Two Completely Different Ways to Deal With the Upward-Mobility Crisis
Top economists from the Clinton and Bush administrations debate how to revive the economy to keep people from getting stuck.The upheavals in the American economy over the past decade (and beyond) have challenged workers, business owners, and government officials. Even economists have struggled to reach consensus about the causes, much less the cures, of the difficulties facing American families. These debates continue unabated.
To help navigate these disputes, we recently interviewed two of the nation’s most admired economic analysts. Each is mostly identified with one political party but is widely respected in the other. Glenn Hubbard is dean of the Columbia Business School, a former chairman of President George W. Bush’s Council of Economic Advisers, and a top economic adviser to Mitt Romney in 2012. Alan S. Blinder, a professor of economics and public affairs at Princeton University, served during the Clinton presidency as a member of the Council of Economic Advisers and then as vice chairman of the Federal Reserve Board. Blinder is author of the recently published book After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead. Hubbard is coauthor of Balance: The Economics of Great Powers From Ancient Rome to Modern America, due out in June.We spoke with each man separately, asking identical questions to produce this virtual conversation. Their responses (which have been edited for space) show substantial convergence on the problems facing average Americans but continuing divergence on how best to respond.
NJ The median income of middle-class families doubled from 1947 to 1973. But today, in real terms, it’s only 5 percent higher than it was in 1973—and lower than it was in 2000. What’s the principal reason the median income has been growing so much more slowly than it did in the first decades after World War II?
BLINDER Two reasons. The minor one, which is the good-news part of this answer, is that you shouldn’t use 1947 to 1973 as a norm. That was in some sense the golden age for median-income growth, for productivity growth, for a lot of things. A fair amount of the success was catch-up of suppressed desires from World War II and so on. That said, the recent performance is not very good, and the part of it that I want to emphasize—this sounds slightly technical, but it’s not—is the difference between the performance at the mean and at the median—the average American versus the American in the middle. At first blush, those two sound the same. But they’re not, because the income distribution is very skewed; there’s a lot more income near the top than there is at the bottom. So the median family or person always has a lower income than the average. After all, Bill Gates and Warren Buffet count in the average. But the big story of the last 30-plus years now is that growth at the mean, the average, has been pulled up by how well people near the top are doing. But little of that growth has trickled down to people in the middle—the median.
HUBBARD I think it’s a couple of factors. First, there are general macro factors like technological advance and globalization that have suppressed some income growth that middle-income workers experienced when the U.S. had a lot of monopoly power in the global economy. Another factor is health care costs. If health care costs are rising very rapidly, that really comes out of earnings. Indeed, from a policy perspective, one of the best things you can do to improve consumable earnings of every American would be to bring down the rate of growth of health care costs.
NJ We know from many studies that income is growing much faster for families at the top of the income distribution than for those in the middle or the bottom. Has this widening divergence contributed to the slowdown in economic progress for people in the middle?
HUBBARD What to do about rising income inequality depends on why you think the inequality is there. My own reading of the economic research is, the principal drivers have to do with technological change and globalization. So that individuals at the top, with the most marketable skills, [are seeing] their market incomes rise. That’s not necessarily a story that is hurting middle-income people.
That’s not to say inequality isn’t a problem, but it’s not a problem so much of one group against another. Therefore, what we’d need to do is focus on policies that would really help middle-income earnings grow. Taxing people who do well and redistributing the proceeds is less desirable than a policy that would improve the labor prospects of people in the middle.
BLINDER [These diverging incomes] are connected in a mathematical way, and I think the mechanisms are probably connected as well. The mathematical way is the main reason for the widening out of the income distribution: The rich have been pulling away from everybody else.
Why? Although the answers we have are not complete, for many years economists basically pointed to one thing, which is—in the jargon—skill-biased technological progress. That means the technology of production has been requiring more and more “skill,” which we usually measure by education. So the people higher up in the educational/skill hierarchy have been adapting better to, and doing better in, the new economy. And the people that don’t have those skills are doing less well relative to the others. That’s clear, and it’s understandable.
Two other things are slightly more obscure. The story I just told you is true of about the last 35 years. But in more recent times, ironically, the people way down at the bottom—I mean people in low-skilled service jobs and so on—have actually been doing a little better relative to the middle, which was not true over the entire 35-year period. So something else seems to be going on in, say, the last 10 years, making things for the middle class even worse, relatively speaking. One hypothesis is offshoring. More and more of those jobs are getting offshored, or what amounts to the same thing, for wage earners: Foreign service workers are now providing effective competition to domestic service workers. You only have to ask an autoworker whether the incipient competition from Japan, Korea, and elsewhere has hurt him over the years. He knows it has. That same kind of phenomenon is now happening to secretaries, data-processing people, computer programmers, etc.
