The “New Rules Economy” – A growth agenda for the middle class

The rules for middle class success have changed. Here's what the middle class needs and how government can help.

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Editor’s note: The following piece is an adapted excerpt from The New Rules Economy, a paper published in 2007 by Third Way whose authors include Anne Kim, Jim Kessler, Adam Solomon, Bernard Schwartz and Stephen Rose. Some of the data have changed – but only to the extent that the trends highlighted below have increased in magnitude. The policy prescriptions laid out below are as relevant today as in 2007.

 

This world is going too fast. Improvements, politics, reform, religion—all fly. Railroads, steamers, packets, race against time and beat it hollow…. Oh, for the good old days of heavy post coaches and speed at the rate of six miles an hour!

Philip Hone, former mayor of New York, 1844

 

At every level of American society—geopolitically, technologically, economically and socially—the last few decades have brought vast and dramatic change. Just as Philip Hone and his contemporaries debated the deep and rapid structural change that accompanied the Industrial Revolution, conservatives, liberals and moderates today are grappling with the shifts brought on by the Information Age and how, or whether, government should respond.

Conservatives would leave it up to individuals to decipher and navigate the new rules on their own. As for government’s role, their answer is a modern echo of 19th- century laissez-faire economic policies: “Government is not the solution… government is the problem,” in the words of President Ronald Reagan.

On the other side of the political spectrum are a growing number of progressives whose philosophy can best be described as “neopopulism.” Neopopulists see change as mainly a threat that requires American economic policy to turn inward. They believe that the tide of change will bring an unfettered race to the bottom, in which the rich get inexorably richer while the rest of America works harder to earn less.

Capitalism, they argue, must be vigorously restrained, and workers shielded from the risks of competition and from corporations in search of a better, cheaper, faster way to produce goods and services. Reviving old suspicions about capitalism and markets, neopopulists want government to rewrite the rules to recapture a bygone era. It’s an idea that itself is deeply conservative—to turn back the clock “to reinvent the managed capitalism that thrived between the late 1940s and early 1970s,” in the words of Robert Kuttner.

Both sides see change through an ideological prism that pits markets implacably against government. As a consequence, both conservatives and neopopulists overstate the power of their chosen “side” to rewrite the rules of the economy. And while economic conservatism is premised on the myths of an infallible market and incompetent government, neo-populism is premised on the myths of a failing middle class, a declining America, and omnipotent corporations.

We urge a different approach: “progressive realism.”

Realism means recognizing and understanding the economy’s new rules while accepting the limits of government’s power to stop the forces of change. But as progressives, we also believe that government policies—if modernized and adapted to the rules of the 21st century—can create the optimal conditions for increasing economic growth, expanding middle-class prosperity and protecting those who fall behind.

As progressive realists, we do not doubt that change is disruptive and, for many people, painful. Globalization has made many jobs obsolete, and both companies and individuals have been hurt by its impact. As the neopopulists note, all is not well with the middle class. But we also see the current era of change as one of tremendous opportunity and potential for the middle class.

Unlike both conservatism and neopopulism, this approach is profoundly optimistic. In contrast to conservatism, progressive realism involves a positive belief in government’s ability to foster new middle-class opportunity. And in contrast to neopopulism, it has faith in the basic strength of the American economy to grow and in the ability of middle-class Americans to succeed.

Described below are the most significant ways in which the rules for success in the economy have changed for individuals and for families. Defining these “new rules” helps to isolate the gaps in current public policy and to set out guideposts for modernizing and updating government. And by laying out the core truths of today’s economy, we take the first steps toward defining a progressive realist framework for re-imagining public policy in the 21st century.

In the past, successful forward-thinking government policies have harnessed economic progress in ways that increased America’s prosperity while creating a fairer society. From the passage of the Homestead Act to the creation of land grant universities, Social Security, the GI bill, rural electrification and the interstate highway system, government programs have helped the nation capitalize on change, navigate new rules and spread prosperity.

As President Clinton said in his second inaugural address: “At the dawn of the 21st century a free people must now choose to shape the forces of the Information Age and the global society, to unleash the limitless potential of all our people, and, yes, to form a more perfect union.” His aim of building a “bridge to the 21st century” was not just rhetoric but a governing philosophy to prepare America for a radically changing world. The progressive realist approach can best replicate those successes today.

