America has long been seen as a nation of the middle class, but increasingly Americans believe that the middle class has been left behind. The pandemic has amplified this narrative, with many observers concerned that it will stoke the flames of populism on both sides of the aisle. So what is the current state of the US middle class? What should policymakers do to help it? Recently, I explored these questions in a panel discussion which was then presented as 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. Reeves is also the author of Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do About It, and Sawhill is the author of several books, including The Forgotten Americans: An Economic Agenda for a Divided Nation. 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.

What follows is a lightly edited transcript of our conversation,
including brief portions that were cut from the original podcast. You can
download the episode here, and don’t forget to subscribe to my podcast
on Apple Podcasts or Stitcher. Tell your friends, leave a review.

Pethokoukis: To start out, Isabel will speak for about 10 minutes, and then Richard will speak for another 10 minutes. And after that, we’ll have a panel discussion for a while. With that, please proceed, Isabel.

Sawhill: I am going to start by talking about who we mean by the middle class. It’s interesting. If you do a survey of Americans, almost all of them will tell you that they think of themselves as middle class. They don’t like to think that we have an aristocratic elite or that we have an underprivileged welfare class. It’s almost a national ethos. I think it goes along with the belief in this country that anyone can make it if they work hard, are responsible citizens, and are members of their families and communities. So, to the extent that there’s a national identity or a motivating set of ideals, Americans don’t like the idea that some people are more worthy than others. They really have a middle-class mentality.

That said, for reasons of
clarity and precisions, we had to pick a definition in our work, and we decided
to look at people with incomes in the middle 60 percent of the income
distribution. That means people with family incomes between about $40,000 and
$150,000 a year. The typical middle-class family of three has an income of
about $70,000 a year.

Why did we decide to focus on
the middle class? Both Richard and I have spent a lot of our careers studying
issues of social mobility and inequality. I’ve written a book
on poverty and the working class, and Richard has written a book
about the “dream hoarders” — or the top 20 percent. One reason to focus on the
middle class is that they’re a group that people like us have tended to
neglect. But much more importantly, I think the middle class is the foundation
of a healthy society. Without a flourishing middle class, there won’t be the
purchasing power to support a strong economy, there won’t be the broad-based
participation and engagement needed to support a well-functioning democracy,
and there won’t be the sense of community needed to transcend our many other
differences in a big country like the US.

When it comes to what we
should care about when we look at the middle class, their aspirations, or what
our aspirations for them should be, we looked at the research that
psychologists and others have done on what determines the quality of people’s
lives or their well-being. And we think there are five foundations of the good
life. They are money, time, relationships, health, and feeling like a respected
member of the larger community. In each of those areas, we look at the extent
to which the middle class is doing well or doing badly and try to come up with
just a few relatively bold ideas for improving their lot. In doing this, there
were three principles that guided our choices.

The first principle is partnership. We call our little book a
contract with — rather than for — the middle class because one of
our guiding principles is the idea that there should be a partnership between
citizens and their government. For example, we say the government should pay
for two years of college — K–14, not K–12 — but only if you provide one year of
national service. So, an individual that contributes to the country by doing
national service for a year gets two years of free postsecondary education. We’re
very clear that the government should have a role to play in our lives — a
larger role than now — but also clear that it can’t solve all of our problems.

Our second principle is prevention. For example, we argue for a
focus on health and healthy behavior, not just health care. We want fences at
the top of the cliff, not ambulances at the bottom. Again, we’re in favor of
better health care, but we don’t think that health care is going to solve most
of our health problems. In fact, the research shows that health care is only
responsible for about 20 percent of the variation in health outcomes across
individuals. Lifestyle and individual circumstances are three times more
important than health care in determining a person’s health.

Our third principle is pluralism. We are obviously a very large
and diverse country with different races, religions, and communities. One size
isn’t going to fit all. People need and want to be able to choose the way they
live. Individual liberty is another important American value. But in a
pluralistic society, we have to work a little harder to be respectful of each
other. Wearing a mask to prevent COVID is a mark of respect for and solidarity
with others. Providing a year of national service is a concrete way to exercise
that solidarity or sense of community.

I think the other principle that’s a more informal and more stylistic principle that we adopted when we were writing this book — and I gave Richard full credit for this — was that we wanted a very short book that people would actually read. The result is what I would call a long essay or a mini-book. You can literally read the whole thing in about an hour. Moreover, the e-version of the book is available not only on the Brookings website but also on Amazon, and it’s free. We hope its price is not an indicator of its value, but we’ll let our readers be the judges of that. With that, let me turn this over to Richard Reeves.

