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Middle Class Series: A Sweet 16 to Build a Strong Middle Class

Policies to Strengthen the Foundation of Our Economy

SOURCE: AP/Geoff Crimmins

An unidentified University of Idaho student studies at the Teaching and Learning Center on campus in Moscow, Idaho. Policies to help bolser the middle class include rewarding students who work their way through college, awarding students college credit for proven knowledge, and connecting student loan repayments to postcollege pay levels for new graduates.

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President Barack Obama has focused on the middle class since taking office, whether in the form of the Affordable Care Act, which addresses the critical middle-class challenge of providing affordable, high-quality health care for families, or by providing tax relief. Increasingly the president and his team are zeroing in on a strong middle class as integral to the vitality of the American economy as a whole—and the State of the Union address coming next Tuesday will be another opportunity to emphasize middle-class-led growth and to mention additional policy measures.

The 16 reforms below do not come close to rebalancing the scales of our economy between the wealthy and the 99 percent. For instance, they don’t focus on the shamefully modest taxes we impose on the superwealthy or the dangers of financial markets diverting resources from the real economy into casino capitalism.

But they do fit into a larger agenda to create jobs, strengthen the middle class, and ensure that the economy works for everyone. These are ideas—some modest, others more sweeping—that can spur middle-class-led growth but haven’t received the attention or support they deserve.

This is a strategy that makes sense intuitively both to work-a-day Americans and to those of us who study how the economy works and embrace a progressive vision for the growth of our country. Our increasingly unequal society has made the Great Recession and its aftermath worse, has weakened the will and ability to address our economic challenges, has permanently destabilized our economy, and has undermined basic mechanisms that make an economy thrive.

The Center for American Progress website is full of ideas that help the middle class and create jobs. This sweet 16 list highlights additional policies to help rebuild the middle class that should also become part of the national debate.

1. Get young people into jobs so they can be working Americans

Young adults across our nation are among the hardest hit by unemployment, and the inability of these young adults to find jobs is likely to have long-term effects on their economic prospects.

We can address this challenge by putting these young people in full-time national service positions in AmeriCorps, VISTA, YouthBuild, and the youth service and conservation corps that would fill gaps in the services that communities need, prepare young people for future employment, and provide them education awards to pay for college or graduate school.

Fully funding the existing Serve America Act would create 88,000 new youth jobs and enable the more than 15,000 schools and nonprofit groups to engage 170,000 new national service participants in fiscal year 2013.

While pushing national service is not a new idea, making it part of a targeted workforce development and job creation strategy is.

2. Let the aging unemployed retire with dignity

Those unemployed who have worked all their lives and are approaching retirement should be allowed to retire with dignity instead of competing with younger workers for jobs that they’d only hold for a year or two anyway. For 2012 let workers retire a year earlier and get their Social Security benefits without the penalty. The Social Security trust fund would be reimbursed from the general budget.

3. Expand the federal “jobs accelerator” program

Just $200 million in funding could result in 1,800 new businesses started by middle-class entrepreneurs employing thousands of middle-class workers. The Economic Development Administration, the Department of Labor’s Employment and Training Administration, and the Small Business Administration funded the first Jobs Accelerator project in September 2011 with $37 million from existing agency budgets. The program could be expanded through new designated funding, additional financial support from existing partner agencies, or contributions from new partner agencies.

4. Create a common application for federal programs for entrepreneurs

The application process for federal programs for trade, technology, training, and economic growth can be simplified so that middle-class entrepreneurs who can’t afford a team of lawyers can navigate the process.

The president took an important step on January 13 by announcing his plans to create one agency to unify commerce, trade, and assistance programs for businesses large and small. But he doesn’t need to wait for Congress to act. With an executive order the president could jumpstart the creation of a “common application” that would allow small businesses and their regional partners such as universities, manufacturers, and regional economic development organizations, to have easier access to the hundreds of existing federal assistance programs for businesses and regional economic stakeholders.

The executive order should instruct agencies to work to streamline management of parallel programs; integrate missions and criteria across agencies to allow for deeper coordination; and encourage assistance recipients to connect with regional partners with complimentary goals.

A common application that streamlines federal grant, loan, and credit enhancement, and technical assistance programs would empower not only small businesses but also the regional partners whose success they depend on to work together toward shared economic goals.

This policy proposal is explained in detail in the forthcoming Center for American Progress paper, "Rewiring the Federal Government for Competitiveness."

5. Reward students who work their way through college with increased access to federal student aid

Federal work-study aid should be expanded through stand-alone legislation to help working students afford college. Benefits ($3,000 to $5,000) could be targeted to Pell Grant recipients by matching the aid to the size of their Pell Grant award.

