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Yes, There is a Middle-Class Squeeze

By E. J. Dionne

WASHINGTON -- Democrats might usefully take a break from their inane round of backstabbing and score-settling to focus for a few moments on why voters gave them their congressional majorities. A lot of Americans are hurting in the pocketbook, and if Democrats don't use the next two years to help them, the party will squander the trust they have temporarily earned.

To prepare for next year, the Democrats (and those Republicans who want to revive their party) should read a truly remarkable speech that Janet Yellen, the president and CEO of the Federal Reserve Bank of San Francisco, gave the day before voters went to the polls.

In plain language backed by sophisticated analysis, Yellen makes clear that voters who feel severe economic pressures are not deluded, despite the economy's strong performance in keeping down unemployment and inflation.

The reason: new forms of inequality that don't fit into our conventional understanding of how the economy works. She argues that "much of the gain from excellent macroeconomic performance has gone to just a small segment of the population -- those already in the upper part of the distribution.''

Yellen tells unfashionable truths. She does not claim, as many conservatives and free traders try to, that globalization and decline in union membership are innocent in the inequality saga. "Globalization and skill-biased technological change may have been working in combination to particularly depress the wage gains of those in the middle of the U.S. wage distribution,'' she says.

Note the word middle. That's where the biggest negative impact of globalization is being felt. At the top, Yellen says, globalization has been helpful to "highly able workers performing non-routine work requiring problem-solving skills.'' In the middle, "technology and globalization had the opposite effect -- substituting for workers performing routine or repetitive tasks and depressing their wages.''

By the time we reached this decade, "many low-wage jobs that could be eliminated by technology had already vanished.'' That means the remaining jobs "involve manual and service work that cannot easily be automated.''

As a result, "wages in the middle not only rose far more slowly than those at the top, they also rose more slowly than those at the bottom of the distribution.''

Yes, there is a middle-class squeeze.

People at the bottom of the economy need help, which could come from an increase in the minimum wage, guaranteed health insurance, expanded wage subsidies through the Earned Income Tax Credit and unionization.

But for the left-out middle, which rebelled in large numbers last week, the answers are more complicated, though no less urgent.

Job training and education are always touted as the answer. Yellen is all for them. But they are no cure-all because Yellen notices something else that many others have ignored: Even the better educated are now being hit by globalization and technological change, too.

She says that "the distribution of (job) displacement has shifted towards the highly educated: Workers holding a college degree saw nearly a 50 percent increase in their displacement rates between the early 1980s recession and the most recent one in 2001.''

Americans are also suffering from much larger fluctuations in their incomes than in the past. In the 1970s, she says, "a typical family might have seen its income vary from a high of $60,000 to a low of $30,000 over the decade.'' In the most recent decade, the same family might see its income drop to as low as $15,000. Any wonder why so many working Americans are mad?

Yellen draws on the essential policy book of the year, Jacob S. Hacker's "The Great Risk Shift.'' Again, if Democrats get tired of recriminations over an election they won -- imagine if they had lost! -- they might spend time with Hacker, who shows how more and more risk is being offloaded from government and private corporations and onto individuals. He makes a powerful case for remodeling our social insurance systems to provide genuine economic security for all working Americans.

Hacker makes the paradoxical and insightful point that "we are most capable of fully participating in our economy and our society, most capable of taking risks and looking toward our future, when we have a basic foundation of financial security.'' It's common sense: Secure people are more likely to be risk-takers.

The task of creating an economy that is more just and more dynamic will not be completed within the life of the new Congress. It will take a decade of reform, experimentation and innovation. Now that House Democrats have settled on a majority leader, you can only hope they move away from self-involvement and start thinking about the people who sent them to Washington.

(c) 2006, Washington Post Writers Group

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