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The fact that middle classes are made in part by enlightened public policy is illustrated by the contrast between the South and the rest of the nation. While independent yeoman farmers formed a majority in the North in the first half of the nineteenth century, in the South poor white farmers were squeezed between a tiny oligarchy of rich planters and the slaves they exploited. In northern factories, despite employer resistance, unions made gains, particularly during the New Deal and World War II. But the one-party South used law and intimidation to prevent unions from taking root in a region whose elites viewed themselves as employers or brokers of poor black, white, and Latino workers deprived of bargaining power. As a result, in the twenty-first century, many southern states have levels of inequality, poverty, and illiteracy similar to those of developing countries.

SERVICE-SECTOR FORDISM

The combination of automation and offshoring has destroyed many routine clerical and lower-level managerial jobs. With the disappearance of middle-skill jobs, the American job market has become polarized between highly paid managerial and professional jobs and poorly paid jobs in the service sector. Most of the job growth in the early 2000s has occurred in three areas: health, education, and government. According to the Bureau of Labor Statistics, health care accounts for seven out of the twenty fastest-growing occupations, more than any other category. Home health aides and personal and home-care aides are found both among the fastest-growing job categories and among the occupations with the largest overall job openings in the years ahead.

What is driving this growth? The US health-care industry is plagued by inefficiency and rent seeking by private insurers, pharmaceutical companies, hospitals, physicians, and lawyers. But even when costs are brought into line with those of other countries, the US health-care system is likely to increase its share of the economy. One reason is the aging of the population. Another is the fact that societies, like individuals, choose to purchase more health care as they grow more affluent. Health is a good that makes possible the enjoyment of all other goods.

Far from being a problem, then, the steady and sustainable growth of employment in the health-care sector, along with jobs providing care for the elderly and children, education, and the provision of public goods, may be the next stage in the evolution of advanced economies. As technology made possible greater production with fewer workers, first agriculture and then manufacturing shed labor to other sectors. Today, information technology, by eliminating much routine office work, is shifting labor into “proximity” services such as health care that cannot be offshored and cannot be automated. A high-tech economy leads to more “high-touch” jobs that only human beings can perform.

Will the health aide be the typical worker of the twenty-first century, the successor to the farmer, the factory worker, and the office worker? The German poet Johann Wolfgang von Goethe would not have been surprised. In 1787, he sardonically commented: “Speaking for myself, I too believe that humanity will win in the long run; I am only afraid that at the same time the world will have turned into one huge hospital where everyone is everybody else’s humane nurse.”
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The high-wage, high-consumption economy established in the United States and similar nations during the Glorious Thirty Years after World War II was easier to create than its equivalent would be today. In the mid-twentieth century, factory workers were a large enough proportion of the workforce that simply raising their wages stimulated the whole economy when they left the factory and spent money on rent, groceries, clothes, and haircuts. But gains in productivity in the highly robotic domestic manufacturing of the 2030s or 2050s may not translate into gains for the rest of society, even if the few remaining workers are very well paid. Higher pay for robot supervisors will not necessarily translate into higher incomes for home health aides.

It is not enough to say that everyone in society benefits from the cheaper goods and services made possible by productivity. This is true, to be sure. But if an ever-greater share of the gains from national economic growth goes to a small oligarchy of capitalists and well-paid managers, then the distance between them and the rest of society will continue to increase. In the United States, the growing share of the rich of national income and wealth has already translated into much greater political dominance than existed in the days of strong unions and local political machines. If America’s rich continue to get relatively richer than the rest, they will be even more socially dominant and even more politically powerful.

As Henry Ford recognized, workers are also consumers, who need to be paid well if they are to be able to afford the products that they make. What is required is nothing less than “service-sector Fordism”—the equivalent, in the service sector, of the Fordist system in the mid-twentieth-century industrial sector. Industrial Fordism meant that factory workers made enough money to be able to buy the products they made. Service-sector Fordism means that service-sector workers should be able to obtain the kind of services they provide. Whether from the private market or public services, health-care aides should be able to afford health care, nannies should be able to afford child care, and restaurant workers should be able to afford restaurant meals. The alternative—a return to a society in which most Americans, directly or indirectly, are “in service” to the affluent few, like the butlers, valets, and maids lined up in the driveway of an Edwardian British country house—would mark the abandonment of the American Dream.

If the United States is to avoid turning into a high-tech version of stratified societies like Brazil and Mexico, with which it shares the Western Hemisphere, mechanisms must be found to allow most of American citizens to share in the gains from productivity growth, in addition to falling prices for particular services and goods. Higher taxes on the rich could finance greater redistribution of income—for example, by means of an earned-income tax credit (EITC) that goes to middle-class as well as poor Americans. Yet another possibility could be greatly expanded direct or indirect public employment, paid for out of taxes on the rents that go to the rich. One beneficial side effect of greater public employment could be tight labor markets that raise the pretax incomes of private-sector workers.

Other methods would rely less on taxation and redistribution and more on structural changes in the labor and capital markets. Tighter labor markets, produced by the combination of the restriction of unskilled immigration and the growing ratio of retirees to workers, could raise market wages at the bottom, forcing affluent Americans to pay higher wages for service workers. Another alternative to redistributive taxation would be increasing the number of Americans who own shares in highly automated industries—either directly, through some form of universal shareholding, or indirectly, through the nationalization of some industries and the public provision of goods or the use of profits from government sales to reduce tax burdens on the majority. These and other methods to enlarge the middle class are radical but may be worth considering, if the goal is to prevent the good of productivity growth from generating the evil of plutocracy.

