Opinion

Chrystia Freeland

Capitalism is failing the middle class

By Chrystia Freeland
April 15, 2011

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.

Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated.

The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.

Here’s how Spence and Hlatshwayo put it: “The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities, domestically and abroad. Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate.”

Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: “Many goods and services are less expensive than they would be if the economy were walled off from the global economy, and the benefits of lower prices are widespread.” He also points to the positive impact of globalization on much of what we used to call the Third World, particularly in China and India: “Poverty reduction has been tremendous, and more is yet to come.”

Spence’s paper should be read alongside the work that David Autor, an economist at the Massachusetts Institute of Technology, has been doing on the impact of the technology revolution on U.S. jobs. In an echo of Spence, Autor finds that technology has had a “polarizing” impact on the U.S. work force – it has made people at the top more productive and better paid and hasn’t had much effect on the “hands-on” jobs at the bottom of the labor force. But opportunities and salaries in the middle have been hollowed out.

Taken together, here’s the big story Spence and Autor tell about the U.S. and world economies: Globalization and the technology revolution are increasing productivity and prosperity. But those rewards are unevenly shared – they are going to the people at the top in the United States, and enriching emerging economies over all. But the American middle class is losing out.

To Americans in the middle, it may seem surprising that it takes a Nobel laureate and sheaves of economic data to reach this unremarkable conclusion. But the analysis and its impeccable provenance matter, because this basic truth about how the world economy is working today is being ignored by most of the politicians in the United States and denied by many of its leading business people.

Consider a recent breakfast at the Council on Foreign Relations that I moderated. The speaker was Randall Stephenson, chief executive officer of AT&T. Mr. Stephenson enthused that the technology revolution was the most transformative shift in the world economy since the invention of the combustion engine and electrification, leading to a huge increase in “the velocity of commerce” and therefore in productivity.

One of the Council of Foreign Relations members in the audience that morning was Farooq Kathwari, CEO of Ethan Allen, the furniture manufacturer and retailer. Kathwari is a storybook American entrepreneur. He arrived in New York from Kashmir with $37 in his pocket and got his start in the retail trade selling goods sent to him from home by his grandfather.

Here’s the question he asked Stephenson: “Over the last 10 years, with the help of technology and other things, we today are doing about the same business with 50 per cent less people. We’re talking of jobs. I would just like to get your perspectives on this great technology. How is it going to over all affect the job markets in the next five years?”

Mr. Stephenson said not to worry. “While technology allows companies like yours to do more with less, I don’t think that necessarily means that there is less employment opportunities available. It’s just a redeployment of those employment opportunities. And those employees you have, my expectation was, with your productivity, their standard of living has actually gotten better.”

Spence’s work tells us that simply isn’t happening. “One possible response to these trends would be to assert that market outcomes, especially efficient ones, always make everyone better off in the long run,” he wrote. “That seems clearly incorrect and is supported by neither theory nor experience.”

Spence says that as he was doing his research, he was often asked what “market failure” was responsible for these outcomes: Where were the skewed incentives, flawed regulations or missing information that led to this poor result? That question, Spence says, misses the point. “Multinational companies,” he said, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So there is no market failure.”

This conclusion is a very big deal – Spence is telling us that global capitalism is working the way it should, but that the American middle class is losing out anyway. Since global capitalism is the best way we’ve come up with so far to run our economy, that creates quite a dilemma.

Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.

Comments
60 comments so far | RSS Comments RSS

Capitalism is designed to entrench wealth in the property owning elite by providing the majority of wealth created by workers to the people who own equity ordebt. Accordingly, it can’t be failing the middle class becasue it isn’t designed for the middle class. The middle class (the workers) are just a commodity to the capitalists.

Posted by Bharata | Report as abusive
 

“The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities.”

How do you defined “most educated”? I can attest that women with higher degrees don’t even earn the same money as men with less education. Similarly, the statistics show that they aren’t nearly as well represented as men at the top levels of companies, either.

Further, are you defining those with the “most” education as those who went to exclusive Ivy League schools? Those people have the connections to do well in life, regardless of performance or ability. To me, that’s the heart of the matter. The rich steal from everyone else in so many ways and they practically OWN the government so nothing is done about it–against the law or not.

Posted by Gulfstate | Report as abusive
 

What this actually means is that technology should NOT be employed to unemploy people! Why are we humans and why do we work are two other questions that should be addressed? What’s the point of working and having technology if the end result is a lot of poor, unemployed people? What are we working for? To make some CEO or corporation richer? Why?!?

Just because things are cheaper to buy doesn’t mean that they should be. Cheap is not good for our economies. Cheap means just that, cheap. We consumers buy cheap, cheap breaks, and then we have to buy more cheap! It is a counterproductive cycle, using up limited, finite resources.

I don’t know what to do exactly to fix this but I certainly know that globalization as it now exists is not good for America and what’s not good for America is not good for its people, and eventually the world. This country was founded as a democratic republic and is a beacon to the rest of the world. If we succumb to CHEAP then we won’t be any better than those countries who do not have our ideals.

