How to avoid the coming middle-class meltdown
Policy changes can ease the transition to a tech-driven economy.

Being too early is a lot like being wrong. And for 40 years, the Left has been dead wrong in its Dickensian depiction of America as a nation suffering a “hollowed-out” middle class while the super-rich greedily grab all the income gains and heartless CEOs ship jobs to China.

But where have been the decades of protests and riots? And why did America keep electing centrist- to center-right presidents? Even Barack Obama ran in 2008 as more Clintonian technocrat than Great Liberal Equalizer.

The answer is that the data don’t back up those claims of middle-class meltdown. While the portion of American households that are middle-income has declined since the late 1960s, that drop was more than offset by share gains in the upper income levels.

“America’s middle class did start largely disappearing in the 1970s — but it was because they were moving up to a higher-income category,” writes economist Mark Perry at his Carpe Diem blog. Likewise, research from economists such as Cornell’s Richard Burkhauser and the University of Chicago’s Bruce Meyer finds total median household income, adjusted for inflation, up roughly 40 to 50 percent since the late 1970s.

But is the tired, fact-free, left-wing storyline finally catching up to economic reality? It might be, thanks to the increasing ability of smart machines — both robots and the vast, interconnected, digital “second economy,” as technologist Brian Arthur calls it — to substitute for human labor.

Instead of offshoring jobs to Asia, we’re sending to them to Machine Land. And the result will be, according to Average Is Over, by George Mason University economist Tyler Cowen, a sharply bifurcated America in coming decades that increasingly resembles a mash-up between Downton Abbey and Elysium. The middle of the income distribution will thin dramatically. In fact, it’s probably already happening.

While 60 percent of the jobs lost during the Great Recession were mid-wage occupations, 73 percent of the jobs added in the recovery have been low-wage jobs. Many of those disappearing middle-level jobs are what economists call “routine, manual tasks” that can be easily automated. (Cowen also wonders how many are fiscally unsustainable public-sector jobs.)

So if you are one of the maybe 15 percent who are tech-savvy and self-motivated or you “have an unusual ability to spot, recruit, and direct those who work well with computers even if you don’t,” you’ll end up with a wealthy and fantastically comfortable life.

Welcome to the Big-Data-driven hyper-meritocracy, as Cowen calls it, of those who are STEM-smart (smart in science, technology, engineering, and math) or who understand how technology can be used for marketing and management. Cowen analogizes with “freestyle” chess competitors who — even though they are not necessarily the best human players — adeptly use a variety of computer programs to best both unassisted grandmaster and machine.

As for the rest of us who aren’t entrepreneurial self-starters and whose skills don’t mesh so well with technology, “you may want to address that mismatch, ” Cowen writes. If you don’t, you’ll end up — assuming you are conscientious and hardworking — as one of the employable 85 percent whose job it will be to serve the needs of the 15 percent as personal trainers, valets, nannies, and “other forms of direct personal services.”

Hey, the pay won’t be great, but the Internet will provide more opportunities for cheap entertainment, education, and health care. And more people will move to low-service, low-tax, cheap-housing states such as Texas where a buck goes further. Low earners will have to “reshape their tastes . . . toward cheaper desires.”

Is this future of lowered expectations, as plausible as it is, one that must be or may be? Cowen for the most part adopts a detached “It is what it is” posture.

But American policymakers don’t have to be as passive. Education can be improved and reoriented to teach machine-complementary skills. Fewer mandates, along with wage subsidies, can make it more affordable to hire carbon-based life forms or start businesses.

A more pro-investment tax code can help produce the sort of innovation that creates new industries and jobs rather than just making existing ones more efficient. Cheaper urban housing via zoning deregulation would allow more people to benefit from living in the nation’s innovation hubs.

Of course, all our best efforts to maintain shared and increasing prosperity could yet be swept away by Moore’s law. If so, average will be over for good.

— James Pethokoukis, a columnist, blogs for the American Enterprise Institute.

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About the Author


  • James Pethokoukis is a columnist and blogger at the American Enterprise Institute. Previously, he was the Washington columnist for Reuters Breakingviews, the opinion and commentary wing of Thomson Reuters.

    Pethokoukis was the business editor and economics columnist for U.S. News & World Report from 1997 to 2008. He has written for many publications, including The New York Times, The Weekly Standard, Commentary, National Review, The Washington Examiner, USA Today and Investor's Business Daily.

    Pethokoukis is an official CNBC contributor. In addition, he has appeared numerous times on MSNBC, Fox News Channel, Fox Business Network, The McLaughlin Group, CNN and Nightly Business Report on PBS. A graduate of Northwestern University and the Medill School of Journalism, Pethokoukis is a 2002 Jeopardy! Champion.


    Follow James Pethokoukis on Twitter.

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