Room for Debate (The New York Times), September 6, 2011
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For the last three decades the government has pursued a variety of policies that had the effect of undermining the living standard of the middle class and redistributing income upwards. As a result, the middle class has experienced stagnant income and growing insecurity. The key to rebuilding the middle class is reversing these polices.
At the top of this list is a trade policy that was designed to put manufacturing workers in direct competition with low-paid workers in the developing world. This had the predicted and actual effect of lowering the wages of U.S. manufacturing workers. Since manufacturing jobs are comparatively well-paying jobs for the 70 percent of the workforce without a college degree, this policy had the effect of lowering wages for this larger group of workers as well.
The downward pressure on wages was amplified by the over-valuation of the dollar. The over-valued dollar made U.S. goods less competitive internationally and has given the country massive trade deficits over the last 15 years.
The correction to this policy is to also subject highly educated workers to international competition. This will lower wages of doctors, lawyers and other high-end earners. It will also lead to more affordable health care, college and other services provided by highly paid workers. Restoring the dollar to competitive levels can rebalance trade and create more than 4 million new jobs in manufacturing.
The over-friendly patent policy in the United States also shifts enormous sums from the middle class to the wealthy. We spend almost $300 billion a year (roughly $4,000 for a family of four) on prescription drugs that would cost around $30 billion a year in a free market. Other countries pay roughly half as much for their drugs.
The explicit and implicit protections for the financial industry, such as “too big to fail” insurance for the largest banks, also have the effect of redistributing income from the middle class to the wealthy. Restoring market discipline to the financial sector and taxing speculation would go a long way toward correcting this problem.
In short, the destruction of the middle class was not an accident of the market but rather was driven by policy. It can be reversed by better policy.