Does globalization mean that we have to destroy our middle class and make our workers poor and/destitute so they can be like other workers around the world? Why are we running trade deficits while other countries (democracies) have high wages and little or no deficits? Does this mean that high wages don’t necessarily lead to trade deficits but it is our own faulty trade policies that have landed us in this economic mess?

We have to start asking ourselves if we are living to work, or working to live? Which one would you rather do?

Posted by repar | Report as abusive
 

Just a few facts most do not want to hear.
A. The imports we get very much mimic the junk shipped to USA in 60-70s, “Cheap” items that wear out in 1/10th time older products did, levies good example. But they provide a cheap imitation of “really good stuff”, but basically trash.
B. Most hardware of any kind, electronics to garden use is simple not repairable, cheaply made, wears out quickly, but designed to look really neat.
C. Corp/LLC push A/B to keep profit levels up to foist off more cheap stuff.
C.Myth of “increased USA productivity. USA workers mostly ASSEMBLE sub-assmebly/parts items t end item. USA does little real manufacturing, do not label “assmebly’
as manufacturing.
D.Items imported are generally high end complex stuff, engines, computers etc, while USA “builds” cheap sheet metal etc to house them. Note good example is Boeing Acft 70-90% tariff free imported parts, auto firms import engines, electronics etc. “Built by more productive workers”, hardly so, just election/profits spin.
E.Amusing accounting via D. Government/Corps assemble imported parts with no tariff, then when exported, deduct FULL sale price of Acft-etc from balance of trade.
F.There is not much doubt, as facts provide nearly daily money/shadow government owns state/DC elected/appointed and “consultants”. Reality is USA now a two tiered nation, one with 90% of real wealth, as required access to write and change legislation at will, the other, simply a profit center for votes/cash/warriors as needed. There is no peoples representatives at any level for 95% of USA.
E.Result impact of F is simply 95% seeing real wages drop, zero chance of real medical or retirement futures. But oddly only 40% chose to vote.
F. Low voter turn out, probably reflects increase in dumbed down slovenly population then anything else,as more paid to vote for TV programs then voted for government. That is due to fact most have more in depth knowledge of latter then former.
G.Power/money mongers, robber barons and others such much prefer dumbed down as easier to manipulate, scare and panic. They insure control by now voting across nation to cut education as “we cannot afford it”, but in same breath, knowing extraordinary education is core item of kids futures claim “We must cut spending (education) in order not to burden out kids”? Kind of kills chicken and egg with that bit of political treason to nation.

Lastly the middle class will soon run out of funds, they are mostly on edge now and credit is the make up they wear to “look like all is well”. We have even returned to the good ole early 2000′s “Lease new car with little down” farce. Greed, corruption and a complete distaste for the nation, it’s people by the elected, appointed and shadow money controlling/owning USA seems to be final fruition of plan started 40 years back, might call it “final solution for middle class”, the last great unions destroyed, budgets cut, but not one mention of any real jobs or the devastating impact of cuts on low and most missed it, the mid class. How bad, well Icon is AZ, state in “Richest nation on Earth cut funds for transplants, RAM (Rural Area Medical) whom used to operate only in third world medical needs, now attends across USA. Icons are icons, need we add more?

Surrender was announced by mid.lower class but most missed it. The news simply told us, “Surveys show most (mid class) expect their kids will not have a good a life/culture then they did when they grow up”
AKA “We (the other 95%) surrender, we are now your indentured citizens and workers” as the distribution of real wealth and incomes prove, but do not tell “other 95% that, as it might upset them, maybe!

Posted by chuck2 | Report as abusive
 

No mention of the working class or even working poor. What about them? No one ever talks about the poor anymore, that has become a dirty word in politics and public discourse.

Why? Because the right will brand you as a socialist or commie if you talk of them.

Hey, Alan Greenspan, what do you make of this research? How will the corporate media talking heads spin this?

Posted by MarieD | Report as abusive
 

I know that if America wanted to..we can work out of this. We just have to get innovative and creative. Personally we need to invent the next wave of massive energy..and I am talking about hydrogen technology. Cars can run on pure water and there are now hydro torches..that just use water and get hotter then any gas I use.

People don’t wait or depend on a failing government who really is only out to line their pockets.

We can do this! America needs to start inventing the next appliances and machinery that will change the world..and make us completely NON dependent on oil.

This is it…we either break down on our knees or we stand up and do something..do something.

Posted by TiredoftheBS | Report as abusive
 

Why is being in the middle class a negative? Someone has to. Everyone can’t have the same position. It absolutely is designed for all classes, the middle is part of the necessary conditions.

Duh

Posted by infidelguy | Report as abusive
 

To get globalization to work for the American middle class, America has to be poor first, and we are on our way there.

Why?

Globalization is like the ocean. America is like a lake on a plateau 300 feet above the sea level. Globalization forces the dam to open its gate, and the wealth is pouring out to the lower sea. We buy everything cheaper from elsewhere, and that creates jobs for them; but they are not buying as much as we are spending. Eventually, we will drain our reservoir and we will be on the same level as the ocean. At which point, we can really benefit from globalization. In the mean time, we are bleeding dry.

