Economic progress and the middle class

Apparently, economic progress rides the tails of a middle class that spends. This insight is often attributed to Henry Ford. He reputedly gave his workers relatively higher wages so that they could afford to purchase the automobiles they labored to make.

Last Thursday in the New York Times, Bill Clinton’s former secretary of labor Robert Reich wrote an Op-Ed claiming that the reason that the United States’ economy continues to sputter is because the middle class no longer has the means to spend. The average male worker in the US earns less, when his wages are adjusted for inflation, than he did thirty years ago.

Over the past three decades, the economy continued to grow because the middle class found ways to increase their spending even though wages had essentially stagnated. First, women increasingly entered the workforce contributing to households’ disposable incomes. Second, men and women worked more hours than before. And finally, households got into debt in order to be able to keep on spending.

If the growing economy did not result in increasing middle-class wages (not in real terms), then who was benefitting? The rich were. This is a problem because the rich do not spend like the poor and middle class do. Henry Ford and his wealthy friends were not going to buy up all of the automobiles that were built in his factories.

Spending is the true motor of economic growth. Investing (or saving), what the rich often do with a significant portion of their money, only functions if others are spending. Economic growth will continue to be meager, argues Reich, until middle class worker once again have the means with which to spend.

Why is it that Canada has weathered the recession better than the United States? It certainly has something to do with the tighter regulation of banks north of the border. Following Reich’s arguments, I would suggest that it also might have a lot to do with the fact that in Canada the middle class is comparatively a lot stronger than it is in the US.

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