The New Rules Economy for Individuals: Working Smart

In the past, a high school diploma was the ticket into the middle class and even into the wealthiest quintile. A “good” job was in a factory, and climbing the ladder meant loyalty to, and rising up the ranks within, a single employer.

Today, the price of admission into the middle and wealthy classes has gone up. It’s no longer enough to work hard and play by the rules. In today’s economy, Americans must work smart and play by new rules if they are to increase their earnings and wealth. Workers need to be educated, flexible and have the ability to chart a career that spans multiple employers or industries. They also need help with a new requirement: the ability to grow and manage some degree of wealth.

Public policies, however, are still designed for an era when high school was sufficient, manufacturing dominated the economy, the workforce was less mobile and only employers were investors.


Old Rule:
Success required a high school diploma.

New Rule:
Success requires a college degree.


As recently as 1960, high school graduates were a minority of American workers—49 percent. Today, more than 90 percent of American workers have at least a high school diploma.

While this achievement is a triumph of 20th century public policy, it is based on an old model for success. Under the old rules, workers could do quite well with only a high school degree. Under the new rules, they probably won’t.

In 1973, the top income quintile was populated with as many high school grads as college grads. By 2004, the ratio of college degrees to high school diplomas in the top quintile was four to one.

For men with high school diplomas, median real earnings peaked in 1974. High school graduates earn 13 percent less today than they did 30 years ago while college graduates make nearly 20 percent more. Over the course of the typical career, college graduates will earn about $900,000 more than high school graduates.

Despite the growing advantages conferred by a college degree, less than one-third of today’s workers are college graduates. It’s a percentage that has risen by only nine percentage points in the past 25 years.

For more Americans to succeed today, government must shift its focus to a new goal of increasing college participation and graduation rates. Its first task is to deal with costs. College tuition has risen faster than inflation every year for the last 26 years. In 1993, 50 percent of students graduated with debt, the median amount of which was $12,100 (in 2004 dollars). In 2004, 64 percent of students graduated with student debt at a median amount of $19,300—a 58 percent real increase.

Second, public policies must address college dropout rates. Nearly two-fifths of those who matriculate never graduate—a failure rate that resembles those of broken urban high schools. While finances are a factor for some students, research shows that college preparedness is equally if not more critical.

Third, opportunities for higher education shouldn’t end at age 22. In today’s economy, a college degree is valuable regardless of the age at which it’s earned. This is particularly true in today’s economy, when the demands of globalization are requiring more workers to reinvent themselves to succeed by upgrading or adding new skills.

Finally, parents must want to and intend to send their children to college. Government must encourage and raise the expectations of parents for themselves, their children and their schools.

Policy goals for the New Rules Economy

  • Address college affordability through tax deductions and credits aimed at middle class families.
  • Determine causes of and propose solutions for lowering college drop-out rates.
  • Continue to reform public K-12 education, and make college preparation the goal of every high school.
  • Address the barriers to college, such as teen pregnancy, that lead teens to make short-term choices.
  • Make college graduation a universal aspiration for all families, and encourage parents of school age children to make the home a learning environment.
  • Eliminate the term “non-traditional students,” and encourage adults to go back to school to gain a degree and learn new skills by offering generous grant or loan programs for adults who want to—or are forced to—pursue a second career.

 


Old Rule:
“Good” jobs were in factories.

New Rule:
“Good” jobs are in offices.


Under the old rules, a place on the assembly line was at least as good as a desk. Under the new rules, a job in an office holds far more promise than a job at the plant. In 1960, manufacturing accounted for more than one-third of American jobs. Today, manufacturing employs less than 15 percent of Americans.

In the same way that America once led the world in manufacturing, it now leads the world in services. In 2005, U.S. services exports totaled $396 billion above the $183 billion in services exports from the second-ranked United Kingdom. High- skilled services workers (office, education and health care workers) outnumber factory workers by a ratio of seven to one, and these new jobs are increasingly well-paid. In 2005, the average office job paid $51,814, compared to $39,437 in manufacturing.

Most of the growth in services jobs has occurred in high-skilled “smart” jobs, such as finance and management, computers and information technology, not low-skilled services such as retail. Since 1979, the economy has created 23 million new office jobs, accounting for 53 percent of all new job growth, while low-skilled service jobs have grown by 10 million and construction and blue-collar manufacturing jobs have declined by 70,000 over the same period.

