Banking Exchange Magazine Logo

America’s economic challenges

Former top bank regulator assesses economic challenges and opportunities of low- and middle-income Americans

  • |
  • Written by  Eugene Ludwig, Promontory Financial Group, with Philip Kalikman
  • |
  • Comments:   DISQUS_COMMENTS
Former Comptroller of the Currency Eugene Ludwig suggests multiple steps that could support a stronger U.S. economy. Former Comptroller of the Currency Eugene Ludwig suggests multiple steps that could support a stronger U.S. economy.

York, Pa., where I’m from, is emblematic of what’s happening in too many cities and towns across America. It used to be a bustling town with booming industry. Retirement for many wasn’t a worry because a good pension was essentially guaranteed. It was an article of faith that your life would be better than your parents’.

But, in today’s York, like many American cities and towns, even in the “upper-income” suburbs many children are on assisted lunch. In most families both parents work, or are looking for work, and guaranteed pensions are entirely a thing of the past. Wages have stagnated. Factories have closed.

It may be cheaper now to buy some consumer goods, like a television. But life’s necessities and opportunities to get ahead, higher education for example, are becoming out of reach.

This article elaborates on this economic reality, provides some reasons for it, and suggests why some policymakers haven’t fully understood it. And it concludes by making a few suggestions as to how we can begin to turn this dreadful situation around.

How bad is it?

Though total aggregate national income is up somewhat, real wage gains have at best stagnated for most Americans. More than 50% of income gains from 2009 to 2015 went to the wealthiest 1% of Americans, while the median American family still makes hardly more than in the 1990s. American workers’ wages tracked gains in productivity 1-for-1 in the postwar era through the early 1970s. This stopped in the period from 1973 to the present, as productivity increased 74%, but private-sector workers only gained 12% in real wages and benefits. This trend appears true through today.

Economic reality in America is a widening chasm between the wealthy and everyone else, and fueling disquiet in those who struggle economically. Since 2000, median wages for the full-time employed rose by just 3.3%.

To say this doesn’t compare with the increases in costs of essentials and avenues for advancement wins a prize for understatement. In fact, critical basics have increased in cost over the same period of time: education 131.7%, housing 58.4%, healthcare 52%, and food 51%.

Half of Americans think the next generation will be worse off. Of young Americans, 60% believe their parents had better opportunities to build careers, and they’re right: Young Americans are earning less than workers of the same age 20 years ago, and the fraction of children who earn more than their parents has declined significantly.

Young people’s struggles are especially significant. In 2017, 9.9% of young college graduates were jobless, versus 8.4% in 2007. And 43.5% were in non-college jobs, versus 41.8% in 2007. The unemployment rate of high-school graduates without college degrees was 16.9% in 2017, versus 15.9% in 2007. These workers’ average wage of $10.89 was lower than in 2007, after adjusting for inflation.

Former American manufacturing cities have become hollowed-out shells. Between 1970 and 2013, Cleveland lost about half its population, tumbling from 10th to 45th in population. As residents flee cities, they take with them commerce and the watchful eyes of a neighborhood.

As hard as the middle class struggles, low-income Americans have it even worse. Our political leaders are loath to talk about the very poor, but over 40 million Americans live in poverty, an even higher percentage today than at the turn of the century. If not for federal subsidies, that number would be approximately double. Furthermore, the social safety net has eroded at the same time that the free-market economy has widened the disparity between the haves and the have-nots.

Despite claims that America’s poor are better off than most of the world’s middle class, poverty, even in America, means dire circumstances. Our welfare system serves less than a third as many people as it did in 1994 and fewer than 10% of poor households with children receive the Temporary Assistance for Needy Families benefits that were designed precisely for them. Even with more families seeking to participate in benefit programs such as the Supplemental Nutrition Assistance Program, funding for those programs has been cut, even by President Obama.

