Many Americans believe that the middle class has been left behind — that wage growth has slowed down, life expectancies have stagnated, and civil society has deteriorated. To what extent are these fair diagnoses? And what is to be done about the problems Americans face? I recently explored these questions in an extended episode of Political Economy featuring Richard Reeves, Isabel Sawhill, and Michael Strain.

Richard Reeves and Isabel Sawhill are both senior fellows in Economic Studies at the Brookings Institution and are the co-authors of the recently released “A New Contract with the Middle Class.” And Michael Strain is the Arthur F. Burns Scholar and director of economic policy studies at AEI. He is the author of “The American Dream Is Not Dead: (But Populism Could Kill It),” released in February of this year.

Below is an abbreviated transcript of our conversation. You can read our full discussion here. You can also subscribe to my podcast on Apple Podcasts or Stitcher, or download the podcast on Ricochet.

Pethokoukis: Belle and Richard, what does your new book have to say about the state of the middle class? What policymakers should do about it?

Sawhill: A flourishing middle class is the foundation of a
healthy society. Without it, there won’t be the purchasing power to support a
strong economy, the broad-based participation and engagement needed to support
a well-functioning democracy, or a proper sense of community.

We think there are five foundations of a good middle-class life: money, time, relationships, health, and respect. In each of those areas, we looked at how well the middle class is doing and came up with a few ideas for improving their lot. In doing this, there were three principles that guided our choices.

The first principle was partnership — the idea that this is a
contract with — rather than for — the middle class. Our second
principle was prevention. For
example, we argue for a focus on health and healthy behavior, not just health
care. And our third principle is pluralism.
We are a large and diverse country, so one size isn’t going to fit all. People
need to be able to choose the way they live.

Reeves: The US is against the idea of aristocracy, and also against
dependency — there’s some sense of independence that comes with being middle
class. That’s why we say in the contract that middle-class Americans are not
vessels ready to be filled up with good things from a benign state. And there
is something in this policy debate which assumes too much passivity on the part
of individual citizens. However, we do think that the state of the middle class
is a cause for real concern.

First, there has not been
enough growth in middle-class incomes. And the modest income growth that we
have seen mostly comes from a growth in women’s hours and earnings, which may
not be something we can rely on for increasing household income forever. So we
should eliminate the income tax altogether for most of the middle class by
raising the standard deduction up to $100,000 for married couples and $50,000
for singles. We can pay for that by increasing marginal rates for the top 15 or
20 percent and by taxing carbon, capital, and consumption.

We also propose a national minimum wage of $12 per hour, a worker tax credit, tax incentives, and profit-sharing. And we are in favor of allowing two years of free public in-state college or vocational training, in exchange for a year of national service. We call that proposal “Scholarships for Service,” with the idea that engaging in service becomes the norm rather than the exception.

Middle-class Americans also face a time squeeze. The average married middle-class couple is now working roughly a day and a half extra per week than in the late ’70s. This is unique to America; we’ve seen a continued decline in working hours for Europeans. So we propose that everyone should get 20 days per year of guaranteed paid leave — not restricted to any particular purpose — so that everybody can have some time off during the course of the year.

Regarding relationships, there’s
been a significant increase in the number of children being born outside
marriage in the lower and middle classes. This has led to an increase in family
instability, which is not great for kids’ outcomes. Access to reproductive health
care is critical for promoting family stability so people can actually start
their families when they’re ready.

We also think the issue of
declining relationships in America is associated with broader declines in
social trust, and we believe national service will increase relational equality
through exposure to people from different backgrounds. Critically, if you are
exposed to people of different backgrounds, it will improve your ability to
work with people from different backgrounds. Whereas today, separation into
different neighborhoods and institutions is diminishing the relational quality
of our republic.

The US doesn’t do great in terms of life expectancy. In that sense, the US had something of a preexisting condition when COVID hit. The diet of Americans has a huge impact on a whole range of health problems, including diabetes. If we could rethink our food system, it would have a huge impact on public health, and one policy to do this would be to start taxing sugary drinks. We also should follow the UK’s lead and provide universal access to effective mental health care. We actually want to make it the norm for people to be seeking mental health care support rather than only once things have gone very badly wrong.

Finally, we focus on respect.
This may not be something you’d expect to find in a wonky book. But we’ve kind
of come to believe that self-respect and respect for each other are critical to
people’s sense of themselves and their quality of your life. Quality of life is
partly about how you are treated by other people in society and how you feel
about yourself. The sense of people having equal standing in society is important.

We think national service
will build respect. One of my favorite ideas for promoting respect is having
every high schooler attend a citizenship ceremony. They’re highly patriotic
events which give you a real sense of what it means to become an American. That
would be a useful part of civic education and perhaps help build something more
of a republican respect.

Thanks, Richard and Belle. Mike, what are your thoughts?

Strain: There’s so much to like about this book. I agree
completely with their emphasis on both the rights and the obligations of
American citizens. So much of the policy discussion talks about what people
should expect and are entitled to, and there’s a squeamishness among intellectuals
to talk about obligations at all. Richard and Belle tackle that head-on. I
think that’s the right way to think about American life: We all have
obligations to each other, we have obligations to ourselves, and we are in a
partnership with the rest of society — and that partnership isn’t one way.

