Tax and spend government is what sustains the middle class

Lots of people have commented on this surprising Globe and Mail piece, and deservedly so:

From 1980 to 2000, a period of explosive economic growth and expanding wealth, most major Western nations actually saw their middle classes shrink in size. The middle-income ranks (earning 75 to 125 per cent of the median income) in Britain shrank by 4.5 percentage points; in Sweden by 7.1 points; and in the U.S. by 2.4 points. These numbers represent tens of millions of people.

Were all these people disappearing from the middle class because they got rich? Or had they failed to find a place on the economic escalator and slipped to the ground floor?

“There was both upward and downward mobility,” Mr. Pressman told me, “but downward mobility exceeded upward mobility by around two to one.”

But there are exceptions to this trend. Switzerland's and Germany's middle classes stayed roughly the same size. And two countries – Norway and Canada – saw their middle classes grow substantially. In Canada, it grew to 37 per cent of the population from 33 per cent, the equivalent of a whole mid-sized province joining the station-wagon brigade, moving Canada into the league of Scandinavian nations in the size of its middle class.

Some of this came from wealthier Canadians being humbled: During the same 20 years, the upper class shrank by 1.9 percentage points, to 33.3 per cent of the population. But more came from poor families moving up. Canada is a middle-class success story, especially compared with the slouching United States. But the story doesn't end there.

Mr. Pressman set out to learn what is making the middle class collapse in many countries but expand in others. Some have attributed these changes to an aging population, the number of working women or divorce rates. He used statistical methods to remove age and gender from the picture, but the patterns remained the same.

Then he looked at unemployment: Were countries with rising employment rates experiencing a growing middle class? Nope. Britain has far lower unemployment than Canada, but a shrinking middle class: “While jobs were being added, households were not moving into the middle class.” In the Netherlands, unemployment fell dramatically, but the middle class declined.

Then Mr. Pressman took his data and subtracted everything except salary and wage earnings. That is, he looked at what would be happening if people lived off only the money paid by their employers.

Suddenly, everything changed. Canada's great middle-class boom turned into an enormous decline: If people were forced to live off their earnings alone, our middle class would have shrunk by a staggering six percentage points. The same was true in Germany. In Britain, the middle class would have contracted even more dramatically.

What had Mr. Pressman subtracted? In short, government: All the handouts, tax benefits, subsidies and rebates that transfer money into middle-class pockets (not including pensions). Without government help, Canada's middle class would be endangered.

In a modern economy, Mr. Pressman told me, “I am not sure that the middle class can be self-sustaining. It seems to require active government policies. The market tends to produce great inequalities in income; these inequalities seem greater in a global economy.” Contrary to earlier economic belief, the countries that are most competitive in a globalized economy are those with the most robust tax-and-spend programs. But they have to be aimed at the right places.

Many Canadian families wouldn't be middle-class if it weren't for government handouts. One key example is the thousands of dollars that Ottawa reimburses parents for child-care expenses each year: Without it, many women wouldn't be able to work, so their families would be deprived of one income and may slide into the lower-class bracket. Tax-funded aid for education savings, first-time home buying, retirement savings plans and medical coverage add up: If you gave up all these breaks, would you still be in the middle class?

...

Herein lies the paradox of the modern middle class: Its existence is reliant on a thriving and open market economy, but its size and sustainability are equally dependent on the tax-and-spend mechanisms of the modern welfare state – which, it turns out, are even more important in globalized, high-competition economies.

The countries that are doing best are those that spend serious money on cultivating and maintaining a middle class. Many poor countries, despite having developed booming economies during the past 15 years, fail to join the middle-class club because they can't afford to erect government-supported stepladders to success. And countries such as Canada, which can and do spend that money, have done the best at surviving the social turmoil of our age.

None of this is news to those who've been paying attention without neo-liberal blinders on, which hitherto has not included the reliably 'market uber alles' Globe and Mail. Kudos for waking up and seeing which way the wind is blowing.

See:

The rising tide leaves most boats at the bottom

The pendulum swing