Solving the Productivity Puzzle

February 27, 2018

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McKinsey Global Institute, “Solving the Productivity Puzzle: The Role of Demand and the Promise of Digitization,” 2018. 

This report discusses why the rate of growth in economic productivity has been so low in recent years, and how it might improve in the future.

Productivity: Why it matters

The report makes a fundamental assumption: “Productivity growth is crucial to increase wages and living standards, and helps raise the purchasing power of consumers to grow demand for goods and services.” That’s basic economics, but worth remembering at a time when people in many countries have grown accustomed to minuscule productivity growth.

Production and consumption are, of course, two sides of the same economic coin. The most obvious way for the average worker to receive more goods and services is for the average worker to produce more goods and services per hour of work. People can also get ahead by working more hours, but then they are paying for their economic gains with reduced free time.

The benefits of high productivity may not be distributed evenly, but that’s another issue. Workers may not receive their fair share of the benefits when productivity is rising, but they are even less likely to get ahead when productivity is not rising. Then the competition for benefits is more of a zero-sum game, and the haves will be especially resistant to redistributing benefits to the have-nots. The widespread assumption that anyone’s gain must be someone else’s loss is a big reason why our politics have become so ugly. (That last point is mine, not the report’s.)

Sagging productivity

The report is based on data from seven countries: France, Germany, Italy, Spain, Sweden, the United Kingdom, and the United States. Productivity is defined simply as Gross Domestic Product per hour worked.

The data show these trends for recent decades:

  • Productivity growth was strong during the postwar economic boom
  • In general, productivity growth has been much slower since the 1970s
  • A brief productivity boom occurred from about 1995-2005, especially in the United States, associated with applications of information and communications technology (ICT)
  • Productivity has stagnated since then, with near zero annual growth in both Europe and the U.S.

The report identifies three main reasons for low productivity growth, describing them as waves passing over the economy one by one.

First, the rate of innovation associated with ICT slowed after 2005. For example, big retailers like Walmart had used the new technologies to make their supply chains more efficient, but the biggest changes had already occurred by then.

Second, the financial crisis of 2007-08 ushered in a period of “weak demand and uncertainty.” Businesses were reluctant to make costly changes in production without confidence that the market could absorb the additional goods or services produced. Companies held back on new investments and held the line on wages. The economy recovered from the recession, but it was a “job-rich” and “productivity-poor” recovery. As long as there were people wanting to return to work, “companies met slowly rising demand by filling excess capacity and adding hours,” not by raising productivity and wages. Hopefully, the economy can now move beyond recovery into a new period of productivity growth and wage gains. The danger is that the economy becomes stuck in a vicious cycle, in which workers earn too little to raise demand, and businesses fail to invest in higher productivity because they can meet existing demand with low-cost labor.

Third, a revolution in digital technology is underway, but “the impact of digital is not yet evident in the productivity numbers.” Many sectors of the economy, such as education, health care and construction, are only beginning to digitize their operations. Transition costs can be high, including not only the costs of equipment and training, but the disruptive impact on existing operations. A retailer that adds an online store may suffer offsetting declines in business at its brick-and-mortar stores.

Prospects for digital-based productivity growth

As of now, the economy is in a paradoxical position: “…In an era of digitization, with technologies ranging from online marketplaces to machine learning, the disconnect between disappearing productivity growth and rapid technological change could not be more pronounced.” How long can it be before technological know-how actually translates into productivity gains and higher wage potential for the average worker?

The authors of this report see “the potential for at least 2 percent [productivity] growth a year over the next ten years, with 60 percent coming from digital opportunities.” But they also see some potential problems that need to be addressed if that potential is to be realized.

One of their concerns is the market power that digital technologies may bestow on a few hugely successful companies:

Various digital technologies are characterized by large network effects, large fixed costs, and close to zero marginal costs. This leads to a winner-take-most dynamic in industries reliant on such technologies, and may result in a rise in market power that can skew supply chains and lower incentives to raise productivity.

To put it more simply, once a company has made a large initial investment in new technologies, it may be able to turn out products so cheaply and maintain such a locked-in customer base, that it may no longer have to raise productivity to dominate a market. It might just become fat and lazy. I doubt if this phenomenon is unique to the digital age. It may be part of the dynamics of capitalism, helping to explain why productivity-based economic change comes in cycles of growth, maturation and stagnation.

