Why There's Hope for the Middle Class (with Help from China)
The status of the middle class has become a highly charged political issue. Nonetheless, a sober look at the trends of recent years reveals some reason for optimism: Pathways that already exist offer some chance of rejuvenating the middle class.
America has often thought of itself as a middle-class nation — one in which most people are merely comfortable and neither very rich nor very poor.
That notion has come under siege lately. Income inequality has been rising since the early 1980s, and the median household income is now lower than it was in 1999. The status of the middle class has become a highly charged political issue. Nonetheless, a sober look at the trends of recent years reveals some reason for optimism: Pathways that already exist offer some chance of rejuvenating the middle class.
The weakness of recent middle-class wage growth has stemmed from a number of factors, including foreign competition, technological changes that favor highly skilled workers and persistent poverty. Let’s consider each in turn.
Much of the competition for American manufacturing has come from China, and recent research has shown that China’s economic impact in the United States has been bigger than many economists initially thought, and in some ways, it has been more painful. China’s manufacturing has held down American middle-class wages, while soaring Chinese demand for commodities has pushed up resource prices. Of course, cheap Chinese imports have made American paychecks go further, but that is no consolation for people who have lost their jobs or suffered lower wages as a consequence.
Better times may be ahead, though. Higher wages in China — and other emerging nations — are now limiting the competitive advantage of those economies. And perhaps more important for Americans, as China reaches technological maturity, it is likely to shower innovations on consumers, creating a net gain for people in the United States.
China is already the major producer of solar panels and electric cars, for example. It is likely to contribute important innovations in consumer drones and driverless cars and in many other fields: The Chinese government is pouring immense resources into biotechnology, including new gene editing techniques. When it comes to mobile apps, messaging and electronic payments, China is arguably ahead of America. Imagine a future in which Chinese innovations benefit Americans just as the United States benefited Europe and vice versa.
This would mean more competition from China, of course, and lost jobs in some fields, but to simply focus on the negatives would be shortsighted. The reality is that innovators do not capture all or even most of the benefits they bring to the world. Once an idea emerges, its benefits begin to expand, and those benefits will surely spread to the United States.
What economists call skill-based technical change may also shift in a more egalitarian direction. The advent of information technology increased the value of workers and managers who could manipulate these new talents effectively, while smart software eliminated the jobs of many travel agents and paper-filing clerks. But consider a universe in which all it takes to work with a computer is to talk to it. That could lower the wages of technicians, while opening a new world where less skilled laborers could work with information technology effectively.
That new world is already emerging. Consider the Amazon Echo, a small stationary computer that responds to voice commands. It can play music, call a car service or build a shopping list. Imagine fully functional voice-activated computers created for the workplace as more people grow up with information technology at their fingertips.
Finally, income inequality may begin to reverse itself through the evolution of social norms. Poor people who see no way out of their plight won’t all be able to advance without outside help, but some of the impoverished will succeed despite the barriers they face.
Religions and social movements with strong moral codes may be able to help improve life prospects. It is striking, for example, that Utah fits the economic profile of an older, more middle-class-oriented America. The reasons for this are complex, but they may stem in part from the large number of Mormons in the state.
Mormons have done relatively well in economic terms, perhaps, at least in part, because their religious culture encourages behavior consistent with prosperity, such as savings, mutual assistance, family values and no drug and alcohol abuse.
I am not a Mormon and am not advocating that religion or any other. But it seems reasonable to observe that changing social norms, sometimes associated with religion, can help improve living standards.
All of these mechanisms involve some degree of speculation, and the speed at which they will develop will vary. Still, these processes can already be found around us to a limited degree. Furthermore, all of them could happen without requiring any major change in American public policy and thus they could bypass possible government gridlock.
Most people agree there is plenty of unfairness built into the current political system, such as bad public policies, which often favor the well-off and erect barriers to the advancement of poorer and less educated individuals. How to change these policies will no doubt continue to be a matter of political debate.
But there is reason to believe that when inequality trends start to run in reverse — whenever that might be — it will be because of processes that are operating largely outside of politics. Technology, trade and even religion may help restore prosperity to the middle class.