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.
As the this article states, a rather unremarkable conclusion. India and China have the fastest growing middle class in the world thanks to outsourcing. Another significant problem is the shrinking of skilled labor therefore making us dependent on other countries for manufacturing or whatever. This could pose problems for the US in the event of any disagreements or having be to be self sufficient. Even having advanced degrees does not guarantee you a high paying job unless it is technology related, bio science or other limited specializations. America was built on the middle class embracing the American dream which is saddly not the case anymore.
Mikeymouse03, I think you are missing the point of the study and article. Nobody argues the fact that our parents and grandparents worked harder and were satisfied with less material luxury. the ppoint is that the income gap is rising, meaning that fewer people partake in America’s economic success while the majority of the middle class is left out. As the broad middle class also carries the political system in a nation, this can lead to some very nasty political and social backlash in the future. Plus, you complain about the rising expectations of the middle class but do not mention the increasingly ridiculous lifestyle of the wealthy. Their expectations did not rise then? Lastly, American economic success depended on the rising expectations of the middle class. It was their ability to afford consumer goods and plastic junk that kept the wheel of capitalist growth turning. So were do you think this is going to go when their money runs out?
@mikeymouse03:
It is nice for you to have such fond recollections of your hard-working great-grandfather and grandfather. No doubt they worked hard, like most people do. I wish you had shared your own heartwarming life story with us…
But 2011 is NOT the 1918 of your great-grandfather, nor is it the 1940 of your grandfather.
There are the small matters of globalization, off-shoring, outsourcing and the internet. We are burdened with an enormous military-industrial complex that provides little benefit and healthcare costs that are almost double the OECD average. The rules that applied to your ancestors’ success no longer apply, no matter how nostalgic you make it sound.
Business has moved out of the US because government policy facilitates these decisions, by awarding tax breaks for companies that send jobs overseas. Add to it WTO and Free trade. The billionaire class has no allegiance to this country — those parasites and bloodsuckers are bankrupting us and destroying the middle class.
Your suggestion that Americans should take the below minimum wages paid to illegal immigrants is ridiculous. Do you own a stoop-labor farm or something? Illegal immigration happens because the government ALLOWS it — business loves a compliant workforce that asks for no benefits and works for peanuts. ICE should visit every farm, hotel, restaurant and construction site and fine employers $10,000 for every illegal they employ. Like you say, GET OUT AND JUST DO IT!
You write … “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.”
With that said, you should read the new M.I.T. report “The China Syndrome: Local Labor Market Effects of Import Competition in the United States” written by David H. Autor, MIT, Professor Hanson, University of California, San Diego (UCSD) and David Dorn, CEMFI and IZA, in which they and clearly report that increases in negative social costs to the USA can be directly attributed to America’s increased uncontrolled trading with Communist China. The study further indicated that the professed financial benefits claimed by those importing from China are cancelled out by the increases in negative social costs and therefore uncontrolled China trade is simply bad for American society.”
Click here to learn more and view the full report. — http://www.americanmadeheroes.com/hanson -gordon.html
Middle class people didn’t decide to move factories and transfer technology to China and other low wage countries. The already wealthy management and bankers did so in order to to maximize their wealth. But sooner than you think, much manufacturing will be forced back to the huge US market by unimaginably high transportation cost caused by declining total world oil production. That will change our civilization faster than anything since the dawn of the industrial revolution. Look for it to begin between 2016 and 2022. Nothing can now stop it. Study a graph of USA oil production. No amount of drilling could stop the decline, only slow it a bit with new extraction technology. Oil moves nearly everything and is finite. And then there is new oil demand from China & India, 1/3 of humanity. Bill Simpson in Slidell
The headline should read ‘Crony Capitalism is Failing the Middle Class’.
We’ve seen decade after decade of bigger, more centralized, unconstitutional government in the United States.
Consider the tentacles that intertwine Goldman Sachs and the U.S. Treasury Department. Or General Electric and the Department of Health and Human Services.
The free market hasn’t failed “the middle class” (whoever that is – which, by the way, is prototypical Marx-Alinsky class warfare rhetoric).
Monstrous government programs have failed Americans: from disastrous housing debacles like Fannie Mae and Freddie Mac; the control of more and more elements of the energy sector in the name of a “global warming” fraud; “financial reform” authored by the likes of Barney Frank and Chris Dodd; further centralization of the health care industry; the failing welfare state; open borders; and dozens of other programs that are little more than Ponzi schemes.
If Americans can ever restrain the government to its constitutional duties, the “middle class” might get back in the game.
What we have today is an out-of-control leviathan of a federal government, mandating our light bulbs, electric cars, low-flow shower heads, what kinds of insurance we must buy, and controlling literally every aspect of our lives.
