. With each major intervention (for example, an income tax, social security, disability insurance, Food Stamps, Medicare and Medicaid), opponents have predicted dire results arising from reduced incentives to invest, to work and work hard, and to innovate. But, over the past century, the opposite has occurred as interventions have grown far beyond levels that opponents predicted would be disastrous. Jobs and workers have expanded enormously, investment has gone through the roof, productivity has steadily improved, and innovation has been astonishing. Certainly we must be wary of dangers as we extend and hone interventions; but we shouldn’t be diverted from assuring a broad middle simply by the chronic cry of disaster.
Our reality has important implications for American and political ideology and public policy as we will see in Part 4.
Previous parts revealed that our market economy distributes its wealth so unequally that few can afford even a modest, middle class standard of living without substantial help; that democracy requires a broad middle class; and, therefore, that our market democracy must intervene heavily in the market to assure this broad middle. Government interventions alter distributions by enterprises (wages and benefits) and redistribute income through taxation and spending; and they do these things to the tune of several trillion dollars. This reality challenges key ideologies and self-images and the stories that perpetuate them. It also carries major implications for public policy and approaches to our promotion of justice. Here are half-a-dozen examples.
Reality challenges our self-reliance story. We believe that hard work will enable most of us to pay our own way to a comfortable middle class life, but our reality contradicts this. For most households, market earnings only lead to the middle class if government adds a sizeable subsidy. So, if we want a society where most workers and their families (and maybe most who truly can’t work) do pretty well, we have to reframe our deeply-imbued sense of self-reliance.
Our reality also challenges liberals to revise one of their favorite stories, the one stated by Betty Jones – how the fortunate many should help the unfortunate few. It turns out that most of us “fortunate” Americans like the Joneses are only fortunate because we receive government help. We are “takers” to adopt a Mitt Romney phrase, rather than “givers.” So liberals like me need to shape and embrace a rationale for promoting redistribution that is based on something other than compassion. There are various possibilities like, “it takes a village” or “community.” But it seems to me that the most profound rationale lies in our concept of democracy itself, a concept which – not so coincidentally – is under tremendous current stress.
Our reality also challenges conservatives who, like Al Jones, feel that we’d all be doing better if Sam got off our backs and out of our pockets. This tenet is a core belief of the Right (it is the lead tenet of the 2014 Republican Platform, for example) and the favorite theme of a flood of presidential candidates crisscrossing our state. But the truth is that most of us would be doing worse without sizeable public intervention. Either we would be unable to afford decent shares of food, housing, and other out-of-pocket basics if we had to pay market prices for what government provides; or we would be unable to afford a fair share of basics like national defense, public safety, and education if we paid first for average amounts of food, housing, transportation and health care.
Our reality also challenges another favorite American story. We are taught from community civics forward that markets and democracy go together like a horse and carriage. We’ve seen that they don’t. They must be vigorously hitched if they are to co-exist in the market democracy we espouse.
One policy implication from our reality is that a defined goal and commitment to a broad middle class would allow us to shape and aim policy much more effectively and efficiently. A goal would identify the key basics in a middle class standard – there is much consensus as to most of these. And it would identify adequacy standards – we already have a sense of this with public basics such as defense and public safety, with private basics such as housing and food, and with mixed basics such as health and education.
With a goal, we would need to shape distribution indicators to measure and track our progress with household prosperity – just as we have shaped and carefully watch production indicators like Gross Domestic Product, employment rates, labor productivity, and the DOW Jones Average (no relation to Al and Betty).
An implication of special relevance to New Hampshire involves taxation. The barrier to a broad middle class is the skewed way that markets distribute income, so the most direct and honest way to fund redistribution remedies is through taxing income (earnings from work, investments, and/or inheritance). Income taxes should be the first considered when assessing revenue options, not the last; and they certainly should not be kept off the table of revenue options by some pledge. Alternatives to income taxes such as property and sales taxes should be adopted only if they offer compelling advantages over the direct approach.
Another implication involves the popular cry of some for a “Living Wage,” a wage that would allow workers and their families not simply to survive but to do pretty well -- to enjoy a modest, middle class living. What is much more relevant, in the face of our reality, is to demand a “Living Income” since a decent living for most of us requires both a good wage and a good income subsidy package from government.
I want to end this series of articles on a broader note. Perhaps the most vital, current value of seeing our reality is to recognize market economies as man-made mechanisms. They are tools of society, not products of Nature or God-like mechanism with invisible hands. Man-made laws create vital market ingredients such as corporations and other enterprises, contracts, and property. Police and judges protect these ingredients. Managers organize market enterprises, workers fuel them, and consumers sustain them. Public infrastructures such as roads and water supplies support them, and so forth.
Like all complex, man-made things, markets may do good and may cause harm. We know, for example, that unregulated markets can create, produce, and distribute weapons of mass destruction, fool consumers into buying harmful food and medicine, exploit desperate workers, entice the sale of people or their body parts, etc.
Today, market economies are at the center of our newly-recognized and likely devastating threat of climate change. If we want to avoid the worst of this threat – to shift quickly away from our dependence on fossil fuels and to shift our focus onto long-term survival and sustainability rather than short-term gain – we must see markets simply as man-made tools that we can, and must, shape to fit our needs.
ARTICLE CITATIONS (not used in Monitor Series):
Congressional Budget Office data is from its publication, The Distribution of Household Income and Federal Taxes for 2010 and 2011 and supplemental material to these reports. See www.cbo.gov.
Tax Foundation data from Prante, Gerald & Hodge, Scott. (2013). Special Report #211: The
Distribution of Tax and Spending Policies in the United States. Washington, DC: Tax
Foundation. World Wide Web at:
American Enterprise Institute Report: Perry, Mark J. (2014). New CBO Study of Tax and
Spending Policies in the United States. World Wide Web at:
Small Business data: ProQuest. (2014). Statistical Abstract of the U.S., at Table. 772, page. 517 and Table 785, page 526.
Stockman, David. (1987). The Triumph of Politics: Why the Reagan Revolution Failed. NY:Harper & Row.
Thurow, Lester. (1996). The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World. NY: Morrow & Co.