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House, Senate Committees Focus on Economic Security of the Middle Class

On January 31, the Joint Economic, House Ways and Means, and House Education and Labor Committees held hearings examining the economic condition of middle class families, with a focus on income security, retirement and personal savings, and globalization.

Joint Economic Committee

The Joint Economic Committee focused its hearing on promoting middle class prosperity. In his opening statement, Chair Charles Schumer (D-NY) said that the duty of the committee was to “ask difficult questions and challenge assumptions” as they considered economic reforms. Calling the middle class “the engine of the American economy,” Sen. Schumer said that “all is not well. Raising a family, buying a home, and saving for retirement are becoming hurdles for ordinary, hardworking people.” He called for a new direction to promote economic growth, one that would reduce income inequality.

Ranking Member Jim Saxton (R-NJ) said, “A lot has been said about income inequality, but the fact is that it hasn’t changed much in recent years.” He said that the committee was “wise to examine policies that might encourage personal savings and retirement savings;” such policies “promote the dynamism of the U.S. economy.” However, Rep. Saxton cautioned against acting too quickly, saying, “Congress will have to carefully consider these data and other relevant statistics in order to make informed policy decisions.”

Dr. Lawrence Summers, former secretary of the Treasury and president of Harvard University, said that the United States is facing three policy challenges: “returning its finances to a sustainable basis, making necessary investments for the continuation of rapid economic growth, and assuring the benefits of growth are widely shared, and in particular, that we continue to have the strong middle class that has long been the underpinning of our democracy.” Dr. Summers said that America must invest in science and technology and education as “a growing body of evidence suggests that pre-school education has an enormous rate of return, particularly for children from disadvantaged backgrounds.”

Dr. Richard Vedder, a professor at Ohio University, said that his colleagues on the panel “painted a somewhat pessimistic and perhaps mildly alarming picture of the American economy.” Dr. Vedder shared statistics from the Economic Report of the President, statistics that contradicted the claims of rising income inequality made by other witnesses. Among other figures, the report stated that real hourly compensation (wages after taking into account inflation) has risen 75 percent since 1964. “You don’t need a Ph.D. in economics,” he said, “to observe that never has a society had a middle class more used to what once were considered goods and services available only to the uber rich.” Dr. Vedder said that “history again shows disappointing results of many initiatives to help the poor or middle class…Despite spending far more in real terms per student than a generation or two ago, American students do not appear to be learning much more, and education for lower income students is particularly deficient…While Medicaid has brought some increase in medical care for the poor, it has done so at an enormous cost to society, and the cost pressures of a highly inefficient system are leading companies to cut back on health care benefits for working middle class Americans.” Dr. Vedder concluded his remarks by saying that past analyses of wealth-enhancing policies show that “rising government spending is associated with falling market values and wealth” and as such he urged Congress to restrain government spending.

“The problem [of income inequality] has been with us so long that I fear we may become inured to it,” said Dr. Alan Blinder, a professor at Princeton University. Dr. Blinder said the primary reason for the rising level of income inequality is that “sometime in the late 1970s, the market turned ferociously against the less skilled and the less well educated.” He argued that Congress should not combat income equality with protectionist trade policies, but rather “cushion the blow, [by] raising the minimum wage and the EITC [Earned Income Tax Credit], devoting more resources to compensatory education, and making health insurance more affordable.” But, said Dr. Blinder, the government hasn’t cushioned the blow; instead, it “piled on by enacting tax cuts for the rich while permitting or causing large holes to emerge in the social safety net.” Dr. Blinder emphasized education repeatedly in his testimony as a way to “ensure that our labor force and our businesses supply and demand the types of skills and jobs that are going to remain in America rather than move offshore.”

During questions, Sen. Amy Klobuchar (D-MN) asked Dr. Blinder to elaborate on the ways in which the recent tax cuts aggravate the problem of income inequality. Dr. Blinder said that it was “hard to imagine a more regressive tax cut.” Sen. Klobuchar also asked the panelists how Congress could simultaneously combat income inequality and reduce the trade deficit and national debt. Dr. Summers advocated closing tax loopholes for corporations, such as offshore tax shelters.

Sen. Schumer asked the panel what specific measures they would recommend to decrease income inequality. Dr. Blinder said that we need to do a better job cushioning those who fall and that he would argue that “we need to make the cushion a trampoline to get folks back into the market where they can really compete.” Dr. Vedder recommended more research and development and restructuring the education system to make it more competitive.

