Monday, September 26, 2011

Our truly parlous economic situation

The ongoing demonstrations in the Wall Street section of Manhattan emphasize that that the US economic problems are much more complicated than the struggle over the budget in DC, squalid and discouraging as that is. It is not yet clear what the actual stance--or stances--of the demonstrators may be.

I doubt that any of these courageous people read Dyneslines; they have more urgent tasks to accomplish.

Still, in the interest of bringing some clarity to the matter, I would like to share some pithy observations by the brilliant Canadian economic journalist Chrystia Freeland, as published in the NY Times blog.

“. . . [T]he gap between rich and poor in the United States has widened in the past 30 years. In 2007 the top 1 percent of earners took home 18.3 percent of national income -- that is more than two and a half times their level in 1973, when their share was 7.7 percent. Those at the top haven’t enjoyed such a big slice of the national pie since 1929. The middle-class dominated nation that the Greatest Generation inhabited has become as polarized as the plutocracies of Latin America or as America itself was during its fevered Gilded Age.”

Further denial is useless. “The conservatives' argument that equality of consumption outweighed the inequality in incomes has been eviscerated. . . . The elite, particularly the conservative intellectuals who have dominated the national economic debate since the Reagan era, insisted that growing income inequality was propaganda invented by the class warriors on the left, and cited robust consumer spending as evidence. In a 1998 speech at Jackson Hole at the annual gathering of American economists and economic policy makers, Alan Greenspan, then chairman of the Federal Reserve, argued that what mattered was what people could buy, not what they earned.

“Inequality in consumption, when measured by current outlays, is less than inequality in income,” he said. Greenspan illustrated his point with some unusual measures of inequality -- ownership of consumer goods like dishwashers, microwaves and clothes-dryers. The comforting result? Even though inequality as measured in dollars was growing, when measured in dishwashers, microwaves and clothes dryers it was decreasing.

“The 2008 financial crisis and the prolonged economic downturn has eviscerated the consumption defense as ruthlessly as it has burst the credit bubble that allowed the middle class to feel richer than it was. Income inequality is today a fact of life, as essential to doing business as the rate of inflation: Proctor & Gamble executives study the Gini co-efficient, a technical measure of income inequality, to divine what is happening to their erstwhile middle-class consumer base, and have decided the best strategy is to give up on the center and to market instead to the top and the bottom.

“Citigroup advises investors to design their portfolios around income inequality. It calls this strategy the "Consumer Hourglass Portfolio" and has created an index of companies that serve the rich and the poor while avoiding the vanishing middle.

“Once income inequality has become a tool for marketing executives and stock pickers it becomes pretty hard to deny. But we can still argue over what is causing it.
The left likes to blame pro-rich tax policy. And it is certainly true that the gap in the U.S. has widened even as taxes on the rich have decreased. Today’s top tax rate, 35 percent, is half what it was 30 years ago. Capital gains taxes are even less than half of what they were 35 years ago -- 15 percent today, compared to 39.9 percent in 1977.

“Politics have tilted the playing field in favor of those on top in other ways, too. Unions are less powerful than they were 30 years ago, and an ever bigger gap between executive officers and the average worker has become acceptable to shareholders and boards: in 2010, C.E.O. pay at S&P 500 companies was 343 times the median wage.

Now Freeland comes to the truly important part. “But taxes, unions and compensation committees tell only part of the story. What’s also happening is an economic revolution -- actually, a pair of them -- that favors those on top and squeezes those in the middle. The technology revolution and globalization have allowed the very talented, the very lucky and the very brave to build companies and make fortunes nearly overnight. They have also created a highly numerate superclass of workers -- technologists, engineers, traders -- whose skills are in great international demand and whose salaries have soared accordingly.

“Meanwhile, a vast swath of jobs -- ranging from manufacturing, to clerical work, and now to routine law and accounting -- can be done much more cheaply by machines or by people in lower-income countries, and this is devastating the U.S. middle class, even as those at the top prosper.

“Justice is a central issue in American politics and in American society. That’s why it seems so important to figure out whether the rich are paying their fair share. It is a crucial question -- and the truth is that the rich are getting a better deal than they used to. But the even more central issue -- and it is one that both left and right are reluctant to acknowledge -- is that the fundamental forces shaping U.S. capitalism today are hostile to the middle-class majority, which defines U.S. democracy.

“The rancor and the paralysis that characterize American politics at the moment are the result of this conflict. Someone needs to admit that modern capitalism isn’t working for the middle class, and find a way to make it work better, before it is too late.”


Thus the middle class in this country may be well on the way to extinction, as we become an Hourglass Society. Taxing the rich may not do much to solve this problem, because that leaves two other huge problems: the growing use of technology, which makes many traditional white-collar jobs obsolete, and export of jobs to countries where labor is cheaper. Obvious remedies would be ludditism, restricting the use of technology' and erecting high trade barriers (protectionism). At this stage both seem quixotic. There remains the issue of what is to be done?

