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Saving the middle class

By Peter Morici
web posted January 2, 2012

The hollowing out of the middle class is a potent campaign issue. Almost everyone -- even affluent professionals and entrepreneurs -- want to identify with the middle class, but increasingly, the genuine middle is a tough place to be.
 
Since 2000, the median income of working age households has fallen more than 10 percent. With the top 25 percent of earners grabbing a much larger slice of a shrinking pie, income losses for folks in the middle and working classes are much greater.

Lost jobs and stagnant wages have put 100 million Americans -- one in three -- below or close to the poverty line. Ten million Americans are permanently unemployed -- many are displaced professionals or recent college graduates.

Globalization makes American technology, finance and resources more valuable, and individuals producing and managing those enjoy soaring incomes. But free trade pits ordinary American office and factory workers against legions of capable Chinese and others, and destroys jobs without creating enough new opportunities in exporting activities.

China and others are careful not to let free trade suck them into permanent dependence on western technology and banks. Their governments require American and European firms to establish on their soil R&D, sophisticated manufacturing activities and financial activities.

Through business acumen and shrewd government policy, emerging economies have captured more of the jobs and wealth that globalization creates than the free play of markets would require. U.S. policymakers cry foul but those governments will not willingly abandon successful approaches to economic development. To rebuild prosperity and the middle class, Washington must better grasp statecraft and rethink approaches to free trade.

Taxing the rich to finance longer unemployment benefits or a $20 a week payroll tax holiday are palliatives. To create enough high quality jobs and sustain the middle class, America must better play its strengths in technology, resources and finance.

American technology is buttressed by a superior network of colleges of science engineering and corporate R&D activities, supported by federal grants, loans and tax breaks.

Too many engineering students are foreign born and return to their home countries -- taking American technology to compete for U.S. jobs. Universities should be required to adjust admissions and tuition policies to ensure more engineering students are educated to work in the U.S. economy. High schools should emphasize the importance of studying science and engineering as a national value, much as they promote social activism, multiculturalism and careers in public service.

Too often, federally supported R&D results in patents worked abroad -- consider how little Apple or Microsoft technology results in U.S. manufacturing jobs. Federal policy should require that patents accomplished with some federal support be worked in the United States to be honored by the courts, otherwise competing firms should be permitted to manufacture those products here.

Innovations in solar power and other alternative energy technologies will dramatically reduce petroleum use in 20 or 30 years, but for now, the United States will continue to use oil and import 10 million barrels a day, greatly taxing jobs creation and growth.

At $100 a barrel, prudent development of U.S. reserves could cut imports in half, and coupled with better use of abundant natural gas and wiser application of emerging internal combustion technologies, the United States could become an energy exporter within a decade. All that is lacking is the national leadership.

For decades, Wall Street financial houses accelerated U.S. growth -- innovative products fostered the more efficient use of capital. But in recent years, those creative energies morphed into the buccaneer pursuit of big bonuses and nearly dealt a lethal blow to American capitalism.

The recent crisis and new regulations are causing large Wall Street banks to acquire regional institutions who cannot cope with the quagmire of federal rules, concentrating control over capital and causing banks again to focus too much on trading and not enough on making loans, especially to heartland businesses.

The time has long passed to separate again commercial banks from the Wall Street casinos, break up the largest banks so that none controls more than 5 percent of U.S. deposits, and offer banks more streamlined regulation befitting the purpose of taking deposits and making loans. Leave the financial engineering to the cowboys on Wall Street but don't let them bring their six shooters into town.

The agenda to restore growth and the middle class is clear. It's not Robin Hood policies -- those won't halt economic decline. Rather, it's the tough work of ensuring engineers educated and technologies developed in America build America, developing conventional energy instead of sending environmental challenges and jobs abroad, and cutting banks down to size to again serve their communities. ESR

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. Follow him on Twitter.

 

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