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The Economy - Mobility and Productivity

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Face it.  You're never going to get rich.  This life of yours?  You're stuck.  Get used to it.

"Goodbye, Horatio Alger. And goodbye, American Dream."  Really?


Is may be true that inequality is getting worse, social mobility is declining, and it's all being helped along by very deliberate policy decisions.  I wonder how long it will take before even conservatives admit that this might be a real problem?

The New York Times columnist Paul Krugman has a column that just appeared in The Nation and is getting a lot of comment. 


Yes, most on the right consider Krugman a raging, left wing pessimist, full of unwarranted doom and gloom.  Maybe so.  But he is often insightful, if a bit dour.

See The Death of Horatio Alger
Paul Krugman, The Nation, posted December 18, 2003 [from the January 5, 2004 issue]


The other day I found myself reading a leftist rag that made outrageous claims about America.  It said that we are becoming a society in which the poor tend to stay poor, no matter how hard they work; in which sons are much more likely to inherit the socioeconomic status of their father than they were a generation ago.

The name of the leftist rag?  Business Week, which published an article titled "Waking Up From the American Dream."  The article summarizes recent research showing that social mobility in the United States (which was never as high as legend had it) has declined considerably over the past few decades.  If you put that research together with other research that shows a drastic increase in income and wealth inequality, you reach an uncomfortable conclusion: America looks more and more like a class-ridden society.

And guess what?  Our political leaders are doing everything they can to fortify class inequality, while denouncing anyone who complains - or even points out what is happening - as a practitioner of "class warfare."


Is this man serious?  Can't anyone grow up to be president?  George Bush did.  Well, maybe he's not a good example.  Some say he started out a bit ahead, so to speak.

Krugman of course, being a Yale (or is it Princeton?) economist with his fancy PhD and all his books on economic theory, does review income distribution data.  You can click on the link for all the details, but these stuck me:


According to estimates by the economists Thomas Piketty and Emmanuel Saez - confirmed by data from the Congressional Budget Office - between 1973 and 2000 the average real income of the bottom 90 percent of American taxpayers actually fell by 7 percent.  Meanwhile, the income of the top 1 percent rose by 148 percent, the income of the top 0.1 percent rose by 343 percent and the income of the top 0.01 percent rose 599 percent. (Those numbers exclude capital gains, so they're not an artifact of the stock-market bubble.)


Well, yes, the rich get richer, but perhaps this has always been so. 

But that leads to this:


As a general rule, once they've reached their 30s, people don't move up and down the income ladder very much.  Conservatives often cite studies like a 1992 report by Glenn Hubbard, a Treasury official under the elder Bush who later became chief economic adviser to the younger Bush, that purport to show large numbers of Americans moving from low-wage to high-wage jobs during their working lives.  But what these studies measure, as the economist Kevin Murphy put it, is mainly "the guy who works in the college bookstore and has a real job by his early 30s." S erious studies that exclude this sort of pseudo-mobility show that inequality in average incomes over long periods isn't much smaller than inequality in annual incomes.


Well drat!  If you can't trust the conservatives on economic facts, who can you trust?

Here's Krugman on how this all is playing out, and he sees some "bad guys" of course -


Business Week attributes this to the "Wal-Martization" of the economy, the proliferation of dead-end, low-wage jobs and the disappearance of jobs that provide entry to the middle class. That's surely part of the explanation. But public policy plays a role - and will, if present trends continue, play an even bigger role in the future.

Put it this way: Suppose that you actually liked a caste society, and you were seeking ways to use your control of the government to further entrench the advantages of the haves against the have-nots. What would you do?

One thing you would definitely do is get rid of the estate tax, so that large fortunes can be passed on to the next generation. More broadly, you would seek to reduce tax rates both on corporate profits and on unearned income such as dividends and capital gains, so that those with large accumulated or inherited wealth could more easily accumulate even more. You'd also try to create tax shelters mainly useful for the rich. And more broadly still, you'd try to reduce tax rates on people with high incomes, shifting the burden to the payroll tax and other revenue sources that bear most heavily on people with lower incomes.

Meanwhile, on the spending side, you'd cut back on healthcare for the poor, on the quality of public education and on state aid for higher education. This would make it more difficult for people with low incomes to climb out of their difficulties and acquire the education essential to upward mobility in the modern economy.

And just to close off as many routes to upward mobility as possible, you'd do everything possible to break the power of unions, and you'd privatize government functions so that well-paid civil servants could be replaced with poorly paid private employees.

It all sounds sort of familiar, doesn't it?


Ah, yes it does.

Where is this taking us?  Will this eventually create "a class of rentiers in the U.S., whereby a small group of wealthy but untalented children controls vast segments of the US economy and penniless, talented children simply can't compete."

Will we end up suffering not only from injustice, but from a vast waste of human potential, as Krugman fears?

Who cares?  I got mine.

