This Time, We Can't Leave the Middle Class Behind

Even before we got to the White House, the President, the Vice President, and the economic team were crafting policies designed to offset the deepest recession since the Great Depression. Back in mid-December of last year, I remember a meeting in Chicago, with the snow swirling outside, as we began to plan the Recovery Act, the financial stabilization plan, and housing relief, all in the context of a budget that would bring down the trillion-plus dollar deficit we were about to inherit as quickly as possible.

I also remember the Vice President talking about the difficulties facing the middle class, struggles that predated the recession. With the campaign fresh in their minds, he and the President recalled that even in supposedly good times, when the economy was expanding and unemployment was low, the families they met on the trail were having far too much trouble making ends meet. Saving for college, paying for health care, keeping up with the mortgage payments … just making their basic budgets balance out at the end of the month seemed awfully hard in an economy that was supposedly solid.

Of course, that solid economy was fading fast; the recession was a year old, unemployment was rising, and helping people get back to work had become our top priority. But the longer-term, structural challenges that have been facing the middle class since long before the recession began were never far from the President’s mind, which is why, shortly thereafter, he asked the VP to chair the Middle Class Task Force.

Today, in August of 2009, we’re faced with yet another set of realities. After falling at a rate of about 6% from the last quarter of 2008 through the first quarter of this year, a rate of decline we hadn’t seen in half a century, the economy contracted at a 1% rate in the second quarter of 2009. Yes, our economy is still ailing, but six months ago, economists worried the recession would descend into depression; now they’re asking when recession will become recovery.

Here in the White House, however, recovery means something very specific, and it’s different than what economists generally mean when they talk about it. According to the panel that decides when recessions officially begin and end, you don’t need job growth or falling unemployment to declare that a recovery is underway. In fact, in the last two recoveries, it took 15 and 19 months, respectively, before the unemployment rate peaked.

That definition doesn’t work for us. No jobs, no recovery.

But — and this is the real subject of this post — job growth isn’t enough either. Remember, unemployment fell to below 5% at the end of the last expansion, but middle-income families ended up worse off, in real dollar terms, than they were before that expansion began. The productivity of our economy increased by 19% from 2000 to 2007, but the real median income of working-age households fell $2,000. The share of Americans living in poverty was actually higher in 2007 than it was in 2000.

How could this happen? In fact, the arithmetic is disarmingly simple. If the economy’s growing, but middle-class and low-income families are falling behind, then the growth must be accruing to the top of the scale. And that’s exactly what happened.

Some of the best data on income inequality are collected by two economists: Emmanuel Saez and Thomas Piketty. Their data go back almost to the beginning of the last century, allowing us to make some pretty amazing observations, like the one shown in the figure below. Income concentration, measured as the share of income going to the top 1% of households, was higher in 2007 (23.5%) than in any year on record going back to 1913, with one ominous exception: 1928, the height of the speculative, bubbly "roaring 20s" and the year before the stock market crashed and the Great Depression began.

For middle-class families to be part of the next recovery, this trend must reverse.

Yes, we want to see a GDP recovery take hold as soon as possible, and once we start seeing robust, consistent job growth we’ll know we’re solidly on track. But even then, we won’t be done: not until the prosperity we’re generating reaches everyone who’s contributing to it, not until all the bakers get their fair slice of the pie—not just the owners of the bakery or the investors in the bakery, but the men and women who are actually doing the work.

Here’s what the President said about this way back in February 2007, when he announced his candidacy:

Though he may not have realized at the time, the President-to-be was really describing the work of the Middle Class Task Force. Vice President Biden, the Task Force staff, and our members at all the cabinet agencies will do everything we can to make sure that the next recovery lines up very differently than the ones in the graph above. The middle class won’t get left behind again.