Reeves: Thanks, Belle. We were partly inspired by a book that Michael had written — which was also very short — which Jim mentioned earlier.

I’m going to move on to some
of the policies that we talked about. But before I do that, I just want to underline
a few of the points that Belle made, maybe from more of a personal perspective
as a new American. I think this idea of what it means to be a middle-class
nation is not just a nation with a
middle class but also a nation of the
middle class. That isn’t just an arithmetic claim. It’s an aspirational one.

I come from a country where
the idea of princes and paupers is still very much in the air. And of course, in
the UK, where I come from, we still have actual princes. But there’s something
about the US that is against the idea of a kind of luxury class and aristocracy
that perpetuates itself. It is also against the idea of dependency, of being
dependent on the kind of patronage of other people based on how they feel. And
so there’s some sense of independence that comes with being middle class. There’s
something about the value of that. And that’s why — underlying this point about
partnership — 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.

That said, we do think that the
state of those who are in the middle 60 percent are a cause for real concern. It’s
not that they have not seen any increase in their standard of living, but, as
Belle shared, it is increasing much, much more slowly than elsewhere.

There’s a tendency in policy
circles, and perhaps in political circles, to focus on the tails. It’s sometimes
a natural kind of human instinct to look at the tails — so the top 1 percent
who are extraordinarily wealthy or the poorest who are really in desperate
straits. But actually, there’s a whole lot of people in the middle who are
suffering. So if you want to think of it in higher education terms, the folks
who might not get Pell or very much Pell, but who really don’t have much in a
529 savings account. They may not be reliant on food stamps, but not
necessarily people who will be fine dining near me. People who may not be
dependent on the state for their housing, sitting on public housing, but they’re
definitely not in gated communities or having second homes. So, there’s this
whole swath of people in the middle of the distribution who tend to get less
attention — hence our focus on them.

It’s worth underlining that,
led by Belle, we’ve done some work, actually, with focus groups and individual
interviews in partnership with Jen Silver at the University of Indiana, where
we’ve actually run some good-quality qualitative work to find out what people
think matters to them. And that has strongly informed the work we’ve done here.
That’s ongoing work, and there’ll be more coming out from that project soon.

So, let’s talk about money
first, which comes up. And I think it’s where we might spend some of our time
today. So, I’m just going to show some stylized facts around what’s happening
to income. Looking at cumulative income — CBO data, so it includes post-tax and
transfers — even the lowest quintile has seen decent growth. (Very importantly,
that includes, to a significant extent, the value of government-provided health
care because that is fully included in the CBO numbers.) But then let’s look at
the middle 60, who are our main focus here.

Now, it’s important to say that
there’s been growth in middle-class incomes. Those who say there’s been no
growth, that’s just inherently wrong. But it’s also true to say that the growth
in the middle has been significantly less than at the top and even at the
bottom. And so I think it’s fair to say that those at the top have done pretty
well as a result of the labor market and wages also combining those wages into
two households or two earnings very often. And no one is claiming that the
bottom 20 percent are doing great — remember, this is growth from a low base —
but nonetheless, it seems that the safety net has to some extent been working
in ensuring that those at the bottom do not fall behind.

Meanwhile, you’ve seen
cumulative growth about half as fast in the middle of the distribution. So there’s
been growth, but not enough, in our view. This is disappointing enough to
trigger some real concerns about what’s happening in the middle of the
distribution.

Wages are a very big part of
the story. And if you’re just looking at the median for overall in the middle,
you’ll see that it’s been relatively flat. It obviously is better at the bottom,
and a lot depends on which year — Michael and I have been around this many
times, about which year you start and so on. But that disguises a very big
difference between women and men. There’s been a significant increase in the
median for women and something of a drop at the median for men.

This then goes to the next
point: In the middle class, it’s really women’s hours and earnings that have
contributed to that relatively modest income growth we’ve seen in the middle-class
at all. If women hadn’t worked more and earned more in middle-class households,
then there really wouldn’t have been any growth at all. So to the extent, we’ve
seen income growth in the middle class, it has been as a result of the welcome
increase in women’s earnings and employment. But as we point out, that may not
be in the contract. That may not be something we can rely on continuing at pace
forever. And so that is something that might actually begin to run out. And we
have already seen something of a drop in women’s labor force participation, for
example, over the long term. So that’s one of the reasons we’re worried about
other issues.