Demand-side constraints on productivity

Another big concern is that weak economic demand may continue to exert a drag on investment and productivity growth. Some of the weak demand may be just cyclical, a normal after-effect of recession. But the authors of this report join other economists in worrying that some of it may be structural–that is, built into today’s economy. They express concern that “declining labor share of income and rising inequality are eroding median wage growth, and the rapidly rising costs of housing and education exert a dampening effect on consumer purchasing power.”

How digital technologies affect jobs also has implications for the demand side. In theory, the benefits of higher productivity could appear in the form of higher wages and shorter work weeks, as they did in the postwar era. If, on the other hand, a large segment of the labor force is simply replaced by smart machines, their loss of purchasing power could reduce economic demand and nip economic growth in the bud. “Unless displaced labor can find new highly productive and high-wage occupations, workers may end up in low-wage jobs that create a drag on productivity growth.”

This line of reasoning leads the authors to recommend public policies that focus on the demand side. That is in contrast to conservative policies that focus on helping the supply side (businesses and their investors) with tax cuts and looser regulations. The implicit assumption (perhaps rarely stated since it seems so counter-factual) is that the poor capitalists don’t have enough capital to raise productivity and grow the economy. If, however, the problem is more on the demand side, then the economy may be helped by government spending to supplement the purchasing power of low-income consumers, invest in public works like infrastructure repairs, make education and health insurance more affordable, and support worker retraining for new jobs.

The report also recommends that companies “rethink their employee contract in order to develop a strategy, potentially together with labor organizations, where people and machines can work side by side and workers and companies can prosper together.” If that sounds like pie in the sky in this era of anti-labor capitalism, we should remember that it is a pretty good description of the business-labor understanding that existed during the last great era of productivity growth. More of us knew then what many of us seem to have forgotten recently, that the economic engine runs best when its benefits are widely shared. In the 1950s, the “widely shared” part mainly applied to white men. Now we must learn to be even more inclusive.

Overall, the report is an optimistic, yet not unrealistic vision: “A dual focus on demand and digitization could unleash a powerful new trend of rising productivity growth that drives prosperity across advanced economies for years to come.”


White Trash (part 2)

February 16, 2018

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Nancy Isenberg discusses how pejorative stereotypes like “poor white trash” have served to stigmatize people as a “breed apart,” attributing their economic position to their own inherent deficiencies. Occasionally, however, the derogatory labels give way to more sympathetic portrayals, some of which can inspire economic reforms.

That was especially true during the Great Depression. In promising a New Deal for forgotten Americans, Franklin Roosevelt focused the country’s attention on poverty in general and Southern rural poverty in particular. He called the South “the Nation’s No. 1 economic problem.”

The Roosevelt administration explicitly rejected the conception of poor whites as a distinct breed, hopelessly confined to a mean and ugly condition by some hereditary weakness.

Secretary of Agriculture Wallace predicted that if at birth one hundred thousand poor white children were taken from their “tumble-down cabins” and another hundred thousand were taken from the wealthiest families, and both groups were given the same food, education, housing, and cultural experiences, by the time they reached adulthood there would be no difference in mental and moral traits.

In his Southern Regions of the United States (1936), Howard Odum supported this view with comprehensive data and sociological analysis. He showed how the Southern states had perpetuated poverty by managing land poorly, tolerating high rates of illiteracy, and depriving citizens of basic services. Among the groups the New Deal targeted for special assistance were tenant farmers, two-thirds of whom were white. They did much of the South’s agricultural labor but owned practically nothing.

The suburban frontier

After the Depression and World War II, the U.S. population was majority urban, and many upwardly-mobile Americans were moving to the new suburbs. Although the large metropolitan middle class may have created the impression of a classless society, “suburbs were turned into class-conscious fortresses. Zoning ordinances set lot sizes and restricted the construction of apartment buildings, emphasizing single-dwelling homes to keep out undesirable lower-class families.” [Early suburbs, like the one I grew up in, also had restrictive covenants in the deeds confining ownership to Caucasions.]

Among the groups left behind in the move into the new suburban neighborhoods were inner-city residents–now mostly nonwhite–and the rural poor. The latter might now be living in mobile homes instead of shacks, but they were still stigmatized as “rednecks” or “trailer trash.”

However, the discontents of suburban living gave an interesting twist to lower-class stereotypes. At a time when many social critics and young people were starting to criticize the suburban lifestyle as too bland and conformist, colorful characters with lower-class origins, like Elvis Presley, could achieve status in popular culture. Their uninhibited, undomesticated and macho personas could have broad appeal, at least in the expanding leisure and entertainment industry.