THE NEXT SOCIAL CONTRACT

In addition to devising new forms of stakeholder capitalism and utility finance, Americans need to construct a new social contract that is suited to the workforce and economy of the twenty-first century.

The social contract that crystallized after World War II combined four different, rival approaches. The social-insurance programs, such as Social Security, Medicare, and Medicaid, were administered by government and paid for chiefly by payroll taxes. Coexisting with this system of social insurance was another system of tax-favored employer-based benefits, of which the most important were employer-provided health care and employer-provided pensions. To complicate matters further, beginning in the 1970s, two other approaches were added: tax-favored private accounts—for retirement savings and other purposes, including health care—and tax credits for welfare purposes—of which the most important were the EITC, a subsidy to low-wage workers, and the child tax credit.

Changes in the economy and society have undermined all the elements of the American social contract other than simple, straightforward social-insurance programs. The employer-based health-care system is crumbling, because the rising costs of health-care provision in the United States have caused fewer and fewer employers to offer health care. Employer-based pensions are even further along the road to extinction, having been replaced either by nothing at all or by tax-favored individual retirement accounts like 40l(k)s or IRAs. Tax credits are popular among politicians, because they allow transfers to be hidden in the tax system rather than visible among direct appropriations, but a tax code riddled with tax credits must raise revenue with higher nominal rates, which generate political opposition.

If the system of employer-based benefits collapses entirely, the alternatives, if the safety net is not simply to be reduced, are an expansion of social insurance or an expansion of tax-favored private accounts or tax credits. Most conservatives and libertarians favor replacing Social Security with private savings accounts invested in the stock market and replacing Medicare and Medicaid either with vouchers in the form of tax credits or tax-favored health savings accounts.

These are bad ideas. After two stock market crashes in the first decade of the twenty-first century and the prolonged bear market of the Great Recession, it makes no sense to argue that Americans should be more rather than less dependent on the state of the stock market at the time of their retirement. Even worse, retirement-fund managers routinely and quite legally rob American investors in private plans by charging hidden fees, while the administrative costs of Social Security are much lower. Social Security provides a more stable source of retirement income in bad times as well as good. Its long-term solvency could be assured without significant cuts either by lifting the cap on payroll taxes paid by the affluent or by adding new revenue from other sources, such as general revenues or a new dedicated tax such as a value-added tax (VAT).

The idea of using competition based on individual health-care vouchers to reduce medical costs is a naive fantasy of right-wing ideologues; no modern society does that, because no modern medical sector functions as a free market. Indeed, the combination of vouchers with uncompetitive markets is a recipe for disaster. Unlike Social Security, Medicare can be thought of as a voucher system for health care, and student loans can be thought of as vouchers for higher education. As the cancerous growth of health-care prices and tuition prices in the United States demonstrates, vouchers without price controls encourage unchecked price-gouging by the providers of subsidized goods and services, such as American health-care providers and American universities. For practical and political reasons, it is impossible to turn health care and higher education into truly competitive markets with vast numbers of small providers. Like other natural monopolies or oligopolies, health care and higher education need to be turned into publicly regulated utilities, in order to prevent their providers from extracting excessive rents from a victimized public.

Of the mechanisms that other countries use to contain health-cost increases, the most important is “all-payer regulation”—in effect, price controls, set by the government in consultation with health-care providers and renegotiated every few years. This kind of regulation of rates is taken for granted in the United States in the case of electric utilities and local water systems. Americans need to treat the health-care sector as a public utility, with publicly regulated rates. If health costs are brought under control, then the aging of the US population by itself is predicted to add only a few percent of GDP in increased spending on Medicare and Medicaid in the next half century, something that can easily be managed.
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Notwithstanding the enthusiasm for pseudomarket solutions that have dominated Democratic as well as Republican thinking for decades, the conclusion must be that the best way to rebuild the American social contract would be to reduce or eliminate the rickety Rube Goldberg schemes of employer-provided benefits, private savings accounts, and tax credits, and replace most or all of them with a simple, streamlined system of universal social insurance paid for out of current taxation (not necessarily payroll taxation alone). Inasmuch as employer-based benefits, private accounts, and tax credits are all government programs, replacing them with social insurance would not replace “the market” with “big government”; it would simply replace inefficient, overcomplicated, and frequently unfair government programs with government programs that are more efficient, simpler, and difficult for special interests to manipulate.

AMERICAN IMMIGRATION: FROM NEPOTISM TO SKILLS

With the exception of the American Indians and descendants of American slaves, all Americans are the descendants of voluntary immigrants. In the past two centuries, the American population has been expanded and transformed by immigration, which will continue to reshape the nation in the generations ahead.

The major trend in the United States, as in other developed countries, has been a long-term trend toward falling birth rates, which are below replacement level for native-born white and black Americans. Only the above-replacement fertility of immigrants and their children keeps the US population growing.

During the bubble economy of the late twentieth and early twenty-first centuries, straight-line projections based on the high immigration and high immigrant fertility of the last generation led to estimates of anywhere between 400 million and a billion Americans by 2100. All such projections should be treated with caution, because even minor changes in immigration or fertility can produce major long-run differences.

Nevertheless, it is safe to predict that the United States will continue to choose to admit significant numbers of immigrants, as an alternative to allowing the population to shrink because of low native fertility. What criteria are used to select foreign nationals to work in the United States and become citizens has always been a matter of contention.