Executive Summary: Ready for the New Economy

“You press the button, we do the rest.”

That slogan could have come from Apple in 2015—but it’s from Kodak in 1888, the year its name was trademarked.¹ For more than a century, Kodak was one of the most advanced technology companies in the world. In 1922 alone, Kodak produced 147,000 miles of motion picture film.² In 1975, it built one of the first digital cameras.³ In 1976, it accounted for 90% of film and 85% of camera sales in America.⁴ In 1988, it employed 145,000 people.⁵ In 1997, the company was worth $30 billion.⁶ But by 2013, Kodak employed practically no one, was worth virtually nothing, and had been all but replaced by iPhones and apps from Instagram to Snapchat.

This radical dynamism is the defining feature of the nascent global digital age, placing the United States merely at the beginning of a long period of profound economic change. Thus, the political party that speaks honestly and persuasively about these new realities—and offers an agenda that harnesses these trends to benefit all Americans—will have the best shot at restoring shared prosperity and therefore winning political majorities.

In Section 1 of this paper, we argue that the challenge facing the middle class is less about fundamental economic unfairness—but fundamental change due to globalization and technology coupled with a country, a workforce, and a set of institutions that are simply not ready for this new economy. Moreover, we show that the narrative of fairness has demonstrably failed to excite voters, with three consecutive losing performances with the middle class—leaving Democrats with the fewest number of officeholders since 1928. In Section 2, we propose an ambitious and actionable Democratic agenda that would generate economic growth that directly benefits the middle class through over 70 policy ideas that create more skills, more jobs, and more savings.

Section 1: The Argument

Between 1950 and 2000, the U.S. economy grew at an average annual rate of 3.7%.⁷ It was a growth rate strong enough to build and sustain the world’s largest middle class. By 2000, median household income in America stood at $57,730 in 2014 dollars—an all-time high.⁸ But starting in 2001, U.S. economic growth shrank to an average annual rate of 1.9%. In only two of the last 14 years has growth exceeded 3% and not once since 2005. This is the longest period of prolonged slow growth in at least a century. By 2014, median household income stood at $53,900—a 5.9% decline from the peak.⁹

Slow growth and sinking middle class wages have led to a vigorous economic discussion in Washington—one that had been put on hold for the first decade of the 2000s. After the boom of the 1990s, political leadership was consumed by the twin crises of Islamic terrorism and a near-economic collapse. In addition, arguments over the Affordable Care Act (ACA) occupied both parties. This makes 2016 the first presidential race since the new millennium in which a vision for a 21st century U.S. economy can be fully debated absent either an existential crisis or the drive to complete the 20th century task of stitching together basic safety net and worker protections.

In this lively and essential intraparty conversation, there is broad recognition among Democrats that this new vision must center on restoring prosperity to the nation and its middle class. This year, Rep. Ron Kind (D-WI) and the moderate House New Democrats proposed an “American Prosperity Agenda.” The more liberal Senator Elizabeth Warren (D-MA) and Representative Elijah Cummings (D-MD) offered a “Middle Class Prosperity Project.” Presidential candidate Hillary Clinton speaks often of “lasting prosperity.” And fellow candidate Senator Bernie Sanders (I-VT) calls for “health, prosperity, security and joy.”¹⁰

Thus, the two wings of the Democratic Party are united in the goal: prosperity for everyday people. But where Democrats differ internally is over the cause of our current economic woes. And as Democrats differ in cause, so too do they differ on solutions.

On the left, the culprit is a fundamentally unfair economic system that stacks the deck in favor of the wealthy and powerful. The slogan “the 1%” often sums up the left’s indictment of the U.S. economic system, and their main goal is to divide up the pie much more evenly. In 2010, the top 1% of earners accumulated 13% of national income after taxes, employer benefits, and government transfers were factored in. This is a slight decline from 2000, but it is nearly double the share of income the top 1% claimed in 1979.¹¹ Persistent income and wealth disparities have sparked a national debate on the topic with President Obama declaring in December 2013 that income inequality is the “defining challenge of our time.”¹² It has also garnered widespread public interest—a Google search of “the 1%” yields 303 million entries.¹³

This viewpoint certainly has merit. Income inequality can be measured in many different ways, but the disparity exists in all of them.¹⁴ There are also inequalities in our political system, including donors on both the left and right who contribute sums of money so vast that it would be naïve to believe that along with it doesn’t come outsized influence. And some corporations have arguably done more for shareholders than for employees.