Varieties of identity politics

Lyndon Johnson’s “Great Society” programs tried to carry on the New Deal tradition, seeking to uplift rather than stigmatize the poor. As a Southerner himself, Johnson was well aware of how southern elites and politicians kept poor whites in their place, but held their support with appeals to white supremacy: “If you can convince the lowest white man he’s better than the best colored man, he won’t notice you’re picking his pocket. Hell, give him somebody to look down on, and he’ll empty his pockets for you.”

Johnson tried to help both the rural poor and the inner-city poor. But he knew that his party’s strong stand on civil rights legislation was going to lose white votes in the South. That gave the Republican Party an opportunity to win over poor white voters who had voted Democrat since the 1930s. Another problem for liberals was that public assistance now carried more of a stigma than it had during the Depression–the stigma of a lazy dependency on Big Government. Republicans could invite voters–rich and poor–to identify with a much more positive image–Nixon’s “‘Silent Majority’ of Americans who saw themselves as hardworking, middle American homeowners dutifully paying their taxes and demanding little of the federal government.” This reinforces one of the main points of the book, that “identity has always been a part of politics.” Different parties just go about constructing social identities in different ways.

Negative stereotypes of the poor persisted, but they were more likely to emphasize a “culture of poverty” than hereditary deficiency. Social scientists no longer thought that poverty was inborn. But they became divided over whether children acquire an impoverished way of life mainly from their families and neighborhoods, or whether they are forced into it by oppressive economic conditions. That is a subject I wish Isenberg had explored in more detail.

The politics of social class

On one level, this is a book about how we stigmatize the poor instead of confronting the class barriers that keep them poor. More subtly, it is a book about how we co-opt the poor by offering them more positive identities to sustain them in the absence of real opportunity. The rebel soldier defending his Southern heritage, the fiercely independent hillbilly in coal country, the low-wage worker claiming to want nothing from government–All these politically enhanced self-images have served systems mainly profiting someone else.

Those who are profiting more than ever, the economic elites who claim an increasing proportion of the national wealth and income, work to channel the resentments of the poor away from actual elites and toward those who question the system.  The poor:

…are told that East Coast college professors brainwash the young and that Hollywood liberals make fun of them and have nothing in common with them and hate America and wish to impose an abhorrent, godless lifestyle. The deceivers offer essentially the same fear-laden message that the majority of southern whites heard when secession was being weighed. Moved by the need for control, for an unchallenged top tier, the power elite in American history has thrived by placating the vulnerable and creating for them a false sense of identification—denying real class differences wherever possible.

Donald Trump’s brand of populism is taking the co-optation of the poor and the vilification of liberals to an absurd extreme, hopefully absurd enough to expose the game for what it is. He appeals to poor whites not as low-wage labor in need of economic reforms, but as whites, or men, or Christians, or gun owners, or native-born Americans hostile to immigrants. And he is quick to brand his political adversaries and critics as “enemies of the people,” the people being the folks described above.

This is not a book about economic policy as such. It contains little analysis of what programs would actually uplift the poor today. It is more about the stereotypes that get in the way. What Isenberg wants is a sober class analysis unencumbered by such stereotypes:

…The most powerful engines of the U.S. economy—slaveowning planters and land speculators in the past, banks, tax policy, corporate giants, and compassionless politicians and angry voters today—bear considerable responsibility for the lasting effects on white trash, or on falsely labeled “black rednecks,” and on the working poor generally. The sad fact is, if we have no class analysis, then we will continue to be shocked at the numbers of waste people who inhabit what self-anointed patriots have styled the “greatest civilization in the history of the world.”

Neither stigmatizing the poor nor co-opting them with flattering stereotypes is helpful. As Tevye said in Fiddler on the Roof, “It’s no disgrace to be poor, but it’s no great honor either.” Poverty can become a cultural tradition and a flawed social identity. But policymakers need to see it first and foremost as an economic condition.


White Trash

February 14, 2018

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Nancy Isenberg. White Trash: The 400-Year Untold History of Class in America. New York: Penguin Books, 2016.

The term “identity politics” has recently entered our political vocabulary, mainly as an accusation against Democrats. The complaint is that Democrats divide the country by appealing especially to women and minorities. In contrast, Republicans like to claim that they aim to unite the country with an economic growth agenda that will help everybody.

