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UNSTUCK

How can the world’s vanishing middle class escape an economic trap?

Incomes are stagnating, housing prices are on the rise and millions of people once on the cusp of stability are losing ground. From China’s industrial belt to the suburbs of Cleveland, Doug Saunderslooks at the causes and effects of – and cures for – a stalled global economy

Photography by Liang Qing and Dustin Franz for The Globe and Mail


DOUG SAUNDERS

CLEVELAND, OHIO, AND DONGGUAN, CHINA The Globe and Mail Last updated: Saturday, Feb. 20, 2016 12:03AM EST



From the moment he rises shortly after dawn, Song Xingming feels the effects of a stagnating economy. Stepping off the mattress, this muscular, compact man of 44 is careful not to wake his wife, Huihui, and their toddler daughter, Yishan, who share the single bedroom of their two-room rented apartment – a tidy and quiet place, but too small.


He laces his shoes for his morning jog, stretches, and looks across a chaotic urban vista he has watched grow bigger and busier over the two decades since he first moved here. This is Dongguan, a “third-tier” city of eight million in the great industrial belt of southern China, almost entirely populated with people from faraway provinces who moved here to earn a better life.

He listens. There’s the constant low crackle of nearby electrical towers in the damp winter air, and behind that, the more distant thump of the metal-stamping machines in the factory, a block away, where he has been working for 17 years.

Though he has only a primary-school education, Mr. Song is well aware of his place in the world economy. When he left his farming village in distant Sichuan in 1994, he was a skinny 21-year-old peasant, one of hundreds of millions like him who flooded into low-wage, export-driven industrial work in the coastal cities, making the products everyone in the world uses. He was part of a worldwide pattern: From Malaysia to Morocco to Mexico, hundreds of millions of people left for the better incomes of industrial life, even if it meant living, as Mr. Song did, in eight-to-a-room dormitories for 15 years.

Life did get better. He worked a metal-stamping press, then got some technical training and made a better wage supervising and setting up the presses, eventually earning $15,000 a year – tantalizingly close to his hard-fought goal of affording a home and a university education for his daughter, but not quite enough.

Now he’s stuck. “It’s frustrating. Although I have been here a long time, I am not finding any new places to be promoted,” he says quietly. Everyone he knows is caught in some version of this trap. China launched a bid after 2008 to undergo a second transition, into a middle-class society, hoping to replace foreign export sales and investment with domestic consumerism and equity markets. But behind this year’s market turmoil and slowing growth are signs that for a great many people like Mr. Song, the goal of a secure life is slipping away.

DIFFERENT WORLD, SIMILAR PREDICAMENT

On the other side of the planet from Mr. Song, April Alvis begins her morning in a much larger apartment and a strikingly similar sense of anxiety. As she prepares to leave for her job in downtown Cleveland, she looks out from her condominium’s window at a snow-covered scene of suburban calm: well-treed streets lined with modest, century-old, wood-shingle houses on big lots.

It takes a while to notice that some of these houses, about one in five, have recently become empty, abandoned or demolished.

Ms. Alvis, an elegant and self-confident woman of 49 who appears, by most measures, to have a successful middle-class life, is about to join the exodus: The bank is in the process of foreclosing on her apartment.

“It was a crush to the ego, realizing that, all these years of work, and I still was losing my house,” she says. “A lot of people here are living month-to-month, even if they’ve got college degrees.”

When she moved to the eastern suburbs two decades ago, they were the scene of social and economic progress. Her parents had been part of the first sizeable generation of African-Americans to use home ownership and university education to join the burgeoning black middle class. Ms. Alvis came of age during the Rust Belt years of industrial decline, earned advanced degrees in management and urban planning, and found work – first for government agencies, then for private consulting firms. She bought a nice car and, for $170,000 U.S., a condo in this racially integrated bedroom community that became a successful place during Cleveland’s 1990s renaissance, as the old blue-collar jobs were replaced with a new economy built on services centred on “eds and meds” – pharmaceutical industries and universities.

But then Ms. Alvis, and her community, got stuck. Her employment, after 2008, became a sequence of contract jobs, often without health insurance or pensions. The government agencies and corporations that had employed her directly before outsourced their low-level professional work to agencies and contractors. Her pay slipped, and the contracts becoming shorter-term. For a while, in 2012, she took a department-store job on the side to bring her earnings high enough to keep up her payments, but it wasn’t enough. She fell behind on mortgage payments, condo fees and property tax. During one lean period between contracts, she went on food stamps.

She landed a full-time job in August, but by then the arrears were overwhelming: The bank is still proceeding with its foreclosure, although Ms. Alvis is asking for an appeal, and she’s likely to declare personal bankruptcy.

THE SHRINKING MIDDLE

Ms. Alvis and many of her neighbours have seen their ambitions collide with three new realities of the U.S. economy – realities that have become increasingly prevalent in many Western countries since 2008.

