The Servant Economy (part 2)

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My last post about Jeff Faux’s The Servant Economy presented a prolog to the main story. It described the rise of a strong manufacturing-based economy with a thriving middle class in the mid-20th century. But most of the book concerns the decline of that economy and its replacement by one that seems unable to create wealth for as many of our people. Since 1979, two-thirds of all the income gains in the U.S. have gone to the richest 10% of the population, compared to only one-third in the previous three decades. Real wages and benefits for non-supervisory workers rose 75% between 1947 and 1973, but less than 4% between 1979 and 2005. Median household income continued to rise slowly, but that was mainly because so many households sent more than one worker into the labor force. The other way that households got ahead was by going more deeply into debt, especially because of the high cost of health care, education and housing. In 1970, it took the average worker 41.5 hours to earn enough to make the monthly payment on an average-priced house; in 2000, it took 67.4 hours.

Between 1980 and 2006, the manufacturing sector declined from 21% to 12% of GDP, as jobs were automated or offshored. The mirror image of that decline was the rise of the financial sector from 12% to 20% of GDP. “Finance replaced manufacturing as the driving force of the American economy.” And what did bankers and investors choose to finance? Massive amounts of consumer debt, for one thing. Leveraged buyouts of existing companies from which short-term profits could be extracted by cutting wages or selling off assets, for another. And speculative bets on future asset prices, such as the housing bubble. The financial sector became both more powerful and less connected with the production of real wealth. Why bother with the long-term risk of investing in new products, let alone new industries like clean energy, when you can see so many ways of making a quick and easy buck?

In theory, the flow of capital toward cheaper foreign labor was supposed to benefit everybody. Countries with less-skilled populations could assemble manufactured goods at the lowest cost, providing jobs there and inexpensive goods for consumers around the world. Countries like the United States would keep more of the higher paying jobs requiring more education and training. It hasn’t quite worked out that way. As economist Alan Blinder pointed out, any task that can be done with a computer can be done anywhere, and large countries like India are rapidly  producing educated workers. The CEO of Intel said that “Intel can thrive today and never hire another American.” So what kinds of jobs are we creating? Primarily personal service jobs, since they are hardest to export. Most of the rapidly growing service occupations–like restaurant workers, retail salespeople, and home health care aides–are fairly low in educational requirements and pay. Rich people can afford to hire maids, nannies, gardeners, and fitness coaches. Busy middle-class families may want more hired help too, but will be unwilling or unable to pay very much for it. Of course, good jobs remain in professional services, but many of those depend directly or indirectly on public funding. (Faux doesn’t make this point, but private capital investment in health and educational services is limited by the fact that the individuals needing the service often can’t afford to pay for it personally. Development and maintenance of our human capital is something we agree to do together.) Getting a good education may be necessary to get a good job, but it’s not sufficient unless the country is investing in the tasks that make use of that education. In general, private capital investment decisions are tending to create manufacturing economies overseas and a “servant economy” at home.

Much of Faux’s book tells how the nation’s political governing class–Republicans and Democrats alike–encouraged or acquiesced in the creation of the servant economy. To put it most simply, they sacrificed the economic vitality of the middle class for other priorities, especially protection of unregulated capitalism and maintenance of the world’s largest military establishment. Faux tells the political story of the last half-century mainly as a series of policy mistakes.

Lyndon Johnson’s decision not to raise taxes to pay for the unpopular Vietnam War increased inflation and weakened foreign confidence in the dollar, as did the growing excess of imports over exports in the 1970s. With the price of gold rising, the Nixon administration had to stop redeeming dollars for gold and devalue the dollar. Oil-producing nations responded by curtailing production in order to boost the price of oil. President Carter’s Chairman of the Federal Reserve, Paul Volcker, fought inflation by raising interest rates and slowing the economy, but the initial result was “stagflation,” a combination of inflation and recession. The energy crisis and trade deficit did encourage some discussion of whether the country needed a new “industrial policy,” but economic conservatives prevailed, and markets were allowed to take their course. Ronald Reagan got elected in 1980 largely by blaming government social spending for inflation. Then he ran up a large deficit of his own by cutting taxes and increasing military spending. He also deregulated the Savings & Loan industry, facilitating the wave of fraud and mismanagement that required a $200 billion taxpayer bailout. Bill Clinton agreed with the Republicans that “the era of big government is over,” and he cooperated with them on cutting spending, adding a work requirement to welfare, deregulating banking, refusing to regulate derivative securities, and encouraging offshore production through free trade agreements. George W. Bush turned the Clinton budget surplus into a new deficit by cutting taxes and increasing military spending, limiting the government’s options for responding to a new economic crisis.

All this set the stage for the speculative housing bubble of the 1980s and the financial crash of 2008. Among the contributing factors were “the 30-year flattening of incomes, which drove consumers to take on more debt in order to keep up with the expanding American dream,” the eagerness of mortgage brokers to make subprime loans at high interest without the traditional banker’s concern about the borrower’s ability to pay, the marketing of financial derivatives rated as low-risk but relying ultimately on shaky mortgages, the corruption of accounting and rating firms by the companies offering the risky securities, and the availability of foreign capital to help finance the boom, due to the trade deficit and the dollars it put into foreign hands. When the bubble burst, U.S. taxpayers had to borrow more money in order to finance a Wall Street bailout.

In Faux’s view, the economic outlook remains gloomy. Both political parties depend heavily on Wall Street for campaign contributions, making new limits on its ability to speculate or move capital overseas unlikely. The U.S. continues to spend almost as much on its military as the rest of the world combined. Reductions in the federal debt will fall most heavily on domestic spending, limiting the country’s capacity to make new investments in infrastructure, energy or education. The main weakness of Faux’s book is that it is more negative than positive, providing little detail about the policies he would like to see. Usually he limits himself to statements like these:

National adjustment to our new condition requires economic redevelopment: improving the basic capacity of the economy to compete in a way that generates rising living standards….The United States is obviously not a third-world country. But its future, like that of a third-world country, depends on its ability to build infrastructures, to educate its people, and to set national priorities….A country’s economic development is a political process as much as an economic one.

The investments that President Obama’s American Recovery and Reinvestment Act made in infrastructure and clean energy are a start, but Faux notes that they had to be marketed as part of a short-term stimulus package to get Congressional approval. We don’t yet have any consensus supporting an expanded role for government in overseeing national economic development.

The most important first step that Faux recommends is a Constitutional amendment to reverse the Citizens United decision, establish that corporations do not have the free-speech rights of persons, and allow strict limits on campaign spending. That would presumably pave the way for a government less under the control of the rich and the financial industry, and more responsive to the rest of society. How that might translate into better American jobs is a question that will occupy policymakers for some time to come.

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