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Why the Middle Class Is Declining: Economist

The American middle class is "hollowing out" as the U.S. economy fails to compete effectively in a globalized world, Harvard economist Michael Porter told CNBC's "Closing Bell" this week.

"America used to be a uniquely productive, low-cost place to do business," Porter said on Thursday. "We had efficient infrastructure. We had limited regulation. We believed in the market."

But bit-by-bit this position has eroded. Regulatory costs have gone up, Porters said, the legal system is more cumbersome, infrastructure is eroding and the country is falling behind on skills.

That means the many Americans do not have the skills needed to earn a decent living and for the first time in 50 or 60 years, incomes are stagnating and the middle class, which Porter called the bedrock of America, is "hollowing out."

"Being an American doesn't mean that you're guaranteed a high wage," in the era of globalized competition, Porter said. "You have to be productive, and we have to create a very low-cost efficient place to do business and we've let all that slip in America."

The country's budgetary problems are largely a symptom of this lost competitiveness and economic weakness. Without rising incomes and an improvement in the fundamental performance of the economy, there's been less tax revenue, he said.

(Read More: Automatic Spending Cuts Are a Joke: Druckenmiller)

To offset declining incomes, the government has had to make promises to help pay for health care, retirement and housing, but the economy can't afford them because it isn't performing, according to the economist.

America can return to competitiveness, Porter said, if the corporate tax code becomes more efficient, there's a sustainable budget compromise and the U.S. takes advantage of the shale revolution to move toward energy independence.

(Read More: Cheap Energy Luring Manufacturing Back to the US)

"Technology has given us this wonderful opportunity to have low energy costs," Porter said. "We have to seize that, rather than keep debating and discussing and fighting over it."

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