The low-wage social contract has also contributed to a lack of aggregate demand. Because workers are also consumers, and because low-income households spend more of their money than do wealthier households, the low wage system limits the power of workers to help the economy grow by purchasing goods and services.

The Next Social Contract

That’s how we got here—but what might lie ahead?

While the “low wage” social contract may not be much of a bargain for many workers, there’s no pretending we can go back to the New Deal-era system of old. The combination of conditions that allowed for high wages, high profits, and low prices no longer exists in a service-based economy with more unstable employment and in which the declining number of manufacturing jobs are more subject to global competition. And while the welfare capitalist model did benefit many in the middle class, it often excluded African-American workers and was reliant on a family model based on a sole male breadwinner. The next social contract needs to adapt to these new economic conditions and further the huge strides we have made toward equality for women and minorities in the workforce.

What, then, would a better social contract look like?

First, we could accept the basic shape of the low-wage economy while softening its edges by asking government to do even more. With higher taxes on the wealthy, Washington could use the tax code to provide poor and middle-class families more generous means-tested subsidies to pay for childcare, education, and healthcare. Since the Clinton era, much of the Democratic Party has embraced this version of the social contract. It is essentially the model behind Obamacare.

The downside, besides the challenge of raising taxes, is that subsidies don’t guarantee affordability. They can even encourage industries to raise their prices; see, for example, the proliferation of cheap student loans, which have not made college much more affordable. What's more, means-tested programs for the poor often lack the political support needed to keep them strong.

Another possibility, which would please many progressives, would be to nudge the economy toward a social democratic model such as that of Scandinavia. This social contract would entail high wages, a high cost of living, and a universal welfare state paid for with high, relatively flat taxes.

But transplanting the Nordic model as a whole to the U.S. would be difficult in the face of fierce resistance to higher levels of spending. It would also be hard to import a system of benefits paid for by broad and flat taxes, like payroll taxes and consumption taxes, on a country like the U.S. with much greater inequality.

In our own work at the New America Foundation, we have outlined a third idea we call the “middle-income social contract.” It assumes that many service industries won't be able to offer their workers middle-income salaries, which means that, in addition to raising wages somewhat, the government will have to take a more active role in making essential services like education, child care and health care more affordable. The best way to do this is to provide these programs directly, such as through universal Pre-K, single-payer health insurance, or subsidies to the states for taking care of the elderly. Policymakers can begin to build a middle-income social contract by raising the federal minimum wage closer to a true living wage and expanding public early education, both of which are widely popular proposals.

The current low-wage social contract between American workers, employers, and the government has been a raw deal for most Americans. Just as the New Deal contract shifted to the low wage model, we need to shift once again to a system more suited to the current economy and needs of workers and citizens. The options for the next social contract are many—we just have to choose the right one.

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