Tuesday, October 26, 2010

How to Move toward a new American Dream

Fareed Zakaria has an interesting article titled "How to Restore the American Dream" in Time magazine. He notes that U.S. chartered multinational corporations have gone truly global, cutting back on business in stagnant markets and building business in expanding markets, moving production to the places where it is most profitable to produce.

The multinationals are good at capturing profits, but their investors who in turn capture a good part of those profits are increasingly international, as stock markets are increasingly international. The corporations that are successful in the globalized markets provide remunerative jobs for technical and managerial staff, many of whom are in the headquarters country.

A portion of his argument that interested me greatly was the following:
People who get paid a decent wage for skilled but routine work in manufacturing or services are getting squeezed by a pincer movement of technology and globalization. David Autor, an MIT economist, has done an important study on what he calls "the polarization of job opportunities" in America. Autor finds that job growth divides neatly into three categories. On one side are managerial, professional and technical occupations, held by highly educated workers who are comfortable in the global economy. Jobs have been plentiful in this segment for the past three decades. On the other end are service occupations, those that involve "helping, caring for or assisting others," such as security guard, cook and waiter. Most of these workers have no college education and get hourly wages that are on the low end of the scale. Jobs in this segment too have been growing robustly.

In between are the skilled manual workers and those in white collar operations like sales and office management. These jobs represent the beating heart of the middle class. Those in them make a decent living, usually above the median family income ($49,777), and they mostly did fine in the two decades before 2000. But since then, employment growth has lagged the economy in general. And in the Great Recession, it has been these middle-class folks who have been hammered. Why? Autor is cautious and tentative, but it would seem that technology, followed by global competition, has played the largest role in making less valuable the routine tasks that once epitomized middle-class work.
He also writes:
During the early 1950s, personal consumer expenditures made up 60% to 65% of the U.S.'s GDP. But starting in the early 1980s, facing slower growth, we increased our personal spending substantially, giving rise to new economic activity in the country. Consumption grew to 70% of GDP by 2001 and has stayed there ever since. Unfortunately, this rise in consumption was not triggered by a rise in income. Wages have been largely stagnant. It was facilitated, rather, by an increase in credit, so that now the average American family has no fewer than 13 credit cards. Household debt rose from $680 billion in 1974 to $14 trillion in 2008. This pattern repeated itself in government, except on a much larger scale. People everywhere — from California to New Jersey — wanted less taxes but more government. Local, state and federal governments obliged, taking on massive debts. A generation's worth of economic growth has been generated by an unsustainable expansion of borrowing.
Zakaria is well aware of the fact that the United States enjoyed a huge advantage in the decades after World War II, before the European and Japanese economies were rebuilt and before so many countries that had been on the periphery developed economically and joined the increasingly global markets. His point is to recapture the American dream, Americans are going to have to change our culture.

He stresses that we will have to borrow less, save more, and invest wisely. I suspect that a part of the effort to spend less should involve cutting our spending on health care, a form of spending in which we exceed all the other countries in the world. The example suggests that cutting spending may involve not only belt tightening, but also institutional changes such as reforms of our health care financing system.

Investing in technological innovation to keep our corporations competitive in the global economy will help keep our entrepreneurial, managerial and engineering cadres fat and happy. So too will investment in infrastructure, both in new infrastructure such broadband and upkeep of existing infrastructure such as roads and bridges, help to keep us efficient and competitive.

How do we invest so as to keep the middle class productive and comfortable. I suppose that we will have to both create middle class jobs that the nation can sustain in the face of global competition and prepare people to fill those jobs. Perhaps that means we have to create more of the middle class jobs like those of the cadres that have been doing well -- entrepreneurs, managers and technical jobs running globally competitive jobs. I suppose we will have train people not for the repetitive jobs that were held by many middle class people in the past, preparing them for intellectually demanding jobs in the global economy. The implication is that we will have to change our middle class culture so that kids will not assume that a middle class life is theirs by right, but that they will have to work very hard to prepare to compete for that middle class life.

Will we continue to create lots of low paid jobs providing services for a poorly educated workforce? Or will our belt tightening start to cut into these jobs. Certainly, as Zakaria suggests, many of these jobs are non-tradable; you won't get your hair done by a hair dresser in India if you live in California. On the other hand, I can easily imagine automation cutting into the number of jobs of this kind, as household automation has in the past century freed women to work outside the home. The costs of automation are going down, and as labor costs go up there are more possibilities and incentives to automate the lower wage jobs in the economy.

In previous technological revolutions there were major disruptions, and indeed we can see huge internal disruptions such as mass urbanization as China and India industrialize. We may see the disruption in the United States from the Information Revolution and Globalization continue for another generation or more. Zakaria is right that we have to change our culture to respond well to the challenge of overcoming that disruption well. Probably a key element of that change will be to change our political institutions, making them more responsive to the needs of the population and less influenced by the demands of the affluent and the corporate elite. Changing culture and changing political institutions will not be fun nor will they be easy.

 Image source: The Washington Post

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