A second hypothesis, where I think the evidence is slightly stronger but still not unequivocal, focuses on information technology and the way that technology enables people like you and me, not to mention Oprah Winfrey, to benefit from an expanded global market on which we can earn more money. People who don’t have those kinds of skills can’t. Sometimes this is likened to tournaments, where the best tennis players and the best golfers make a fortune while most of the rest barely get by. The economy seems to be acquiring more and more of these tournament features.
The third factor is really iffy, maybe even mushy. Economists don’t like to talk about such things, but I think social norms have evolved. There used to be a kind of restraint on how much, for example, a CEO should get paid relative to his workers (they were all [men] then), and that’s just broken down.
NJ Is upward mobility in our society eroding—and if so, why?
BLINDER To the first question, it seems clear the answer is yes. The why is much less clear. The data used to support the notion that we had a much more mobile economy—both geographically and in terms of income—than almost all the European countries. That no longer looks to be the case. The why of that is pretty obscure to me. It must have something to do with educational opportunities. There is a coincident fact that, roughly over that same time period, Europe and some wealthy countries in Asia like South Korea and Japan have caught up to and surpassed America in the fraction of their youth they send to college. To the extent that getting more education is a crucial aspect of mobility, of how the children of middle-income and poorer families rise in the income spectrum, America’s edge in that has completely disappeared.
HUBBARD First of all, this is the question in my view. Policy ought to be about equality of opportunity. My own reading is, the evidence is mixed and says we may have a problem. My concern is, two things have been happening in recent years. [The first] is some attenuation of mobility. Second is a greater intergenerational link: A society where the income of your parents becomes more and more important about predicting your own success troubles me. There are a lot of potential reasons. If you go back to the technology and globalization factors driving inequality, the answer may be intergenerational correlation in skills. It can also be educational attainment. Higher-income, higher-education parents are able to recommend the best educational opportunities for their children. People are studying that. But it’s definitely a key question. A lot of the policy concern needs to be about education, training, and a muscular empowerment of people’s ability to break that chain.
NJ What are the most important things government can do now—both short-and long-term—to help more middle-class families get ahead?
HUBBARD Two areas strike me as promising. First, we need faster growth and job creation. If we had a more growth-oriented tax system that could boost investment and productivity and a clearer path to resolve our long-term fiscal problems, [it] would improve growth prospects, too. How we do these things is a political choice, but that we do it is what I’m stressing. Those changes will definitely raise growth prospects for all Americans. For middle-income Americans, particularly, we need to focus on education and training. Education reform could increase assistance for college education and expand and simplify programs into uniform credits. Training reform could move toward individual and substantial training support rather than relatively ineffective Department of Labor training programs. Health care reform is essential because lower benefit costs should raise wages. And we need to reform housing finance so that we target whatever assistance we want as a society to helping to build wealth for middle-income families.
BLINDER I wish I knew the answer to that. One part I do know: Get back to full employment. None of these things would look as bad if we had a tight labor market. It’s not a coincidence that, if you look back at the last 30 to 35 years when widening inequality has been the story, the one shining exception to that is the second Clinton [term], when the unemployment rate tracked all the way down to 3.9 percent. If we could get back into a situation where, if you have a pulse and can leave a little breath on a mirror, you can get a job, that would be enormously helpful for people who are low on the economic totem pole. So the short-run part of the answer to your question is easy to state, though not so easy to achieve.
The longer-run part I find much more difficult. But the two things I think most about are education and the safety net. It is a shame that we’re not sending as many of our young people to college as other countries are. And we could do something about it. The second thing is the safety net. When people fall into difficulties, they fall pretty far in the United States. There’s not so much supporting them as there is, say, in Western Europe. Again, it’s quite obvious that the safety net is there for everyone, but it’s mainly there for the middle and below. If somebody earning $500,000 a year loses his job and has to take a $200,000-a-year job, that’s a shame—they feel it, and it hurts. But that’s a whole different thing than somebody who loses a $50,000-a-year job and has to take a $20,000-a-year job—if he can find one.
NJ For decades, both parties have been committed to helping more Americans own their homes, partly as a way to help them accumulate wealth. But the housing-market collapse after 2007 has had a devastating effect on many families. Given that experience, should the government continue to promote and subsidize home-ownership, particularly as a strategy for helping middle-class families build assets?
BLINDER I’d say probably not, for a couple reasons. We should have known this before the boom and bust, but we didn’t. Now we’ve learned the hard way that building equity in a home is not riskless and maybe is not even a very effective way of building wealth, certainly as compared to putting money in the stock market or other things. [Yale economics professor] Bob Shiller, right at the beginning of this crisis, published a book which shows a graph of the price of housing relative to other things. I reproduced the graph in my own book. Shiller’s graph shows that it’s just not true that houses, over 100-plus years, went up in value more than other things. So to a large extent, it was a myth from the start. Second, I think we’ve learned the hard way, during the period when the fraction of homeowners rose from around 64 percent to 69 percent, that some people shouldn’t be homeowners. Homeownership is a leveraged bet. We don’t usually think of it that way, but even back in the good old days, with 20 percent down payments, that was a 5-to-1 leveraged bet. A leveraged bet is pretty good when the asset goes up and pretty bad when the asset goes down.
