During the Great Depression, Senator Huey Long, the populist firebrand from Louisiana, proposed his Share Our Wealth Society, a radical program of wealth redistribution from the rich to "working Americans." In announcing his plan, the Kingfish stated "let no one tell you that it is difficult to redistribute the wealth of this land. . . So let us be about our work. It is simple. Why lie ye here idle? There is enough for all."
But FDR and the Democratic Party had other ideas. Since FDR, Democrats have been a party of growth, albeit growth that is widely shared, but growth nonetheless. As a result, Democrats from FDR through Clinton saw robust and vibrant economic growth as progressive and supported policies that led to it. Indeed, John F. Kennedy's famous phrase "a rising tide lifts all boats" reflected Democrats' belief in economic growth as helping average working men and women.
Seventy-three years later Democrats are sounding more like Huey Long than JFK. Indeed, in recent years it has become an article of faith for most Democratic economic policy pundits to assert that the fruits of economic growth no longer flow to the middle class, but rather to corporations and the rich. As a result, most Democratic officials have lost the faith their party once had in growth as a "rising tide that lifts all boats." Indeed, many on the left now scathingly state that JFK's famous phrase no longer applies, if it ever did.
American Prospect founder Bob Kuttner would have us believe that "three decades of economic growth have gone almost entirely to the top, not merely the top 20 percent but mainly the top 1 percent." Center for American Progress economist Christian Weller claims that families are "working longer to achieve the same results as in 1980."
But this new economic pessimism is not confined to the left wing of the party. Most Democratic centrists trumpet the same middle class stagnation thesis. Jason Bordoff, policy director of Robert Rubin's center-left Hamilton Project at the Brookings Institution, states that "most Americans' wages have been stagnant while the inequality gap has widened enormously." Even Larry Summers, Bill Clinton's Treasury Secretary agrees, asserting that "market forces are often producing outcomes that seem increasingly problematic to middle-class families."
With most left and center-left economic policy experts arguing that productivity growth no longer helps average workers, it's no surprise that most Democratic politicians agree. The Senate Democratic Policy Committee declares that "Americans have worked harder - and more productively - for their families, but are not receiving the proportionally increased rewards for their hard work." And this has become standard fare for Democratic presidential stump speeches. Hillary Clinton tells us that, "The inescapable reality is that globalization, modern technology, economic policy, are creating new conditions that threaten our middle class families and make it harder to achieve a middle class lifestyle." Barack Obama declares that, "The weekly earnings of American workers, which had steadily risen during the years our parents and grandparents were employed, have fallen more than twenty percent since 1973."
Since rank and file workers supposedly no longer benefit from economic growth, virtually all of the economic proposals coming from Democrats these days focus on making sure that the growth that does occur is more evenly distributed through such policies as universal health care, stronger retirement security, a higher minimum wage, and a host of other redistributionist programs designed to divide, rather than grow the pie.
There's only one problem with this Democratic group-think regarding middle class stagnation: it's wrong. It turns out that productivity growth still benefits working Americans, just as it always has. In a recent ITIF report, distinguished labor economist Dr. Stephen Rose carefully examines the trends over the last 25 years in income growth and finds that, contrary to the conventional explanation embraced by many on the left, the fruits of productivity growth have actually been harvested by most working Americans. Much of the difference in productivity and median income growth can be explained largely by demographic changes, especially the increase in single-person households, and by increases in non-wage benefits. Before you say, "Ah, this is another right wing hatchet job," it's worth noting that Rose is a longtime Democrat with strong ties to the progressive community. But he's first and foremost a careful labor economist who wants the facts - and not ideology, political expediency, or wishful thinking - to guide our nation's economic policies.
The starting point for most of the middle class stagnation claims is the fact that GDP per person is up 63 percent from 1979 to 2005, while real median household income is up a mere 13 percent. If median household income had grown at the level of GDP per person growth, it would have been $25,967, or a whopping $20,656 more than what actually happened. With numbers like these, no wonder most progressives have lost faith in growth as an engine of middle-class opportunity.
