There Will Be No Real Recovery Without The Middle Class

What if they gave a recovery, and the middle class were never invited? Well, that’s an experiment we are running now, and, even with the recent strengthening of the jobs market, it’s not looking very good.

Over the last five years, Wall Street and the investor class have been on a bull run, but the economy has been, at best, torpid for the vast majority of the population. Despite blather about our “democratic capitalism,” stock ownership is increasingly concentrated with the wealthy as the middle class retrenches. The big returns that hedge funds, real estate trusts or venture capitalist receive are simply outside the reach of the vast majority.

A recent study by the Russell Sage Foundation suggests these patterns of inequality, which have been developing over the last several decades, have become more pronounced in the post-Recession years. In 2013 the wealth of those at the 90th and 95thpercentiles was actually higher than 10 years ago. Everyone else is lower.

The labor market may be strengthening, with the unemployment rate falling to 6.1% last month, but too many of the new jobs are low wage or part time. They aren’t providing the kick the economy got in the last, more broad-based expansion from robust consumer spending.

Wage growth has been weak, rising 2.5% annually since 2009, according to Bloomberg, compared with a 4.3% annual rise from 2001 to 2007. Consumer spending, which makes up roughly 70% of the economy, has expanded an average 2.2% since the recession ended, behind the 3% advance in the prior expansion.

And many working-age people are still sitting discouraged on the sidelines – the labor force participation rate remains the lowest since 1979.

People in marginal or part-time jobs are not likely to drive consumer spending. Instead we have seen the emergence of a new, top-heavy consumer market. Since 1992 the top 5% of households have increased their share of total spending to almost 40%, up from 27% in 1992.

Former Citigroup economist Anjay Kapur has described this situation as a “plutonomy,” in which the economy is increasingly based on the global wealthy and their tastes and predilections.

Meanwhile broader consumer confidence remains weak. Last year some two-thirds of Americans polled by the Washington Post and the Miller Center said they felt life had become tougher over the last five years compared to just 7% who thought theirs had improved. Pollsters also have found almost two-thirds of parents felt their children would do worse in life, a stunning shift from far more optimistic readings back in 1999.

The Housing Market

Historically housing has been the primary asset held by the middle and working class. Despite government efforts to keep mortgages affordable, post-crash, growth has been slow, and much of the buying restricted to investors, including major financial interests. Particularly damaging, there has been a marked decline in the “trade up market” and even more so, sales to first-time buyers, whose share of the market has declined to under 30%, well below the historic average of 40%. This reflects the weak economy, tighter lending standards, and, for younger customers, the heavy burden of student loans.

Some on Wall Street hope to profit from a perceived shift in America to a “rentership society.” Housing more of the population in rental apartments would do little to improve social mobility, as people end up working not for their own equity but to pay the mortgage of their landlords. Nor can the economic payoff from apartment construction come close to that of single-family homes. According to the National Association of Home Builders, building 100 new single-family homes adds 324 jobs to the average metropolitan economy in the year of their construction and 53 jobs annually in the following years. This compares to 122 jobs per 100 new apartments in the year of construction and 32 in the following years. With home starts at less than a third their 2005 level, lack of construction employment also deals a body blow to one of the primary sources of higher-paying blue collar jobs.

The Emasculation Of Small Business

In previous recoveries, small businesses have provided much of the spark and job creation. Not so this time. Small business start-ups have declined as a portion of all business growth from 50% in the early 1980s to 35% in 2010, while its share of employment dropped down from 20% to 12%. Indeed, a 2014 Brookings report revealed that small business “dynamism,” measured by the growth of new firms compared with the closing of older ones, has declined significantly over the past decade, with more firms closing than starting for the first time in a quarter century.

Nor is the future prognosis too good. The rise of the regulatory state, including the Affordable Care Act and higher taxes, amplified in deep blue states such as California, has hit smaller businesses hard. The gradual culling of smaller banks, traditional lenders to entrepreneurs, and the growing concentration of assets in the “too big to fail” banks, historically unfocused on the needs of small companies or individual proprietors, suggests credit may remain tough for grassroots entrepreneurs.

Needed: A New Paradigm

The recession and the weak recovery have taught us you cannot have strong economic growth without the participation of the vast majority of Americans. We’ve run an experiment under Bernanke, Bush and Obama to pump up the economy from above, and what we’ve done is squash the aspirations of those middle orders, particularly small business and the self-employed.

This issue should be at the center of the political debate.  I would welcome suggestions from the right and left about how best to restart a broad-based economic recovery. The best ideas may come from across the spectrum, such as flatter taxes, supported by many conservatives, as well as new spending on major infrastructure projects as improved roads, rivers and ports that generally come from more liberal groups.

The good news is the fundamentals for a broader-based prosperity, including the creation of high-paying blue-collar jobs, remain in place. Progress is already evident in the energy and some manufacturing-oriented regions. Restarting the housing sector — particularly the single-family home component — would do wonders for middle and working class people in many regional economies, as can be seen, for example, in Houston, where more homes will be built this year than in the entire state of California. Nationwide, the gap between  between demand and potential housing, according to the NAB, is roughly 1 million homes, which translates into close to 3 million jobs.

How to drive growth to these and other productive sectors may require not only changes in government policy but also reacquainting the investor class with the virtues of long-term growth, productivity and the revival of the mass economy. Perhaps once they do investors might earn something other than intense dislike from the rest of the population.

This story originally appeared at Forbes.

Joel Kotkin is executive editor of NewGeography.com and Distinguished Presidential Fellow in Urban Futures at Chapman University, and a member of the editorial board of the Orange County Register. He is author of The City: A Global History and The Next Hundred Million: America in 2050. His most recent study, The Rise of Postfamilialism, has been widely discussed and distributed internationally. He lives in Los Angeles, CA.