The first is a decline in the quality, and security, of middle-income jobs. Median family incomes in the Cleveland area fell from $58,000 in 2008 to $46,000 in 2013, or 20 per cent, according to one study. The economy had shifted from secure industrial jobs to less robust service-sector jobs. The proportion of private-sector jobs in Ohio that are unionized (and thus have a greater likelihood of having pensions, health insurance and higher pay) declined from 24 per cent in 1983 to 9 per cent last year.

The second is the increasing difficulty, in many countries, of entering the middle class. According to an analysis by Brendan Duke, the head of economic research for the Washington-based Center for American Progress, the average cost, for a family of four, of the services that are generally considered the necessities of “middle class” status – child care, higher education, health care, housing and retirement – rose more than 30 per cent between 2000 and 2012. But average U.S. middle-class family incomes actually fell by 4.5 per cent during the 2007 to 2014 period. Housing is a major factor: The disproportionate cost of homes has created an insurmountable barrier, for many, to social mobility.

The third reality is the declining size and influence of the middle class. In 2015, according to a study by the Pew Research Center, fewer than 50 per cent of American families had middle-class incomes, down from 61 per cent in 1970. Both the low-income and high-income share of the population have grown; the space in the middle, where social progress so often occurs, is being chiselled away.

“There are fewer people in the middle, and being in the middle is less of a boost than it once was, because of declining median incomes,” says Mr. Duke. “Real incomes aren’t going up, but the cost of things you want to buy to consider yourself middle class are going up real fast.”

The eastern Cleveland suburb of South Euclid at least is still able to raise enough tax revenue to take some actions to try to prevent a downward spiral and, it hopes, ride out this moment of stagnation.

“About two-thirds of the households here have had no problem with their mortgages and are doing just fine – so the challenge is to keep those foreclosed properties from creating a climate of decline,” says Sally Martin, the city’s housing manager.

A big part of her job these days involves demolishing abandoned houses, planting trees on their empty lots, and encouraging developers to buy up the lots and build higher-income housing there. “We’re trying to reduce the number of vacant properties that result from this economy,” she says. “This isn’t really a housing crisis as much as an economic crisis whose symptoms are being felt in housing…we’re trying to keep it from causing wider forms of damage in the community.”

This isn’t the old story of industrial decline and jobs disappearing to Mexico or China: Post-industrial Ohio’s unemployment rate is well under 5 per cent and most people here have at least one job. Nor is it related to the subprime mortgage crisis that cost many urban Americans their homes after 2008: People in these inner-ring suburbs generally had premium mortgages and good credit ratings.

Rather, it’s a symptom of a changed world economy, in which labour markets, in both Asia and the West, are less stable, secure or predictable. Ms. Alvis’s neighbours include nurses and schoolteachers whose incomes have slipped below mortgage-supporting levels because professional work no longer provides the pay, job security and benefits that their parents’ factory jobs once did.

This faltering labour market is causing other forms of progress to stall: South Euclid, for example, is seeing a return to racial segregation. Its schools, which in the 1990s were a black-white mix, are now 80-per-cent black. The housing mix here has shifted to rental, mostly taken up by lower-income black families, while the more securely employed white parents have withdrawn their children to schools in wealthier white neighbourhoods; the effect is to reverse 50 years of equality gains, forcing black kids into inferior schools.

When one form of progress is blocked, others often follow.

‘A GLOBAL VICIOUS CYCLE’

In both Cleveland and in Dongguan, people are frustrated because the current economic slowdown is denying them the lives they expected, based on the previous 20 years of economic growth. This is a historically unique situation. There have been recessions, slowdowns and economic crises before, but none that have caused so many forms of progress to become arrested or slowed in so many countries at the same time.

“What's striking is how productivity growth has slowed in a wide variety of countries: advanced, middle income and developing alike,” says Barry Eichengreen, an economist at the University of California, Berkeley, who is famous for his analysis of the “middle-income trap,” which argues that formerly poor countries tend to get stuck when their citizens attain income levels just below middle-class levels – the point recently reached by many countries including China, Brazil, Russia, South Africa and India. At that point, he believes, these countries can no longer compete as low-wage exporters, but don’t have the domestic demand, or the research and innovation capacity, to become large-scale consumer economies.

But, he and other economists note, there are equally strong pressures pushing down growth and social mobility in the wealthier countries of the West. “It can't be all a middle-income trap if the problem is not limited to middle-income countries,” Dr. Eichengreen told me. “In some countries it is a failure to do more structural reform. In others it is a failure to deregulate. In others it is slowing global investment demand.”

One influential school believes that the slowing international economy is a direct result of stunted consumption rooted in declining middle-class populations. Larry Summers, the former U.S. treasury secretary, has famously defined it as a crisis of “secular stagnation,” in which a chronic shortage of demand (partly rooted in slowing population growth) causes economies to hoard cash rather than investing, causing interest rates to fall – an international crisis that “raises the spectre of a global vicious cycle in which slow growth in industrial countries hurts emerging markets, thereby slowing Western growth further.”