The work-study aid would be available during a student’s second year of study and be stacked on top of their second-year Pell Grant award. Providing this assistance in a student’s second year could serve as a strong incentive to complete a full load of credits in their first year. Studies show that one year of college credit often serves as a “tipping point” for substantially higher earnings in the future. Additional work-study aid would also reduce the record level of student loan debt that is currently burdening college students.

6. Save tuition costs for students by awarding them college credit for proven knowledge

As the cost of college tuition climbs, families are increasingly looking for ways to work toward a college degree without breaking the bank. One innovative approach is to facilitate students taking advantage of free college-level learning. These days there’s plenty of open courseware available for free on the Internet including from prestigious institutions such as MIT and Carnegie Mellon. Through these sources and many others, students on a budget can access college-level learning easily.

But getting credit for what they’ve learned is another matter. To count this independent learning toward a degree—or to demonstrate the learning to an employer—students must earn college credit. Some universities allow students to pursue credit for prior learning through an exam or evaluation called a "prior learning assessment." The problem is, though the learning is free, the assessments are expensive.

We propose that the federal government make these tests available for free for introductory college courses. The government should also require that colleges that receive federal financial aid funds accept credits earned in this manner. Through open courseware and free prior learning assessment, a student would be able to pursue up to a year of college education for free in a flexible, self-paced format.

7. Automatically connect student loan repayments to post-college pay levels for new college graduates

The payoff of a college education varies, and the rewards of a degree tend to be small in the years that immediately follow graduation. Student loan payments are the same throughout the repayment period regardless of whether a graduate is making $20,000 or $200,000. The student loan repayment system, which ignores the fact that income varies over time, isn’t working. The number of students who default on their loans each year is on the rise, and it doesn’t even begin to account for the individuals who become delinquent on their loans or put aside necessities in order to make their payments.

The Department of Education currently offers a better option for paying down loans: the Income-Based Repayment system. IBR is a pay-as-you-earn program in which students pay a percentage of their discretionary income toward their loans. The program gives students an opportunity to pay their loans back at a rate commensurate with their ability to pay.

IBR is currently an opt-in program, and very few students choose it. The Obama administration should make income-based repayment the default option for all borrowers.

8. Create a web-based national career guidance system to help workers navigate career advancement, education and training, and connect with future employers

This would entail using technology for two purposes. One is to create a home-base web platform (think E-Trade meets Facebook) in which individuals can manage their knowledge, skills, abilities, and interests as assets to be matched to labor market needs (a human capital asset profile). The other is to create a labor market information platform that uses web-scraping and data-mining technology to connect job openings, skills requirements, wages, and degree information in order to better understand the relationship between where jobs are, what skills are being well compensated, and what education yields those skills.

These platforms could be connected by the individual worker by having them give permission to potential employers to match their human capital asset profile to employment needs, or workers could search the labor market information platform to find good employment matches (think match.com).

The departments of Labor and Education could partner with state agencies to create such a program.

9. Boost the earnings of workers and provide a greater incentive for firms to hire new workers by making more workers eligible for overtime pay

Currently too many modestly paid, white-collar workers are largely unable to collect overtime due to unreasonably low-income limits ($455/week). These limits render many workers earning more than about $24,000 per year ineligible for overtime. This cuts into these workers’ earnings and provides little incentive for firms to reduce workloads on overburdened workers by hiring additional workers.

The Department of Labor should raise the minimum salary that a worker must earn to be considered a white-collar “executive, administrative or professional worker”—and therefore ineligible for overtime—and adjust it for inflation so that it keeps up with the cost of living.

10. Help all middle-class working parents afford decent child care by improving the existing child and dependent care tax credit

The cost of child care is a significant expense for many working parents and can be a barrier to employment. Making quality child care more affordable will lead to greater workplace stability for parents.

In prior years’ budgets, the president has proposed to nearly double the benefit that the child and dependent care tax credit provides many middle-class families by raising the income levels where the credit begins to phase out. In addition, making the credit refundable would enable an additional 1.6 million families to benefit from it.

11. Help middle-class families caring for aging parents by expanding the existing dependent tax credit to include a credit for eldercare expenses when the relative does not live with the taxpayer

Last session Sen. Amy Klobochar (D-MN) and Sen. Barbara Mikulski (D-MD) put forward a similar proposal in their bill, Americans Giving Care to Elders Act, or S. 1604, which would provide a tax credit of up to $6,000 for eldercare expenses related to the care of aging parents. This proposal could also be made refundable to provide extra help to lower-income families.