However, while the fortunes of the middle class and the U.S. economy have changed drastically since 2000, income distribution in America has not. The top 5% of household earners captured 22.1% of aggregate income in 2000 and 21.9% in 2014, according to the Census Bureau. The middle three quintiles took in 46.7% of aggregate income in 2000 and 45.7% in 2014.¹⁵ Insofar as there have been recent fluctuations in income inequality, disparity actually declined between 2007 and 2013, as economist Stephen Rose documents using Congressional Budget Office (CBO) data that takes taxes and government transfers into account.¹⁶

Income disparity also doesn’t necessarily correlate with stagnating middle class wages. From 1970 to 2000, when income inequality in America widened, middle class incomes still jumped 22.8% in real dollars.¹⁷ From 1980 to 2010, income gains (after taxes and government transfers are included) favored the wealthy but were still spread across all income brackets: a 53% increase for the bottom quintile; a 41% increase for the next two; a 49% increase for the 4th; and a 90% increase for the richest fifth.¹⁸ Thus, while income inequality may offend our sense of justice, its actual impact on the middle class may be small.

With a singular focus on income inequality, the left’s main solutions are greater re-distribution and a re-writing of the rules to “un-rig” the system. But, however well motivated, some of the biggest ideas into which they are directing their energy do not remotely address the underlying “Kodak” conundrum—how do Americans find their place in a rapidly changing world? In fact, some would actually make the task of increasing shared prosperity significantly harder.

Take, for example, a policy championed by Senator Bernie Sanders and others that is in danger of becoming a top progressive litmus test for Democrats—expanding Social Security benefits for all, regardless of income. The leading House version of this idea raises taxes on every working person and employer.¹⁹ It takes trillions of dollars from working age people and transfers it to the elderly—many of whom don’t need it. In fact, those who would get the greatest benefit net of new taxes are well-to-do suburban elderly couples.²⁰ Meanwhile, this huge tax increase would do nothing to foster new investments in children, schools, research, or innovation—investments that have taken a back seat to entitlements.

Another populist policy would spend $15 trillion to create a single-payer, government-run health care system²¹—a massive amount especially when we have just finished the largest expansion of the social safety net in decades with the enactment of the Affordable Care Act (which we strongly support). Single-payer would be funded with a large payroll tax increase on all who work, according to the plan offered by Senator Sanders. As with the proposal to expand Social Security for rich and poor alike, it would divert money away from job-creating public investments—such as cancer research, bridge repair, and school construction.

Moreover, the narrative of fairness and inequality has, to put it mildly, failed to excite voters. In each of the last three election cycles, Democrats—the self-styled party of the middle-class—have lost the middle class by an average of seven points, a combined margin of defeat of 20.4 million votes.²² In 2014, this margin was 11-points,²³ indicating once again that the “fairness” agenda and narrative Democrats offered did not connect well with middle income voters. Between 2008 and 2013, party registration for Democrats shrunk (-428,687) as Independent registration surged (+2.5 million).²⁴ And, at the sub-presidential level, Democrats are in their deepest hole in nearly a century. Democrats today hold fewer House, Senate, and governors’ offices than at any time since 1930. When state legislative bodies are included, Democrats now have the smallest number of legislative majorities since Reconstruction. These trends should compel the party to rigorously question the electoral value of today’s populist agenda.

In contrast, political moderates view the erosion of the American Dream as less about unfairness and more about the dynamics of the new economy—where we are now in competition for jobs with everyone everywhere, and digitization and robotics are disrupting almost everything. Just 28% of moderates feel that “the deck is stacked against me.”²⁵ By a 67-27% margin, moderates would rather see Washington focus on economic growth over income inequality.²⁶ And, in a series of 2015 focus groups, swing voters pushed back against a narrative of unfairness and opined that the notion of the “deck being stacked” denotes pessimism, being “cursed,” “a probability of success [that is] slim to none,” and a “lack of hope for change.”²⁷

Rather than being consumed with populist anger, moderates expressed a different emotion: economic anxiety. They felt they had survived the recession not because of government intervention, but because they did the right things on their own—sacrificing, tightening their belts, staying out of debt, postponing luxuries, and taking on extra work.²⁸ But even though they have re-defined downward what it means to get ahead, they still express concern about reaching even that lower bar of success. They worry that as the economy goes through these vast changes, the best days for them, their children, their community, and their country may be in the past. And insofar as they are angry, their anger is directed toward a polarized government that lets them down, a Washington that bickers, and a political climate consumed by “my-way-or-the-highway” posturing, self-interest, and a lack of respect for the views of others.

We have a new economy and I don’t think we’ll ever recover to the same place we were before. Things are different and changed and so should the mindsets of individuals, companies, and the government. We need to find solutions that adapt to this new economy and not live in the past looking for the way things were.

