[Vision2020] Sobering: Standard of Living Is in the Shadows as Election Issue

[Art Deco]

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October 23, 2012
Standard of Living Is in the Shadows as Election Issue By DAVID
LEONHARDT<http://topics.nytimes.com/top/reference/timestopics/people/l/david_leonhardt/index.html>

WASHINGTON — Taxes and government spending. Health care. Immigration.
Financial regulation.

They are the issues that have dominated the political debate in recent
years and have played a prominent role in this presidential campaign. But
in many ways they have obscured what is arguably the nation’s biggest
challenge: breaking out of a decade of income
stagnation<http://economix.blogs.nytimes.com/2012/07/23/a-closer-look-at-middle-class-decline/>that
has afflicted the middle class and the poor and exacerbated
inequality.

Many of the bedrock assumptions of American culture — about work, progress,
fairness and optimism — are being shaken as successive generations worry
about the prospect of declining living standards. No question, perhaps, is
more central to the country’s global standing than whether the economy will
perform better on that score in the future than it has in the recent past.

The question has helped create a volatile period in American politics, with
Democrats gaining large victories in 2006 and 2008, only to have
Republicans return the favor in 2010. This year, economic anxiety,
especially in industrial battlegrounds like Ohio, is driving the campaign
strategies of both President Obama and Mitt Romney.

The causes of income
stagnation<http://economix.blogs.nytimes.com/2012/08/20/the-14-potential-causes-of-the-income-slump/>are
varied and lack the political simplicity of calls to bring down the
deficit or avert another Wall Street meltdown. They cannot be quickly
remedied through legislation from Washington. The biggest causes, according
to interviews with economists over the last several months, are not the
issues that dominate the political debate.

At the top of the
list<http://economix.blogs.nytimes.com/2012/08/21/globalization-and-the-income-slowdown/>are
the digital revolution, which has allowed machines to replace many
forms of human labor, and the modern wave of globalization, which has
allowed millions of low-wage workers around the world to begin competing
with Americans.

Not much further down the list is
education<http://www.nytimes.com/2011/06/26/sunday-review/26leonhardt.html>,
probably the country’s most diffuse, localized area of government policy.
As skill levels have become even more important for prosperity, the United
States has lost<http://www.google.com/hostednews/afp/article/ALeqM5juGFSx9LiPaur6eO1KJAypB2ImVQ>its
once-large global lead in educational attainment.

Some of the disconnect between the economy’s problems and the solutions
offered by Washington stem from the nature of the current political debate.
The presidential campaign has been more focused on Bain Capital and an
“apology tour” than on the challenges created by globalization and
automation.

But economists and other analysts also point to the scale of the problem.
No other rich country — not Japan, not any nation in Europe — has figured
out exactly how to respond to the challenges. “The whole notion of the
American dream,” said Frank Levy <http://web.mit.edu/flevy/www/>, an M.I.T.
economist, “described a mass upward mobility that is just a lot harder to
achieve right now.”

For the first time since the Great Depression, median family income has
fallen substantially over an entire decade. Income grew slowly through most
of the last decade, except at the top of the distribution, before falling
sharply when the financial crisis began.

By last year, family income was 8 percent lower than it had been 11 years
earlier, at its peak in 2000, according to inflation-adjusted numbers from
the Census Bureau. On average in 11-year periods in the decades just after
World War II, inflation-adjusted median income rose by almost 30 percent.

Matching the growth rates of the postwar period — when the country was
poorer, when harsh discrimination against women and minorities was receding
and when the rest of the world was weaker — is probably impossible. Yet
there is still a vast difference, both economically and politically,
between incomes that are rising modestly and not at all.

Historically, periods of economic stagnation have tended to bring
pessimism, political turmoil and a lack of social progress, said Benjamin
Friedman, an economic historian and the author of “The Moral Consequences
of Economic Growth.”<http://www.nytimes.com/2005/11/27/books/review/27easterbrook.html?pagewanted=print>The
political volatility and partisan
rancor<http://www.people-press.org/2012/06/04/partisan-polarization-surges-in-bush-obama-years/>of
the last several years seem to fit the pattern.

The recent stagnation has also led, economists say, to confusion and even
scapegoating about the real sources of the problem. The causes that can
seem obvious, and that often shape the political debate, are not
necessarily the correct ones.