It’s not capitalism that’s at fault. It’s crony capitalism — and a failure to abide by our nation’s highest law: the Constitution.
What “mikeymouse” drivel. Imagine your grandfather, who was a draftsman, then engineer, had his job shifted to India for a fraction of labor cost no matter how “hard” ‘ol grandpa worked. Would you be able to recite this nostalgic story?
This article rightly states that it isn’t the lack of hard work; rather, the dynamics have to do with the commoditizing of labor by using low-wage offsore areas. Being a hard-worker has no more to do with it than Indians or Chinese being somehow inherently smarter. It is all labor cost as a commodity.
Since you profess to have an interest in history, it was America that invented the transistor and then the integrated chip (IC). These led to the huge technological advancements that were indirectly funded by the US government which in turn was funded by….drum roll…the middle class taxes.
In effect, it was the middle class of the United States of America that have made China and India what they are today. They got all that technology that came from America …gratis. Lose the American middle class and you have a hollow shell of financial instruments which are just worthless bits in a computer storage.
All the concerns are addressed in one simple concept no one wants to confront: our system of finance using debt/interest constantly skims the wealth gains provided by the productivity improvements implemented by the middle class. So, we no longer have true capitalism to much of a degree, i.e., the application of labor and materials to capital to create real wealth. Just making money in some enterprise that will give gain is NOT necessarily capitalism. We have been taught that it is; it is NOT. You see, the level of debt under our current system rises to the level of aggregate productivity percentage increases plus an additional small administrative percentage. Otherwise, the 5 cent soda of 1955 would cost, with productivity improvements since then, much LESS than 5 cents now. Instead, the increases are taken, skimmed, each year in financial growth. That is, the debt level grows to take off that wealth increase in interest, for the debt-mongers, as it occurs. That feeds the financial-connected classes, and slowly starves the productive classes. Communist doctrine !, you say. No, I hate communism, but I also hate usury mercantilism, which doesn’t have to cross borders to occur. It’s simply the math. Explain the 5 cent soda problem to yourself, and you will have it. Everything else is attempting to treat symptoms. Take away the skimmers making money only on debt ( abt 35-45% of the economy is financial now ), and you will return to growth of producers and the productive, who are then funding new capital and investment with their savings, not with ginned-up money. Their yearly productivity increases will go to increasing their prosperity, instead of the prosperity of the lenders who make up their money from thin air, and demand its return with interest, skimming the gains yearly.
Very few want to think about it like this, as their concept of the structure of society is shaken. But how shaken will it be if we allow this to play out to its end ?
Hey “mikeymouse03″ … I suspect that your intentions were genuine when you wrote the story sharing the history of your grandfather. Unfortunately, the destruction of THAT form of “bootstrap” success and the middle-class American legacy is exactly the point of the article. Both are evaporating at unprecedented levels.
Today, essentially I am your grandfather. My dream was his dream. I have three boys and wanted little more than a warm house, sufficient food, a single working car, and money enough to afford health-care should one of us become sick or require dental work.
I am 52, have a college degree, and worked non-stop for over thirty years (often 100 hours a week) to the point where I owned a small technology-based business and was doing OK. But pile on two major economic recessions in less than ten years, globalization of product manufacturing, Government squabbling–apathy–arrogance in both parties, corporations ruled by self-indulgent–myopic–CFO–gods, de-regulation of the financial sectors, unfunded wars, blah-blah-blah….and HERE we are.
Add to that the wonder of being over 50 years old–the hardest hit employment demographic of all, since businesses save lots of money hiring younger, lower paid, recent college grads, or have out-sourced the labor…and voila–you have Me, or perhaps your grandfather, had he been born in 1957, as I was.
Today, I am unemployed, homeless (I lost my modest house to foreclosure two years ago), have no health, dental, life, or auto insurance, no 401K (wiped out trying to save my house), etc, etc, etc. I don’t even have enough money to file for bankruptcy–it costs almost $2500. The last job I got, after sending out over 600 resumes, was driving part time for a rental car company. After taxes, I took home $105 a week.
American Dream anyone?? I don’t want a handout–I don’t want sympathy–I don’t want pity. I want a job that pays more than $8/hour.
But what I also DON’T want is another out-of-touch, conservative, well-paid, commentator or political-pundit throwing me a bunch of BS about how cutting social services is good because only dead-beats and do-nothing losers are unemployed. Nice try, but that’s the biggest lie of all!
For the sake of all the hardworking, disenfranchised, unemployed people in this country, let’s take our heads out of the sand and admit how big and how real this problem really is, and do something sustainable that will fix it. I sincerely believe that your grandfather would have some great solutions. I wish he were here, and in charge.
Thanks. Zen
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