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OSEC Congressional Testimony

Remarks prepared for U.S. Labor Secretary Robert B. Reich Democratic Leadership Council Washington, DC [11/22/94]

The Revolt of the Anxious Class

The question that has preoccupied Washington over the past two weeks is why American voters, in the midst of a buoyant recovery, reacted so harshly on Election Day to the President's party. There are as many answers to the question as there are pundits in this city, which means that there are well over half a million theories. I offer only one perspective, that of Secretary of Labor -- Secretary of the American workforce -- whose job is to pay special attention to American jobs, and who has spent much of the last 22 months talking with ordinary American workers across this country.

The great American middle class has not shared in the benefits of this recovery any more than it shared in the economic growth of the l980s. True, over five million jobs have been added since January l993, most in high-paying occupations, and we are justifiably proud of that record. But the 110 million existing jobs continue to split between a relative few well-paying ones, mostly for well-educated professionals and executives, and a much larger number going nowhere. True, corporate profits soared 45 percent in the last quarter, and productivity grew at an annual rate of 2.7 percent. But wage growth hasn't matched this pace. True, inflation has been kept at bay. But rising interest rates are hitting middle class families with higher payments on cars, mortgages, and credit cards, while those earning over $100,000 a year -- who own 60 percent of the nation's bonds and almost one-third of all other interest-bearing assets -- have much to gain from the rising rates. True, the Administration has managed, against long odds, to get our economic house in order by shrinking government, cutting spending, and lowering the deficit. But better fiscal management cannot reverse the long-term decline of America's middle class.

This divergence -- most of the middle class being left behind while the overclass breaks away -- has been deepening for fifteen years. Last year alone, the top fifth of American households took home a record 48 percent of the nation's total income, and pocketed 72 percent of the entire growth in incomes. The top 5 percent in particular -- America's overclass -- widened their lead on the rest of the nation last year, taking home 20 percent of the nation's total income and more than 40 percent of all the growth in incomes.

Other factors influenced the recent election, no doubt. But never underestimate the political potency of a declining paycheck. Exit polls on November 8th showed that support for Democrats dropped most precipitously between Election Day 1992 and Election Day 1994 among men who lack college degrees. This group--which includes nearly three out of four working men--has seen its economic prospects shrivel over the past fifteen years, and has suffered a 12-percent decline in average real incomes since 1979.

The old middle class has become an anxious class -- worried not only about sustaining their incomes but also about keeping their jobs and their health insurance. Our large corporations continue to improve productivity by investing in technology and cutting payrolls. In a recent survey, three out of four employers say their own employees fear losing their jobs. Meanwhile, l994 is on track to become history's second biggest year for mergers and acquisitions. But who wins in this $300 billion derby? Certainly not the average American worker. When two industry giants merge, the advantages of the deal often come from layoffs. Across America, I hear the same refrain: "I've given this company the best years of my life, and now they dispose of me like a piece of rusty machinery."

What has happened to the men and women who have lost their jobs? Some have navigated their way to new and better opportunities. But nearly one out of five who lost a full-time job since the start of l991 is still without work. And among those who have landed new jobs, almost half -- 47 percent -- are now earning less than they did before.

In sum, tens of millions of middle-class Americans continue to experience what they began to face in the late l970s: Downward mobility. They know that recoveries are cyclical, but fear that the underlying trend is permanent. They voted for change in l994 just as they voted for change in l992, and they will do it again and again until they feel that their downward slide is reversing.

What so many Americans find shocking about today's economy is the seeming randomness of their fates. On a recent national poll, 55 percent of American adults said they no longer believe that you can build a better life for yourself and your family by working hard and playing by the rules. Of those without college degrees, fully 68 percent no longer believe it. Because they have been working hard, and they are still falling behind.

This isn't the way it's supposed to be in America. Unlike more fatalistic cultures, Americans have always had a deep faith that effort will be rewarded, that you reap what you sow -- in other words, that you earn your fate. If you work hard and play by the rules, you'll get ahead. That was the bargain. For generations, Americans have believed in that bargain, guided their lives by it, passed it on to their children. It's woven deep into the fabric of our culture. It sounds like an economic equation, but it's more than that: It's an implicit moral compact. The conviction that you earn your own fate forms the bedrock for the American ethic of individual worth and accountability.

In the years after World War Two, America built the biggest middle class in history on the foundation of that bargain. We turned our hard work into homes and cars, health care and pensions. The middle class grew, enlarged and enriched still further, as the barriers of race and class and gender slowly began to fall. Poverty reached an historic low. And the sense of possibility grew stronger.

But then something happened. Around 15 years ago, this American dream began to fade. And as it faded, middle class families tried every means of holding on: Spouses went to work, both parents worked longer hours or took multiple jobs, they decided to have fewer kids and have them later, they drew down their savings. But as economist Frank Levy has pointed out, middle class families have pushed these coping mechanisms about as far as they can go. And they still feel they are losing the dream.