Ben Bernanke, the former chairman of the U.S. Federal Reserve, instead blames international flows of investment drying up, causing a similar effect. And Northwestern University economist Robert J. Gordon, in his new book, The Rise and Fall of American Growth, blames a shortfall in innovation and new technology, and argues that we need to wait for the next industrial revolution to begin.

But these causes have the same effects on the ground: It has become harder for many people to get ahead in life.

THE DONGGUAN HUSTLE

Song Xingming’s morning run takes him out of the cluster of ramshackle apartment buildings and sprawling factories, up a teeming retail street and into a more modern district full of call centres, warehouses and the glass-fronted offices of import-export centres. Here he is surrounded by a new generation of upwardly mobile worker, struggling against different economic circumstances: young, university-educated and working not in the southern Chinese factories but in the new economy.

One of them, a bespectacled 26-year-old with the gregarious manner of a salesman – albeit an exceptionally polite and somewhat nerdy salesman – is Wei Bin who, like Mr. Song, is a migrant from the centre of China. He has a degree in business management and believed he’d be able to own a home by this point, allowing him to marry his girlfriend and start a family (something that isn’t done in China without a house).

But that goal keeps getting more complicated. His entry-level management job, running an export e-commerce office owned by a huge state-owned conglomerate, pays a lacklustre $21,000 a year, not really enough to save for a house.

So he spends his weekends in Shenzhen, the larger city to the south, teaching a course in e-commerce – that is, telling people how to sell Chinese products to Westerners on Amazon and eBay. That gives him another $10,000. And he practices what he preaches, selling clothing and accessories online, packaging and mailing them, for another $10,000 to $12,000.

“There’s no way anyone can make it into a middle-class life now without two or three different ways of making money,” he says. This is the Chinese version of what some Westerners call “the gig economy” – rather than a single formal job, you piece together bits of income from, say, driving Uber and selling things online, and taking odd contracts.

For Mr. Wei, it means working seven days a week, and seeing little of his girlfriend. But it does give him some savings – just not enough, he fears.

Two-bedroom apartments in Dongguan typically cost between $200,000 and $400,000 (and China’s mortgages require at least 30 per cent down); those prices fell in 2014, but last year shot up by almost 20 per cent, after a new high-speed bullet train made Dongguan a desirable bedroom community for the larger city of Shenzhen.

“I feel that my dream of a secure family life is constantly just beyond my fingertips,” he says, shaking his head with exasperation as he prepares to make the long drive to his teaching job in Shenzhen.

Young, educated people like Mr. Wei were supposed to be the future of places like Dongguan. In fact, the city has gone to great efforts to change itself from a rough-and-tumble city of low-wage factories and prostitutes (its other famous industry) into a high-technology, knowledge-economy centre of innovation. But as the urban-policy scholar Desheng Xue of Sun Yat-sen University found in his research, the city’s attempt to move its economy up the value chain has not panned out: declining rental incomes from departing low-wage manufacturers have triggered a fiscal crisis, and it remains largely a city without a middle.

China’s authoritarian government seems ill equipped to conjure a middle-class economy as quickly as it would like. So the question is whether the money-making activities of hundreds of millions of people like Mr. Wei, cast out of the old economy but not yet fully in the new one, will eventually trigger a wave of innovation, economic activity and, in the end, progress.

TOP-DOWN, AND BOTTOM-UP

The challenge is to find ways to get some part of the system unstuck. This slowdown has shown, as never before, how interlinked the world economy has become, and how the frustrated lives of factory workers in southern China can be related to the fate of struggling homeowners in Ohio.

“If you look at the emerging economies, they haven’t been able to engineer a working transition out of the middle-income trap,” says Paola Subacchi, director of the international economics department at London’s Chatham House. “The great example of a country that successfully made it out of the mid-income trap and into a high-value economy is South Korea, and that’s the model that everyone wants to follow – but it’s really difficult to do that when the world economy is stagnant.”

In many wealthier countries, the only solution being seriously discussed is one that’s been employed on and off since 2008: Use large-scale government spending, in an atmosphere of near-zero interest rates, to generate demand in Western economies and, with luck, prime the pump across the world economy and get growth and progress going again.

But as our look inside Dongguan and South Euclid has shown, it is not just big macro-economic forces that have caused progress to become stuck: There are specific barriers in housing, education, labour markets, small-business policy, credit access, urban planning, university accessibility and social security that are preventing millions of people from moving forward, and which could be improved with smart policy interventions at the local, regional or national level. The Stanford University economist Raj Chetty, in his ground-breaking work on social mobility, identified a set of specific obstacles that, if removed, can make social mobility and economic equality improve sharply. Those include residential race and income segregation, neighbourhood economic inequality, poor quality primary and secondary schools, lack of community organizations, and lack of assistance for single-parent families.

The economy could become unstuck from the top – through massive government action – but it is just as likely to happen from the bottom, through technological change or policy actions that remove obstacles to joining the middle class. These are valuable and much-needed policy interventions at the best of times. They have become absolutely crucial in 2016, as we begin to realize that hundreds of millions of people around us are stuck in an uncomfortable place, just beneath the middle.


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