Wednesday, August 29, 2012

Saving the Middle Class By Hurting the Middle Class

A few days ago, Robert Samuelson wrote an odd column addressing the middle class. He points to the two candidates,
Republicans will accuse Barack Obama of destroying the middle class through policies perpetuating high joblessness and feeble economic growth. Democrats will portray Mitt Romney as a tool of the rich who doesn’t understand the middle class.
Samuelson responds,
This is mostly political symbolism. The idea that anyone can “save” the middle class assumes that it’s in danger of disappearing, which it isn’t, and that presidents possess sufficient powers to resurrect it, which they don’t.
Let's take a step back. Samuelson has told us that he expects the Republicans to (continue) accusing the President of "destroying the middle class through policies perpetuating high joblessness and feeble economic growth", and that he believes that claim to be false. He compares that to the anticipated Democratic Party argument that "Mitt Romney [is] a tool of the rich who doesn’t understand the middle class", an assertion that is fairly described as "mostly political symbolism", but which is not an economic argument. That is, Samuelson's attempted parallel between that statement and what he describes as a fabricated economic narrative from the Republicans fails, because they address different issues. He's also comparing a statement of opinion about Romney, one with which he expresses no actual disagreement, with what he claims to be a false statement of fact about the economy. A better comparison would be if Samuelson had said, "Democrats will portray Mitt Romney as a tool of the rich who wants to cut taxes for the rich while implementing policies that make life harder for everybody else." Samuelson could argue that such a position would be an exaggeration - for example, Samuelson might believe that we need only make life more difficult for a huge swath of the population, not for the entire middle class - an argument he makes later in his editorial. But his attempt to analogize a false statement of fact on economics to a statement of opinion on personality does not hold up. Samuelson next tells us why the parties are attempting to connect with the middle class - or at least to create a rift between the middle class and the other party,
Still, the symbolism is potent because most Americans equate the middle class with the kind of society we are and ought to be. It is a society where hard work and personal responsibility are rewarded — where “getting ahead” is expected; where economic security and social stability are enjoyed; and where privilege is minimized.
Samuelson then proceeds to fumble between two competing arguments, the first being that "the middle class is fine, thank you very much" and the second being that the middle class is in serious peril. He does not attempt to reconcile his competing thoughts. In support of his position that the middle class is fine, Samuelson argues:
  1. Most Americans think of themselves as middle class - "Only 7 percent of Americans called themselves “lower class,” although the government’s poverty rate is 15 percent.... Despite decades of rising inequality, only 2 percent put themselves in the “upper class.... Nine of 10 Americans locate themselves somewhere in the middle class.”

    The problem with that argument is that it does not rely upon either fact or economics. If I go to a prison and survey the inmates, and 90% of the inmates tell me that they are innocent, would Samuelson truly conclude "Therefore the vast majority of prisoners are innocent," or would he say, "We need a better measure"?

  2. Some people with pretty high incomes think of themselves as middle class - "Many Americans with incomes of $200,000, $300,000 or more refuse to count themselves as rich."

    As previously noted, the self-report is not what matters. There are plenty of reasons why people at the lower end of the upper income brackets may say that they're "middle class" instead of "upper middle class" or... would Samuelson say "upper class"? They are likely to live in houses and drive cars not much different from those of their middle class peers, they may be burdened by large amounts of student loan debt, they may have very little in the way of accumulated assets. Also, as many have pointed out, the distance between those in the 95th to 99th percentile of income has expanded to the degree that the concept of what constitutes "wealth" has shifted - If your household income is $300K and you compare yourself to a family earning minimum wage, you might feel rich, but if you compare yourself to the class of people who are unquestionably rich, your lifestlye seems objectively middle class. Definitions and points of comparison matter.

  3. A big part of the problem is "confidence" - "The middle class can’t regain its self-confidence and financial health without a strong economic recovery. But the economy can’t recover strongly without a financially healthy middle class, which provides most consumer spending."

    I know that economists like to speak of consumer confidence as a measure of how willing people are to make large expenditures, buy on credit, and the like, but the debt overhang to which Samuelson alludes diminishes the role of confidence. You can be certain that the economy is going to recover, but if your house is upside-down, your income is down and you can't get credit, you won't be spending money. Samuelson nods to that fact, "Not surprisingly, the economic expansion is glacial", but assumes that the government is powerless to assist. I suspect that if you were to point out possible interventions - debt forgiveness, across-the-board mortgage write-downs and the like Samuelson would speak of moral hazard. That type of relief, it appears, should be reserved for the financial industry and the unquestionably rich people who mismanaged them to the point of collapse.