Let’s get into our proposals
on money. We should try and eliminate the income tax altogether for most of the
middle class. Our view is it’s not enough to say we won’t raise taxes on the
middle class. In terms of income taxes, we should be cutting them. And so we
propose that actually, if we just raise the standard deduction up to 100,000
for a married couple and 50,000 for singles, that would take most of those who
are middle class on our definition out of the income tax obligation. We then
pay for that in various ways, partly by increasing marginal rates at the top.
And not just for the top 1 percent, but for the top 15 percent or 20 percent. We
also pay for it by taxing the three C’s: carbon, capital, and consumption. So a
broad-based value-added tax or carbon tax, and then we would increase some of
the taxes on capital and on corporations. And so we’re trying to really shift
the tax base away from taxing the incomes of the middle class towards taxing
carbon, consumption, and capital.

I won’t dwell on these, but I
should say it’s important that in the contract, we have some headline
proposals, but then we also have a series of others, which we mentioned. We
mentioned them in a way that it’s glancing by usual standards, but with heavy
references and links, in many cases to other colleagues. And I’ve just talked
about the carbon tax and VAT, and that’s what many people have done, including
AEI and at Brookings, including the work of scholars like Bill Gale and Adele
Morris. We’ve essentially just been using their work to justify some of these
proposals.

We’re also proposing a
national minimum wage of $12 an hour, a worker tax credit, tax incentives,
profit sharing, etc. There’s a series of other measures that we don’t spend
very much time on but which form part of the overall package.

One of the proposals Belle
has already mentioned is to try and reduce the cost of college — especially for
these middle-class families between Pell and 529 — by moving to K–14. So, two
years. We have landed after much discussion and argument in favor of allowing
two years of free public in-state college or vocational training. Very
importantly, this would be in exchange for a year of national service. We call
that proposal “Scholarships for Service.” We think there is an argument to
treat at least some postsecondary education now as a public good, but that
should be in exchange for public service. So it’s free in a financial sense,
but it’s not free of obligation.

We actually want to create
around national service this idea that it becomes the norm rather than the
exception. We envisage a society where the question, “Where did you do your
service?” is something that you ask people in the same way you ask them, “Where
did you come from?” or “Where did you go to school?” And so the person who
doesn’t have an answer to that question is the exception. One way to do that is
to encourage it by linking it to postsecondary education.

Next is the sense of the time
squeeze. The time squeeze and the money squeeze are related to each other. Middle-class
families are just working more now. And yes, we’re strongly in favor of work — that’s
why this is a contract. But the average married middle-class couple is now
working roughly a day and a half extra per week than in the late ’70s — largely
as a result of the increase in women’s work, of course. The average couple is
putting more into the labor market than they were, for sure. Most couples are
now dual earners, and there are many couples where the mother is the main
earner.

So, moving on to our policy
proposals in this era. How do we tackle this time squeeze? One thing to point
out is the US is unusual, in that there hasn’t been the same decrease in
working hours as in European countries. We can argue whether it’s a good or a
bad thing. But it is striking. Certainly, in recent years, you’ve seen a continued
decline in working hours for Europeans, but not for Americans. And importantly,
that’s because of the number of days worked in the year, rather than the number
of hours worked in the day or days in the week, typically. And so that leads us
to some of our proposals.

One of the proposals is that
everyone should get 20 days per year guaranteed paid leave, not restricted to
any particular purpose, but just so that everybody can have some time off
during the course of the year. We also argue for reforming the Social Security
system so that people can take what we call mid-career sabbaticals. It’s
actually very hard to retrain in terms of time. And so we are giving people a
time to do that.

We’re in favor of a paid-leave
policy. We’ve done a lot of work on that, including a joint project that Belle
is now leading with Angela Rachidi of AEI on paid leave and child care, etc — and
also trying to align school days or workdays. There’s a historic misalignment
between school days and working days in the US right now.

There’s been a significant
increase in the number of children being born outside marriage — most
importantly, into cohabiting couples. It’s not really driven by rising single
parenthood. It’s driven much more by rising cohabiting parents. This is done by
education, so the data is hard to break by income. But we’re actually seeing
this phenomenon in the middle of the education distribution — i.e. some college
— and much less so among those with a four-year college degree. So those who
are at the top of the education/income distribution are still typically having
their children within marriage. That’s much less true for those lower down,
including middle-class Americans. The issue of having children outside of
marriage is no longer an issue for the poor; it’s increasingly an issue for the
middle class.

You might wonder why we care
about that. Well, we only care about that to the extent that it leads to family
instability. It’s family stability that matters. And we’ve seen an increase in
family instability, which is not great for kids’ outcomes. So, what do we do
about that?