Those who do receive food stamps may not be able to use the full amount, as they may have other pressing needs that force them to accept low value-on-dollar opportunities to trade food stamps for cash—a common occurrence. Some who cannot find work have taken to donating blood, earning $30 for three hours of their time. The law allows them to do this twice a week. But as Kathryn J. Edin, a Johns Hopkins professor, said in a Washington Post article about her book $2 a Day: Living on Almost Nothing in America, donating this much can leave the poor with “divots inside their elbow” and overwhelming fatigue. 

Consumer and student loan debts are replacing mortgage debt for many and are holding them back. Young people are so cash-constrained and crippled by debt that they are forming households later, delaying investment in homes, and neglecting other productive investments in their futures. Nonetheless, some students may feel they don’t have a choice and need to spend on education for the sake of their families’ futures, as success is even more difficult for children born to parents without college education.

Sadly, many low- and moderate-income young people cannot even borrow enough money to go to or finish their educations. Demands of family members in dire circumstances too often force young people to go to work rather than pursue education.

For the have-nots, the weakened social safety net is much more damning today than in the past. In 2009, families with poor credit experienced a destabilizing event, such as a medical issue or job loss, every 87 days. By 2016, they endured such an event every 30 days. Employer health coverage declined from covering 64% of the workforce in 1997 to 52% in 2017. Even for those lucky enough to be covered by their employers today, their health insurance is at risk from constant efforts to undermine it and increase its cost.

With no recourse, the poor must borrow heavily against their own futures, promising outrageously steep future sums to survive in the present. Accordingly, 77% say they would prefer greater stability to moving up the income ladder. The poor won’t achieve stability without gains in income and wealth, and these gains are out of reach without social aid or some benign financial mechanism that doesn’t exist today.

And these statistics mask that families on net are working much harder, in large part because more families have two earners instead of one, even as the household does only as well as it did in the past. Dual-income households were up from 25% in 1960 to 60% in 2012, while mother-earner-only households tripled from 2% to 6% in the same time, and father-earner-only households shrank from 70% to 31%. Some families are too poor to work; the minimum wage is so low in some places that staying on benefits is more secure than a job.

For many of these families, poverty is a double punch. Not only do the poor earn too little to cover their costs of living, let alone have anything to save, but their very lack of savings denies them access to the financial products that would enable them to start saving, invest in their futures, and move up the economic ladder.

It's clear that recent downturns in lifespan and life quality reflect a failure of our economy. More Americans are living lower-quality lives, dying younger, and dying more violently. Life expectancy in the two decades since 1990 dropped for women by five years, and for men by three. Death rates for white Americans are rising, driven by alcohol and drug abuse. Drug abuse is causing more deaths than car crashes, H.I.V., or guns, and drug deaths are increasing at a faster rate than ever. Drug use is part of a vicious spiral, preventing users from getting jobs that might pull them out of the poverty that makes drug use appealing. Whatever expectations one might have of a working economy, surely this isn’t it.

How did we get here?

Often touted data say that we are better off than any time in recorded human history: There are fewer wars, less disease, a higher standard of living, much higher economic productivity, and so on. Even those in the middle of the income distribution use the same i-products as those higher up the economic ladder.

But as noted earlier, spending on housing and other essentials increased. By 2014, middle-income households were spending 78% of their budgets on basic needs.

These statistics reveal how the measures commonly used to explain, from a macroeconomic perspective, our economy’s health paint a misleading picture. At the heart of this measurements problem is the difference between the aggregate and the individual. If Bill Gates moved into a struggling Detroit neighborhood, we would measure the average wealth in his new zip code as being phenomenally higher in the year he moved than in the year prior. But incomes for many wouldn’t have changed.

This situation is characteristic of distributional inequality, whether in income or wealth or any other measurable quantity. The more unequal a distribution, the more measurements such as totals and averages are dominated by relatively few of the individuals in the distribution. No matter how happy or secure Bill Gates feels, his move to Detroit will not manifestly increase his zip code’s average reported sense of security or well-being.

This distributional effect really has managed to mask important developments in Americans’ economic security. Most Americans actually are poorer now than they were before: Between 1963 and 2016, the median family in the poorest 20% of families went from having no wealth to being about $1,000 in debt, while the median of the richest 20% increased fivefold.