Robert Rubin, a former secretary of the Treasury, also testified.

House Ways and Means Committee

The House Ways and Means Committee focused its hearing on economic challenges facing middle class families, including wage stagnation, prolonged unemployment, pension benefit plans, and the increasing costs for education, health care, and energy.

Dr. Peter Orszag, director of the Congressional Budget Office (CBO), reported on national economic volatility. The CBO analyzed data from 2001 and 2002, and, after adjusting for inflation, “one in four workers saw his or her earnings increase by at least 25 percent, while one in five saw his or her earnings decline by at least 25 percent. A substantial portion of workers, 11 percent, saw their earnings decline by at least half.” Dr. Orszag attributed variability in wages to several sources, including the decision to leave the labor market to raise children, involuntary job loss, disability, and retirement, but noted that the variability was most acute among the least educated.

“The most significant economic and social change in the past half-century has been the movement of women into the labor market,” said Dr. John Goodman, president and CEO of the National Center for Policy Analysis. “Since the 1950s, the labor participation rate of women ages 25 to 55 years has increased more than 75 percent. Today, more than 60 percent of mothers with children under the age of six are working,” he said. However, Dr. Goodman told the committee that current tax and pension law and benefit policies “assume women never left the home.” He called the committee’s attention to unfairness in pension and benefit policies, specifically for women, who are more likely to work part-time and more likely to change jobs, and are burdened by programs that penalize job switching, such as slowly vesting pension plans. He said the maximum tax credit for child care is $1,050 per year “well below most families’ actual expenses,” and that no tax credit exists for “uncompensated care provided by a relative, friend, or family member.” Dr. Goodman called for more flexible workplaces wherein employees could decide whether to receive benefits or higher wages; this, he said, will avoid a “duplicative and unnecessary set of benefits.” Dr. Goodman concluded his remarks with several suggestions for improving both the workplace and the economic security of the middle class, including: making all employee benefits personal and portable so that they can travel with the employee from job to job, changing the tax system so as not to penalize two-earner couples, and increasing the flexibility of labor law to make it “easier for workers (especially parents with young children and caregivers for elderly parents) to choose alternatives to the traditional 40-hour work week.”

Dr. Diane Rowland, executive vice president of the Kaiser Family Foundation, focused her testimony on the “growing burden of health care costs for America’s families, and the challenge of making affordable coverage a reality for all Americans.” Dr. Rowland said that employer-based coverage is declining, especially among low wage workers, but that even when health care coverage is offered, “it is becoming increasingly unaffordable for many…The average annual family premium reached $11,480 in 2006, and the average family contribution was $2,973. This means a family earning $40,000 in 2006 would have to pay 7 percent of their pre-tax income for their share of health insurance premiums. At $11,480 per year, the full cost of family coverage now exceeds the full-year income of a minimum wage worker.” Even families with health care coverage are burdened by the cost of health care: “In 1996, about 16 percent of the middle class had out-of-pocket health expenses that consumed at least 10 percent of their family income. By 2003, however, 23 percent of middle-income families experienced a financial burden from health care costs that exceeded 10 percent of family income, and about 6 percent had health costs that consumed over one-fifth of the family’s disposable income.” She concluded her remarks saying, “As Congress moves forward to address rising health care costs and their impact on America’s families, it will be important to address not only the cost of health insurance, but also the impact of any changes on reducing the uninsured population and promoting improved access to affordable care for all Americans. Shifting more costs onto consumers could further endanger access to care and financial security.”

“Low- and moderate-income families face unique retirement security challenges,” said Dr. Jason Furman, a senior fellow at the Brookings Institute. “Financial planners generally recommend that retirement income replace about 70 percent of pre-retirement income and Social Security gets the typical family about halfway to this goal,” he said. Dr. Furman said that in the past, many workers could depend on pension plans but that there is a shift to “defined contribution plans” today; that is, accounts managed by the employee and subject to market risk. These plans “present a tremendous opportunity for the workers who participate, make smart choices, and invest during strong markets, [but] they also present a substantial risk to workers who fail to participate, make the wrong choices, or invest during weak markets,” he said. Low and moderate income workers face special challenges in saving for retirement, Dr. Furman said, because they may be forced to deplete savings during hardship and asset tests for some programs “mean that low-income families can face a higher effective tax rate on their saving than high-income families.”