Take immigration, especially illegal immigration. Whatever other problems
it may cause, evidence suggests that it has not
played<http://economix.blogs.nytimes.com/2012/10/19/immigration-and-american-jobs/>a
significant role in the income slump.

It may have caused a slight decline in the wages of native-born workers
without a high school diploma (and maybe not even that). But most illegal
immigrants lack the skills to compete with the bulk of native workers,
according to research by Giovanni Peri, Chad Sparber and others. Notably,
incomes in some states with large immigrant populations, like California,
have risen faster than in
states<http://www.nytimes.com/2006/04/16/business/yourmoney/16view.html>with
relatively few immigrants, like Ohio.

The minimum wage, similarly, appears to play only a minor role in the
income slump. It has risen
faster<http://economix.blogs.nytimes.com/2012/09/05/why-the-minimum-wage-doesnt-explain-stagnant-wages/>than
inflation since 2000, even as overall pay at the bottom of the income
distribution has not. And the size of the federal government also looks
like a dog that is not barking: Washington collected taxes equal to 15.4
percent <http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200>of
gross domestic product last year, down from 20.6 percent in 2000.

A second group of much-cited forces have indeed played a role in
middle-class stagnation and inequality, many economists argue, just not as
big a role as automation, globalization or education.

Health care costs have grown sharply over the last decade, leaving
employers with less cash to use on salaries. Labor unions have shrunk; all
else equal, unionized workers earn more, often at the expense of corporate
profits. Tax rates <http://www.cbo.gov/publication/43373> have fallen more
for the affluent than for anyone else, directly increasing the take-home
pay of top earners and indirectly giving them more incentive to earn large
amounts.

But many of these factors are particular to the United States, while
globalization and automation are obviously universal forces.

One of the more striking recent developments in economics has been
economists’ growing acceptance of the idea that globalization has held down
pay for a large swath of workers. The public has long accepted the idea,
but economists resisted it, pointing to the long-term benefits of trade.
“That is starting to change only in the face of very strong
evidence<http://economix.blogs.nytimes.com/2012/08/29/changing-views-of-globalizations-impact/>over
the past decade,” said Edward Alden of the Council on Foreign
Relations.

In particular, job growth and wage growth have been weaker in sectors
exposed to global competition — especially from China — than in sectors
that are more insulated.

Automation creates similar patterns. Workers whose labor can be replaced by
computers, be they in factories or stores, have paid a particularly steep
price. The American manufacturing sector produces much more than it did in
1979, despite employing almost 40 percent fewer workers.

Workers with less advanced skills have also suffered disproportionately.
The pay gap between college graduates and everyone else is near a record.
Despite the long economic slump — and the well-chronicled struggles of some
college graduates — their unemployment rate is just 4.1
percent<http://www.bls.gov/news.release/empsit.t04.htm>.


What is the solution to this thicket of economic forces?

That question is the one that Mr. Obama and Mr. Romney are trying to
convince voters that they can best answer. They both accept that the
government and the market have a role, but they put a different emphasis on
those roles.

It is hard to see how either globalization or automation can be stopped.
The proposed solutions instead tend to involve managing them.

If the economy can be made to grow fast enough, incomes can still rise
across the board, as they did when the unemployment rate fell below 5
percent in the 1990s and briefly below 4 percent in 2000. If educational
attainment rises, more people will be able to get jobs that benefit from
technology and global trade, rather than suffer from it. And if inequality
continues to soar, the government could choose to use the tax code to
ameliorate it — a solution that Democrats favor and Republicans say will
hurt economic growth.

Maybe the biggest reason for optimism is that there is still a strong
argument that both globalization and automation help the economy in the
long run. This argument remains popular with economists: Trade allows
countries to specialize in what they do best, while technology creates
opportunities to extend and improve life that never before existed.

Previous periods of rapid economic change also created problems that seemed
to be permanent but were not. Neither the cotton gin nor the steam engine
nor the automobile created mass unemployment.

“When technology reduces the need for certain kinds of labor, we know that
some inventive people will one day come along and find a way to use that
freed-up labor making things that other people want to buy,” said Mr.
Friedman, the economic historian. “That’s what in the long run made the
Luddites wrong.”

He added, “How long does it take the Luddites to be wrong — a few years, a
decade, a couple of decades?”

Perhaps just as important, what happens to the workers who happen to be
living during a time when the Luddite argument has some truth to it?


-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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