Technology, policy, and education

The 21st-century economy will continue to reward the technologically savvy, entrepreneurial, and upper-middle- and high-income families. Those who have access to high-quality education, especially those who can afford advanced degrees, will in most cases continue to prosper. The less prepared and economically disadvantaged will fall further behind.

Middle- and lower-income Americans have not been given the tools to take advantage of the technological revolution. Too often, they’ve been left behind. Education for middle- and lower-income Americans—such as job retraining—has been too weak for today’s circumstances. Primary and secondary education has declined in quality while postsecondary education has dramatically increased in cost, edging out too many Americans. We face a jobs deficit in high-paying engineering and other STEM-based jobs; but because of our educational system, our middle- and lower-income children are not sufficiently prepared to fill them.

U.S. policies have been weak, allowing foreign jurisdictions to unfairly take our intellectual property and jobs. From counterfeiting to corporate espionage, where patent protections mean less than they should, we have failed to push back on non-U.S. piratical behaviors, including by foreign governments.

Federal policies have not only been weak in terms of supporting education and preventing international technology piracy, but in keeping our technological edge and supporting American business. We have seen declines in federal-government support for the National Aeronautics and Space Administration, National Institutes of Health, and other federally funded basic technology and research efforts. There has also been declining support for infrastructure projects. Even the Export-Import Bank of the United States, equivalent to the export banks of other nations, has been underfunded, allowing well-paying jobs to bleed abroad.

At the heart of this policy weakness has been both congressional dysfunction and the foolish view of too many in Congress over the past 20 years that the federal budget is the equivalent of an individual’s and that what goes in shouldn’t be a penny more than what comes out. (Though, in the past several months, it has been unclear whether many in Congress have any view on this.) This flawed analysis fails to recognize that investment and capital spending to grow the economy is fundamentally different from consumption expenditures. If any analogy is appropriate, it’s between the federal budget and a company’s budget. What company doesn’t obtain funding, equity, and debt, in order to grow?

Networks, superstars, and winner-takes-all

Global networks are growing, becoming tighter, and more efficient. This reduces frictions and makes the returns greater for economic winners. These trends are driven largely by technology. Advances in the technological landscape amount to a breaking down of barriers of distance and frictions of delay. The effect is that we all have easier access to the same pool of replicable resources. Before, our dollars were spread around different producers in the economy; now they are concentrated to an increasing degree in one.

Consider New York and Philadelphia. For much of the 20th century, if each town had a Mozart string quartet and a loyal fan base, the city could sustain its own four, very talented musicians to play Mozart once or twice a month. You might not care that there’s a New York quartet if you live in Philadelphia, nor vice versa.

Suppose, though, that New York’s quartet is significantly better. In the past, the local audience would sustain the Philadelphia quartet. But with cheap virtual reality, Philadelphians could sit in their living room and experience New York’s quartet as though sitting in the first-tier front box at David Geffen Hall.

As Philadelphians, Chicagoans, and other Americans concentrate their viewing and patronage of the New York quartet, it will naturally get much richer, even while other quartets around the country shut down. And with advances in travel—high-speed rail and private planes—those who care about a live performance have readier access to it than before. This development is emblematic of technology’s changes on the modern economy.

Winner-takes-all effects in entertainment and media are now fairly familiar, even if we are still grappling with the implications for performing artists. But technology’s tendrils are also creeping into the domain of knowledge workers, whose intangible work product permits the same replicability, transmissibility, and instantaneity effects that have shaken the entertainment industry.

The result is that the superstar effect applies in more segments of the economy. As a result, more and more jobs will face downward pressure on incomes as a smaller number of workers capture a greater share of the gains.

Loss of the U.S. craftsman’s edge

During our early history, U.S. craftsmen produced superb products—whether mechanical, such as tall case clocks, or practical, such as a chest of drawers. Superb machinists and other factory workers built products that dominated world commerce and two world wars.