We won’t dwell on this, but this is relevant to Bob Putnam’s book, which is coming out shortly, which I know Belle has been involved in, and the decline in broad social trust. It’s about relationships — not only about family relationships, but also the broader relationships within society — and the decline that there has been in social trust within the republic, which we’ll say a bit about at the end.

So proposals — again, I won’t
dwell on these — much of this is featured in our earlier work too. But in terms
of promoting family stability, we’re big believers that access to reproductive health
care — is absolutely critical and particularly reduces the inequalities in
access to that so that people can actually start their families when they’re
ready. That will promote family stability. And then national service, which we’ve
already kind of mentioned, which we believe 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. So, in that sense, separation into
different neighborhoods and institutions is diminishing the relational quality
of our republic.

Moving into health, Belle’s
already, I think, teed some of this up, but prevention is very important. The
US doesn’t do great in terms of life expectancy. There are lots of reasons for
that which we can discuss. Notoriously, we do spend quite a lot on health care,
but as Belle mentioned, we actually think that there’s so much attention paid
to health care and not enough to health. And so we focus most of our attention
on health. And in that context, we talk a lot about mental health as well as
physical health.

The US is not doing great,
health-wise. In that sense, the US had something of a preexisting condition
when COVID hit. And we do get into some of the issues around the rise in
diabetes and obesity in the essay, as well as the rise in mental health
problems. So, what do we do about all of that?

So, one of the proposals is
to start taxing sugary drinks. Obviously, this becomes politically freighted
very quickly. But there is no doubt that the diet of Americans is having a huge
impact on a whole range of health problems, including diabetes. And just the
same way that we tax other things that have these problems, there’s no question
that we should move in this direction, following the lead of other countries
now. It has a huge impact on public health if we could just rethink our food
system. And one policy to do this would be to start taxing sugary drinks. There’s
pretty good evidence that it’s effective.

We also think we should push
hard on mental health care, and we actually propose following the UK’s lead
here by providing universal access to effective mental health care. The UK now,
without prescription, allows access to cognitive behavior therapy. It’s
relatively cheap; it’s highly effective. 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. And the trends in mental health care are perhaps
the most disturbing ones in the whole health care field. So we want to really
expand access to that by making it essentially free at the point of delivery.

Finally, we focus on respect.
And again, this may not be something you’d expect to find in a kind of 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 not just
about dollars, hours, health care, and so on, but it’s also about how you feel
you are treated by other people in society and how you feel about yourself. And
so this sense of being able to look each other in the eye, having equal
standing in society, is hugely important. We think many of the problems we’ve
seen recently stem from a lack of respect that’s been shown across racial
lines, of course, but also across class lines too. And so the absence of
respect we think is very corrosive. So we actually think respect and
self-respect are hugely important. And again, it’s difficult to wave a magic
policy wand and make people respect each other. But we have some thoughts in
that direction, which we hope will at least spark a debate, which I’ll finish
with.

How do we build respect? We
think national service will build respect. People have proposed citizen juries
to involve citizens in policymaking, for instance. One of my favorite ideas for
promoting respect — one that I have a personal interest in — is having every
high schooler attend a citizenship ceremony. They’re highly patriotic events.
And I think that actually anyone who goes to them will tell you that it actually
gives you a real sense of what it means to become an American. And then we
think that every high schooler should actually attend one. And that would be a
useful part of civic education and perhaps help build something more of a republican
respect. With that, I’ll leave it and see what others have to say. Thanks.

All right. Richard, Belle, thanks a lot. Let’s go to Mike Strain to get some thoughts, both in areas of agreement and disagreement. Mike?

Strain: Well, I want to begin by thanking Richard and Belle
for joining us today and to really commend them on this book. There’s so much
to like about it. And it’s very short, which is perhaps another thing to like
about it. Every sentence has something, which is terrific.

Their definition of the
middle class, I think, is a good one. In the tax-policy debates, it’s common to
define the middle class as everybody below the top 2 percent, stopping at maybe
the bottom 15 percent or 20 percent. Under those definitions, you end up with
around four out of five households in the middle class. While I think Belle is
right to emphasize that Americans have a middle-class mentality, from an
analytical perspective, you know, that’s not a particularly useful definition. Richard
has convinced me in his own work that we really should think about the top 20
percent differently than households at the median. And so I commend them on
their definition.