Posted by skeptico | Report as abusive
 

OpenCalais from Reuters wants to connect everything.

But what would they find? :-) The basics I’ve found? Good health comes from eating vegetables, getting some sunlight, having friends, having meaningful work, having family and community ties, basic exercise woven into your day, a sense of connection to that which is beyond you, and so on… And we need to rethink our economy for abundance, like so, as I outline here:
http://peswiki.com/index.php/OS:Economic _Transformation

Of course, I achieved that (incomplete) understanding by years and years of reading and searching. So, others will find it on their own in their own way, eventually. I can hope OpenCalais and other tools helps with that some.

There are solutions. The biggest challenge of the 21st century is the irony of technologies of abundance in the hands of those thinking in terms of scarcity.

Posted by pdfernhout | Report as abusive
 

As I begin to look at Michael Spence’s report in detail, I find it has some 20th century assumptions about economics which are no longer that valid in the 21st century. Search on “21st century enlightenment” for a related RSA Animate YouTube video. To begin with, Spence assumes lots of jobs are “nontradable”. How does he justify that?

He references health care as one example, and on the surface, that seems to make sense, for how could a supposedly hands-on profession like a family practice physician ever be offshored? Yet, much of human health connects to nutrition; as we read books on nutrition written by international authors or citing studies done in other countries, or as we eat imported vegetables and fruits, or as we use imported cheap home medical test kits to assess our nutritional status, as we do all these things, we are trading our local doctoring for offshored services and goods. And that does not even begin to talk about telemedicine, imported medical robotics, or medical tourism. Reading X-rays has been more and more offshored for years, for example.

I could suggest the same for other industries, too, for things we normally think of as local, where new goods and services or better design can move them into the economic cloud. :-) Such goods and services move towards cheap labor, towards automation, towards better design, towards cheap energy and cheap raw materials, and towards voluntary social networks. But at some point, we will see a major phase change in our economy, like ice melting into water, or water boiling into steam, as quantitative change eventually becomes qualitative change (the late James P. Hogan wrote on that theme in sci-fi novels like “Voyage from Yesteryear”). Entrepreneur and author Marshall Brain also talks about these trends in “Robotic Nation” and “Manna”.

Spence dismisses “automation” as a major factor in current trends but I feel that is an old-school reaction to a whole bunch of trends like AI and robotics, better design, and voluntary social networks based on a gift economy that are reshaping our economic landscape. This shift is all made possible by better technology. Ironically, Spence writes about the “explosive growth” in electronics sales.

I would suggest it likely that Spence also would not accept that demand could possibly be self-limited by people adopting an ethic of voluntary simplicity or reduce-reuse-recycle as they move up Maslow’s Hierarchy of Needs. When you add self-limited demand along with a falling value of most human labor in the market, trends are far worse than he discusses, and we need larger change (including probably a basic income) to address this. In the same way we might see a desire for physical obesity as a mental illness, is it really just mentally illness to want to be financially obese?

Most mainstream economists can’t admit these trends because then their beautiful classical equations would end up blowing up with divide-by-zero errors as labor costs go to zero through robotics and as demand also grows more slowly than productivity, reducing prices to zero. Then we are left with people promoting things like war spending, expanded prisons and criminalization of difference, and endless schooling to get people out of the labor pool and create endless make-work.

These general issues were all talked about in a 1960s essay prepared originally for President John F. Kennedy called the “Triple Revolution Memorandum” about ongoing transformations related to cybernation, WMDs, and civil rights. So there are not new issues, but they are coming to a boil now after a long simmer.

So, I feel there are flaws and missing parts in Spence’s analysis, which actually makes the US situation much worse than even he is willing to admit. There are no doubt other implicit flaws, like assuming that monetary incentives have much to do with productivity in a 21st century information-age economy, one of the the things talked about in the RSA animate video, as well as another by them called: “RSA Animate – Drive: The surprising truth about what motivates us”.

And search also on: “IMF bombshell: Age of America nears end” about China’s rise and the USA’s decline in general. The other day I read a comment by someone in Canada talking about that “angry country in decline to the south” an I can wonder if it is indeed an apt description? And that is worrisome, because such a mindset tends to lead to the rise of the hard right with regressive social policies. Even in Canada a rightist government has just taken power. Still, ultimately these issues transcend left vs. right, because they will change fundamental aspects of what is possible and desirable socioeconomically.

Anyway, I am both heartened that the mainstream economics profession is paying attention to the years of data in front of them, as well as disheartened about how far they have yet to go.

But there are some other opinions out there. A search on: “An Appeal from Teachers and Researchers of Economics” will lead to an appeal from the editors of Heterodox News that begins with: “The authors of this appeal are deeply concerned that more than three years since the outbreak of the financial and macroeconomic crisis that highlighted the pitfalls, limitations, dangers and responsibilities of main-stream thought in economics, finance and management, the quasi-monopolistic position of such thought within the academic world nevertheless remains largely unchallenged.”

Or for a more mainstream economics take on that, search on “They Did Their Homework (800 Years of It)” for a related major newspaper article.

Posted by pdfernhout | Report as abusive
 

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