12. Enact a Consumer Bill of Rights for mortgage customers that would create consumer protections and standards for mortgage servicers to protect homeowners and ensure stability in the housing market

The current structure of the mortgage-servicing industry is such that servicers are responsible to investors and “owe no duty at all to consider the needs and interests of consumers.” That is, the clients of mortgage-servicing companies are investors in mortgage-backed securities for whom the servicers collect monthly mortgage payments from homeowners. As a result, servicers have no fiduciary responsibility to protect consumers from improper acts and omissions.

Mortgage-servicing standards will help strengthen the housing and mortgage markets, and for this reason the Federal Housing Finance Agency is within its mandate as conservator of Fannie Mae and Freddie Mac to pursue these consumer protection rules.

13. Fight rising gas prices by helping consumers spend less on gas

We need to get more consumers into more fuel-efficient or alternative-fuel vehicles—or out of their cars altogether. Cash for clunkers was successful in speeding up the purchase of new fuel-efficient vehicles. We recommend restarting the program and expanding it to include a broader range of oil-saving activities such as purchasing alternative-fuel vehicles and taking older vehicles in for major maintenance including tire inflation, installation of high-flow air filters, and other fuel-saving measures.

In addition we should help get commuters out of their cars by offering employers greater incentives to subsidize the use of public transit by their employees. Workers were allowed to exclude (for income and payroll tax purposes) up to $230 per month in employer-provided commuting benefits, whether for parking, mass transit, or vanpooling until 2012. But due to a historic quirk in the tax code, the benefit for mass transit and vanpooling (though not parking) shrunk to $125 starting this year. This means about $45 per month in additional costs to many middle-class transit riders, for whom transit expenses can be a sizeable part of their household budget.

14. Help middle-class families and small businesses fight the high cost of energy by making their homes and small commercial properties more energy efficient

The administration has already weatherized 788,000 homes, saving consumers more than $400 per home per year.

We can learn from past weatherization and appliance efficiency efforts to effectively help families reduce their energy bills. Look to the existing Weatherization Assistance Program, USDA Rural Energy for America, and Better Building Initiative programs to fund community-based weatherization projects, allowing cities to use teams of workers to approach residents and small-business owners in their neighborhoods to explain the economic value of energy efficiency retrofits and get people to sign up by street or block.

Aggregating homes and businesses in a neighborhood would allow teams of city-supervised workers to do the retrofits at scale, creating stable jobs while saving consumers valuable dollars on their energy bills.

15. Require companies that offer their CEOs “golden parachutes” in their contracts to offer strong severance packages to their other employees in the event of layoffs

While workers laid off through no fault of their own often get no help from their former employers and instead rely solely on inadequate unemployment benefits while they look for a new job, many CEOs who are let go for poor performance, or even misconduct, nevertheless receive golden parachutes large enough that they never have to work again.

That is why we should require companies that offer their CEOs golden parachutes in their contracts to also offer strong severance packages to their other employees in the event of layoffs. This could be enforced through a denial of the corporate deduction for the golden parachute and/or an excise tax.

16. Stop subsidizing excessive levels of CEO pay

Executive compensation has skyrocketed in recent years, and it is a major cause of the growing income gap between the middle class and the 1 percent.

Worse, excessive executive compensation is often rewarded through the tax code. A rule enacted in 1993 was intended to limit excessive executive pay by denying tax deductions for executive compensation at public companies in excess of $1 million. But gaping loopholes for “performance-based” pay (such as bonuses or stock options) essentially allow firms unlimited deductions. In addition, corporations regularly claim tax deductions for executive stock options that far exceed the expense reported to shareholders.

We suggest two pro-middle-class reforms.

First, the cap on deductibility should apply to an executive’s total compensation and be set at 25 times the nation’s median salary, which would restore a meaningful limit on deductible pay, tethered to the pay of regular workers (and even enable the cap to rise if median wages for workers also rise).

Second, the tax code should require that corporate tax deductions for stock options not exceed the expense shown on the corporation’s financial statement. Sens. Carl Levin (D-MI) and Sherrod Brown (D-OH) have introduced the Ending Excessive Corporate Deductions for Stock Options Act providing for consistent treatment of stock options for tax and financial reporting purposes. These reforms would prevent taxpayers from subsidizing excessive executive compensation.

Conclusion

We can expect President Obama to address how to create jobs and ensure that the economy works for everyone in the State of the Union address next week. The president is increasingly focusing on the middle class as being integral to the vitality of the American economy as a whole. The 16 policy recommendations above can’t fix all of what ails our economy, but they can help spur middle-class-led growth and create jobs. Consequently, the recommendations deserve to be elevated to the national economic debate—and it wouldn’t hurt if it is President Obama who gives them this attention as he addresses the nation on Tuesday.

Karla Walter is a Senior Policy Analyst with the American Worker Project at American Progress.

 

To speak with our experts on this topic, please contact:

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This is part of a special series: Middle Class Series

For more from this series, click here