America will always have a manufacturing base, but it is unlikely ever to enjoy its former pre-eminence. Since the fall of the Berlin Wall, the world has added several billion new low-skilled workers. By some estimates, it could take as long as thirty years to absorb the additional labor. Moreover, because of productivity gains, American manufacturers are able to produce the same amount of goods with increasingly fewer numbers of people. In 1970, the American steel industry employed 570,000 workers to produce 91 million short tons of steel. In 2004, the industry employed 156,000 workers to produce 103 short tons of steel.

Nevertheless, while hands are fungible, brains are not, and that is America’s advantage. While past government policies have supported and nurtured the manufacturing sector, there is a dearth of equivalent policies geared to helping services sector workers cope with change and prosper. Government should help workers invest in themselves so they are better equipped to take advantage of service- sector job opportunities. And for those workers whose livelihoods have been casualties of the decline in manufacturing, we should provide a modernized and robust set of transitional services designed to better equip those workers for future employment.

Policy goals for the New Rules Economy

  • Improve workforce development for service-sector workers, such as by broadening opportunities for continuing education.
  • Provide more robust transitional assistance to people who lose jobs in manufacturing so they are able to renew their careers in other fields.
  • Create pre-emptive training and education policies to help workers in manufacturing and low-skilled service jobs gain new skills in better-paid growth industries while they are still in their current jobs.

Old Rule:
Climbing the ladder meant rising up the ranks within a single company.

New Rule:
Climbing the ladder means chasing opportunities with multiple employers.


Under the old rules, seniority was synonymous with success, and workers sought lifetime security with a single employer. Under the new rules, individuals are just as likely to be free agents.

Since 1983, median job tenure for men has plummeted—down 44 percent for male workers between the ages of 55 and 64, 39 percent for workers ages 45 to 54, and 34 percent for those between the ages of 35 and 44. While some of this is due to layoffs and downsizing, it’s also workers who are expecting to move. Nearly half of all workers say they expect to change careers in the future. 61 percent of Americans say they’ve switched from one type of work to another, and 39 percent of workers say they’ve switched at least twice. Moreover, a small but significant number of high-skilled workers are opting for alternative work arrangements as independent contractors, consultants or as employees with temporary placement firms.

But while most workers are moving onward and often upward, government policies are still geared toward a model of static and permanent employment. Affordable health insurance is lacking for workers in transition; COBRA is expensive and limited. Pensions and retirement accounts are far less portable than they should be, and nearly half of all workers cash out their 401(k)s when moving from one job to another. Even the unemployment insurance system is largely aimed at full-time, permanent workers. Most part-time workers are ineligible for benefits, and many states disallow benefits for workers enrolled in school or training programs.

Self- employed contractors and consultants do not have easy access to affordable health insurance because they are outside the employer-based system.

Government should eliminate all barriers to employment mobility—an outcome that makes sense for individuals who should not be penalized for seeking to further their careers.

Policy goals for the New Rules Economy

  • Provide full health care portability for workers in transition and independent contractors and better access to low-cost transitional health insurance instead of COBRA.
  • Eliminate pension vesting requirements for defined contribution plans (currently 3 years).
  • Create mandatory, automatic and portable 401K accounts that are owned by the worker and to which employers contribute.
  • Reform unemployment insurance to allow for reeducation, retraining, and labor mobility.

Old Rule:
Wealth was managed on behalf of workers.

New Rule:
Workers need to manage their wealth


Under the old rules, decisions about retirement security rested largely in the hands of professional money managers who ran pension funds for big companies. In 1975, defined-benefit pension plans were the most common employer-sponsored retirement benefit, with 87 percent of covered workers participating

For long- tenured workers at financially healthy companies, pensions were ideal. So long as the company stayed in business, the individual risk was low.

Today, almost everyone has to act as their own investment expert with responsibility for their retirement security. Between 1985 and 2004, the number of defined benefit plans fell by more than 82 percent.

There are only about 31,000 traditional plans active today, and nearly half (46 percent) are for public employees.

Most workers today participate instead in defined contribution plans, most commonly a 401(k). In 2004, 63 percent of workers were covered by a defined contribution plan only, while only 20 percent still had only an old-style pension.

Some policymakers see this shift as an unequivocal negative for workers, but success largely depends on knowing and navigating the new rules. For those who invest early, invest wisely and let the nest egg grow, a defined-contribution retirement plan can bring returns as good as or better than a pension. For young workers and women who tend to change jobs or move in and out of the labor force, a defined- contribution plan also avoids the penalties imposed by long vesting periods that are typical of old-style pensions.