— Millennial female focus group participant, July 2015²⁹

So what must Democrats do to offer a narrative and agenda that can restore broad prosperity and help the party do better at the ballot box in the long-run?

They must begin by recognizing that while this transition to a global, digital economy is a paradigm shift comparable in scale and scope to our move from an agrarian to industrial economy—2015 is simply not 1915. Large government was absent 100 years ago; today, total government spending is more than one-third of the economy.³⁰ There was no safety net back then; today’s social safety net now ranks 2nd in social spending and subsidies among wealthy nations, according to the Organization for Economic Cooperation and Development (OECD).³¹ We had few regulations and worker protections and little legal infrastructure to enforce them; we now have myriad regulations and an extensive enforcement capacity. The top tax rate was 7% a century ago;³² it is 42% today* and is among the most progressive tax codes in the world.³³ From climate regulations to the critical Dodd-Frank reform legislation, we have come a long way in the last decade. That is not to say that the safety net cannot still be strengthened, regulations toughened, enforcement beefed up, and taxation made more just. But this century demands dramatically different priorities.

*This includes the 39.6% marginal tax rate plus the 1.45% Medicare surcharge from the 1993 budget deal and 0.9% surcharge from the ACA in 2010.

Kodak, with its 145,000 employees, was not undone by economic unfairness, but by digital photography and the fact that people can take photos with their phones. Nine years ago, Borders Books had more than 1,000 stores and over 35,000 employees.³⁴ Four years ago, it liquidated. This did not happen because of a stacked deck in Washington, but because of the Kindle and Amazon. Tower Records fell to iTunes. Radio Shack’s more than 7,000 brick-and-mortar stores were ill-suited for internet sales.³⁵ Airbnb did not exist ten years ago; by next year, it will serve more travelers than the largest hotel chain in the world,³⁶ and yet it will employ just 1,600 people³⁷—about the same number of people employed as hotel desk clerks in North Dakota.³⁸ Similarly, Lyft and Uber weren’t even imaginable just eight years ago; now they are increasingly used as an alternative to the highly regulated taxi industry. The daily reality for many working and middle-income voters is less about being treated unfairly and more about finding a way to succeed in an economy where change is occurring at a dizzying pace.

Most poignantly for Democratic policymakers, while voters try to navigate these economic tides, they sense our public policies and institutions haven’t been modernized for this global information age. They worry that they and their families are on their own in this journey, and that the basic middle class bargain—work hard, play by the rules, achieve the American Dream—has fallen into dis-repair. Driving this anxiety is deep skepticism about the efficacy of government, especially as a vehicle to help them succeed. To cite just one statistic: in a 2013 Gallup survey, 72% of voters cited “big government” as the greatest threat to the country, while just 21% named “big business”.³⁹ This sentiment is a potent indicator of our national failure to re-imagine, much less reform—not simply expand—our government institutions, regulations, and policies to better fit this new era.

Thus, to ensure America and Americans are ready for this “Kodak” moment, a modern Democratic economic agenda should be organized around one over-arching goal: sustained private sector economic growth that expands and greatly benefits the middle class. And given the existing dynamics—a truly global economy, an ongoing technology revolution, and an already expansive government—the most effective formula for achieving that will be one that focuses relentlessly on the virtuous cycle that will drive widespread prosperity in the 21st century: more skills, more jobs, and more savings.

• Skills: Gone are the days when getting a high school diploma was enough to secure a middle-class lifestyle. Attaining and holding a series of solid-paying jobs now requires far more knowledge acquisition and mid-career learning. Yet our K-12 system is mired in mediocrity, higher education costs too much and delivers too little, and there are no easy avenues to keep one’s skills sharp over decades. The result is a massive mismatch between skills and available middle-income jobs that is likely to only widen.
• Jobs: Businesses are no longer required to locate, expand, and hire in the U.S. Globalization and digitization have transformed where and how jobs are created. Democrats too often are playing catch-up in this new economy, failing to re-think regulations, the tax code, R&D investment, small business promotion, export policy, and foreign direct investment to best enable private sector job creation.
• Savings: With entitlement spending already on an unsustainable path, wages squeezed, and defined benefits plans increasingly relics, we need to focus on fresh strategies to boost savings, giving job-hopping Americans a better shot at financial security for their families.

Bill Clinton began the conversation about economic modernization in the quieter and prosperous 1990s; President Obama continued it by making health care portable and secure, updating Wall Street rules, cutting the budget deficit, and pursuing the biggest export deal ever. But as the global economy evolves, so too must the Democratic Party. This is a discussion the Democratic Party will have for decades to come, as it seeks a substantively and politically resonant response to the economic enigma of our time: how to restore middle class well-being in ways that seek to seize, not stifle, the forces that are propelling our global, digitized century.