UPDATE (Sept. 27). An op-ed by economics correspondent Joe Nocera in today's NY Times provides two telling examples of the devastation that the application of technology is causing. In North Carolina two big new industrial plants are rising one in Charlotte for Siemens and other in Winston-Salem for Caterpillar. Yet since both rely heavily on robotics Caterpillar expects to employ only 500 people in its plant (notwithstandin some $14 million in incentives), while Siemens will have about 800 workers. Last year a major furniture manufacturer in Winston-Salem shut down, ending 900 jobs; the Caterpillar plant will not even make up for these.

Another piece of bad news is of broader import: an estimate that NC has lost 108,000 jobs (from the Economic Policy Institute, which implicates China).

FURTHER UPDATE (Sept. 29). In a piece in Slate yesterday ("The Bobots Are Coming!), Farhad Manjoo points up some of the changes that lie ahead:

"In the next decade, we'll see machines barge into areas of the economy that we'd never suspected possible—they'll be diagnosing your diseases, dispensing your medicine, handling your lawsuits, making fundamental scientific discoveries, and even writing stories just like this one. Economic theory holds that as these industries are revolutionized by technology, prices for their services will decline, and society as a whole will benefit. As I conducted my research, I found this argument convincing—robotic lawyers, for instance, will bring cheap legal services to the masses who can't afford lawyers today. But there's a dark side, too: Imagine you've spent three years in law school, two more years clerking, and the last decade trying to make partner—and now here comes a machine that can do much of your $400-per-hour job faster, and for a fraction of the cost. What do you do now?"



Blogger Burk said...

Mr. Dynes-

"Taxing the rich may not do much to solve this problem, because that leaves two other huge problems"

Of the three levers you rightly point out, one is under our collective control, which is taxing the rich. That is that way to restore economic viability to the middle and lower classes.

It isn't rocket science. The problem is that the rich are getting richer. Whether you view this through the lens of just deserts- that being born well, educated well and treated well makes one worthy of high reward- or through the lens of classic cultural conflict- that as in ancient Rome the political war is always about how to capture as many resources as possible through corruption, cronyism, and all other means, fair or foul- the solution is the same: redistribution in some form that keeps the system on an even keel, counter-balancing the inevitable concentration of power and wealth upwards, even while the essential motivations of the invisible hand are retained.

Something like a 100% inheritance tax, and 50% rates on the high end would do wonders! Then the poor can be provided with public goods like education and jobs that keeps the whole economic system working optimally. the bottom line is that free markets are not enough.. they are not a sustainable solution to a high-level civilization.

9:55 AM  
Blogger Dyneslines said...

Redistribution is fine--I guess.

But it will not do much to quell the two most menacing dragons that Freeland identifies. Many years ago, I was a junior executive at a major NYC publisher. Naturally, I had a secretary, and would summon her to take dictation whenever I needed to write a memo or a letter. Nowadays executives, unless they are very grand, don't have secretaries: they are expected to write their own emails. A lot of jobs of that kind are gone forever.

Similarly there was no concept of sending manuscripts off to Asia for preparation. But the last time I worked with a publisher this was routinely done.

Last night I watched a wonderfully nostalgic TV offering, "PanAm." The first time I flew to Europe it was on PanAm. The airline is no more, alas. But no more also is the spirit of optimism and readiness to take on any task that were so characteristic of that era (1963, to be exact).

Even then I am not sure that we could have dealt with the two horrendous dragons we now face: rampant technology, which is destroying jobs right and left; and job flight to countries with cheaper wages.

10:39 AM  
Blogger Burk said...

Yes, technology. If you look at the big picture, the only thing an economy really has to produce is food. Everything else is gravy. Now that the US needs only 3% of its workers for agriculture, the rest can blog, teach, study music, give pedicures.. whatever. Technology is disruptive, but ultimately makes us all better off, with more stuff and comforts.

How do you design a system where all those extra workers do something useful and are paid for it? That is the fundamental problem of political economy. Those secretaries you didn't need anymore maybe became real estate agents, and in the downturn lost their businesses. They are sitting around with nothing to do. What now?

The answer is not to devise makework like forcing them to become secretaries again. The answer is to look at what society needs right now and set them to work on it. Do we need more teachers? We sure do. Do we need to become more energy efficient? We sure do. For some of these needs, market mechanisms work. Others are public/common goods that markets never provide.

I did an interesting calculation yesterday.. our current level of unemployment is equivalent to 62 Apollo programs. All that talent lying around wasted.. it is a crime. The propaganda campaign that the State is bad, government is the problem, etc... that is what is at fault and what is lengthening the misery for the most base motives.

11:09 AM  
Blogger Dyneslines said...

That is a view.

But not, I fear, one that stands to gain much traction in the present climate of opinion--or any other that is likely to ensue.

12:44 PM  

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