Harvard Economist Sees Shrinking Middle Class

by John M. Curtis
(310) 204-8700

Copyright Feb. 25, 2013
All Rights Reserved.                                         

         Warning of a “hollowing out” of the middle class, Harvard economist Michael Porter told CNBC’s “Closing Bell” that there are big problems with the country’s infrastructure, no longer supporting a growing middle class.  “America used to be a uniquely productive, low-cost place to do business,” said Porter, blaming current economic woes on globalization.  “We had efficient infrastructure.  We had limited regulation.  We believed in the market,” suggesting that today’s Washington gridlock, where both political parties don’t work together.  Faced with about $85 billion in mandatory spending cuts, the GOP has insisted on slashing the federal budget, costing thousands of middle class infrastructure jobs.  With so many publicly traded companies paying little or no taxes, it’s doubtful, as Porter suggests, reducing government regulations would improve jobs creation.

             Talking about declining infrastructure, Porter put his finger on the government’s dilemma of slashing the federal budget.  If Congress goes ahead with cutting $85 billion in government spending, many infrastructure programs, government jobs and private sector contracting will suffer.  Many well-known economists and business leaders have warned about political gridlock, leading S&P to downgrade U.S. credit to A-minus Aug. 5, 2011.  While rejected by Federal Reserve Board Chairman Ben S. Bernanke, S&P cited Washington gridlock as the reason for the downgrade.  Claiming that most Americans lack the training or skills to compete in the global economy, Porter blames stagnating wages for why the tax base can no longer support the government’s ambitious social programs.  Porter knows that globalization itself was corporate trend of using cheap labor markets to produce affordable goods.

             When Porter talks of “hollowing out,” he’s referring less middle class Americans facing lower wages.  Porter doesn’t talk about years of inflated unit-labor costs, causing today’s salaries to adjust downward to more reasonable levels.  Instead of looking at a poorly trained or ill-prepared labor force, Porter should focus on today’s transitional period where some the country’s biggest companies, including Apple Computer Inc., have decided to build iPhones and Macintosh computers back in the states. For the last 20 years, foreign automakers have committed to building plants in the U.S.  Other industries, especially consumer electronics, are also gearing up to start manufacturing in the U.S.  “Being an American doesn’t mean that you’re guaranteed a high wage” in global markets said Porter.  Whatever Porter considers high wages, most American workers expect reasonable pay for comparable work.

             Creating more productivity domestically means that either U.S. or foreign companies must return to assembling or manufacturing in the U.S.  With the U.S. dollar low relative to foreign currencies like the Yen and Euro, the U.S. can become competitive again as a manufacturing power.  “You have to be productive, a we have to create a very low-cost efficient place to do business and we’ve let that slip in America,” said Porter, believing that more domestic manufacturing would be a good thing.  Porter talks of over-regulation but recent history shows that banks have gambled away depositors’ money by risky stock market trading, especially once banned derivative trading that’s become all to familiar in today’s financial world.  Once banned when Glass Steagall was the law of the land, Banks now routinely engage in high-risk investment strategies.

             If the White House and Congress really want to see the economy progress, both sides have to get on the same page when it comes to upcoming spending cuts. Slashing more money out of the federal budget takes jobs directly away from the middle class.  Obama and the Democrats are more in sync with Keynesian economics with the government spending more money on infrastructure projects.   It’s penny wise and pound foolish to slash government spending when economists like Porter see erosion in middle class jobs.  Getting globally-based companies to commit to manufacturing back in the U.S. takes time.  While the government finds ways to incentivize companies to come back to the states, it’s not the time to slash domestic spending.  Whether the government runs deficits or not, keeping people working is the best deficit reduction plan, not slashing government jobs.

             Looking at the big picture, Republicans and Democrats on the Hill need to revisit Keynesian economics and get on the same page with respect to impending spending cuts.  Economists, like Harvard’s Porter, know that the economy works best with a healthy combination of public and private sector partnerships.  On the horizon, Porter sees the fledgling oil shale industry as a positive development in achieving energy independence, reducing pump prices and fueling more jobs.  While still unknown, it’s also possible that Obamacare, which kicks in next year, should generate millions of new jobs in the health care industry, also contributing mightily to the middle class.  Slashing government spending only temporarily reduces the deficit, adding eventually to the unemployment problem that has reduced government tax receipts and actually caused today’s whopping budget deficits.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.