Notes from an indolent, or unlucky in some self-fulfilling way, victim of our country's economic fecundity: Comments on Macroeconomics

David Ignatius in The Washington Post earlier this month wrote about the economic news of the day no, not that the job growth posted that day was only one third of what was expected.  That's a bummer, yes.  But that particular statistic is jumping all over the place.  He wrote about exchange rate changes.

See Fiddling While the Dollar Drops
David Ignatius, The Washington Post, Friday, December 5, 2003; Page A31

Here he sets the "ominous" scene:


Something ominous is happening when the United States reports its biggest surge in productivity in twenty years, as it did Wednesday, and yet the dollar plunges to an all-time low against the euro.

The dollar is sinking these days on good news and bad, and the explanation is pretty simple: Investors around the world are worried that the Bush administration's policies are eroding the value of the U.S. currency. So they're rushing to unload greenbacks, in what could soon become a full-blown financial crisis.

"The dollar crisis is the story," warns James Harmon, an investment banker who headed the Export-Import Bank during the Clinton administration. "A lot of smart money has moved out of the dollar in the last six months," he explains. "Now the latecomers are rushing to sell, and that's adding to the momentum."


Ignatius of course then goes on to explain all the awful things that would happen if folks in other countries stop buying US treasuries.  It becomes really, really hard to finance our new multi-trillion dollar deficit when folks don't buy those things, and interest rates then rise in a desperate effort to convince investors to finance our economy, and that rise in the cost of money would depress all the markets and end this current, quite odd job-loss recovery.  That stops the recovery dead in its tracks.   Investors think the dollar is less attractive and buy euro bonds, which offer a better return.  Yeah, yeah.

And is this true?


The dollar's decline during the Bush presidency has been remarkable. It has tumbled about 44 percent from its October 2000 high of about 83 cents to the euro. Over the past year alone, the decline has been more than 15 percent.  Investors who trusted in the dollar as a store of value have been clobbered, so it's not surprising that they want to sell, even at current depressed prices. They fear that worse is coming.


Perhaps so.  A few years ago a euro would cost you eighty-five cents.  This weekend you would pay about a buck twenty-four.

And it will get worse, perhaps...


If you haven't already gagged on your raisin bran, consider this nightmare scenario - outlined by an investment banker who for many years headed his firm's currency-trading operations.  This veteran trader contends that the markets have entered a cycle in which "overshooting" - meaning a further sharp fall in the dollar's value - "is a distinct possibility."


Yeah, but our productivity is growing by leaps and bounds!  Isn't that good?

Well, Everett Ehrlich, who was an undersecretary of Commerce in the Clinton administration, now director of research of the Committee for Economic Development, a nonpartisan economic policy think tank, had some stuff to say about that in The Los Angeles Times the same day.

See High Productivity Is Fine, but It's Just Not Enough
Everett Ehrlich, The Los Angeles Times, Friday, December 05, 2003
[registration required to access this]

Ehrlich says high productivity is good, but not the answer to the problems we face now:

Nothing so unites a gaggle of economists as their reverence for productivity growth.  Higher productivity allows us to make more, earn more and consume more; it is the stuff of which our standard of living is made. 

... To optimists, this news was the robin that heralds spring.  To the pessimists, it foretold a rain of pink slips as firms eight years from now make the same stuff they always have but with a smaller labor force.

Well, the problem is simple.  We can make more and more stuff with fewer and fewer workers.  But as unemployment rises with massive gains in productivity, who is going to be able to buy all this stuff?


The problem is that productivity growth does not automatically turn itself into economic growth.  Productivity tells us our potential to grow, but not the actual result.  Consider an economy spilling out 9% more "stuff" - haircuts, computers, insurance, fast food, all of it - every year without any need for new hires.  Who will consume the fruits of this abundance?  Incomes would need to rise by a like amount (or prices fall like a son of a gun) in order to snarf this stuff up.


Yes, one should not use "snarf" as a verb.  One should not use it at all, I suppose.

Be that as it may, he does tie this issue back to the weak dollar.


Still, two issues remain. The first is: What happens next?  If the economy does grow substantially in the year ahead, business demands for funds may start to compete with burgeoning federal borrowing, and the low interest rates that have helped propel the economy may start to unravel.  Or the Asian lenders who are financing our deficits by soaking up Treasury bills may think twice about doing so, with the same result.

And the second issue is the human one.  If productivity is surging, then some jobs will be harder to find - read manufacturing.

We are told to think of the jobless as indolent, or unlucky in some self-fulfilling way.  In fact, they are the victims of our country's economic fecundity.   The story of productivity is that economic growth and change are irrevocably intertwined.  We need an economic policy that promotes adjustment in order to make productivity the productive force it is supposed to be.

Yes, but what adjustments?

That is a problem.  I do not see a solution.

As Ehrlich points out, the traditional economic stimulants have already been tried; the economy is already heavily tax-stimulated and money is already dirt-cheap.  And we are producing more and more with less and less labor.

Now what?

Anyway, this is something else to consider in addition to the issues with our occupation of Iraq, our standing in the world, and who will run against Bush.