A lot of the things that I
liked the most about this book resulted from the implicit framework that they
wrote it in. I am very impressed and agree completely with their emphasis on
both the rights and the obligations of American citizens. So much of the policy
discussion, to say nothing of the broader public debate, talks about rights —
the things that people should expect and are entitled to. So little of the
conversation talks about obligations. And there’s a squeamishness, I think,
among policy analysts and intellectuals to talk about obligations at all. Richard
and Belle just tackle that head-on. For instance, they want to provide some
postsecondary education, free of charge, but you have an obligation to do
something for that. And I think that is really 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. The partnership runs both ways. If we thought more about American life
and more about public policy in those terms, that would really help us.

I admired that they discuss
agency, and they state that people have agency. People want to be treated as if
they have agency. That is a surprisingly controversial claim. And I think one
of the most corrosive aspects of the populism that America has been living with
for the last five to eight years — depending on how you want to count it — has
been this implicit denial from both populists on the left and on the right that
people have agency. There is this rush to treat everyone as if they are
helpless victims. The populism of the political left argues that people are a
helpless victim of the big corporations, the elite, and the wealthy. The
populism on the right argues that people are helpless victims of globalism and
of immigration. But the common theme is denying that people have the ability to
improve their circumstances — the obligation to improve their circumstances and
provide for themselves and their families — favoring instead this sense of
victimhood. It’s refreshing to see Richard and Belle push against that.

I am very impressed by their
focus on respect. So much of the policy debate measures outcomes in terms of
dollars that go in pockets, access to programs, and things of that nature. That
emphasis 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.

The book is closely tied to
the evidence, which is extremely important. Obviously, there’s a lot of debate
about how to interpret that evidence, and I come to some different conclusions
at times from Richard and Belle. But their commitment to keeping their analysis
tied to the evidence is also, I think, very admirable.

So much of the disagreements
that I have with Richard and Belle come down to questions of emphasis. And a
lot of them, I think, come down to questions of policy emphasis. We may be able
to do more for the middle class if we cut their taxes and adopt many of the
policies that Richard and Belle suggest. But those policies, you know, 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. I
would put a larger weight on future generations than I think Richard and Belle
do, but this is obviously something that can be discussed.

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 certainly accrue to the benefit of
the middle class. Still, 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. It’s not crazy at all to argue that that’s a
trade-off that we should make, but there is a trade-off there. It’s not the
trade-off that I would make. I’m concerned about, you know, many of the policy
proposals for reasons like this, but these are the sorts of things that we
should debate.

The book also raises, I think,
some puzzles. I agree with the analysis that increases in the wages of female
workers have pulled up the average, pulled up the median. But how do we think
about that, though? In my own household, both my wife and I both have full-time
jobs. It might be that I would be in a much more lucrative occupation if she
weren’t working. And so if she weren’t working, male wages might go up a little
tiny bit, if I were in a higher-paid occupation.

In other words, we tend to
think of income as a household concept. And Richard and Belle break that
household up by gender, and then you see the female line going up and the male
line, you know, stagnant, falling, or at a minimum going up less quickly. How
do you interpret that? How do you understand what’s happening there? I don’t
know the answer to that question, but I think it’s an important question to
ask.

I’ll just conclude here, with
a random observation: I appreciated the discussion of health versus health care.
This, I think, is tied into the obligations, the emphasis they have obligations
as well, of course. We talk so much about health care in the public debate and
in policy circles. It is not crazy to ask the question of whether or not health
care improves health at all. I believe the evidence suggests it does, and
Richard and Belle come to that same conclusion. But in fact, you could quite
credibly argue that the effect of health care on health is very negligible.
That’s something that even close observers of the public debate would never
encounter. And so I think that’s just another interesting part of this book to
chew on.

So let me conclude that I
think there’s something on every page of this book for people who are
interested in these issues. I disagree with a lot of the analysis and a lot of the
policy conclusions. But I think the foundation of the book, its commitment to
discussing the evidence, its commitment to openly discussing the value
propositions, its analysis, its emphasis on both rights and obligations, its
acknowledgment of agency, and its focus on respect are all deeply admirable.
And I encourage everybody in the audience to check out the book.

Pethokoukis:
Before I ask a zingy question or two, I wonder if Belle or Richard have a
response to Dr. Strain’s response.

Sawhill: I would just say, thank you, Michael. I think that was
high praise coming from you. And I think all of your comments were pretty much
on target. We could debate anyone of them. And I don’t want to take the time to
do so right now.