We are on the way to becoming a two-tiered society composed of a few winners and a larger group left behind, whose anger and disillusionment is easily manipulated. Once unbottled, mass resentment can poison the moral integrity of a nation, replacing ambition with envy, tolerance with hate. Today the targets of rage are immigrants, welfare mothers, government officials, gays, and an ill-defined "counter-culture." As the middle class continues to erode, who will be the targets tomorrow?

All of which raises the central question: Why is it no longer the case that working hard and playing by the rules reaps a just reward? Why is the middle class fragmenting? Simply this: Hard work is not enough any more, because two emerging forces have rewritten the rules. The first is technology -- largely computer based -- which has either eradicated or devalued every routine job which can be done by a software program, and simultaneously enriched every job utilizing the problem-solving skills of the human brain. The second force is global competition, which has reinforced the same trends, imperiling the jobs of those who must compete with low-wage workers elsewhere on the planet, while rewarding those better equipped to take advantage of new markets for American insights and skills. And we cannot overlook labor unions, whose decline accounts for as much as 20 percent of the increase in wage inequality among American men.

There is another reason, more difficult to quantify but probably no less important: The breaching of the postwar bargain between companies and their employees. It used to be that as companies became more productive and more profitable, employees who worked hard and proved their loyalty could count on steady jobs with rising pay and better benefits. No more.

All the old bargains, it seems, have been breached. The economic bargain was that if you worked hard and your company prospered, you would share the fruits of success. There was a cultural bargain, too, echoing the same strong themes of responsibility and its rewards: Live by the norms of your community -- take care of your family, obey the law, treat your neighbors with respect, love your country -- and you'd feel secure in the certainty that everyone else would behave the same way.

How can we get it back? How can we reconstruct our basic bargains? How can we reverse the erosion of the middle class and the meltdown of our moral core?

It cannot be done by trying to turn back the tides of history -- stopping technological advances or seceding from the global economy. Even were such a neo-Luddite strategy possible, it wouldn't rescue those who are falling behind, only drag everyone down with them. Next week's vote on the GATT accords will reveal whether America's postwar consensus favoring freer trade still endures.

Another choice is conceding that more and more of our wealth will be created by a shrinking number of economic superstars, and then trying to save the middle class by redistributing some of the winners' bounty to the also-rans. Nations have pursued this path for a time, but it is hard to follow forever, and it has never been comfortable for Americans.

Others say the solution is far simpler: Cut taxes and lift the burden of a government which is stifling the middle class. There is no dispute that taxes should be as low as possible, and that government should not spend a single citizen's dollar more than it must. The American voter wants a leaner government, to be sure. But let's not delude ourselves or attempt to delude the nation: Federal income taxes cannot account for the decline of the middle class. Federal taxes -- even including the growing social-security burden on average workers -- took 19.8 percent of middle-income families' earnings in 1980, and take 19.6 percent today.

Some argue similarly that massive tax cuts for the rich will somehow restore the middle class. The claim is that while they may not lift middle-class incomes directly, trickle-down tax cuts, even on the sale of assets that investors already own, will ignite an economic surge that will boost profits and incomes. We have heard this before. In the 1980s, this country ran one of history's most expensive experiments to test this theory. We learned that public deficits can spur a temporary boom, at the price of long-term indebtedness. The rich got richer. Everyone else's income stagnated or declined. And to this day we are paying the bill. Interest on the debt America accumulated under the prior two Presidents alone accounts for $162 billion a year. The dead weight of this burden claims 28 cents of every dollar individuals pay in taxes today. Surely the point has been made. Let's not whip up another toxic economic potion -- a pinch of Laffer, a dash of Darman, the eye of a Newt -- that all of us will pay for in the morning.

The only enduring solution is to equip every American to succeed through hard work--under the new rules. It used to be enough to keep your shoulder to the wheel and be loyal to your employer. But the rules have changed. Now you need to make your own way in the economy, learn new skills throughout your career, be ready to apply them in new ways and in new settings.

Can you get ahead if you play by these new rules? Absolutely. Do the new rules define enough good jobs to support a new middle class? Without a doubt. There is no limit to the ingenuity of Americans, no limit to the opportunities for creating value. A salesclerk who taps PCs to monitor sales and replenish inventories, and who advises customers on the variety of ways to meet the customers' needs, adds substantial value; as does an auto mechanic who can repair the electronic gadgetry under the hood, or the operator of a desktop publishing program who devises new graphic layouts, or the factory worker who reprograms a computer-controlled machine tool for finer tolerances and quicker setups, or the secretary who orchestrates a sophisticated spreadsheet program. In the emerging economy, every job can become more valuable; every person, more valued.

