What Role Can Health Care Reform Play in Restoring Middle Class Prosperity?

Much of the rhetoric coming out of Washington these days is about improving the lives of the middle class. For example, the Vice President’s Middle Class Task Force is focused on “raising the living standards of middle-class, working families in America.” The choice of language here is politically astute since 92 percent of all Americans consider themselves either middle class or working class, according to the National Opinion Research Center. Even people with annual incomes as high as $200,000 say they are “middle class.”

Taking a more limited but still broad approach and defining the middle class as the 60 percent of the population that had household incomes between $20,000 and $100,000 in 2007, we find that this group has not exactly prospered in recent years. Indeed, since 2000 their real incomes have fallen after decades of only modest increases, especially for those in the lower end of this range.

Moreover, much of any gain they’ve experienced is related to the fact that more of these families now have two earners and not because their wages have grown in line with productivity, as noted in both the Vice President’s Task Force and in Creating an Opportunity Society.

Consider a typical high school-educated man just entering the work force. Back in 1973 he earned close to $30,000 a year in today’s dollars. By 2007, he was only earning about $23,000. If the productivity gains that the economy experienced between 1973 and 2007 had been equally distributed across the population, he would have earned about $50,000 a year by the end of this period – more than twice what he actually earned.

Of course, one reason that productivity gains have not been equally shared is because our society now needs more educated workers.

Still the Administration is right to focus on the importance of restoring a more broadly shared prosperity. Economic progress, measured only in terms of GDP growth, is not a sufficient metric when most of the gains are going to people at the very top of the income distribution. The Administration is also right that health care reform, if designed to slow health care spending, can play a role in making life better for this group. But they haven’t spelled out the linkages here in any detail. What they need to explain is that wages have not increased very much for middle-wage workers, in part because spiraling health care costs have eaten into the wage increases their employers could otherwise have afforded, a point made by my colleague, Gary Burtless.

But this also means that health care reform that fails to slow health care spending by improving the efficiency and effectiveness of the system will mean continued downward pressure on wages and faltering progress for the middle class. The simple reason is because employers cannot afford to simply pass on higher health care costs to consumers in a globally competitive economy so it is their employees who take it on the chin. To be sure, these employees are getting something of value as health insurance premiums rise, but the inefficiencies embedded in the current health care system and the tax incentives that favor health-heavy compensation packages are a little recognized culprit in retarding wage and income growth.

Restoring the prosperity of the middle class is a tall order and will not be achieved by health care reform alone. But health care reform will be a pyrrhic victory if all it does is expand coverage and increase choice, without substantially affecting what our health care dollars buy.