Yet, as Rose shows, things are not quite that simple. One reason why there has been such a large gap between productivity growth and median household income is that in many ways this is comparing apples to oranges. While it might seem natural to use GDP per capita growth as the basis of productivity growth, this is not appropriate if the goal is to link it to changes in household income. This is because changes in household size can have big consequences for median household income. Think of it this way: if a husband and wife are both working and make $40,000 each, their average household income is $80,000, but per capita income is $40,000. If they get divorced, their average household income drops to $40,000, while per capita income stays at $40,000. Because the size of the average U.S. household fell from 1979 to 2005, real personal income per household actually rose by 48 percent, even though GDP per person grew by 63 percent.
Moreover, the newer households tend to have lower incomes. For example, in 2005 the median income of single women-headed households with or without children was $25,000 while the median for couples was $62,550. As the share of adults in married couples fell from 76 percent in 1979 to 68 percent in 2005, the result of this independent demographic effect was many more low income households. If the distribution of household types between married and singles had not changed, the median income would have been $51,924, instead of $46,326.
Finally, some employer benefits are included in GDP data but are not included in household income as reported in Census surveys. Because of rising health care costs, the employer share of health insurance premiums alone rose from 4.2 percent to 9.0 percent of earnings between 1979 and 2005 while the combined FICA and Medicare taxes for employers went from 6.13 percent to 7.65 percent. The increase in these non-cash benefits raises the median income in 2005 by an extra $2,740.
After making these adjustments it turns out that just $6,120 of GDP growth remains that should have gone to the average worker. In other words, the gap between productivity growth and median household income growth was not $20,656, but rather $6,120. This remaining discrepancy can be explained by many factors, the largest of which appears to be the rising pay for top managers and professionals. The discrepancy is still larger than it should have been, and it does reflect an unwelcome growth in inequality, but it's nowhere near as dire a picture as the left paints.
Rose finds the same results when he looks at growth in wages. He finds that real median yearly earnings of prime-age workers (ages 25-59) actually grew by 23 percent from 1979 to 2005 (and for women, earnings grew 54 percent). This is still less than the 40 percent growth in real average earnings, but again it is a far cry from the stagnation or even decline that many Democrats claim occurred.
As Rose shows, a careful analysis of the numbers suggest that it would be a mistake for the Democratic Party to give up on growth and put all of its eggs in the Huey Long redistributionist basket. This loss of faith in productivity as an engine of middle class prosperity matters because it means that it will become harder to gain support for government policies to spur productivity growth. And there are a host of policies, including government support for R&D and technology, and for the more rapid digital transformation of the economy, that are particularly critical for ensuring robust growth. If instead policy makers focus on social policies to distribute an already fixed pie at the expense of productivity growth policies, then growth, and middle class opportunity, will suffer.
The stakes are not small, for maintaining the productivity growth rates of the last decade for the next 25 years will mean that per capita incomes will more than double (105 percent) instead of growing just 44 percent (if productivity growth slips to pre-1995 levels.) But at stake is not simply whether the average worker can afford a nicer car or a house. As liberal Harvard economist Benjamin Friedman notes in his excellent book The Moral Consequences of Economic Growth, economic growth is a prerequisite for the creation of a liberal, open society.
The old lesson of economics, embraced by a generation of Democratic leaders, that a rising tide lifts all boats is still true, and it's even more true that without a rising tide it is very difficult to raise the boats of average working Americans. This means that if progressives want to help raise the incomes of average American workers, a robust economic growth strategy with a strong focus on the key drivers of productivity growth will be critical. This does not mean that other strategies to ensure more equal distribution of that productivity (e.g. a higher minimum wage, more progressive personal income taxes, universal health care, and the like) are not needed to more closely match median and average income growth. But the lesson from Rose's analysis is that progressives give short shrift to productivity growth at their own peril, and more importantly, at the peril of average working Americans. As a result, it would be a grave mistake for the future of our nation if Democrats took inspiration from the Kingfish, instead of JFK, and gave up on growth.