  4. Being "middle class" is a state of mind - Samuelson argues, "Personal responsibility and a strong work ethic still matter and suggest a durable middle class. It will survive today’s economic setbacks — and political pandering."

    The problem here is that there are plenty responsible, hard-working individuals who are falling out of the middle class, or who lack the skills, education, or toehold they need to pull themselves up the proverbial economic ladder. Samuelson's point reminds me of one of my pet peeves about Nicholas Kristof and his defense of sweatshops - yes, it's true that people work in sweatshops because the other options available to them are worse, but that doesn't mean the problem is solved. The idea that "[p]ersonal responsibility and a strong work ethic" should be enough to get you into the middle class is, as Samuelson notes, an American ideal. But its truth is diminishing.

A fair response to Samuelson is that the middle class is not a state of mind. If you're not in the economic middle class, your thought to the contrary will not change that fact. Your strong sense of personal responsibility and good work ethic may help you get and hold jobs, and get promotions, but personal virtues and "confidence" do not, of themselves, generate income.

Also, while it is true that if you define "middle class" as a strata of wealth between "poor" and "rich" it will in some sense always exist, that's not the issue we're confronting. The issue is, can we can maintain the ideal that every American who demonstrates the virtues Samuelson describes will have a chance for a bona fide, secure middle class lifestyle, or are we transitioning into a country with a smaller, less financially secure, less stable middle class. Are we going to be a nation in which most people want to be rich but are content to call themselves middle class, or a nation in which people at the lower end of wealth become, statistically speaking, the "middle class" between the ultra-rich and the working poor? Let's not forget, when you look at history, the modern world's experience with a large, robust middle class is the exception.

Samuelson also describes problems faced by the middle class,
  1. People are no longer confident that they will achieve or sustain a middle class income: "The financial crisis and Great Recession subverted two core beliefs: that hard work ensures “getting ahead” and that being middle class provides security."

    Perhaps that's the "confidence" to which Samuelson was alluding, as opposed to "consumer confidence", but either way it remains the case that the present problem is not a state of mind. If people are no longer feeling secure, it's because the reality of the past few decades is that they are less secure. They can be less confident about how much they will earn, income growth, being able to afford a conventional "middle class lifestyle", how long they'll be able to keep their jobs, whether they'll be able to save for retirement.... And let's note at this juncture, the big "fixes" Samuelson keeps pushing for the nation's budget, specifically cuts to both Social Security and Medicare, will worsen that insecurity.

  2. Unemployment is high and people are losing their homes: "True, they don’t affect everyone (about 5 million unemployed have now been jobless for more than six months; from 2007, completed home foreclosures total 4.5 million, reports Moody’s Analytics). But the demonstration effect is strong.... This psychological pall is compounded by widespread wealth loss."

    I'm reminded of a place I once worked where, during a previous economic downturn, any time an employee inquired about a raise the head honcho would pull a stack of papers out of her desk drawer, "These are unsolicited resumes from people who want your job, and they will work for less than you're already getting." It's not just that people are looking at the population of workers who cannot find jobs - it's that an increased population of workers realize that they're on the razor's edge. Their jobs could be outsourced, domestically or internationally. Their skills may be deemed obsolete. Samuelson should note, one of the reasons for middle class wage stagnation is that the middle class lacks the economic clout to force higher wages, and that's a problem that existed considerably before the start of the 2008-2012 recession.

  3. People can't afford to save or invest, and there is a debt overhang in housing: I extrapolate from Samuelson's statement, "Wealth is slowly rebuilt through higher saving and stock prices — and the hope that home values will follow."

    I know that "on paper" many people were (and probably still are) "saving more" because they can't get credit, but even that's far from enough to "rebuild" their wealth. Samuelson alludes to the housing bubble, and the fact that much of the spending of the G.W. Bush era involved people cashing out "'paper wealth and housing wealth' — which went poof" when the housing market collapsed. Samuelson can't bring himself to say it, but he's implicitly arguing that the problem he describes dates back at least to the start of G.W.'s presidency and was masked by the housing bubble. Further, absent significant income growth or a new asset bubble, we're not going to see both significant increases in saving and investment and significant spending that will drive a strong economic recovery. It's not clear how Samuelson proposes that we achieve "higher saving and stock prices" for the benefit of the middle class, and in fact it appears that he's offering no solution beyond "keep waiting and keep hoping".

