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The Choice Ahead

U.S. Secretary of Labor Robert B. Reich

National Press Club in Washington, DC

January 5, 1995

In this new season of Republican dominance in Congress, what is at stake, simply, is the future of working Americans. For a decade and a half, ordinary families have been working harder and getting less, puzzled that somehow they've been disinherited from the American Dream. Our middle class, as I noted on Labor Day, has become an anxious class.

It was this frustration with the present, combined with a fear of the future, that helped make Bill Clinton President in 1992 and Newt Gingrich Speaker of the House last November. If the elections of 1994 were the revolt of the anxious class, the next two years will be a battle for the anxious class's soul. The biggest defections from Democrats last November were among workers who had lost the most -- workers without college degrees. The popular consensus to do something to reverse the breakdown of America's middle class has become an unstoppable political force.

But do what? Today I want to talk about the real choice before us. As Washington speculates about reforms in how Congress does business, we must remember that procedural changes -- however welcome they may be -- are about means, not ends. The end toward which we struggle must be restoring America's heritage of middle-class prosperity. When the hoopla of this week dies down and the hard work of the coming month begins, Americans will rightly apply the following test to the Republican agenda, and to ours: Will this make my family and me better off? It will become clearer and clearer, in the months ahead, that their agenda does not put ordinary working families first. Ours does.

The context of this choice -- somewhat ironically -- is an extraordinary boom in the overall economy. While the employment statistics for December haven't been compiled yet, we know that America has been achieving buoyant job growth -- well over five million new jobs in the past two years, most of them in highpaying occupations. The unemployment rate is lower than it has been in four years, yet there are no signs of accelerating inflation. Even more important is the resurgence of productivity growth, the vital precondition for rising living standards.

Yet while productivity and corporate profits are up, the wages of most Americans are not. This has been the pattern. Since 1979, household incomes have swelled by $826 billion, in 1993 dollars. But about 98 percent of the increase has gone to the top fifth. Everyone else -- 80 percent of American households -- has shared just 2 percent of the income gains. The typical American family is living on less than it did fifteen years ago, adjusted for inflation.

Let me be clear. The problem is not that some of us are getting rich. That's good news. The problem is that most of us are getting nowhere. We are hurtling toward a two-tiered society composed of a minority who are profiting from economic growth and a majority who are not.

The consequences of this erosion extend beyond economics. It helps explain why hard-pressed parents can't find the time to raise their kids the way they were raised, and to pass on the values they grew up with; why voters whose family budgets pinch so tightly are outraged about government inefficiency and waste; why even instinctively generous Americans find their compassion toward the less fortunate flagging; why our politics has become so angry, sometimes ugly.

Perhaps most important are the moral consequences. Put simply, it just isn't right. The glaring, grotesque wrongness of what's happening to hardworking American families spawns despair and cynicism. It affronts our values, mocking the American bargain linking effort and reward. It makes responsible people feel like suckers, and gnaws away at the precious ethic of responsibility. It closes the gate to the very poor. Ultimately, the hollowing-out of the middle class and the creation of a twotiered, class-ridden society poses a mortal threat to what's always been special about our country.

It didn't used to be this way. During the three decades after the Second World War, nearly everyone's income rose as the economy grew. Millions of Americans -- myself included -- were raised to believe in a simple bargain: Anybody who worked hard and played by the rules could earn a better life for themselves and their family. That's anybody -- not just the wellborn, not just the well-connected. Anybody with the drive and discipline to make the most of their opportunities had a decent chance to make it. Corporate America backed the bargain, too. Employees who worked hard and gave it their all could share in their company's success. If the company did well, their jobs were reasonably secure, and their wages and benefits rose.

In the l950s, my mother and father worked six days a week in a small clothing shop, selling skirts and dresses to the wives of factory workers. I remember making signs when they had special sales: cotton dresses, $2.99, blouses $1.00. As factory wages went up, local families had a bit more to spend every year, and my parents' little business grew less precarious. We all did better together. Growing together was the way it worked in America. But today, we are no longer growing together. We are growing apart -- and at a quickening pace.

My parents retired before the new economy elbowed out the old. Most of those factory jobs are now gone. Jobs like them accounted for over a third of all American jobs in the l950s; now, no more than 16 percent. Many of the old service jobs have disappeared as well. Telephone operators have been replaced by automated switching equipment, bank tellers by automated teller machines, gas station attendants by self-service pumps which will now even accept credit cards, and secretaries by computers and voice mail. Any job that can be done more cheaply by a computer is now gone, or pays far less than before. Global competition has accelerated this revolution.

Yet the same forces are creating millions of new jobs, some paying better than ever. The right education and skills don't guarantee a good job in the new economy, and certainly not job security. But it is getting harder to have either without education and skills. The three-fourths of American workers without college degrees have suffered the sharpest drop in wages and benefits. Fifteen years ago, a male college graduate typically earned 49 percent more than a man whose formal education ended with a high-school diploma -- not too large a difference for the two groups to share the label "middle class." But by l993 the average male college graduate was earning 83 percent more than his high-school counterpart -- a difference so great that they no longer inhabited common territory. Women are divided along similar, although less stark, lines.

