A quiz: How does the Democratic Party plan to lift stagnant middle-class incomes?
I realize that liberal-leaning economists can give a long, substantive answer to this question, touching on health care costs, education and infrastructure. But most Americans would not be able to give a clear answer — which helps explain why the party took such a drubbing last week.
The Democratic Party’s short-term plan to help the middle class just isn’t very clear. Some of the policies that Democrats favor, such as broader access to good education, take years to pay off. Others, like reducing medical costs or building new roads, have an indirect, unnoticed effect on middle-class incomes.
The fact remains that incomes for most Americans aren’t growing very fast and haven’t been for years. Median inflation-adjusted income last year was still $2,100 lower than when President Obama took office in 2009 — and $3,600 lower than when President George W. Bush took office in 2001. That’s not just because of the financial crisis, either: Last month was another solid one for job growth and another weak one for average wage growth, the latest jobs report showed.
We’re living through the great wage slowdown of the 21st century, and nothing presents a larger threat to the Democrats’ electoral fortunes than that slowdown.
The Democratic Party fashions itself as the defender of working families, and low- and middle-income voters are indeed more favorably disposed to Democrats than to Republicans. Those voters have helped the party win the popular vote in five of the last six presidential elections. But if Democrats can’t deliver rising living standards, many voters aren’t going to remain loyal. They’ll skip voting or give a chance to Republicans who offer an alternative, even a vague alternative.
As the 2016 presidential campaign begins to stir, the central question will be how both parties respond to the great wage slowdown. Neither has offered a persuasive answer so far — let alone a solution — which is why the public mood is so sour and American politics has been so tumultuous lately. The partisan makeup of the Senate has seesawed more over the past decade than in any time since just after World War II. The Republicans won big victories in 2004, 2010 and 2014, the Democrats in 2006, 2008 and 2012.
All the while, incomes keep stagnating, and nothing influences the national zeitgeist quite so much as income trends, for understandable reasons.
What can Washington do? The answers are very different for the short term and the long. Over years and decades, nothing matters more than economic growth. The last period of strong income gains — the late 1990s — was also the last period of strong economic growth.
The Great Wage Stagnation of the 21st Century
Washington could definitely do more to help growth: better infrastructure, a less burdensome tax code, a less wasteful health care system, more bargaining power for workers and, above all, stronger schools and colleges, to lift the skills of the nation’s work force. Countries that have made more educational progress over the last generation have experienced bigger income gains than the United States, and even here the pay gap between college graduates and everyone else has reached a record high.
Yet no mix of these policies is likely to end the great wage slowdown anytime soon. “This is not a silver-bullet issue,” says Gene Sperling, a longtime adviser to Bill and Hillary Clinton and Mr. Obama, “and that’s part of what’s frustrating to people.” In fact, the country is making good progress on several of these issues, starting with health costs, but incomes are still stuck.
Politicians often like to boast that they’ve come up with bold ideas to solve economic problems and then package those ideas as new — a new deal, a new frontier, a new covenant. But most aren’t really new. That’s O.K., too. Truly new ideas don’t come along very often in any field, including economics.
So it goes with lifting middle-class incomes. The best hope for doing so, in the immediate future, is probably the oldest and most obvious play in the book: a tax cut.
A few years ago, a middle-class tax cut would have seemed a silly idea. Both Mr. Bush and Mr. Obama had already cut taxes, and the federal budget deficit was enormous. But the deficit has since fallen sharply, thanks in part to lower health costs. Meanwhile, middle- and lower-income families are reaping a disproportionately small share of economic growth. Having the government try to rectify the situation doesn’t sound so silly now — and probably won’t in the 2016 presidential campaign.
Tumult in Congress
The partisan balance in the Senate has seesawed more over the past decade than at any other time since the early 1950s, while the House balance has changed more since the 1970s.
Obviously, a tax cut doesn’t need to be a Democratic idea. If anything, it’s traditionally been more of a Republican one. But Republicans’ first priority tends to be cutting the top marginal tax rate or the corporate tax rate, changes that mostly benefit the affluent households already doing pretty well. (And history is clear that such tax cuts rarely bring the economic benefits their advocates claim.)
Any presidential candidate — from either party — who can claim the mantle of middle-class tax cutter is likely to benefit from it. For that matter, you could imagine Mr. Obama or reform-minded Republicans in Congress proposing such a tax cut sooner.
The details could be straightforward. The cut could be temporary or permanent. It could involve a decline in marginal tax rates for the middle class or an expansion of tax credits. Mr. Sperling, for example, has suggested giving middle-class and poor families some of the same tax incentives to save for retirement that wealthy people have. Any one of these plans would raise people’s effective income in a tangible way.
Because the long-term budget deficit remains a problem, any such tax cut could be paired with a tax increase for top earners, who — even after the expiration of some Bush-era tax cuts — still face lower rates than they have for most of recent history. “Taxes for high-earning Americans are too low,” argues Roger Altman, the Wall Street executive and Democratic adviser. Most Americans favor tax increases on the well-off, polls show.
The model for such a combination, and for winning the political debate over it, is Mr. Obama’s 2008 presidential campaign. He proposed higher taxes on top earners along with a larger middle-class tax cut than Senator John McCain, his opponent, did. By the campaign’s end, polls showed that many voters understood this fact — and viewed the Democrats as the party of tax cuts.
A middle-class tax cut would not solve all of the country’s economic problems. To be honest, it would worsen some of them — particularly the widespread notion that my taxes are too high and your government benefits are too high. In truth, federal taxes are still low from a historical perspective.
But after 15 years of disappointing income growth, many voters are skeptical of sophisticated economic plans with uncertain, long-term payoffs. They’re looking for simple ideas that can help people immediately. The popularity of minimum-wage increases makes the point: Even as Democrats were going down to defeat nationwide, voters in five states handily approved such increases.
The challenge for the next election will be coming up with a version of the minimum-wage increase that applies to the middle class as well.