Samuelson then turns to a class warfare argument - not a war between classes, but a war he hopes to see played out within the middle class:
There is also a larger conflict. Sooner or later, broad-based tax increases will be needed to reduce budget deficits. How large depends on how much federal spending is cut. This creates an unavoidable conflict between workers and retirees, because workers are the biggest taxpayers and retirees are the biggest beneficiaries of federal spending. Which middle class deserves support? Cut Social Security and Medicare and help workers. Raise taxes and help retirees.
And we're back to one of my long-term frustrations with Robert Samuelson. To Samuelson, the only path to national financial stability is to cut programs he doesn't care about so we can afford to spend hundreds of billions of dollars in "pocket change" to support discretionary spending he endorses. Even if he underestimates he cost of government ventures he supports, even if by a factor of ten, twenty or more, they're still worth it. But if he doesn't support the program, don't look at the actual economics, don't examine reforms, certainly don't look at how other nations are providing similar programs at much lower cost - just cut 'em to the bone.

Social Security doesn't matter to Robert Samuelson, as he's a wealthy man. He can get by without it, and so can all of his friends, so it apparently doesn't enter his consciousness that many middle class Americans rely upon those benefits to make ends meet during retirement. It similarly appears to be outside of the scope of his experience that some people work a lifetime in jobs that don't generate enough income to allow them to accumulate significant wealth, or work in jobs that involve activity more strenuous than going to a comfortable office, sitting at a desk and typing on a keyboard. Samuelson is in a position in which he could reduce his work to one day a week and he would still pull in six figures; he does not appear to fully understand that most Americans don't have that luxury.

Samuelson has a similar history of decrying any effort to reform Medicare or rein in its costs, and rejects the idea that we should look at how other developed nations are able to achieve similar, sometimes better, health care outcomes while serving their entire populations, at considerably less expense than the U.S. system. He diminishes or criticizes efforts to limit the growth in healthcare expenditures, even though (or perhaps because) that's how we could make the present system sustainable, while providing no criticism of programs that would arbitrarily cap Medicare spending or replace the present guaranteed benefit program with a voucher program, without regard to whether retirees would be able to afford the care they need.

The only conclusion that can be drawn from Samuelson's refusal to acknowledge basic facts on the economics of Social Security and Medicare is that he is philosophically opposed to the programs, or perhaps supports them if they provide only the most basic of safety nets, and if people can't afford to retire or can't get needed healthcare, well, too bad. His "solution" is purely numbers based, after all who cares about good policy formation, and is built on the false premise that retirees are somehow depriving the "middle class" of a decent lifestyle. Never mind that middle class workers might hope to one day retire, or might not be rich and blessed (as is Samuelson) with gold plated employer-sponsored health insurance during their senior years.

Samuelson also appears to believe that healthcare spending does not impact the economy, never mind that healthcare spending is a huge portion of our nation's economy. He does not explain how Medicare cuts will not result in a reduction in healthcare spending, how the cuts will translate into middle class workers being able to afford to engage in more consumer spending, or how the two might balance out. For that matter, if we're overspending on Medicare and Social Security, Samuelson should be able to identify yet another internal inconsistency in his argument - the subsidy results in an increase in middle class spending (albeit by middle class retirees) over what would otherwise be the baseline and program cuts to help balance the budget will result in a net reduction in middle class spending.

Samuelson offers no explanation for how the cuts he repeatedly endorses will benefit current workers, as he is not proposing FICA tax cuts. Similarly, when Samuelson says "Raise taxes and help retirees" he's talking about income tax - not FICA - and his objection is to the expiration of G.W. Bush's temporary tax cuts (never mind that they did not deliver the promised economic boom) that benefit him. I don't recall Samuelson overtly playing the game of pretending that the only taxes Americans pay are federal income taxes, but when he conflates all tax increases in this manner his approach is not much different. It is very possible to increase taxes in a manner that puts the cost of maintaining Medicare and Social Security directly upon those who will eventually benefit from those programs, but Samuelson's concern appears to be that it will be his economic class, to which the benefits form those programs are literal "pocket change", that will be asked to share the burden.

Samuelson's "solution" is for workers to keep on paying what they're presently paying, but to receive considerably less upon retirement. That's from from cutting "Social Security and Medicare [to] help workers". It's cutting those programs to either reduce the deficit or to fund the continuation or expansion of tax cuts for the wealthy, and so Samuelson can continue to endorse enormously expensive discretionary spending programs or wars on the basis that we can easily afford the added debt.

Samuelson knows he's a rich man. He's simply not honest enough, perhaps with himself and certainly not with others, to admit that the class war he endorses is not within the middle class, but is instead between himself and his wealthy, like-minded peers and the middle class. Samuelson and his peers will feel no pain from the cuts he proposes, and apparently would prefer to keep Social Security and Medicare in somewhat precarious states such that they can hand-wring about the "necessity" of reform, rather than implementing meaningful reforms that would undermine the case for cuts.

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