And in today’s economy, when corporations often merge into and out of existence, and many large pension funds are shaky or already broke, severing workers’ fortunes from that of a single company can in some instances offer more security.

But too many workers don’t know the new rules and are in danger of coming up short in their retirement. Government policies are still geared toward an era when pensions were far more common; aside from Social Security, the Pension Benefit Guaranty Corporation is the only major government institution dedicated to middle- class retirement security.

As a consequence, American workers aren’t getting the help and basic knowledge they need to maximize their retirement wealth. One in five American workers eligible for a 401(k) chooses not to participate.

And as many as 45 percent of workers who switch jobs cash out their 401(k)s—despite the 10 percent penalty. The cumulative impact of these kinds of errors can be costly. A study by the Center for Retirement Research shows that if a typical worker invests in a 401(k) early and wisely, this retirement nest egg should equal about $380,000.

But the real median retirement savings for workers between 55 and 64 is $60,000. And with the typical retirement lasting upwards of 18 years, careful planning is becoming increasingly important.

21st century public policies must guide workers through the new rules of building retirement wealth. Saving should be easy, automatic and early.

Policy goals for the New Rules Economy

  • Mandate minimum employer/employee pension contributions and make maximum 401(k) contributions the default option.
  • Encourage more companies to provide investment advice to their workers.
  • Provide financial education in schools and provide greater access to basic financial education and investment planning for adults.

 

The New Rules for Families: The Scarcity of Time

If the 20th century belonged to men, the 21st century belongs to women. Between 1975 and 2005, the U.S. economy created a net of 56 million jobs, 32 million of which went to women. Whereas real wages for men without a college degree have declined since 1974, wages for women at all education levels have increased. Very shortly, American women will be more educated than American men, holding a majority or supermajority of college and professional degrees. Women are not just participants in the workforce; they are its new leaders.

Public policies, however, are decades behind and still rooted in a single-earner model. Women with young children now routinely work outside the home, which has created a new set of pressures for families. Child care is expensive and its quality uneven. And in addition to caring for children, many families now have the added responsibility of caring for aging parents. For many families today, time is their scarcest resource.


Old Rule:
Mothers expected to stay at home.

New Rule:
Mothers expect to work.


Under the old rules, opportunities for women were scarce. Today, opportunities are abundant. In 1970, 57 percent of college degrees were awarded to men. In 2004, 57 percent were awarded to women. In 1970, three out of five masters’ degrees were awarded to men. In 2004, nearly three out of five were awarded to women. In 1970, for every professional degree awarded to a woman, eighteen were awarded to men. In 2004, the ratio of law, medicine, and accounting degrees was one to one.

Government, however, still seems stuck in the debate over whether women should be working or at home. This even though in 2005, 63 percent of moms with children under age 6 worked outside the home (compared to 39 percent 30 years ago).

Few policies are geared to the needs of two-earner families, giving rise to what family policy expert Karen Kornbluh has dubbed “the juggler family” —juggling work and parenthood and balancing cost and quality for child care.

Two out of three working parents say they don’t have enough time with their kids, and nearly two out of three married workers say they don’t have enough time for their spouses.

The time crunch is serious enough that 64 percent of working Americans say they would rather have more time than more money from their jobs.

On any given workday, nearly 12 million children under the age of 5 are in daycare. 80 percent of children under one year old and 63 percent of all kids under age 5 are in some type of regular child care arrangement.

Moreover, child care is generally expensive and often mediocre. The National Institute for Child Health and Human Development found that the vast majority of day care provided in America is merely “adequate.”

Nevertheless, annual fees for full-time care in a center range between $4,020 to $14,225—or more than the average annual cost of tuition at a public university.

In 2004, the median household income of working-age adults in America with children was roughly $70,000, which means that child care costs for a single child can consume anywhere from 6 percent to more than 20 percent of total pre-tax household income.

With most families struggling to balance work and child rearing, government policies must catch up. Lesotho, Swaziland, Papua New Guinea—and the United States—are among the few countries in the world without paid family leave. Government provides families with few resources for child care and little assurances of child care quality. Flextime is still relatively rare in the public and private sectors. And marriage penalties in the tax code still disadvantage two-earner families.