The truth is a lot more complicated. For one thing, a facade of unity politics can hide a reactionary kind of identity politics. A campaign’s overt message may be that it is not specifically about women’s rights or minority rights because it’s for everybody. But the underlying message may be that it’s really about defending white, male privilege. Isenberg’s history of America reveals an even deeper problem, that identity politics goes beyond issues of race and gender to infuse discussions of social class. People of the same race and gender–such as white men–have often been assigned different social identities based on their class level. The persistent use of slurs like “white trash” reveals this, and it tell us a lot about the dark side of the American class system.

Politicians have a long history of claiming to identify with one class of people or another, in order to invoke deep feelings of class superiority or class resentment. Donald Trump is only the latest and most obvious example. “Like many before him, Trump…tapped into a rich vein of identity politics: the embrace of the common man, the working stiff, the forgotten rural American.” What I find most fascinating about this phenomenon is that Trump tries to have it both ways, combining policies favoring the wealthy with populist rhetoric appealing to the poor–but especially the white, male poor. That this has worked for him shows just how powerful identity politics can be, whether the identification is authentic or manipulative.

White poverty and its stigmatization

Isenberg is interested in how Americans have characterized the white, rural poor, usually in some pejorative way: “First known as ‘waste people,’ and later ‘white trash,’ marginalized Americans were stigmatized for their inability to be productive, to own property, or to produce healthy and upwardly mobile children–the sense of uplift on which the American dream is predicated.”

Such pejorative descriptions are a response to the tension between the American dream of upward mobility and the class barriers that have made it unrealistic for those born into poverty. Attributing poverty to the innate characteristics of the poor rather than to a lack of opportunity helps preserve the American dream and deny the need for social reform. “Rationalizing economic inequality has been an unconscious part of the national credo; poverty has been naturalized, often seen as something beyond human control. By this measure, poor whites had to be classified as a distinct breed.” If rich and poor are distinct breeds, then the class system reproduces itself naturally, and there’s little to be done about it.

Occasionally, “populist themes have emerged alongside more familiar derogatory images, but never with enough force to diminish the hostility projected onto impoverished rural whites.” This makes their class struggle as much about respect as it is about financial gain. And that goes a long way to explain their enthusiasm for politicians who seem to speak for them, even if the tangible support they promise never quite materializes.

The roots of poor white stigmatization go back to Colonial times, especially in the Southern colonies originally created for economic gain.

British colonists promoted a dual agenda: one involved reducing poverty back in England, and the other called for transporting the idle and unproductive to the New World. After settlement, colonial outposts exploited their unfree laborers (indentured servants, slaves, and children) and saw such expendable classes as human waste.

Land was the major source of wealth, but it was considered wasteland until it was put to commercial use. People who were not engaged in economically productive activity were seen as a kind of waste as well. “…Colonizers denoted some people as entrepreneurial stewards of the exploitable land; they declared others (the vast majority) as mere occupiers, a people with no measurable investment in productivity or in commerce.” Southern colonies became divided between a hereditary class of owners and a hereditary class of landless servants, with only limited opportunities to cross class lines. Actual slavery was a “logical outgrowth of the colonial class system.”

By 1770, most of the land in Virginia was owned by less than one-tenth of white people. The society of “freeholders” imagined by Thomas Jefferson never came to pass because too few people could acquire the land or resources to become successful farmers.

In 1663, King Charles II granted a charter creating the Carolina colony with eight “absolute Lords and proprietors.” Several years later, John Locke wrote the Fundamental Constitutions of Carolina, a document that not only gave every freeman “absolute power and authority over his Negro Slaves,” but established a servant class whose status would be inherited from generation to generation.  (This reminds us that in those days, even the advocates of democracy placed severe limits on it.) While South Carolina conformed to the hierarchical model pretty closely, North Carolina became somewhat of a “swampy refuge for the poor and landless,” with a weaker planter elite. For that it got the reputation of a “wasteland resistant…to the forces of commerce and civilization,” a land of “useless lubbers.”

“Squatter” or “common man”?

After the American Revolution, many of the landless poor looked westward for land and opportunity. Even along the frontier, however, upward mobility was more limited than Americans like to imagine. “Speculators and large farmers–a mix of absentee land investors and landowning gentry–had the most power and political influence, and usually had a clear advantage in determining how the land was parceled out.” Many settlers eked out a meager living on small pieces of land, often as squatters who could not obtain ownership.

