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By Tom Cushing

A few thoughts on restoring the middle class

Uploaded: Oct 26, 2011

Last week, I complained that none of the candidates for the highest office in the land are talking about what really ails the country – the steady decline of the middle class, since at least the 1970s. It's a difficult problem, as testified by the flood of two suggestions from the gallery. Both, however, hit on important themes: promoting the native genius for innovation, and reviving the manufacturing sector (although the latter's canard that there's a good trade to be made between environmental protection and industrial vitality just won't fly – indeed that's a 'race to the bottom' in which everyone is guaranteed to lose).

So, step into my revival tent for a threesome of issues that need to be addressed to resuscitate the middle class. The first two are intended to provide direct, immediate assistance to a specific sectors of the economy (manufacturing and construction), whereas the third addresses concerns about where America puts its emphasis for the future. We will return to the tent for more of these fixes, over time.

1 – Trade/Currency Adjustment: China, with its mammoth internal market potential and burgeoning export sector has, I believe, artificially undervalued its currency on the world markets. This policy has had the twin effects of making their exports 20-30% cheaper and thus more competitive than they "should" be, and retarding the development of those internal consumption markets that might be targets for American and other manufactured goods. The US should find ways to revalue its currency to counteract the Chinese strategy, as by countervailing duties on Chinese goods, or a general devaluation of the greenback.

I am aware that we risk Hawley-Smoot 2 in slightly more modern clothes, but instead of a general protectionism, this move would be designed to discipline pre-existing currency manipulations by Beijing. Consumers would also pay more for those now-underpriced goods; so be it.

2 – Construction and Housing: I am among those who believe that the economy will not recover until housing starts do – there are both construction jobs and all those manufactured goods that go into a new house. The spending power of the middle class has also been truncated by the fact that many, many mortgage holders are continuing to pay pre bubble-burst rates on their real estate that is under water. Strategic default remains an unacceptable option to many, for fear of FICO or eternal damnation. I would force the mortgage holders to value their investments at current market prices, and absorb the losses they should incur in free market conditions – it was, after all, BOTH borrower and lender who "made bad choices." Currently, only one party to those unfortunate transactions is bearing the brunt.

Revaluing would tend to break the log jams currently inflicting the real estate market – and let the losses fall where they belong. Near as I can figure, the banks are currently dribbling houses into the market to suit their own inscrutable purposes – but clearly having nothing whatever to do with the public's interest. Once the market has concluded its bottoming-out, builders can begin to adjust to the new reality in ways that will provide steady jobs and fuel consumer spending.

3 – Education: as I wrote last week, America achieved its current pre-eminent position as a nation of builders and doers, not staffers and money changers. I fear we have collectively become too focused on fields like law and finance, and not nearly enough on research (value-builders) and engineering (doers). For example, we've developed a ridiculously sophisticated industry of accountants and lawyers to figure out how to surf a ridiculously complex tax system. As finance has become the master, rather than the servant of industry, it has devised ways to re-pile existing boxes and extract value from them, rather than making more boxes. We need more boxes. As those "staff" functions have drawn-off an increasing number of the future Best-and-Brightest, America's universities have increasingly trained technical folk to work in other parts of the world.

So in addition to a vastly simplified tax structure to free-up all that churning talent (I like Fareed Zakaria's version best), I want to create public scholarship and loan incentives that are targeted to underwrite the study of engineering and science. If "shirt-sleeves to shirt-sleeves in three generations" is still true, as I hope, then many able and ambitious up-and-comers need assistance every year. If that government help serves to direct them into value-adding pursuits (rather than value-counting or value- keeping fields), then the effects will be felt domestically, and off into the future.

Fire away!