Thus, the nation's challenge: To restore middle-class prosperity. Thus, the nation's choice: Which path promises to lead us there?

The new Republican agenda defines one path. First, cut taxes on capital gains, even on the sale of assets that investors already own. The theory is that such tax cuts will trigger an economic surge that will raise everyone's income. The problem with the Republican approach to capital gains taxation is not simply that almost all the immediate benefits would go to the well-off, with 45 percent collected by the small fraction of families earning over $200,000 per year. Perhaps more economic inequality would be a tolerable price to pay, if it would reliably boost capital spending, and if more capital spending reliably led to higher incomes for everyone. But the evidence linking their tax-break idea to any significant and sustained investment increase is far too weak to warrant the massive redistribution the Republicans are proposing.

A related proposal is to grant corporations far larger tax deductions for purchasing equipment, machinery, and buildings. This proposal may increase business investment, but at a huge cost: a $169 billion windfall that would essentially eliminate the corporate income tax and resurrect the tax-shelter industry that squandered so much of America's potential productivity in the 1980's. Their corporate tax break proposal is carefully crafted to elude the discipline of the budget process -- a fiscal time bomb set to explode after five years. But the more fundamental problem is that it will not restore the incomes of working Americans. Consider: Over the last 15 years, spending on durable capital equipment, as a share of the overall economy, has climbed by as much as a third. Capital investment has risen. But over the same period of time, most families' real incomes have fallen. Spending on new machines and buildings is necessary. But it is not enough.

A third proposal is to lighten the regulatory burden on business in order to spark higher profits and more job growth. The theory here is that corporations are so entangled in regulations that they are producing paperwork and little else. Release them from these ties, and businesses will increase profits to the benefit of ordinary working Americans. This argument, too, deserves a respectful look. There is no dispute that the benefits of regulations -- even those that protect the health or safety of consumers and workers, fight fraud, and maintain the integrity of financial markets -- should be weighed against their burdens, and regulations which don't measure up should be scrapped. But blaming the middle class's decline on regulations that strangle job creation does not accord with the facts. Job growth is booming today. Indeed -- despite the cyclical ups and downs of the past fifteen years -- employment has grown even while the middle class has lost ground.

The words in which these proposals are couched reflect some cherished economic truths. Private investment is important. Government must be efficient and accountable. Regulations that don't make sense should be fixed or ended. On these points, there is little disagreement. The ultimate question, the real test, is whether their proposals will make working families' incomes higher and more secure -- whether they will put working Americans back on the path to prosperity.

I am convinced that the hard-won evidence of our recent economic history reveals their proposals to be irrelevant to the cause of restoring America's middle class. At worst, they move us in the opposite direction. Their tax proposals will drain the Treasury of so much revenue that -- unless they allow the deficit to explode once again, or unless they subject national defense, Social Security, and Medicare to major cuts -- they would force crippling reductions in education, job training, Head Start, and all other investments in working families. Most of these tax savings, on the other hand, would go to families earning six-figure incomes. And despite their free-market slogans, few Republicans in Congress have shown any inclination to join the President's recent call to curb needless subsidies for well-connected special interests.

They believe -- or they want us to believe -- that the middle class is breaking down because capital spending is insufficient and corporate profits are too low. But these simply are not the root causes of working Americans' distress, and remedying them will not restore prosperity. The core challenge facing Americans is to adapt to a new economy which is fundamentally different from the old; an economy driven by advanced technologies and global competition; an economy in which productive skills are the keys to individual success.

The best way to increase the wages of most Americans is to follow a different path -- one that this Administration has begun to blaze: Equip all Americans to earn their own prosperity in this new economy. The evidence is overwhelming that the sharper a person's skills, the higher that person's wages. Each year of education or job training after high school, whenever it occurs in the course of a career, increases average incomes by 6 to 12 percent.

Most of the good-paying jobs that have been created in the last two years require some technical know-how. That doesn't mean that everyone has to get a college diploma. In fact, many men and women whose traditional education ends at high school can earn comfortable middle class incomes. Gas station attendants are lucky to make $12,000 a year, but an auto mechanic skilled in computer diagnostics can earn up to $70,000. Unskilled assemblyline workers rarely take home more than $20,000, but the yearly pay of a programmer or repairer of computerized machine tools begins at $50,000. All across this country there is booming demand for workers with technical skills -- sales technicians, physical and occupational therapists, desk-top publishing operators, x-ray technicians, computer-aided designers. There is no quick fix to the plight of working Americans. But many technical skills can be learned in a year or two by someone with a high school degree.

Our campaign of human investment is already underway, propelled by a strong bipartisan consensus in the last Congress on the importance of education and job training. Each year, 130,000 additional children are able to enroll in Head Start, a proven first step on the path of lifelong learning. School systems throughout America have millions of dollars in new incentives to improve their performance, in line with voluntary national standards of excellence. Within a few years, a half-million youth apprentices a year will move from the classroom to a skilled job with a future. Three and a half million people who take out education loans each year can now borrow at lower interest rates -- and can repay their loans at the pace their future income allows. We are transforming the old unemployment insurance system into a reemployment system, ensuring that this year alone an additional 150,000 Americans who have lost their jobs will get the skills or the job-search help they need to find new ones.