Also testifying were Dr. Eugene Steuerle, a senior fellow at the Urban Institute, and Dr. Jacob Hacker, a professor at Yale University.

House Education and Labor Committee

Chair George Miller (D-CA) said, “We are here today to discuss the economic squeeze on America’s families, and to learn what we can do to strengthen and grow America’s middle class.” He continued, saying, “I hear from workers whose basic expenses for housing, food, education, transportation, and healthcare keep going up, even while their paychecks stay about the same size.” Rep. Miller concluded his remarks, saying, “We don’t have to accept the middle class squeeze as a fact of life. We can promote policies that will make work pay, that will make healthcare stable and accessible; and that will ensure a secure retirement for everyone.”

“I’ve never been one to engage in class warfare, and I’m not about to start here,” said Ranking Member Howard P. “Buck” McKeon (R-CA). “I’ve always found that, while pitting one class against another often makes for good politics, it rarely makes for good policy. And frankly, I think Members in both parties have a good story to tell when it comes to our economy, because our policies have worked and worked well.” Rep. McKeon touted the current unemployment rate 4.5 percent and “record high combined pay and benefits” as signs of economic growth and success.

Dr. Eileen Applebaum, director of the Center for Women and Work at Rutgers University, said, “There has been a dramatic increase in women’s paid employment especially in the employment of mothers of young children as women have responded to both increased opportunities and increased financial pressures on families with greater attachment to the paid workforce. More women are working and working more hours than ever before. Workers have generated a huge increase in the size of the economic pie.” Dr. Applebaum said that families’ working hours have increased to keep pace with the cost of consumer goods, but families have worked “without the benefit of affordable quality child care, paid sick days and family leave, or greater control over work schedules.” These factors have led to a “time squeeze” on American families that is especially acute for those caring for elderly parents and single parent households, she said. Dr. Applebaum said that the declining presence of unions, combined with rising inflation and job insecurity, are stretching families to their economic limit. She advocated increasing the minimum wage, strengthening union protections, paid family leave, and increased education and training as solutions to the problems facing middle class families.

“American labor markets are strong and are the envy of the world,” said Ms. Diana Furchtgott-Roth, director of the Center for Employment Policy at the Hudson Institute. “Last December, the payroll survey recorded an increase of 167,000 jobs. Over the past year the economy has created 1.8 million jobs, of which 1.6 million are in the private sector.” Ms. Furchtgott-Roth said that the committee should examine consumer spending as a guide to well-being, rather than pretax income. “Last year,” she said, “Americans in the lowest income quintile spent an average of $11,247 per person, according to the Bureau of Labor Statistics, compared with $15,843 for middle income quintiles, and $28,272 for the top quintile. The top group is spending only 2.5 times as much as the bottom group, and 1.8 times as much as the middle classes. This is not major inequality.” She strongly emphasized the need for education, saying that “Lower-skilled workers earn less and are more likely to be unemployed than higher skilled ones. Hence, it is vital to take a serious look at education.” She recommended against raising the minimum wage, saying that employers will not be able to absorb the associated costs.

Rosemary Miller, a flight attendant, testified about her cut in benefits following her employer’s bankruptcy filing. After the filing, her employer froze her pension and reduced her wages and benefits. “The bankruptcy laws have become a smokescreen for union busting and a tool to destroy employee contracts that were originally bargained in good faith,” she said. “The abuse of these laws has eliminated employees’ access to legal self-help when confronted with gross inequities in the sacrifices they have had to make during economic hard times.” She concluded her remarks, saying, “I know that there are many issues facing our government today. But when you, the Members of Congress, walk onto an airplane, or check in to a hospital; when you send your kids to school, or go to the grocery store, or call the police, you expect us to be there to do our jobs. Now we are asking you, as legislators, as law- and policy-makers, to do yours.”

Kellie Johnson, president of ACE Clearwater Enterprises, an aerospace manufacturing company, told the committee that the country has an “urgent” problem an aging skilled workforce coupled with rising demand. She used her own company as an example: “ACE Clearwater currently has 12 open positions…Our biggest challenge is finding skilled personnel…ACE Clearwater is doing its best to provide good quality jobs, but we must see a resurgence in this country of educational skills programs to stress that people can make a great living through the many opportunities that manufacturing has to offer.” She implored the committee to approve policies that would result in a “highly skilled and adaptive” workforce. Also testifying were Dr. Christian Weller, a senior economist at the Center for American Progress, and Dr. Jacob Hacker, a professor at Yale University.

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