I think we could get into
especially the first one about investment and growth. Just to make one quick
point there. We do a call for expensing investment, which I think is a very
different policy than a lot of what you’re hearing discussed on the campaign
trail and elsewhere. The person who is most likely to become president,
according to the polls right now, is talking about raising the corporate income
tax to 28 percent. We raise it to 25, but we expense all investment. Just making
that one quick point.

Reeves: Let me add my thanks and make one point, too. I love
the fact you’ve drawn out the issue of trade-offs, Michael. It’s something that
we believe very strongly is important to be front and center about. There are
very few public policies that don’t create losers. And you’re making
trade-offs. And your example of the minimum wage is a great example of who is
it going to help? Who is it not going to help? Is that the right decision? It gets
away from a situation where either the minimum wage is just a job-killing
disaster that can’t do any good for the labor market or is it just going to
magically lift lots of people’s wages without any impact at all on lower skills.
Of course, there’s a trade-off.

And I think our whole public
policy debate will be significantly improved if we can all get ourselves to a
place where people could admit the downsides of their policy proposals without
that somehow dealing a killer blow. Currently, people have to sort of pretend we’re
in some sort of magical world where there are policies without losers. All of
our policies create losers. We just happen to think that they create more — or
more deserving — winners. And that’s the right conversation.

Is there a consensus on
what has caused the negative economic changes for the middle class? Take weak
wage growth. Is that a productivity issue? Is it a bargaining power issue? Is
there consensus on that?

Reeves: No. There isn’t a consensus on this panel, for sure. I’ll
have a quick go.

We will all admit that the
two big things that are going to affect wages are productivity and power. And
so productivity is going to be what the worker brings to the table and to what
extent that translates into wages. And the other is what their bargaining
position is with regard to the employer. And I think the difference is going to
be one of emphasis. I suspect Michael would say that this is largely a
productivity story, so if you want to get wages up, you’re going to have to
make people more productive.

And there are some power
issues too. I think Michael would be the first to say, “Of course power matters.”
Whereas we would come at this and say, “Actually, in recent years, we think
that power has become a much bigger part of the story.” It’s not that the
productivity doesn’t matter. But actually, if you look at worker bargaining
power and even power within the market, some companies, because they do well, can
pay their workers more. So, it’s not just worker versus employer; it’s employer
versus employer. And we believe that those changing power dynamics within the
labor market and within the product market are a really big part of the story,
and we have to address that directly. But Michael, if I’ve misrepresented your
view, please jump in.

Strain: No, you haven’t misrepresented my view. I think the
labor market, particularly for the types of workers that Richard and Belle
discuss in their books, is mostly competitive, by which I mean that the
principal — and really, overwhelming — determinate of wages is productivity.
This is, I think, borne out in some recent studies that do a pretty good job
getting at this question.

Obviously, this is a very
difficult question to get at, because it is nearly impossible to observe worker-level
productivity. So the ideal thing you would do is get, you know, 10,000 workers
and look at the productivity of each worker and look at the wages of each
worker and see what that looks like. You can observe wages. You cannot observe
productivity. (It’s quite common for economists to use a worker’s wage as a
measure of his or her productivity, which should, you know, tell you how kind
of deeply ingrained that that idea is.)

But there are ways of getting
around this. You can look at wages and productivity by detailed industry
categorization. You can look at macroeconomic wages and macroeconomic
productivity. And I think that the economists who’ve studied this in recent
years come to the conclusion that wages are, by and large, determined by
productivity. Of course, you know, productivity sets the baseline, but, you
know, issues like power dynamics and the quality of the firm you work at — these
sorts of things 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 want to do one
thing to raise wages — and I think Richard and Belle’s analysis agrees with
this — you want to increase the skills and 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 increasing the amount of education and
training they have.

Richard and Belle, there
are a lot of things you want the government to do that it is not currently
doing. Has the pandemic made you more or less confident about the quality of
American governments to be able to pull off a rather expansive agenda?

Sawhill: One of the other principles that we didn’t actually
pull out or discuss — but that is, to some extent, threaded through our
proposals — is what I would call “keep it simple.” The people at the Niskanen
Center like to talk about kleptocracy and the fact that if government tries to
do everything in a very intrusive way with all kinds of rules with different
rules for different groups and different parts of our lives, it’s not going to do
a great job.

Therefore, one of the reasons
to eliminate income taxes for most of the middle class and tax some other
things instead is because all the other ideas that are out there for tax
reform, which had a lot of merit, are very complicated. For example, there are
a lot of proposals on the table now to change deductions into tax credits. Let’s
have a first-time-homebuyers tax credit instead of a mortgage-interest
deduction, or let’s tax retirement savings but at 28 percent instead of your
top marginal rate or instead of not taxing them at all. It all gets very
complicated.

