Capitalism is failing the middle class
Global capitalism isnât working for the American middle class. That isnât a headline from the left-leaning Huffington Post, or a comment on Glenn Beckâs right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paperâs 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 â 21 per cent for the economy as a whole, and 44 per cent in the âtradableâ 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.
Hereâs how Spence and Hlatshwayo put it: âThe 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.â
Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: âMany 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.â 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: âPoverty reduction has been tremendous, and more is yet to come.â
Spenceâs 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 âpolarizingâ impact on the U.S. work force â it has made people at the top more productive and better paid and hasnât had much effect on the âhands-onâ jobs at the bottom of the labor force. But opportunities and salaries in the middle have been hollowed out.
Taken together, hereâs 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 â 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 âthe velocity of commerceâ 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.
Hereâs the question he asked Stephenson: âOver 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. Weâre 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?â
Mr. Stephenson said not to worry. âWhile technology allows companies like yours to do more with less, I donât think that necessarily means that there is less employment opportunities available. Itâs 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.â
Spenceâs work tells us that simply isnât happening. âOne possible response to these trends would be to assert that market outcomes, especially efficient ones, always make everyone better off in the long run,â he wrote. âThat seems clearly incorrect and is supported by neither theory nor experience.â
Spence says that as he was doing his research, he was often asked what âmarket failureâ 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. âMultinational companies,â he said, âare 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.â
This conclusion is a very big deal â 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 weâve 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.