Contrary to some theorists, our destinies do not reside in our genes. Study after study shows that skills can be learned. Every year of education or job training beyond high school -- whenever it occurs in one's life -- increases average future earnings by 6 to 12 percent. GNP is not simply a matter of DNA. Most Americans are on a downward slide not because of some genetic deficiencies, but because they lack the learnable skills to prosper in an economy convulsing with change.

We know we cannot resurrect the old middle class of the first decades after World War Two. The economy has changed forever. What we can do is clear the way for a new middle class -- a middle class equipped to master the realities of the new economy, at least as large but more inclusive than the vast middle class of our younger days. A new middle class with plenty of room for people who play by the rules, without requiring a four-year college degree as the entry ticket. A new middle class that rests on a refinement of the old American bargain: You take responsibility for working hard, you get a chance to work smart.

The private sector has a critical role to play in creating this new middle class. It won't happen unless companies invest heavily in training their workers to use new technologies, and give them authority to make decisions. This is not a matter of charity. The best companies in America, large and small -- Levi-Strauss, Lincoln Electric, LS-Electro-Galvanizing, Anheuser-Busch -- are treating their employees as assets to be developed rather than as costs to be cut. Some are also sharing with their workers the upside gains of the enterprise as well as the downside risks, converting a portion of wages into a share of the profits. I have begun to travel around the country, celebrating the companies and workers that are leading the way in this new compact.

Mark my words: If American industry fails to forge such a compact with their workers, it will jeopardize American competitiveness in decades to come. If American business continues to pursue short-term profits at the price of insecurity and falling living standards for a large portion of our society, it will sooner or later reap the bitter harvest of popular rage. The American public is basically pro-business. But that support rests on an implicit bargain. And business betrays that bargain every time it fires an older worker in order to hire a younger one at a lower wage, provides gold-plated health insurance to top executives while denying its workers health coverage, labels employees independent contractors in order to avoid paying them full-time wages and benefits, or discards its workers rather than invest in them when profits are booming.

But it's not realistic -- it's not even responsible -- to expect business to carry the whole burden. All of us have a stake in rebuilding the middle class, creating ladders into it from the underclass, and restoring the reward for working hard and playing by the rules. If the rules have changed because of advanced technologies and global competitors, then this nation has a moral obligation to help all Americans who are willing to work hard prosper under the new rules.

We have made progress on this agenda in the last 22 months -- an agenda which Al From, Will Marshall, Rob Shapiro, and the DLC have championed: The Earned Income Tax Credit, to help hard-working families stay out of poverty. Low-interest loans to attend college. School-to-work apprenticeships to gain job skills. One-stop career centers to link unemployment insurance to job training. Voluntary skill standards, to know what to train for. All of these have been bi-partisan efforts (which partly explains why they received so little coverage in the media). They already have helped real people get new and better jobs.

These initiatives, however important, are only a bare beginning. If this society is to reverse the long decline in living standards of American workers, a far bolder strategy is necessary. Incrementalism just won't do; if there was any doubt on that point before November 8, there can be none today. First, to be sure, let's accelerate the agenda of reform: Streamline and consolidate the current clutter of adult education and job-training programs, and pull the plug on programs that don't work. But reform is no longer enough -- we need to reinvent lifelong learning. Instead of feeding the budgets of bureaucracies -- federal or state -- let's channel resources directly into the pockets of ordinary Americans so they can get the skills they need -- at the time, in the place, and in the way that makes sense for them. In other words, let's put people first. And finally, let's make sure that Americans have up-to-date information on what skills are in demand and likely to stay in demand, and where they can get those skills.

How to pay for this, on the scale required to reverse the downward slide? The federal budget is already strained. The DLC's Progressive Policy Institute has suggested at least one possibility -- one that squares with the voters' distaste for halfway approaches. It has compiled a formidable list of special tax benefits for particular industries, totaling over $111 billion over 5 years. I invite the other great think-tanks of this city -- the Heritage Foundation and the Cato Institute, to pick two at random -- to add to the list their own examples of business subsidies that don't make sense. Since we are committed to moving the disadvantaged from welfare to work, why not target corporate welfare as well, and use the savings to help all Americans get better work? Ending corporate welfare as we know it is a worthy goal, made all the worthier if it frees funds for investments in workers. "Welfare to work," in the fullest meaning of this phrase -- including cuts in corporate welfare to pave the way to better work -- offers a powerful theme for the 104th Congress.

What America must do, fundamentally, is to empower every man and woman to earn their way into the new middle class. This is the Administration's central mission; we must not be distracted by secondary concerns or entangled in partisan wrangling. We are eager to cooperate with the new leadership in Congress on how best to rebuild the middle class. But there will be no compromise in our commitment to this mission. Because America's real choice for the coming decades is between strenuous measures to restore our middle class tradition, and equally strenuous -- but infinitely sadder -- efforts to accommodate ourselves to its disappearance.

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