Today’s Era Need Not Kill the Middle Class

22.08.14 Publication:

When we are in trouble, we often look for a grand, systemic, ideally epochal explanation, one that defines it as being somehow new and unprecedented, or at least as far bigger than previous troubles. This is comforting—it is more heroic to fight new battles than to repeat old ones. But it also dangerous, as it erodes our sense of responsibility by casting us as victims of history, as sufferers from vast, perhaps irresistible forces, rather than from our own, more mundane mistakes.

In my view, that instinct is the background to the idea, explored fascinatingly in La Stampa on August 19th, that Western countries are experiencing “the end of the middle class”, and that we must get used to the idea that progress, at least measured in terms of rising living standards for successive generations of the average members of our populations, has come to an end.

Of course, either of these things might happen in coming years. It would be complacent to rule out such a disaster as a possibility. But there is no convincing evidence at present to support the idea that Western countries and their middle classes are stuck ineluctably in a long-term economic decline rather than struggling (as we clearly are) to emerge from an unusually severe and long recession.

In fact, if I look for long-term, structural trends in the West, then they point to the opposite conclusion, at least about classes: the coming decades could be a golden age for the middle class. If those trends bring calamity to any class, it is likeliest to be the working class, the poorest groups in society.

Think of the long-term trends we are familiar with. Economies dominated by knowledge rather than physical work. Rapid technological change, which favours those with creative skills and tertiary education. Ageing demographic structures, which favour people with better health and the mental skills to be able to remain in the workforce for longer. These are middle class characteristics, and in an age when western societies typically send 40-50% of their young people to university they are getting more widespread, not less. The working class are the ones who will be hurt most.

So how has this idea of “the end of the middle class” taken hold? Partly, it is because of American commentators’ domination of international discourse. Americans have what in my view is a strange definition of “middle class”: in their eyes, that class is typified by a General Motors factory worker. And that view is buttressed by citing statistics showing that average hourly wages have barely risen, in inflation-adjusted terms, over the past quarter century.

Such workers have indeed fared badly, in the face of recession, technological change and global competition. Yet manufacturing workers make up only around a tenth of the American workforce (compared with about 15% in Italy), so to align the term “middle class” with them is highly misleading. And those wage statistics are the wrong place to look: the right place is average household incomes, especially as more households now have several breadwinners and perhaps some pensioners too. Those incomes have shown a steady rise. That rise has been outpaced by the rising incomes of the rich, as inequality has risen, but the middle class has not ended, on this evidence.

There is also a widespread confusion of short-term facts and long-term trends. The short-term fact—one that has lasted for a painful six years now—is that since the western financial crisis began in 2008, people on middle incomes have indeed suffered more than the wealthiest. Quite apart from the other advantages held by the wealthiest 10% of society, central banks’ policies of huge expansions to the money supply have helped anyone who owns equities, bonds or property, of which the wealthy have more than most.

So the middle class has suffered, and is certainly going through a difficult period. But let’s not forget that it is the poor who have suffered the most, whether in Italy, the rest of Europe, or America.

That point is reflected too in the votes for extremist political parties. The most dramatic protest votes in May’s European elections were those for Britain’s UKIP and France’s Front National. Both parties do have plenty of bourgeois supporters, but their core voters are poor, white and working class. Those, after all, are the people likeliest to feel that their jobs have been stolen from them by immigrants or by automation. It is their alienation that is the biggest threat to our democracies, not that of the bourgeoisie.

Now, those who are worried about the state of today’s middle class could well respond to my analysis by saying: yes, fine, but what if your short-term facts do last for longer and longer? Larry Summers, former US Treasury Secretary, has warned that western economies might now suffer from “secular stagnation”, from many years stuck with slow or no growth, rather as Japan has been since the mid 1990s.

A first response is to say that Japan confirms my point: there, the middle class have fared reasonably well, while inequality has grown and along with it poverty. The second response is to point out that worries about short-term troubles turning into long-term diseases are hardly new: the job of policymakers is to deal with that.

In the 1970s, we in the West came to believe that high inflation coinciding with rising unemployment might be our permanent condition. Moreover, when I graduated from university in crisis-ridden Britain in 1978, many of us worried that the era of rising living standards for each generation might be over. That partly explains why Britain elected Margaret Thatcher as its prime minister in 1979. When I was a student, about 15% of my age group went to university; today the figure in Britain is over 40%.

In his editorial on August 19th, Gianni Riotta reminded us of a book published in 1989 by Paul Krugman, the American Nobel-prize winning economist, called “The Age of Diminished Expectations”. The key point about this book was that it was looking for grand, epochal explanations, but turned out to be wrong. It had followed a gloomy decade in the US (a decade that in Europe too was known as “Euro-sclerosis”, by the way) of high unemployment, budget deficits and seemingly invincible Japanese competition. The book in fact marked a turning point to a new American economic boom, during which the Clinton administration repaid federal debt and living standards rose, strongly.

Moreover, the title sends us in completely the wrong direction. Between 1960, say, and 1989 when Krugman wrote the book, and in fact between 1989 and today, in both America and Europe expectations have not diminished but have risen, hugely. That, indeed, is part of our current predicament: a correct question to ask would be whether we can still afford the much higher expectations that we now have, compared with those of 20, 30 or 40 years ago, expectations about education, pensions, health, job security, travel, technology and more, expectations that our parents and grandparents could only dream of.

Looking into the future, we cannot, by definition, know whether or not our generation will meet this challenge. To do so, we ought to recall how new many of our middle-class expectations really are, to avoid simply taking them for granted. But we should also not evade responsibility by treating the world as unchangeable, as the product of mysterious structural forces beyond our control. Our parents and grandparents solved the short-term crises that they faced. Our task is to do the same.