Politicians have no cure for the middle-class bluesMarch 30, 2012: 5:00 AM ET
Obama and Romney each have a plan to lift Middle America from its rut, but election-year promises aren't going to fix an issue that's been brewing for decades.
By Geoff Colvin, senior editor-at-large
FORTUNE -- President Obama likes to say, "The 2012 election is a make-or-break moment for the middle class." He's mistaken -- it isn't. Mitt Romney likes to say, "This President and his policies have made it harder on the American people and on the middle class." He's evading the issue. We'll be hearing much, much more campaign blather about the middle class before Nov. 6, so before we drown in it, we need to get real about the actual plight of the middle class, income inequality, and what a President can and can't do.
The middle class' unhappy state may well become the central issue in the general election. Middle America is furious -- still facing high unemployment and stagnating pay while CEOs and investment bankers are raking it in again after a taking a few hits during the recession. The middle is where the votes are, so both parties have created narratives to explain middle-class misery as the other side's fault. Democrats say the recession started under Bush, caused by the Republicans' best friends, fat-cat bankers. Republicans claim Obama has shackled the job-creating private sector in favor of "more spending, more debt, more government regulation," as Romney puts it.
Both narratives are virtually irrelevant to the sorry situation of the middle class, which began long before the financial crisis and recession. Incomes in the broad middle have gone nowhere for more than 20 years after rising slowly but steadily through most of the 20th century. Why? Many theories have been advanced, but the one that holds up best is set out by Harvard economists Claudia Goldin and Lawrence Katz in articles and a book, The Race Between Education and Technology. The economy continually demands higher-level skills from workers, they argue, and for most of the 20th century the U.S. workforce kept up. In 1900 few people stayed in school past eighth grade; by 1970 a large majority finished high school, and many went on to college. American workers became the world's best-educated and earned the rewards.
Then, in the 1970s, America's level of education stopped rising. The high school graduation rate peaked at 77% in 1969 and has since dropped to about 69%; college rates, too, stopped rising. The economy kept demanding more workers with advanced skills, but we stopped producing more. At the same time, other countries relentlessly educated their people, so the U.S. workforce fell from No. 1 in the world to the middle of the pack. Result: The minority of workers with advancing skills became more valuable, while the broad middle got flat or even falling pay.
Then things got worse. The infotech revolution is great for high-wage workers because it turbocharges them; an executive with three screens on her desk and an iPhone in her pocket is enormously more productive. Infotech doesn't much hurt low-wage workers, many of whom do place-based work (cooking in restaurants, pouring concrete) that can't be done elsewhere. But infotech makes middle-class jobs disappear; software takes over routine back-office tasks, and infotech coordinates supply chains, so manufacturing jobs can be done by lower-paid workers abroad.
It's clear what the problem is not. It's not that the middle class got clobbered in the recession -- that is, the recession's end isn't rescuing the middle class. Nor is the problem that income inequality increased, because it didn't during the recession; top earners on average got clobbered even worse in the recession than the middle class did. The problem is that the middle class isn't supplying the new skills that the world is demanding. We can fix that problem. We fixed it in the early 20th century and again in the 1960s after Sputnik by overhauling our education system. That is mainly a state and local job, not a federal one. Above all, it's a cultural change. Presidents can do a little but not a lot to make it happen.
As we hear the endless sound bites during the coming presidential contest, we as voters need to grit our teeth and remind ourselves that we know what really needs doing, and it's mostly in our own hands.
This story is from the April 9, 2012 issue of Fortune.