The Fall Of The Middle Class Is Starving The Economy Of Its Most Basic Need by David Madland

The Fall Of The Middle Class Is Starving The Economy Of Its Most Basic Need by David Madland

25 Aug

Excerpted from “Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class”

When Steve Jobs — the founder of several of the most important companies in the world, including Apple and Pixar Animation Studios — was six years old, his father gave him some small tools and set aside a corner of his workbench. “Steve, this is your workbench now,” his father said, and he began showing his son how to take things apart and put them back together. Jobs’s father was not highly educated—he never graduated from high school—but he was able to share his mechanical skills as well as his rudimentary knowledge of electronics with his son.

Over the years, Jobs spent a lot of time playing on that workbench, and among the most important projects he worked on were do-it-yourself kits with detailed instructions for building electronic devices. The kits were valuable because they gave Jobs an understanding of what was inside a finished product, but especially because they gave him a sense that he could actually build something he’d never worked on before. When he looked at a television or other piece of advanced equipment, he would think, “I haven’t built one of those but I could.”

Though Jobs’s parents were not highly educated and didn’t have family wealth, they were able to provide a stable and supportive middle-class environment. During Jobs’s childhood, his confidence, curiosity, and electronics knowledge were nurtured. For helping Jobs develop his skills, he credits not only his family but his fourth grade teacher, who was able to “re-ignite” his desire to learn, as well as some of the classes he attended in college. This “human capital,” when combined with some financial capital — from a small bit of savings Jobs had been able to sock away, the sale of his Volkswagen microbus, and similar contributions from his cofounder — enabled Jobs to start Apple. And throughout his career, these skills helped him create novel products, from the Macintosh computer to the iPhone and iPad.

While Jobs was a unique talent, his story illustrates some basics of human capital, showing why it is important, but also hinting at why, as the middle class has weakened, we have fallen behind other countries in producing it. When the middle class was stronger, more people had a chance to be like Steve Jobs and take full economic advantage of their talents. But as the middle class has weakened, it has become more difficult for individuals to develop and make use of their capacities.
Across a number of measures of human capital, America was once a leader, but now fares quite poorly.

High school graduation rates have hardly budged since the 1970s, and are now well below the level of countries like the United Kingdom and even Hungary. Our college graduation rates have also hardly moved in decades. The United States now ranks fourteenth in the world in college graduation rates, down from being tied for first not so long ago. And international tests of high school students that measure math, science, and reading knowledge show that the United States is in the middle of the pack of wealthy countries, well behind countries like Finland, Canada, Korea, and Australia.

We also have much worse health outcomes than other rich countries, an overlooked component of human capital. If enough of a country’s population suffers from poor health, then a nation’s economy suffers. As a National Academy of Sciences report explained: “[T]he United States has been falling steadily in the world rankings for level of life expectancy, and the gap between the United States and countries with the highest achieved life expectancies has been widening.” Further, the average birth weight of a child born in the United States has fallen since 1990, indicating that future health outcomes may worsen because low birth weight is a key predictor of chronic diseases in adulthood.

Entrepreneurship is down, and has fallen by nearly half as a share of the population over recent decades. In the mid-1970s, for every 10,000 Americans over age 16 there were more than 35 new businesses created each year with at least one employee. Over recent decades, that number steadily declined so that there were just 17 new businesses per 10,000 Americans in 2010. Other measures of entrepreneurship, such as self-employment and the number of start-up firms, show the same downward trend.

And in the most comprehensive measure of wasted talent, the ability of American children to rise above the economic position of their parents is below most other wealthy countries. So many studies in recent years have shown this that according to Isabel Sawhill, a senior fellow at the Brookings Institution, “it’s becoming conventional wisdom that the U.S. does not have as much mobility as most other advanced countries.” And the differences are quite big—intergenerational economic mobility is three times higher in countries like Denmark and Finland than it is in the United States. Not surprisingly, in a global survey conducted in 2013 of a broad range of human capital measures, the United States ranked just sixteenth.
To be sure, the relationships between inequality, education, health, entrepreneurship, and mobility are complicated, and there are important feedback loops with inequality both causing and being caused by, for example, poor educational outcomes. These caveats are critical to a proper understanding, but they should not take away from the basic story that America is failing to fully develop and take advantage of the human capital of its people in significant part because of the decline of the middle class.

The sad state of human capital in America goes against the predictions that proponents of supply side economics have been making for more than three decades. According to supply-side theory, growing levels of inequality provide greater incentives for people to get more education so they can earn more money. In a similar vein, George W. Bush’s White House argued that his tax cuts — which disproportionately benefited the highest income earners — would unleash “the entrepreneurial spirit,” because “the lower the marginal rate, the greater the incentive to…start a new business.” Supply-side logic clearly failed to pan out. Instead of helping people develop and utilize their talents, extreme levels of economic inequality have weakened human capital in America, directly refuting the mechanisms underpinning supply-side economics.

The weakness of human capital in the United States is also an indictment of the faulty logic employed by too many academic economists. Though many economists recognized that inequality could on occasion hinder the development of human capital, until recently much of the profession felt that on balance inequality promoted it. According to the standard economic theory, inequality provides incentives for individuals to acquire additional knowledge and skills. Supposedly, the greater the differences in earnings between people with high and low levels of education, the greater the incentive to pursue higher levels of education. While there is a body of economic research showing that the poor and even the middle class often cannot make the optimal level of investments in their education because they do not have enough money or the ability to borrow, little of this research made its way into economists’ understanding of growth—and thus the standard theory that inequality helps foster human capital and economic growth prevailed.

Because the modern economy depends upon human capital, the failure to take advantage of America’s human talents is causing deep harm to our economy. As Nobel Prize–winning economist Theodore Schultz explains, “Human capital…is the key to economic progress.”

Paul Krugman summed up the problem we face when he wrote: “Do talented children in low-income American families have the same chance to make use of their talent—to get the right education, to pursue the right career path—as those born higher up the ladder? Of course not. Moreover, this isn’t just unfair, it’s expensive. Extreme inequality means a waste of human resources.”

To get the economy back on track, we need to make sure everyone has a real opportunity to succeed. If the middle class were stronger, more Americans would be able to achieve their full economic potential. Americans would be better educated and healthier. They would also be more likely to become entrepreneurs and do better financially than their parents. And healthy, highly educated citizens who rise above their conditions of birth and become entrepreneurs would make the US economy much more dynamic.

David Madland is the author of “Hollowed Out: Why the Economy Doesn’t Work Without a Strong Middle Class” and managing director of economic policy at the Center for American Progress.

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