So I think one of the ways to
think about government is to “keep it simple, stupid,” as well as respectful of
individual differences and the complexities of people’s lives and business
itself. I think, you know, you can have good, smart regulation, and you can
have regulation that is overly complicated and not well designed. So, I think
really worrying about how government intervenes
is just as important as how much it
intervenes.

Reeves: I think there’s a serious point here about the
political economy of this. There’s a slight 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 basically not in favor of much
government policy, then it doesn’t trouble you if government is not very
effective. I’m not suggesting that’s true of anyone at AEI or Brookings for a
moment. But there’s a bit of a vicious circle there: You can end up saying, “Well,
look how terrible the IRS is at collecting — look how awful. Do you really want
to spend more money on this broken system, a broken machine?” And the answer to
that for a lot of people will be “no.” But who broke it?

I would say that it is
important to think about implementation and the quality of governance and the
ability to actually do these things well. And perhaps there’s a tendency on the
left to just assume that you pass the law and the money flows and all will be
well — magically, it’ll all just happen. But there may be a bit of a tendency
on the right sometimes to actually pay insufficient attention to that very
question, which is the quality of governance. Because some on the right
actually will get some benefit from dysfunction, because then they can point to
the inefficiency of government as a reason not to fund government. And that’s a
dangerous vicious circle.

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

Strain: There’s this incredible confusion between paying
income taxes and just paying taxes. Around half of households already don’t pay
income taxes. 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. They still pay
payroll taxes, of course, if they’re working. And they pay all sorts of other
taxes every time they engage in daily life, though those may go to other
entities of government.

So 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. But an argument that
they would feel like they’re less part of the American family, I think, is not one
I’m particularly worried about.

Sawhill: It’s interesting, 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 that they’re responsible
for what goes on.” And like you, Michael, I have a similar response. 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 or come close to
eliminating 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. So I very much agree with your
answer.

Reeves: I think that we will tax the middle class. We’ll tax
their consumption, and we’ll tax their carbon emissions and so on too.

But I have two points. One is
around this kind of income tax cut. I think one of the distinctions is the
sense of urgency that we feel around some of these proposals. I think that some
of these proposals, like the income tax cut, have a very quick timeframe,
because we think there is a sense of urgency around the condition of the middle
class. This isn’t something we can wait 20 or 25 years to do. And we think that
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. So, I think that
might be one of the differences between us, as I reflect on it.

I will say on the income tax
thing: There’s no evidence I can see 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 patriotic duty to avoid paying income tax in
America as much as possible. That seems to be the way to prove you’re a real
American: to find those crazy tax breaks that no one else knew about and reduce
your income tax bill. It seems to be a badge of patriotism to pay as little as
possible rather than the other way around. I wish it were otherwise.

Richard and Belle, how
would these kinds of proposals be received by sort of the median Democratic
voter? Regarding your proposal for the $12 minimum wage, it seems like $15
seems to be the minimum among Democrats. I would think that things like the VAT
tax would be seen as regressive, and the 25 percent corporate tax as not nearly
punitive enough on corporations.

So, if a Democratic presidential
candidate proposed this kind of agenda, would they be a non-starter?

Sawhill: Well, I have sort of an obvious answer to that
question, which is that Democrats don’t control the world, very obviously. The
political scientists who have looked at the American electorate will tell you
that it is actually more conservative than those of us who are policy wonks
believe and those that are activists, especially on the progressive side,
believe. And even if Democrats get into power in the White House and in
Congress, they are going to need some Republican support.

And I think that everybody is
saying, “Oh, my gosh, well, if Democrats get into power, they’re going to get
rid of the filibuster, and they’re going to pass a whole lot of very left-wing
ideas with a simple majority.” I think that’s unlikely and unrealistic,
although that’s just my opinion and nobody knows. But I really think that — for
the reasons that Michael articulated so well — we’re talking about a
value-based proposition here in which government does more for people, but
people also do more for themselves. A combination of rights and
responsibilities is the message that is going to carry today in the end.

Reeves: And Jim, you asked the question specifically about
the median Democratic voter, right? So taking that seriously, I think there
will be quite a lot of alignment, actually. Clearly, there’ll be some who say,
on the left, that it doesn’t go anything like far enough, in many cases. But
the minimum wage is a good example where, actually, we look at the labor market
and think $12 is okay as a national floor, but you’ve got to be careful. And we
do say some cities and places might want to go higher, but 15 is, in our view,
too high because of the trade-offs we discussed before — you can’t just imagine
the economy away and all of this stuff. But if we look at who’s currently
running, Joe Biden won the nomination. And so that suggests that you know, the
median Democratic voter might actually not be a bad person to be thinking about
in this case.