The decline of factory and other skilled-labor jobs accounts to a great degree for the decline in the well-being of middle- and lower-income Americans. In part, this loss of jobs reflects globalization and technology, but also much more.

The decline in skilled labor has also to do in part with social mores. In the U.S., many talented young people have been encouraged to get a college degree, instead of pursuing the skilled professions that involve more manual labor. Indeed, skilled craftsmen have been viewed as lower on the social pecking order than college-educated generalists, with many of the latter lacking strong skills and intellectual underpinnings. Furthermore, manual jobs in the U.S. have tended to be much lower-wage than professional jobs, such as medicine, law, and accounting, further stigmatizing the craftsman sector. And our educational system has not been geared toward manually skilled jobs.

This is much less the case in other countries, such as Germany, where engineering and craftsmanship have been more highly prized. Not only is pay and social status higher for these jobs in Germany, but the German educational system helps reinforce the strength of this sector, whereas it is undercut in the U.S.

These jobs have also suffered considerably more from foreign competition than equivalently modest-pay teaching, accounting, and other professional jobs, where the foreign-substitution effect has been harder to achieve because of language barriers and the nature of the service. Craftsmen who produce goods can replicate those goods and ship them long distances. Service jobs are much more directly hands-on with the customer, and foreign competition is harder to achieve.

Other jobs in America involve equivalently low economic rewards. Teachers (including college professors on the whole), judges, and civil servants are modestly paid. And relative to upper-income groups, economic rewards have been declining. But these jobs have suffered less of a decline because of the lack of non-domestic-based competition.

It is not politically correct in some circles to point to foreign competition as a major source of the loss of well-paying jobs in America. But as domestic automation puts the last nail in the coffin of skilled labor lost to outsourcing and offshoring, we need to explore new ways to find a place for skilled crafts in America.

Missing vision

Though perhaps deriving from technological change, or at least economic disruption, other societal forces are at work to make this era particularly challenging. One of these forces is a declining sense of shared vision in America.

Today’s society is fragmented in ways—racial and gender discrimination aside— that we were not in the decades following World War II. Our nation is more politically polarized; fewer Americans would approve of interparty marriages, Congress is less productive, and Americans don’t trust their institutions.

Fragmentation should not be mistaken for diversity.

Diversity makes our nation better, stronger, more interesting, more creative, and more forward-thinking.

But fragmentation destroys the gains we stand to make from aligning our efforts toward a common goal.

When we all push in the same direction, we are much more likely to move forward and succeed. When we push against each other, the opposite is true.

We once could rely on visionary politicians such as Lincoln, Wilson, the Roosevelts, Kennedy, and Eisenhower to lead our nation and develop a shared sense of purpose and responsibility. A sense of purpose breeds productivity, creativity, openness, and the ability to solve problems.

In finance, I have seen the difference that optimism makes, and it’s astonishing. And it doesn’t fit squarely into the economic theory of income and incentives: I would bet on an optimistic worker, and an optimistic population, over any driven purely by financial incentives.

So what should we do? (At least in the short and medium term?)

There are certain initial, clearly needed steps we can take to help the economic circumstances of middle- and lower- income Americans:

Revise macro-economic measurement: We need additional measures to paint a more robust view of the economy, particularly in respect of the well-being of middle-income and lower-income Americans. This will help policy leaders and others focus on the real problems.

Infrastructure spending: America must improve its highways, bridges, tunnels, railroads, airports, cybersecurity, and other infrastructure. The need is so profound that the short-term job benefits this would create should be considerable. Spending on these efforts directly produces high-paying, middle-class jobs, gives rise to technological developments, has an indirect employment ripple effect through the entire economy—including by way of increased efficiencies and competitiveness—and has positive psychological impacts.

If we invest in and encourage businesses to create green-energy alternatives to fossil fuels, this will further produce good jobs and give our country a global technological edge.

