An excerpt from EPI’s forthcoming "State of Working America"

I haven’t had a chance to read the whole thing yet, but the Economic Policy Institute, by far the best progressive economic research not-for-profit in the US, has published a chapter from its forthcoming 2006-2007 State of Working America report. The chapter is called “International Comparisons: How Does the United States Stack Up?”, and it provides an interesting frame of reference in which to view the health of our domestic economy vis-a-vis the middle class.

No question GDP has continued to post increases since the end of the 2000-2001 recession, but the distribution of wealth has continued to favor the already wealthy, leaving the lower and middle classes far behind. As Elizabeth Warren, a professor at Harvard Law School and a blogger at TPM Cafe recently pointed out, “the vice has continued to tighten on the Middle Class.” According to Warren:

Rapid inflation coupled with slowly-rising wages put the squeeze on every worker. But Americans owe more money than ever before in history—an average of 108% offf their annual incomes. The rising cost of servicing that debt acts like a multiplier, increasing financial pressures even if family spending stays steady.

The debt squeeze didn’t just happen on its own. When Congress and the Supreme Court combined to get rid of interest rate caps on credit cards in the early 1980s, the stage was set for credit card interest rates to float completely out of sight. When mortgage companies, cheered on by Alan Greenspan, marketed variable rate mortgages to millions of families, the good times of low interest were bound to be followed by the tough times of high interest.

Interest rate fluctuations may be a fact of a modern economy. But whether those rate fluctuations will be borne collectively by the institutions that issue consumer debt or one-at-a-time by the families who face rising costs and flat incomes is a matter of deliberate public policy. Current policy says individual families bears those risks. These families lack both the information advantages of big institutions and the ability to spread their risks over millions of other customers and longer time horizons, but folks like Alan Greenspan urged them to take on interest rate risks. Now weÂ’re beginning to feel the effects of some of those policy choices.

These are just a few of the problems Middle Class Americans are facing in trying to get ahead in the 21st Century. But to put it simply, the gap between the rich and poor is growing into a chasm.This is not a liberal/progressive vs. “centrist” or even strictly a Democratic issue: this is an issue of basic economic fairness that effects hundreds of millions of people.

So back to the EPI report–how does the US, with the largest economy in the world–stack up with other countries?

To quote from the report:

While the United States is, on average, a very wealthy country, it also has a large variance in incomes between those at
the top and the bottom of the income scale. Large variances in incomes make it difficult for economic growth to reach those at the bottom. Therefore, while it is true that many people in the United States are well-off, many are not. In fact, inequality is greater in the United States than in any of the other OECD countries. Moreover, inequality in the United States (along with the United Kingdom) has shown a strong tendency to rise, even as inequality was relatively stable or declining in most of the other OECD countries. Poverty and child poverty rates are the highest in the United States, as is the infant mortality rate. The de-emphasis on redistributive social policies only exacerbates the high levels of poverty and income inequality in the United States.

Second, many OECD countries with strong unions, worker protections, and higher taxes have caught up with, and in many cases, surpassed U.S. productivity while achieving lower unemployment rates. It is telling that so many European countries have been successful and productive within the more “rigid” European economic models. It is not a given that economies that have strong welfare states and labor protections are necessarily less productive and/or inferior to the economic model that characterizes the United States.

This is only a brief summary from the first two pages of the chapter; of course the findings are much more nuanced than this. But you get the point–the US economy continues to grow, but income inequality continues to grow much faster here than in most OECD countries. Additionally, the fact that poverty, child poverty and infant mortality rates are higher in the US than in countries with much smaller GDPs and GDP growth raises the obvious point that economic policymakers here don’t seem to have the right priorities in place.

Also, for some historical background on the trend of rising income inequalities, see here, here and here. And read this great article from The Atlantic Monthly (subscription required) which traces the history of the Middle Class in America , explains why it is disappearing and offers up some sensible policies for saving it from extinction.

(Another great organization, which focuses more on government budget issues, is the Center for Budget Priorities and Policies. I am a big fan of their work as well, especially when they conduct research in conjunction with EPI.)