Different stereotypes of settlers coexisted in early nineteenth-century America. They could be courageous and hardworking frontiersmen, or lazy squatters who built nothing and stood in the way of real progress. Andrew Jackson promoted their positive image and represented their interests up to a point, but Isenberg believes that his presidency was “not about equality so much as a new style of aggressive expansion.” Jackson’s forcible removal of Native Americans from the southeast appealed to many white settlers (as Trump’s deportation of undocumented aliens appeals to many whites today), but Jackson did not support more egalitarian measures like universal male suffrage.

Identity politics in the Civil War

Beyond their obvious disagreement over how to view slavery, Northerners and Southerners had very different views of poor white Southerners as well. A common view in the North was that poor Southerners had been reduced to “white trash” by the plantation system. In fact, it was during the war that this derogatory term came into wide usage.

Northerners, especially those who joined the Free Soil Party (1848) and its successor, the Republican Party (1854), declared that poor whites were proof positive of the debilitating effects of slavery on free labor. A slave economy monopolized the soil, while closing off opportunities for nonslaveholding white men to support their families and advance in a free-market economy.

Ulysses S. Grant saw it as his mission to liberate not only the slaves, but also the poor whites, from the grip of the planter aristocracy.

Southern intellectuals like Daniel Hundley saw it differently, of course. They blamed the problems of poor whites on their own natural inferiority rather than on any injustice of the social order. At the same time, Southern aristocrats had the challenge of enlisting the enthusiastic support of the lower classes in the war effort. Many people who owned no slaves complained that it was a “rich man’s war and poor man’s fight.” The way to counter that complaint was to appeal to all classes of white Southerners as exactly that–white Southerners. James Henry Hammond of South Carolina argued that every society needs a “mudsill,” a class of menial laborers to do the lowest forms of work. By assigning such work to the most inferior of all races–Negroes–the South had elevated all whites to a somewhat better position. White Northerners, on the other hand, had debased their own race by confining too many of their fellow whites to the “mudsill.”

Social Darwinism and eugenics

In the late nineteenth and early twentieth centuries, the idea that poverty was a natural, inherited condition for some segment of the population got additional support from a widespread interpretation of Darwinian evolution. (In The Descent of Man, published in 1871, Darwin himself distinguished “civilized” and “savage” races and predicted that the first would eventually replace the second through evolutionary competition.) The idea that whole categories of people were biologically more fit than others was a powerful weapon not only in racial and ethnic conflict, but in regional and class conflict as well.

Northerners who had opposed slavery wanted to believe that former slaves could become good citizens. “In account after account, freedmen were described as capable, thrifty, and loyal to the Union.” But many Northerners had far less confidence in the potential of chronically poor Southern whites, whom they saw as a “‘dangerous class’ that was producing a flood of bastards, prostitutes, vagrants, and criminals.”

Southern Democrats countered these ideas with their own racial arguments. For them, the former slaves were still the most unfit of races, still to be confined to the “mudsill” of society as much as possible. The mixing of the races would produce a “mongrel” race unfit for achievement or good government. That argument was useful not only for preserving white privilege in general, but for protecting the leadership class in particular. Keeping poor people of different color separate and unequal prevented them from joining together as a class to challenge the Southern elites.

Isenberg discusses the eugenics movement in some detail, since it represented Social Darwinism taken to a logical extreme. Eugenicists wanted to protect and improve racial fitness by discouraging the reproduction of inferior stock. One way to accomplish this was selective mating–encouraging people to marry only qualified partners. A more drastic measure, legalized in twenty-seven states by 1931, was the forced sterilization of the “unfit.” That term was defined rather broadly to include “feeblemindedness, epilepsy, criminality, insanity, alcoholism [and] pauperism,” according to one list. When IQ testing of recruits during World War I found the lowest scores in the Southern states–not surprising considering their lack of funding for public education–eugenicists focused their efforts in that region. In 1927 the Supreme Court upheld the right of states to regulate the breeding of its citizens, in a Virginia case involving the sterilization of a poor white woman.

A question of identification

Identity politics in general–and disagreement over how to characterize certain groups such as poor rural whites–is obviously not something invented by today’s liberal Democrats. The idea that one party divides the country with its identity politics while the other is above such things is ludicrous. All parties need to think long and hard about how they identify and relate to different segments of the electorate.