If we pull back on immigration, which we are in essence doing, and if increasing the number of job seekers proves difficult, too big of an infrastructure spending increase all of a sudden will put pressures on wages. Excessive inflation isn’t what we want, so easing infrastructure spending may be more ideal now than a couple of years ago.

Spending on basic research: We must maintain our global technological supremacy. Long-term research is best funded by the federal government. These expenditures produce jobs directly and, as technologies mature, indirectly.

Spending to support business competitiveness: A robust business climate in the U.S. is necessary to produce good jobs and a better life for all Americans. In many ways, we continue to operate with an uneven, 19th-century business environment. For example, schools too often don’t train for meaningful jobs for the future. We don’t have a settled view as to the balance between shareholder responsibilities of boards and CEOs and responsibilities to other stakeholders. In some cases, local, state and/or federal regulatory and tax environments could be more hospitable to business without harming the environment, safety and soundness, or worker well-being. America needs a much more advanced policy and practice toward these and other business issues if we are to meet human needs in the 21st century.

America’s EXIM Bank should be the best funded in the world, not the least. The EXIM Bank directly supports middle-class jobs and often in areas—e.g., airline production—that enhance America’s technology. Similarly, federal spending on clean-energy development produces jobs, enhances America’s competitiveness, and will lead to a cleaner, healthier environment.

Increasing educational and career-ready opportunities: We have to bring primary and secondary schools and university education up to first-class standards and ensure that our young people are getting the world’s best education—an education that, as much as possible, leads to meaningful employment. These opportunities need to be provided without burdening students and families with debt. Education needs to be strong in STEM. Our students must be given the tools to be at the cutting edge of the technological revolution. And we have to ensure that students with craftsman skills are given a strong education in their specialty and that skills training is respected. If Germany can do it, America can do it.

Eliminate gerrymandering: Electoral gerrymandering is a manipulative technique that has created safe seats—one could say “rotten boroughs”—that not only ensure the election of one political party or the other in particular districts, but even more detrimentally drive these seats in the direction of the extremes of each political party. Whether by way of judicial techniques or statewide referenda, this manipulation of our political process must be stopped.

Fair trade: We can’t allow foreign countries to turn free trade into unfair trade. We should act vigorously through all legal means, including judicial avenues and subsidies, to stop foreign parties from stealing intellectual property, manufacturing in environmentally toxic areas, violating basic health and safety standards, and employing underage workers in what amounts to human trafficking.

Increase quality and effectiveness of regulation: Today, it’s popular to decry regulation. Deregulation is a controversial subject, but shouldn’t be. The fact is—as a former regulator—safety and soundness, conduct and compliance, and other regulations are absolutely necessary to ensure a safe and fair America.

However, there’s been far too little effort to actually study which regulations work, which don’t, and to ensure regulations don’t overburden business. It’s in no one’s interest to weigh down individuals, business, and ultimately the economy with regulations that don’t work and/or don’t work optimally.

We need to do much more in academia and government to confront this issue, not with rhetoric but with real study and research.


Middle- and lower-income economics as well as a bold and shared purpose, which had been a critical component of our nation, have been declining for too long. It will take not only a society in broad command of the facts, but the crucially important intangible of leadership and charisma with a plan to right the ship of state. It falls on our post-World War II generation to provide both, just as our forefathers did in generations past. Educating policymakers and the public as to why this is necessary is important.

In our age of “fake news” and turmoil, it will be difficult. I think this country is worth it.

About the author

Eugene Ludwig is the founder and chief executive officer Promontory Financial Group. He was Comptroller of the Currency during the Clinton administration.

Philip Kalikman, senior economist at SpringHarbor Financial Group and PhD candidate in economics at Yale University, contributed to this article.

back to top


About Us

Connect With Us


Adaptive Authentication:

Superior User Experience and Growth through Intelligent Security

Banks and financial institutions find themselves trying to satisfy competing priorities. Fraud continues to grow at an alarming pace and in sophistication year-over-year.

Intelligent adaptive authentication is a new approach to combating fraud that solves this problem and achieves the twin goals of reducing fraud and delighting the customer.


OneSpan logo