A few weeks ago the President mapped the next steps, in his call for a Middle Class Bill of Rights. First, a tax deduction for education and job training, starting at $5,000 a year and rising to $10,000 a year within four years. The significance of this idea has been little noticed in the horse-race coverage of competing tax cut proposals. But tuition deductibility is not merely a tax cut; it is pathbreaking tax reform. It puts a family's investments in skills on an equal footing with corporate spending on machines, advertising, buildings, or business lunches.

Under current law, any business spending that conceivably can be called an investment qualifies for favorable tax treatment. Yet the tax code does little to encourage the investment linked most directly to rising middle-class living standards -- investments in education and lifelong job training.

It treats them the same way it does expenditures on water skis or bubble gum. This makes no sense. Our plan would fix it. If companies get a tax break on their investments, so should families.

This means that for a typical family, the after-tax cost of equipping a parent with new job skills, or paying the kids' college tuition, would be cut by 15 to 28 percent. Research suggests that well over half a million Americans each year who wouldn't otherwise get advanced education or job training will do so because of this tax break. And there's little reason to fear that the benefits of the tax cut will be swallowed up by rising tuition. Tuition inflation is already slowing, and competition among the thousands of community colleges, technical schools, and other educational institutions will ensure that most of the gains of tuition deductibility will stay with the families who make the investments.

But bringing the tax code into the 21st century isn't enough. If America is to restore its defining bargain -- that if you work hard and play by the rules, you should be able to get ahead -- we need to completely transform the patchwork of federal employment and training programs. For Americans who are unemployed, or whose wages are too low for them to take advantage of tuition deductibility, the President proposes skill grants of $2000 to $3000 per year, for up to two years. This represents a radical shift from programs to purchasing power. Instead of feeding the budgets of bureaucracies -- federal or state -- we'll channel the resources directly into the pockets of ordinary Americans so they can get the skills they need -- at the time, in the place, in the way that makes sense for them. Workers who need to start new careers, and low-wage workers who need to make a fresh start, will have a new gateway to better jobs--and information on what skills are in demand, to guide them through those gateways.

What the Administration has already set in motion, coupled with the steps the President has just proposed, defines a strategy for empowering working Americans to build a better life for themselves and their families. But it also depends on what happens in the workplace. The future of the middle class will be determined less in hearing rooms here in Washington than in factories and offices across America. Companies must treat their workers not as costs to be cut but as assets to be developed. They may be able to reap short-term profits by cutting payrolls, shifting production to lower-wage nations, replacing older workers with younger and cheaper ones, or substituting temps and independent contractors for full-time employees. But the best-run companies in America are proving that longer-term rewards come through training workers, giving them more responsibility and job security, and linking pay to profits. Forging stronger and more constructive ties between workers and their companies must be part of any plan for restoring middle class prosperity. We are eager to work with Congress and the private sector to develop effective and fair ways to encourage this.

The agenda I have outlined will not create a new middle class overnight. It will take years. But it is the only realistic approach. And it is resonant with American values-that we earn our keep, that opportunity is the solution to inequality, that work is always better than welfare, that people should develop their talents and make the most of their abilities, and that economic growth should work for everyone.

Our solution depends on people taking responsibility, but it gives them a chance to turn their responsibility into results. It doesn't look to government or to corporations to rescue hardworking Americans. It empowers working men and women to prosper on their own.

Our strategy is not entirely new. It owes part of its inspiration to the G.I. Bill of Rights enacted near the end of World War II, which helped trigger the transition from a period of conflict and anxiety to an astonishingly prosperous postwar era. The G.I. Bill gave ordinary Americans a chance at worldclass skills. The rest is history -- indeed, one of the brightest episodes in our history. The dream of a secure, productive place in the middle class became a reality for a majority of our nation's people.

Nor, of course, is there anything fundamentally new about their ideas. Behind the rhetoric of change is a rerun, on a larger screen, of twelve years of Republican government--twelve years of stagnation or decline for most working Americans. We've seen this movie before, and we know the plot.

We are eager to cooperate with Congress in the days to come. But America cannot simply split the difference between the two visions. The choice cannot be sidestepped.

Their long list of tax cut proposals conspicuously omits investments in skills. What's worse, the price of their bid to boost profits and capital spending will be sharp cuts in education, job training, and other investments in working people. Our strategy centers on building skills.

They ask of corporations no other duty than to maximize profits, and imply that if they do so the future will take care of itself. We say there is no automatic link between economic growth and the living standards of ordinary Americans; that link must be forged.

They ask America's middle class to entrust its fate to the masters of physical and financial capital. We want to equip all working Americans to become masters of their own economic fates.

Which is the better path? Which do you believe will make working families better off? This is the choice before us.

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