I admire how they recognize that people have agency. That is a surprisingly controversial claim. One of the most corrosive aspects of modern populism has been this implicit denial that people have agency. There is this rush to treat everyone as if they are helpless victims of big corporations and the wealthy, or of globalism and immigration. There is a denial that people have the ability to improve their circumstances and the obligation to provide for themselves and their families. It’s refreshing to see Richard and Belle push against that.

I am impressed by their focus
on respect. So much of the policy debate measures outcomes in terms of dollars
and access to programs. That is completely appropriate, but I think being
explicit about what is typically in the background of those analyses is a
helpful way for policy to move forward.

Many of the disagreements
that I have with Richard and Belle come down to questions of emphasis. We may
be able to do more for the middle class now if we adopt these suggested
policies, but some policies — for example, capital-income taxation — would
leave future middle-class households worse off by reducing the capital stock
and making workers less productive. It’s not obvious to me how to weigh that
kind of intergenerational trade-off.

There’s a trade-off between
helping the middle class and helping Americans who are outside the middle
class. For example, a $12 minimum wage would benefit the middle class, but I
think that would accrue to the detriment of the least experienced and least
skilled workers in the labor market by reducing the employment opportunities
they have available to them. Now, maybe that’s a trade-off that we should make,
though it’s not the trade-off that I would make.

Overall, I disagree with a lot of the book’s analysis and policy conclusions, but I think it’s an admirable book that I encourage everybody to check out.

Is there a consensus on
what has caused weak wage growth for the middle class?

Reeves: No, there isn’t a consensus, but I’ll have a quick
go. The two big things that affect wages are productivity and power. Productivity
is what the worker brings to the table and to what extent that translates into
wages, and power is what their bargaining position is with regard to the
employer. I think the difference among us is going to be one of emphasis. I
suspect Michael would say that this is largely a productivity story, but he
would also recognize that power also matters.

Isabel and I think that power
has become a much bigger part of the story in recent years. If you look at
worker bargaining power and power within the market, some companies, because
they do well, can pay their workers more. So, the power question is not just
worker versus employer, but also employer versus employer. And we believe that those
changing power dynamics within the labor market and product market are a really
big part of the wage growth story.

Strain: I think the labor market is mostly competitive, by
which I mean that the principal — and overwhelming — determinant of wages is
productivity. This is borne out in some recent studies that do a pretty good
job getting at this question and come to the conclusion that wages are, by and
large, determined by productivity. Of course, you know, productivity sets the
baseline, but issues like power dynamics and the quality of the firm you work
at can push wages above or below that productivity baseline. And whether or not
the deviations around the productivity baseline are increasing is, I think, an
interesting question.

But if you could do one thing
to raise wages, you would want to increase the human capital of workers. We
could return to the unionization rates of the past, and that would do less for
worker wages than increasing their skills and education.

Richard and Belle, has the
pandemic made you more or less confident about the ability of the US government
to be able to pull off an expansive agenda like this?

Sawhill: One of the principles threaded through our proposals is “keep it simple.” People at the Niskanen Center talk about “kleptocracy” — the fact that if government tries to act with different rules for different groups and different parts of our lives, it’s not going to do a great job. That was one of the rationales for eliminating income taxes for most of the middle class: All of the other ideas that are out there for tax reform, which had a lot of merit, are very complicated.

Keeping government simple, as
well as respectful of individual differences and the complexities of people’s
lives, is the key. You can have good, smart regulation, or you can have
regulation that is overly complicated and not well designed. How government intervenes is just as
important as how much it intervenes.

Reeves: There’s also a danger that those who take the view
that government isn’t the most effective way to bring about changes are
incentivized to weaken government. If you’re not in favor of much government
policy, then it doesn’t trouble you if government is not effective. So it is
important to think about the quality of governance and the ability to actually
do things well.

Perhaps there’s a tendency on the left to just assume that when you pass a law, all will be magically well. But there may be a tendency on the right to actually pay insufficient attention to the quality of governance. Some on the right will even get some benefit from dysfunction because then they can point to this inefficiency as a reason not to fund government. And that’s a dangerous vicious circle.

Is there a danger that by eliminating
the income tax for so many Americans, we will weaken their feeling that they’re
citizens with responsibilities to the nation?

Strain: No. Around half of households already don’t pay
income taxes, but they still pay payroll taxes if they’re working, and they pay
all sorts of other taxes every time they engage in daily life. So I don’t think
that the lack of an income-tax payment makes them feel like they’re less of a
full participant in American life.

However, I would not
eliminate the income tax on the middle class in the way that Richard and Belle
suggest. In fact, we may even need to raise the tax burden on the middle class
while also reducing the Medicare and Social Security they receive.

Sawhill: Jim, I have gotten that same comment from several
different people recently: “If you don’t tax the middle class, they won’t feel
like they’re part of our society.” And I have a similar response to Michael: I
think most people do not realize that two-thirds of Americans pay more in
payroll taxes than they do in income taxes. So when you eliminate income taxes
for the middle class, you’re not eliminating taxes at all. And of course, we
also argue for substituting other taxes that we think would work better and
achieve other objectives.

Reeves: We’ll still tax the middle class via consumption and carbon taxes. Beyond that, we believe there is an urgency to cutting these taxes, given the condition of the middle class. Some of the failure to act more aggressively to help the middle class, especially in economic terms, is one of the reasons we ended up where we are. There’s also no evidence that people feel more connected to the community when they pay income tax. In fact, as a new American, I will point out that it appears to be a badge of patriotism to avoid paying income tax in America as much as possible.

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