A fool rushes in where economists fear to tread.
In this posting, I’m going to venture well out of my area of expertise into the realm of economics and the perception of economic well-being. I do so because I think it is an important topic for our society and because I think on-going trends have important ramifications for midwestern cities. I will address the entire economic spectrum to some degree but I’m going to focus on the middle class because I think that group is both a bellwether of urban vitality as well as the focal point for the changing face of our national economy. By “on-going trends”, I mean events of the last 30 to 40 years -- excluding the current upheaval caused by the COVID-19 pandemic.
First, some definitions. “Middle class” generally refers to households with an annual income between 80 percent and 200 percent of the area median income. Households earning less than 80 percent of the median are lower class and those earning more than double the median are upper class. For a family of three in most midwestern cities, this generally translates to a lower bound between $40,000 and $45,000 and an upper bound of $120,000 to $130,000. This is a fairly broad range, but it contains most households with at least one (and often two) adults working full time at a job with a reasonable salary.
The percentage of the population that falls into each category obviously varies from place to place, but urban areas in the midwest typically have roughly 30 percent of households in the lower class, 50 percent in the middle class and 20 percent in the upper class. The share of adults in the middle class has been falling slowly for the past couple of decades, although it appears to have stabilized over the past couple of years. What is more remarkable is the declining share of income and wealth that is accounted for by the middle class.
For the first several decades following World War II, economic gains were shared relatively uniformly by all segments of the population. Starting in the mid 1980s, however, that started to change as upper income households saw their income grow significantly faster than the incomes of middle and lower class households. This trend is illustrated by the chart below. Particularly during the late 1990s and the past 6 or 7 years, households in the top 20 percent of the income spectrum have accelerated their earnings much faster than the remaining population. The bottom 60 percent of the population (the 1st, 2nd and 3rd quintiles) have seen essentially no inflation-adjusted income growth since the year 2000. (1)
This growing tendency toward economic inequality can also be seen in terms of total household wealth. Although wealth fluctuates year to year with the economy, it has grown substantially, particularly during the late 1990s and early 2000s, and during the past 5 years. That increase, however, has been captured largely by the wealthiest households. Thirty years ago, the top 10 percent of households (by wealth) represented roughly 60 percent of total wealth. Now, that same group holds 70 percent of total wealth. Put another way, 30 years ago the top 1 percent of households had an aggregate wealth equal to approximately 6 times the aggregate wealth of the bottom 50 percent of households. Now, that ratio has increased to more than 22. (2)
I must point out, however, that by just about any objective measure, households in the United States are better off than they were 30, 40 or 50 years ago. Even poor households typically have a smartphone, for example, with capabilities that would have been almost inconceivable just 30 years ago. Our housing, our cars, our entertainment options and our educational choices have all gotten better over time. But as I have pointed out before, what our society has to deal with is not objective reality but perceived reality. I am convinced that much of the middle class feel that they are losing ground economically. And that message is reinforced on a daily basis by social media, television and popular movies which tend to focus on lives -- whether real or imagined -- that seem better than our own.
What I fear is that the perception of “losing ground” is going to foster distrust, polarization and irrational behavior that will exacerbate existing issues in our society. Government at all levels will undoubtedly continue to be a focal point. At a time when cities are being pushed to change by a variety of forces beyond their control, stressed out households are going to resist change with all their might. The “status quo” and “the way things were” is going to be the refuge of many middle class households, particularly those of the Baby Boomer generation who have shaped our urban form for the past several decades. At a time when cities should be focused on defining a new form to meet the demands of the future, economic worries will fuel opposition to any initiative that seems different or innovative.
Will the future be better?
The United States has an amazing track record of economic growth and only a fool would bet against that record going forward. Please recall, however, the first sentence of this post. I don’t actually think there will be a sustained economic decline, but I think that a long, economic malaise might be in store as the country emerges from the pandemic shock. Growth will be slow and uneven, and gains will not be evenly spread across the economic spectrum.
I could be wrong, of course, and given my complete lack of economic credentials most people would probably bet against me. This country still has an incredible economic engine, but there are three trends that I think constitute significant headwinds for economic growth.