And I think the median
Republican voter might not recoil from all of our proposals. Some of the tax
cuts, the idea that you can get two years of free college but only if you do
national service — I don’t think these are necessarily ideas that the median
Republican voter would be against. And you can imagine a world where John Kasich
is the Republican nominee and Bernie Sanders is the Democratic nominee and ask
yourself under which conditions you think some of these would find a home,
right? And I think you’d have a different answer. But as things stand, you’ve
got a relatively median Democratic candidate and a non-median Republican
candidate. And so if we’re interested in the medians, I think that there’ll be
lots here for both sides to like and some to dislike.

Does the panel agree on
the trade-offs of a paid-leave plan for the United States?

Strain: I can quickly answer that question and say the panel
does not agree.

Sawhill: I am in favor of paid leave, but I am in favor of
keeping it limited, and I’m in favor of also making this available to everyone
for any purpose. When you look at the data that Richard talked about, and you
look at other countries, we are way behind in finding the right trade-off. It
goes back to trade-offs, again, between money and time. And we have
institutionalized the idea that everybody should work 40 hours a week and, more
importantly, that we have much more limited holidays and vacations than other
rich countries. And it’s time for us to take a bit more time off, all of us.

And then yes, there should be
some extra time for people who have a new baby at home or for people who get
very ill themselves. COVID is the perfect example there. Did we really think
that someone who gets COVID and needs, let’s say, a month off and has no sick
leave and is working in a low-wage job shouldn’t get any help? I think they
should.

Strain: I would say that, as in so many other arenas, America
is the world leader in not offering this, and at some point, other countries
will see that we’re doing right. And I would point to Richard Reeves, a new
American citizen, as an example of somebody who voted with his feet.

Reeves: Yeah. But let me assure you, Mike, I didn’t come here
for the paid-leave policy. I waited until my kids were pretty old before
coming.

Again, this is a great issue
of trade-offs. Reasonable people can disagree about this. There are
disagreements within Brookings and some of your colleagues at AEI — and I’m
with Belle on this, and so on. And so I just think it’s this issue of the time
squeeze and how we help working families, most of whom now are dual-earner,
navigate the need to earn money and care for their children. That’s a real
issue. And it’s a growing issue. I don’t think anyone disagrees with that.

The question is: What’s the
role of public policy? And is a paid leave an appropriate way to go about that?
I’m with Belle and some of the folks at AEI on this. I think the arguments
against it that Michael and others make are very sensible and that we should be
absolutely clear about the trade-offs here and maybe proceed with a degree of
caution. Don’t go too big too early.

But above all, I respect the
reasons why someone might disagree with your position, Michael. To be against
the national paid-leave policy is a perfectly reasonable place to be. I happen
to disagree with it, but that is the tone of the disagreement. It doesn’t
really count here, I think. And we’re not talking about a huge change here. We’re
talking about a relatively modest change. And we’ll see. Let’s see whether
Europe is about to sort of abandon all its paid-leave policies and follow the US
or whether or not the US makes a small step to following Europe. I would bet on
the latter over the next two or three years.

Sawhill: I would also add that, you know, the idea of aligning
school hours and work hours is a certain institutional change that we really
need to think harder about. Yes, it will be a little hard to pull off because
education is a local responsibility. But if the federal government provided
some leadership and a little bit of a financial incentive for local areas and
states to change their policies to make life a little easier for parents who
were both working and taking care of children, it would help a lot. It would
also improve human capital, which you rightly emphasized a lot, and we
emphasize a lot because, for less advantaged kids, it would be an opportunity
for them to get some extra hours of schooling in the process.

Reeves: Don’t get me started on the structure of the American
school day and school year. Seriously. I mean, don’t. We have to stop, thank
God. It’s crazy. We’re not an agricultural economy anymore. I’ll just say that.

Again, the book we’re discussing is “A New Contract with the Middle Class” by Richard Reeves and Isabel Sawhill. Again, thanks for coming, and thanks, everyone, for watching.

Reeves: Thanks for having us.

Sawhill: Thanks for having us.

The post Do we need a new contract with the middle class? My long-read Q&A with Richard Reeves, Isabel Sawhill, and Michael Strain appeared first on American Enterprise Institute – AEI.