HUBBARD We need to do much more to encourage savings. We need simpler savings incentives and default options. I am not a big fan of encouraging homeownership as opposed to asset accumulation generally. But if we were going to encourage homeownership [we need] targeted assistance to help with down payments as opposed to open-ended mortgage-interest deductions that mostly benefit high-income families.
NJ With rising tuition and debt loads, and difficult job prospects for many young college graduates, many families in our polls are questioning the value of a college degree. Is investing in postsecondary education still a good bet for individuals? What about for the country overall? Would increasing the share of workers with postsecondary degrees meaningfully improve our performance in generating growth, creating jobs, and increasing incomes?
HUBBARD Yes to the first question, and yes or maybe to the second. The question is, what is the most efficient way for an individual to do that? As technology is revolutionizing the ability to teach pure skills, the cost structure for higher education will change, and I think we already have very effective vehicles in community colleges and many universities to do that. And the returns to higher education are still significant. So I still think it’s a good bet for individuals.
On the second question, [the issue] is how do we enable individuals to get a variety of postsecondary skills—from community college to online [education] all the way to four-year degrees and beyond? I don’t think there’s any single strategy we should follow. But I do think we need to have a very strong commitment to postsecondary education and access to that education for every American.
BLINDER For individuals, the answer is easy: If you take an individual, hold other things equal, and compare outcomes on whether he or she goes to school another four years to earn a B.A. instead of a high school degree, then on average the return on that in terms of lifetime earnings is quite generous. Unlike what I said about housing, investing in college is a good deal for the individual. We think it’s also a good deal for society. That’s a slightly harder call, and I will tell you why. There has been a long debate among economists who study the returns to education about what fraction of the return is due to the fact that the individual is acquiring skills versus just moving up in the jobs queue. I think most of us believe it is mostly the former, not the latter; but it’s not entirely settled. That’s what makes your question easier to answer at the individual level than the societal level.
NJ Looking forward, what worries you the most about the economic prospects of the middle class?
HUBBARD I think, for me, the looming fiscal problem in the country is a crisis that will depress economic growth and incomes. How we resolve the dangerous imbalances in the entitlement programs is political, but the pieces are two: We are either going to have to slow down benefit growth substantially and/or raise taxes on middle-income people. The bulk of these changes will need to occur on the benefit side and can and should be accomplished progressively. It will still be the case that many Americans will need to adjust future expectations of the generosity of Social Security and Medicare benefits.
BLINDER Right now, it’s the fact that the weak job market that we got during the recession is improving so slowly. That brings with it a lot of potentially bad things that we economists put under the term “hysteresis.” It’s a borrowed term from physics which means path dependence—that where you wind up depends on where you have been. This stands in contrast to equilibrium theory. The quintessential case of equilibrium theory is a pendulum: In the case of a pendulum, you can push it left or right or hard or soft, but where it comes to rest is always the same, smack in the middle. That’s the equilibrium. But if the system is path-dependent, the echo of what happened stays with you forever. To give a more concrete example, when you have people out of work for very long times, their skills atrophy. If you fail to educate properly a generation when it’s young, they are not going to get that education when they are 50.
It’s things like that that make people like me very worried when we see such high long-term unemployment now. It’s been in the range of 40 percent of total unemployment for a long time in this recession, whereas American data in the past have been more like 15 percent. It is literally un-American to have people unemployed for a year or more. It basically didn’t happen in this country. But now it is happening. Then there’s the case of disability, where people lose their jobs and get forced onto disability and then stay on disability for the rest of their lives. If you’ve got a reasonable job, you could work at it with many ailments. But if you lose the job, and you go on disability, the evidence is that you never get off.
NJ What’s the biggest reason you see for optimism about middle-class prospects?
HUBBARD It’s mainly optimism about the country’s prospects. The three big measures of economic power are the size of your economy, your [gross domestic product]; the growth of GDP; and where the productivity frontier is. If you put those together, the U.S. seems like a pretty great place to be. The big question for the U.S. is, how do you make those future gains more inclusive?
BLINDER I think the biggest reason for optimism is what it’s been in the United States for a very long time: We are a very inventive society. We’re a very entrepreneurial society. I’m relatively optimistic about productivity growth going forward over decades. I’m pretty optimistic about the average standard of living in the U.S. 30, 50, 80 years from now. But I do worry about what in the world is going to break the trend toward increasing inequality. If the median person keeps falling behind the average person at the rate that’s been happening for the last 35 years, that’s going to change society drastically—and not for the better.