Disruptive Innovation The current “knowledge economy” has one key characteristic -- the accelerating pace of technological innovation. Despite the recent spike in innovation over the past 20 years, Jeff Booth in his book “The Price of Tomorrow” argues persuasively that the next 20 years will absolutely explode with innovation at a pace many people will have difficulty coping with. Led by continuing increases in computing power and connectivity, advances in automation and artificial intelligence, and molecular engineering at the “nano” scale, this era of innovation will be a double edged sword for our economy.
On the one hand, innovation will create new benefits that will eventually improve the lives of everyone on the planet. Solar power, for example, has fallen in price dramatically over the past 10 years and in the next 10 years (or less) will become the cheapest form of power available at a global scale. How will our economy change when every country (and every homeowner) can generate their own electricity at a scale that is limited only by your ability to find places to install solar panels? Reasonably cheap and environmentally benign energy available almost anywhere will be hugely beneficial to our society as a whole. But businesses based on coal or oil will end in bankruptcy and countries (or localities) with economies dependent upon those industries will face a very dire future. That is the “disruptive” side of innovation -- entire industries, including all of the jobs that they contain -- will be destroyed. New jobs in new industries will be created, but initially jobs are likely to be destroyed faster than they are created and that will cause economic and social upheaval.
This is just one example -- multiply this impact across dozens of areas of similar disruptive innovation. Technological innovation moves us forward but causes short-term pain, and it will be most beneficial to those who have the economic and educational resources required to adapt quickly.
Unprecedented Debt Levels Sorry, but more numbers and charts are going to be needed here. The chart below shows total federal debt expressed as a percentage of the country’s gross domestic product (GDP) for the past 50 years. This chart does not include the impact of the $2 Trillion recovery package recently approved by Congress. That package, which is more than double the size of the economic stimulus approved in response to the Great Recession, will cause another vertical leap in this chart.
I’m not arguing that an economic stimulus package was not required in response to either the Great Recession or the current pandemic, but large budget deficits have become standard operating procedure at the federal level even in normal times. Over the past 10 years, the amount spent on interest payments for the federal debt (both in absolute terms and as a percentage of the budget) has roughly doubled and is projected to double again in the next 10 years.
The rapid increase in debt is essentially buying short term economic growth at the expense of long-term economic growth. To paraphrase the Congressional Budget Office, increasing public debt retards long-term growth in two ways: First, the financing of federal debt draws money away from private investments, resulting in a smaller stock of capital, and consequently lower output and income; and second, increasing debt requires increasing interest payments which puts pressure on lawmakers to either increase taxes or decrease spending on federal programs, both of which hurt economic growth. (3)
From a class perspective, slow economic growth means slow wage growth and fewer opportunities to move up the economic spectrum.
International Trade Tensions The United States is not the only country experiencing increasingly nationalistic tendencies, increasingly harsh rhetoric toward other countries, and pressure to raise tariffs on international trade. President Trump, of course, has shaped his foreign policy around all three of these strategies but he is not alone. When times are hard, it is human nature to look for someone to blame, and who better than the leaders of another country? This nationalistic rhetoric can be seen not only in our traditional adversaries (e.g. Russia, China and Iran) but also in our traditional allies (e.g. the United Kingdom and Germany).
The trend toward the globalization of the economy over the past 30 years has resulted in a lot of middle class jobs being moved to other countries, but it has created new (generally higher end) jobs in the United States and has kept the price of many consumer goods low. The ironic thing is that I believe that much of the manufacturing that moved overseas in the past will return to the United States in the next decade. But due to artificial intelligence and automation, those manufacturers will be returning with far fewer jobs than when they left. The bottom line is that rising tariffs and trade tensions are likely to hurt the overall US economy more than help.
In summary, I think our economic future is not likely to be particularly kind to the middle class. Technological innovation is likely to eliminate many middle class jobs. Rising national debt is likely to limit the overall growth of the economy. And rising tariffs are likely to increase the cost of many consumer goods. In other words, the future is likely to favor the very smart, the very creative, the very athletic and the very rich -- not the average Joe.
What Does This Mean for Cities?