Policy goals for the New Rules Economy

  • Create a universal guaranteed paid family leave benefit for new parents, perhaps as an add-on to the unemployment insurance system.
  • Provide new parents with a “new baby tax credit” for the first three years of a child’s life.
  • Double the tax break for child care expenses.
  • Create a national, voluntary accreditation standard for child care quality.
  • Reward businesses that offer their employees flexible work schedules, including flexible schedules for men.
  • Permanently eliminate marriage penalties in the tax code, including and especially in the Earned Income Tax Credit.
  • Expand the availability of employer-based child care.

Old Rule:
A family raised its children.

New Rule:
A family now raises children and cares for parents.


In 1989, 60 percent of adults between the ages of 41 and 59 had at least one living parent. In 2005, it was 71 percent. In ten years, the number of senior citizens in America will increase by 10 million. Ten years later, it will increase by another 16 million. Over the next 20 years, the very aged population—those 85 and older—will increase by half.

Under the old rules, parents simply raised their children. When the kids left the house, those prime-age adults may have had some responsibility for their parents. Under the new rules, adults must raise their children and care for their own parents—often simultaneously and for a longer time.

Several factors are creating this “sandwich” generation and its attendant demands: first, people are having children later in life. In 1975, the typical birth mother was 24 years old. By 2004, she was nearly 28.

Second, people are living longer in retirement. In 1975, a person reaching retirement age could expect to live another 16 years. By 2000, a retiree could expect to live another 20 years.

Third, elder care is expensive. In 2002, families spent an estimated $37.2 billion in out-of-pocket expenses for long-term care.

Fourth, younger and middle-aged women who once stayed home and could care for elderly parents are far more likely to work. Two-thirds of family caregivers are also employed, adding yet another source of the time crunch.

Government policies are ill-suited to helping families shoulder these new responsibilities. Families facing eldercare expenses have few government resources available either to cope with its cost or gauge its quality.

Government is also failing to help families tackle the problem of long-term care. A single year in a nursing home cost an average of $74,095 in 2005, or more than one- third of the entire median nest egg saved by a retiree. Medicare coverage of nursing home care is extremely limited, and Medicaid is unavailable until an elderly person’s financial resources are virtually exhausted. For married couples with a spouse who is ill, long-term care for one spouse comes at the price of financial security for the other. Long-term care insurance is generally prohibitively expensive and not widely available. As a result, too many middle-class seniors must “spend down” to poverty to qualify for Medicaid if they need significant long-term care.

Policy goals for the New Rules Economy

  • Provide tax breaks for eldercare expenses incurred by adult children caring for aging parents.
  • Create incentives for enrollment in long-term care insurance plans and make long-term care insurance more accessible and affordable.
  • Reduce and manage the growing costs for long-term care by increasing the availability of home or community-based care over institutional settings.
  • Encourage healthier lifestyles to reduce future medical costs and promote better and more cost-effective techniques for managing chronic ailments.

Conclusion: Progressive Realism – Optimism Rooted in Reality

We are both realistic and optimistic in our firm belief that the American economy will continue to grow. In many respects both the world and the American economy have never been better. Only 60 years ago, over half the world played by the rules of Lenin and Marx; today they play by America’s economics rewards innovation, marketing and technology; no country comes close to America in these areas.

Only 60 years ago, regional and world wars routinely wiped out the wealth of entire mature economies. Today, although we still live in a very dangerous world, the wealth of mature economies is no longer easily destroyed.

As progressive realists, we believe the American economy is on a journey forward toward increasing prosperity and opportunity.

If progressives steadily grow the economy, we can take the incremental financial resources created and invest prudently in government programs that address the challenges faced by individuals as they confront the Information Age. This starts with a reality based, not ideologically exaggerated, assessment of how the economy’s new rules are changing the daily lives of individuals, families and businesses.

There have been two great eras of progressive policymaking in our past, and progressives now have an historic chance to usher in the culmination of the third.

The first progressive era, led by President Teddy Roosevelt, used the whip of regulation to tame the excesses of an unfettered economy. The second progressive era, led by Presidents Franklin Roosevelt and Lyndon Johnson, created the foundation for economic security with the safety net programs of the New Deal and Great Society. The third progressive era was arguably begun by President Bill Clinton, the first progressive realist, with his bridge to the 21st century; his policies principally focused on understanding the new rules to create a ladder to opportunity and wealth for the greatest number.

Today’s challenge is to bring the culmination of this new progressive era and with it, new opportunities and greater prosperity for America’s middle class.

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