Building off the analytic and narrative shift laid out so far in this report, we turn next to exploring the major trends in skills, jobs, and savings. We then propose a set of ideas that could form the foundation of a modern Democratic economic growth agenda—one that shows that Democrats can govern and offers the best opportunity for generating long-term shared prosperity and restoring the timeless and essential American promise: if you work hard and play by the rules, success will be yours.

Section 2: The Agenda

Summary: In this section, we call for an ambitious and actionable Democratic economic agenda organized around one over-arching goal: sustained economic growth that expands and benefits the middle class. We propose more than 70 policy ideas to create more skills, more jobs, and more savings. These budget-neutral policies provide more than $1 trillion in new investments in jobs, growth, education, and people. And the agenda restores the quintessential American promise: if you work hard and play by the rules, success will be yours.

Launch a Skills Revolution

We outline three major trends that are having profound effects on how Americans obtain and retain skills from childhood through their career: Stalling Schools, the College Wall, and Adult Atrophy. We then call for a skills revolution through the entire learning lifecycle—from age 4 to 64—so that far more Americans possess the skills to get and hold 21st century middle class jobs.

Policy Snapshot

• Make Pre-K matter for those who need it most. Comprehensive, peak-quality pre-K for every low- and moderate-income three- and four-year-old in the nation.

• Modernize the teaching profession. Robust loan forgiveness, enhanced teacher certification programs, an overhaul of the way we pay and promote teachers, and national teaching academies.

• Construct a new College Compact. Hold colleges accountable for improving instruction, increases abysmal graduation rates, and improves student outcomes so a family’s biggest investment in the future pays off.

• Mid-career Prep for Success academies. Free, high-quality prep courses for adults to hone basic skills so they can then succeed in community colleges or worker training programs.

• Link job training to employment. Reward training programs that actively engage local business, use labor market data and job projections to tailor training, and bring transparency to the job market.

• Become a global skills magnet. A renewed call for comprehensive immigration reform that prioritizes skills-based immigration, creates a path for temporary workers, and brings undocumented immigrants into the legal economy.

Change the Jobs Equation

We describe three major trends that are reshaping where and how jobs are created: the Upside-Down Economy, the Anywhere Economy, and the Malnourished Economy. We then show how to increase private sector jobs by getting businesses to locate, expand, and hire in the United States.

Policy Snapshot

• Establish a $400 billion Strategic Investment Initiative. A fully offset infusion of new capital for federal investments in infrastructure, research, science, energy, and advanced manufacturing that directly creates private sector jobs.

• Increase U.S. annual exports by $1 trillion by 2025. TPP and TTIP trade deals, personalized export assistance for small and medium-sized businesses, and streamlined export bureaucracy.

• Unleash the full potential of women in our economy. More available and affordable child care, a “phased leave” work option for new parents, and more capital to women-owned businesses.

• Modernize the tax code. Revenue-neutral tax reform that lowers tax rates, broadens the base, eliminates loopholes, and makes the United States more attractive for businesses to locate and expand within our borders.

• Create a Mobility Fund to bring jobs to low-income areas. Raise the top capital gains rate by 5-points and apply the $80 billion in savings to a Mobility Fund that leverages and attracts over $700 billion in private capital to remake low-income areas with sustainable jobs and businesses.

Rewire Compensation to Boost Savings and Wages

We describe four major trends that are reshaping the workplace and worker compensation: the Hopscotch Workforce, the Nickel-and-Dimed Workforce, the Asset-Starved Workforce, and the D.I.Y. Workforce. We then propose a series of policies to boost savings, giving job-hopping Americans a better shot at financial security.

Policy Snapshot

• A minimum pension that closes the wealth gap. A minimum pension of 50¢ an hour, on top of current wages, to help all working Americans build assets, supplement Social Security, and guarantee a comfortable and dignified retirement.

• Home Equity Vouchers for 12 million families. A $500 annual matching contribution for additional principal payments above a family’s current monthly mortgage to help build home equity, relieve the burden of debt, and realign incentives in the mortgage market.

• Wealth Builder Contributions for 90 million middle class workers. An annual contribution of $500 that can be directed to retirement, college savings, student loans, or a mortgage.

• A middle class wage hike through trimming the cost of non-wage benefits. Fifteen policies that would reduce both federal government health care spending and health care costs to employers and employees—making much needed room for increased wages.

• A regional minimum wage hike. Raise to $10-$12 by 2020 based on average hourly wages and regional cost variations, with readjustments every 3 years.