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Rebuilding the middle class

December 03, 2006|Joel Kotkin and David Friedman | JOEL KOTKIN is an Irvine senior fellow at the New America Foundation and the author of "The City: A Global History." DAVID FRIEDMAN is also a senior fellow at the foundation.

OVER THE LAST 20 years, the United States has regressed into what one economist calls a "plutonomy" -- a society in which the largest economic gains flow to an ever smaller portion of the population. According to recent economic statistics, from 1999 to 2004, the inflation-adjusted income of the bottom 90% of all U.S. households grew by 2%, compared with a 57% jump for the richest 10%. Incomes rose by more than 87% for households annually making $1 million and more than doubled for those that take home about $20 million a year.

Most disturbingly, workers losing the most economic ground are not the uneducated and unskilled but those with high school, community college and even four-year degrees. Overall, the middle class, in relative if not absolute terms, has lost purchasing power, especially in big coastal cities where the highest earners and the super-rich have driven up prices for housing and the cost of living. Globalization and automation have not only hurt manufacturing workers but also mid-level managers, engineers and software programmers. Despite enormous media and stock market hype, for instance, the U.S. has lost more than 700,000 information industry jobs since early 2001.

Is there any way to restore the prospects of middle- and working-class Americans? A comprehensive program to rebuild the nation's highways and bridges, upgrade its ports, construct and expand its energy lifelines and enlarge its public transportation systems could generate hundreds of thousands of good-paying jobs. Admittedly, this back-to-basics strategy is not glamorous. But it has helped narrow economic inequality in the past by producing more balanced economic growth.

During the 1930s, for instance, the government sought to narrow the enormous wealth disparities caused by the Depression by putting people to work on an unprecedented number of infrastructure improvements. About 3 million workers, many of them unemployed, were organized to build roads, bridges and dams. They planted millions of trees in middle America to prevent soil erosion. They built transportation networks that helped cities increase their industrial productivity. Rural electrification programs lifted sections of the Midwest and South out of darkness.

In the 1950s, under the Eisenhower administration, construction began on an interstate highway system that, when completed, reduced travel times and made the economy more efficient. By promoting suburban development, the new roads also sparked an unprecedented growth in homeownership for working- and middle-class families.

The result was one of the most balanced periods of prosperity in U.S. history. As ordinary Americans prospered, the share of the nation's wealth controlled by the top 10% of the population fell from nearly 50% in the 1930s to about 30% in the 1960s. Yes, the super-rich did quite well. But coupled with such government programs as the GI Bill and housing for veterans, the infrastructure projects helped give more Americans access to higher education and homeownership.

Both Democrats and Republicans have largely abandoned policies that led to balanced economic expansion. Liberals tend to favor social programs that redistribute income to the less privileged, while conservatives resist nonmilitary spending. As a result, since the mid-1960s, spending on public infrastructure has fallen from more than 3% of gross domestic product to about 2.5%. As the quality of roads, bridges, schools, sanitation and healthcare fell, wealth shifted away from the middle and working classes. Measures of income inequality skyrocketed from relatively low levels in the 1950-1970 period to postwar highs in the late 1990s.

Of course, lack of infrastructure spending was not the only culprit. But minimal investment in public projects that boost the economy's productivity certainly has not helped. By contrast, countries such as China, Japan, Singapore, South Korea and Taiwan have poured billions of dollars into upgrading airports, transit systems, schools and roads, and their economies have benefited.

The scale of today's economic inequality in the U.S. can be eye-popping. Since 1980, for instance, Manhattan's inequality rate has risen from 17th to first among all U.S. counties. The richest 20% in the borough now earns 52 times what the lowest fifth does, a disparity roughly comparable with Namibia. Last month, just as Wall Street hailed record bonuses of more than $25 billion, thousands of New Yorkers lined up for 185 jobs -- 65 of them full time -- at the M&M's World theme store in Times Square. The starting salary was $10.75 an hour, though the benefits package was generous by comparison with most entry-level jobs.

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