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There is a deep anger in the American electorate that explains the rise of two candidates whose presidential campaigns would, in previous election years, have been killed off well before now. It explains why voters are prepared to overlook the relentless insults of Donald Trump, the Republican frontrunner, and the avowed socialism of Bernie Sanders, the main rival to Hillary Clinton for the Democrats, while embracing their unorthodox stances on trade, healthcare and much else. And it explains why two-thirds of Americans say the country is on the wrong track.
At its heart, this anger is economic. Ever more Americans are having trouble making ends meet. Many of the jobs created since the financial crisis are low-wage. And voters do not expect better incomes in the future. For a nation accustomed to believing that each generation would live better than its predecessor, this is a bitter pill.
This economic pressure is not temporary either, because the trends undermining incomes — technology and globalisation — are in their early stages and still accelerating. All the talk from Mr Trump and Mr Sanders about building border walls and killing trade agreements misses the point. Such steps would have no discernible impact on these powerful trends. What is needed are bolder income support policies to cushion workers against them.
How weak are incomes? Today’s real median household income is $53,600, down nearly 7.5 per cent from the peak seen 20 years ago. And real median wages per hour have fallen 4 per cent since the financial crisis. Further, while 14m net new jobs have been created since the crisis, nearly half of these are in the low-wage sector, as defined by the Bureau of Labor Statistics. Of the new jobs that will be created between now and 2025, according to the BLS, more than 90 per cent will pay $36,000 or less annually. In 2013, 22 per cent of children, at some point that year, did not have enough to eat. This cannot be the America we want.
There are two reasons for the downward pressure on income. One is technology. In earlier periods, technology created as many decently paid jobs as it destroyed. That is no longer the case. Just look at total private-sector employment: it has returned to pre-recession levels; but the proportion of decently paid jobs in manufacturing, construction and information services are below the levels of 10 years ago.
Sales of US-made vehicles, for example, are at record levels today in America but automation has sharply reduced employment in the industry. Digital processes, still in their infancy, are reducing innumerable categories of white-collar employment, such as customer service.
Then there is globalisation. Even a generation ago, the US was the biggest market in the world for many products. No longer. Whether it is toothpaste, cars or consulting services, rising living standards across the world have generated a much bigger market for many of America’s products. In response, businesses have created more jobs — with lower pay — overseas than in the US. Africa, the largest emerging global market, is just coming into focus.
On this basis, American incomes will remain weak. Which is why we need to provide a more effective education system. If one-tenth of working-age men who do not have a university degree were to earn one, the 35-year decline in median wages would disappear. So we must make a greater effort to help students complete their degrees.
We also need to provide greater income support for middle and low-wage workers. There are two possible approaches. First, double the impact of the earned income tax credit (EITC) by raising both eligibility levels and payment limits. Second, combine this with a higher minimum wage linked to inflation. Such moves would boost take home pay for tens of millions of working Americans.
Yes, doubling the EITC would cost taxpayers another $60bn annually. But this is not a big sum by federal budget standards and could readily be financed by phasing in higher taxes on dividends and capital gains. Many forget that tax rates on income from capital are not high by historical standards.
In the longer term, it is possible that more advanced technologies will permanently reduce the demand for human labour. If this ensues, we may eventually consider a universal guaranteed income for working age adults.
The point is that the income pressures we see today are going to continue. If we ignore them, voter anger will intensify. It could make Mr Trump’s brand of authoritarianism look moderate.
The writer is founder and executive chairman of Evercore and was deputy US Treasury secretary under President Bill Clinton