No city is going to be able to change the course of technological disruption or the debt levels of the federal government. There are ways, however, in which cities can take small but meaningful steps to make life a little easier and less stressful for the middle class. In the paragraphs below, I outline six of these steps. I would argue that these actions are good public policy even during normal times, but they are especially crucial when a large chunk of the population is struggling.
Increase housing and transportation options The typical household spends roughly 40 percent of their income on expenditures related to housing and transportation. Low and moderate income households spend a considerably higher share. Expanding housing and transportation choices benefits the middle class by helping to control cost and by allowing households to find the option which is the best fit for their needs. This will require a willingness to try new things that deviate from the current suburban focus on large single-family homes and an auto-dominated transportation system.
Reinforce education Cities typically leave educational initiatives to other organizations or levels of government, but I believe that education is going to become so essential to economic health that it would be foolish to continue to do so. There is a strong correlation between educational attainment and economic prosperity as our local economies continue the transition from manufacturing to information. In addition, as rapid technological advancements cause job disruptions, our society will need to take continuous, life-long learning seriously if our workforce is to remain relevant.
Keep debt low Cities have a tendency to try to “power through” difficult economic periods by taking on debt so that they can keep all of their programs intact. If my prediction of an extended economic malaise is correct, however, this approach could result in an accumulation of debt that limits a city’s long-term resiliency and particularly its ability to “pivot” to take advantage of an unexpected opportunity. The recession that is likely to result from the current pandemic should be used as an opportunity to restructure, and potentially eliminate, programs that have out-lived their usefulness. Yes, this will cost jobs in the short run, but it will put cities in a better position to grow effectively down the road.
Use development incentives strategically Too many cities have fallen into the trap of providing development incentives and tax breaks to virtually every major development project that gets proposed, particularly by politically connected developers. These incentives are often defended as a way to promote economic growth that will benefit the entire community. In reality, instead of creating new wealth in the community the incentives simply cause money to move from old businesses to new businesses with very little net change and very little benefit to working class households. Incentives should be used in a “priming the pump” fashion in neighborhoods that have the potential to move from stagnant to self-sustaining revitalization. In particular, midwestern cities should be leery of projects focused on retailing, tourism or conventions -- all of which are generally high-risk strategies for real economic growth.
Be transparent, but tell your story In tough times, communication is crucial. Cities need to be aggressively transparent about what they are doing and why. This means not only publishing agendas, public documents and meeting minutes, but also as much of the data that cities collect as is reasonably possible without violating privacy guidelines. Transparency and communication are the best antidotes to the conspiracy theories that stressed-out citizens are prone to believe. Beyond transparency, however, cities need to proactively push out their story of how they are building for a better future. The media is full of stories that paint local government as incompetent or uncaring. To combat that misleading narrative, cities need to scour their organizations to find examples of employees going above and beyond, or trying an innovative solution to a long-term problem. This isn’t propaganda -- it is making sure that citizens know the full story.
Find reasons to gather as a community Obviously, the midst of a pandemic is a tough time to think about gathering. I am confident, however, that vaccines will be developed and immunities will build up eventually, causing COVID-19 to fade from our everyday thoughts. When the time is appropriate, cities should resume, and if possible expand, their planning efforts for a wide variety of community events. Such events are low-cost entertainment for low- and middle-class households and often create “gig work” that can supplement their income. More importantly, however, gatherings cause people from different segments of the community to interact with each other, breaking down the “us versus them” attitudes that difficult times can foster. Find ways to celebrate your community’s talent, diversity and creativity as often as possible.
Thoughts? As always, share your thoughts and ideas by leaving a comment below or sending me an email at email@example.com. Want to be notified whenever I add a new posting? Send me an email with your name and email address.
(1) Federal Reserve Bank of St Louis, Federal Reserve Economic Data, “Federal Debt: Total Public Debt as a Percent of Gross Domestic Product”, https://fred.stlouisfed.org/series/GFDEGDQ188S#
(2) The Federal Reserve Board of Governors, Distributional Financial Accounts, “Distribution of Household Wealth in the U.S. since 1989”, https://www.federalreserve.gov/releases/z1/dataviz/dfa/distribute/table/
(3) Congressional Budget Office, The 2014 Long-Term Budget Outlook, https://www.cbo.gov/publication/45471