Investing in the Future

Income and Expense Changes, Working Parents, One Small Child, 2000-2007

Economists often talk about workers in terms of their “human capital.” This refers to the skills and knowledge workers have acquired through education and experience.¹ Without a qualified workforce able to improve on old technologies, physical capital, like bridges and the electric grid, degrades or becomes unusable. Every country in the world will meet the challenges of the 21^st century by investing in their human capital. The needed innovations must come, after all, from people.

Training is crucial to make up for a shortfall in skills. The private sector and government must invest more in workforce development to raise the skill level of U.S. workers. Among the 25 richest countries in the world, the United States ranks 21st in spending on job training as a percentage of GDP.² This is not something that happened overnight. Funding for workforce development programs through the U.S. Department of Labor, when adjusted for inflation, fell 29 percent from 1985 to 2003.³

The differences are stark between the innovations needed to battle climate change and the financial “innovations” that led to the housing bubble. Preventing the worst consequences of climate change will help create a sustainable world to pass on to future generations. The financial maneuverings, on the other hand, saddled future generations with debt in return for the excesses of a few in the present.

Ignoring the climate challenge by continuing the reckless consumption of fossil fuels mirrors the actions of the speculators who wrecked the global economy. “We created a way of raising standards of living that we can’t possibly pass on to our children,” says Joe Romm, a physicist and author of Hell and High Water: Global Warming – The Solution and the Politics – And What We Should Do. “Real wealth,” says Romm, “is something you can pass on in a way that others can enjoy.”⁴ The collapse of the housing bubble and the recession that followed, on the other hand, showed how narrowly the United States defines wealth.

Since the housing bubble burst, most families have a lot less of everything to pass on to their children. For many, the evaporation of housing wealth comes on top of years of flat or declining wages. The middle class is shrinking, and has been shrinking for some time.⁵ In the 100 largest metropolitan areas, including their suburbs, the size of the middle class fell from 43 percent in 1970 to 32 percent by 2005.⁶

According to opinion polls, most Americans still believe their country is a land of abundant opportunities that are available to anyone willing to seize them.⁷ Statistics tell a different story. The United States stands out among wealthy countries of the world as having the highest income inequality.⁸ Social mobility is hardest of all for those who start at the very bottom socioeconomically. Meanwhile, the top earners are getting richer more quickly than ever. Some of the big winners are the Wall Street bankers responsible for the Great Recession, and this was one reason the public was so furious when Wall Street got a taxpayer-financed bailout on the order of $700 billion, while millions of middle- and low-income households faced the prospect of unemployment and foreclosure.

Policies designed to spur economic and social mobility in low-income families are covered in Chapter 2.

The middle class will not start growing again until jobs begin to pay better and the basic costs of living stop absorbing every dollar of earnings. While some costs have fallen in recent decades, mitigating the effects of stagnant wages, the costs that matter the most to reducing poverty are rising quicker than the overall rate of inflation.⁹ The main factors that improve or worsen the level of a person’s human capital and chances of achieving mobility are family wealth, educational attainment, access to health care, and homeownership.¹⁰ America’s middle class was built on policies in these areas; the policies were designed mainly to help people on the lower rungs of the economy. For the generation following World War II, government policies did much more to promote broadly shared prosperity than they have done in recent decades. For example, legislation like the G.I. Bill helped create millions of new middle-class families by making home loans and college scholarships available to returning war veterans.

To overcome the economic and social disadvantages they confront, low-income households need a better set of policies. But some policies are headed in the opposite direction. For the most vulnerable families of all, those who are living in extreme poverty, there is simply less help available now. In 2005, an additional 1.3 million children were living in extreme poverty because of policy changes made since 1995.¹¹

Ultimately, people must take charge of their own economic and social mobility. But for poor families, it has gotten harder to build the human capital needed to rise out of poverty and stay out of poverty. Investing in these families will help them to help themselves get ahead. The president’s pledge to end child hunger is a good place to start this investment. But bold pledges must be followed up by bold actions. Success will require hard work.

Issues