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Joseph Mariathasan: Rebuilding America’s middle class

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The 2020 US presidential race has begun in earnest with a number of democratic contenders announcing their bids – including Massachusetts senator Elizabeth Warren.

The key issues she intends to focus on are, according to her website: to end Washington corruption; rebuild the middle class; strengthen democracy; ensure equal justice for all under the law; and to provide a foreign policy for all.

Few would argue that these are not worthwhile slogans, but do they mean much more? An end to Washington corruption is promised by every aspiring presidential candidate – most notably Donald Trump with his “drain the swamp” cries during his own path to the presidency.

Ensuring equal justice for all is an understandable goal for a former Harvard law professor, but it is not clear whether it will have any significant impact on the US population or the world at large.

Providing a foreign policy for all argues for a reconsideration of Trump’s “NAFTA 2.0”, and bringing back US troops from overseas wars – important but perhaps of more significance to the rest of the world than for Americans themselves.

The two remaining issues are to strengthen democracy and to rebuild the middle class. The two are related, but maybe not in the way that Warren has presented them. Regardless, they are crucial to ensuring that the US maintains its pre-eminence and leadership in the world.

In the case of strengthening democracy, Warren has argued against the gerrymandering of voter districts and the influence of powerful lobbyists. She claims that “after decades of largely flat wages and exploding household costs, millions of families can barely breathe”.

Studies such as those in Ganesh Sitaraman’s book The Crisis of the Middle-Class Constitution argue that a strong and sizeable middle class is a prerequisite for liberal democracy to flourish as in the US’s constitutional system. Economic inequality is not just a matter of fairness or economic efficiency, it is central to the survival of democracies.

But the struggle of the middle classes is not just a US phenomenon. The McKinsey Global Institute in a recent study found that between 65% and 70% of the population in 25 advanced economies had total income that was flat or had fallen in 2014 compared with 2005. “Today’s younger generation is at risk of ending up poorer than their parents,” the report declared.

Elizabeth Warren

Elizabeth Warren addresses students in Washington in 2017

Addressing the problem requires consideration of the causes, and not a superficial ‘cure’ for the symptoms of ailing democracy. It is not clear that Warren has addressed these, as her solutions appear to have a focus on “putting power back in the hands of workers and unions”.

Her objective is to increase worker participation in decision making “by letting their workers elect at least 40% of the company’s board members to give them a powerful voice in decisions about wages and outsourcing”. This by itself will not create more middle-class jobs – even with, as she advocates, “a new era of strong antitrust enforcement so giant corporations can’t stifle competition, depress wages, and drive up the cost of everything from beef to internet access”.

Middle-class problems

In common with the middle classes in other developed economies, those in the US face two major structural challenges, both of which lead to rising inequality and the disappearance of middle-class jobs.

The first is the rise of emerging markets, where educated workforces at lower wage levels than developed markets provide an economic arbitrage in whole sectors, particularly manufacturing.

The second is the rise of automation, the internet and artificial intelligence (AI) in its widest forms. These are also serving to destroy large numbers of low-level and even mid-level service jobs in areas such as banking, law and insurance.

The rise of emerging markets is something to celebrate, however, as their rising prosperity is also an enabler for rising prosperity in developed markets.

The issue that has not been addressed is how rising prosperity in developed markets should be redistributed across the population. It is rising inequality within developed markets, rather than a narrowing of the gap with emerging markets, that politicians need to address.

Automation and AI

Washington DC

Capitol Building, Washington DC

In a recent paper by Nobel prize-winning economist Joseph Stiglitz and Anton Korinek, the authors explore another challenge posed by automation and AI: income distribution. If redistribution is too costly, it may be impossible to compensate the losers of technological progress, and they will oppose progress – much as the famed Luddites who destroyed machinery at the dawn of the first industrial revolution.

Presidential candidates such as Elizabeth Warren must understand and address these challenges. It is somewhat disappointing that Warren has so far only addressed them in a cursory manner.

Both should be regarded as unambiguously positive, but as Korinek and Stiglitz warn, while individuals and economies more broadly may be able to adjust to slow changes, this may not be so when the pace is rapid. In an economy characterised by “winner takes all” economics it is not surprising that ideas such as a universal basic income have been promoted by tech leaders from Mark Zuckerberg to Elon Musk.

Warren has made a start in addressing the issues through arguing for greater redistribution of wealth by stopping “giant tax giveaways to rich people and giant corporations”, instead declaring that she would “start asking the people who have gained the most from our country to pay their fair share”.

Her proposals include an “ultra-millionaire tax” on the 75,000 richest families, the proceeds of which she pledges to use to build “an economy that works for everyone”, including universal childcare, student loan debt relief, and healthcare.

Tackling inequality in the US is key to restoring the health of democracy and the middle classes in the US – perhaps this provides opportunities for the likes of Warren.

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