For Republicans, that means a lot of soul-searching about how they think about Blacks, Latinos and women. For Democrats, it means taking another look at poor southern white men. When they think about them, is what comes to mind a racist like Bob Ewell, the villain in To Kill a Mockingbird? Or do they see a victim of an oppressive race/class system, who clings to increasingly shaky white male privileges because upward economic mobility is so elusive? There was a time, not so long ago, when Democratic leaders identified strongly with the underprivileged of Appalachia, seeing them mostly as decent people who needed a decent break. I would like to see a time like that again.

Continued


The Nordic Theory of Everything (part 2)

February 8, 2018

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Anu Partanen does a good job critiquing the American mindset that pits individual liberty against “Big Government” or the “welfare state.” She argues that a system of social supports available to every citizen is actually liberating, contributing to more rather than less freedom, independence and opportunity. Of course, if critics of the Nordic countries could show that such a system makes people lazy and underachieving, that would undermine her argument.

Individual and national excellence

The American system does produce a lot of high achievers, with its relentless emphasis on competition and its concentration of rewards at the top of the distribution. The price we pay for that is leaving so many people behind, the slogan of “no child left behind” notwithstanding. By placing more emphasis on cooperation and the public good, Nordic countries are noted for a high standard of general excellence.

Partanen describes Finland’s educational system as “one of the highest-achieving public education systems the world has ever seen.” Finnish students consistently rank near the top in international assessments of reading, math, and science. Finnish schools accomplish this without lengthening the school day, assigning much homework, or skimping on less academic subjects like arts and crafts.

Finland rose to the top in international rankings by deliberately tackling educational inequalities that were once worse than in the United States today. It succeeded in reducing the disparities among schools in funding and educational outcomes, as well as the performance gap between different kinds of students. It raised standards for teachers, requiring at least a a master’s degree from the elementary level on. It promoted teaching excellence by supporting rather than attacking teachers, making the profession so attractive that “teacher-training programs are among the most selective university majors in the country.”

In contrast, the United States creates large resource disparities by relying on local property taxes to finance public education. It has a much higher rate of child poverty, many more underfunded schools, and a widening gap in test scores between rich and poor students. Educational reforms emphasize more testing, closer monitoring to identify poor teachers and underperforming schools, and more public support for private or privatized schools for students fortunate enough to attend them. Consistent with our competitive approach to things, such reforms help a few students while so far failing to produce much increase in excellence across the board.

In higher education, American universities are known for their excellence in research, but less for their undergraduate instruction. When the OECD’s Programme for International Student Assessment included university graduates for the first time in 2013, Finnish students scored among the best in the developed world, while Americans were below average.

Partanen does not prefer the Nordic model in all respects. She continues to admire certain aspects of American culture:

If I could choose, I’d want my child to have the best of both worlds. From Finland I would take the affordable, relaxed day care, highly educated teachers, high quality of all neighborhood schools, and lack of tuition. From the United States I would take the diversity of student populations and the systematic and inspiring way that the best American schools encourage students to express their individuality, think for themselves, and communicate their opinions and skills to others without self-consciousness or unnecessary timidity.

With regard to excellence in health care, Partanen says that world-class health care is available in both the U.S. and Finland, but is available to more of the population in Finland. There it is a universal service like public education, while here access depends much more on what you can afford. She cites a 2011 Commonwealth Fund study comparing developed countries on quality, access, efficiency, equity, and healthy lives, as well as on death rates from preventable or treatable conditions. “The United States ranked dead last.”

The pursuit of happiness

If Finland surpasses the United States on many objective indicators of well-being, why are Americans noted for being more upbeat and optimistic? Although Partanen does express some admiration for that “all-American optimism,” she thinks there is something a little compulsive and phony about it. We tell our children that everyone is special, and they can be anything they want to be, but then we expect each of them to rise above their peers and become a super-achiever through their own effort. In our winner-take-all system, you’d better be a high achiever, or you risk joining the ranks of the left-behind. So you embrace the can-do spirit and resist admitting defeat.

…In the absence of the kind of true security that comes from things like being able to pay your bills, having affordable health care, knowing your children will get a good education no matter what, or being able to take time to rest, all you can do is either give in to depression or try to build your own personal well-being bubble—with yoga, meditation, diets, and keeping your thoughts in check. That—or eating fast food and burying your worries with the TV remote.

The U.S. also has a huge self-help industry to sell you the means of personal success, from SAT prep courses to seminars on how to get rich in real estate. So corporations profit, even as Americans dream of what they may never have.

Finns have much lower expectations for standout success, and Partanen admits that they can take this attitude too far. They can emphasize equality to the exclusion of uniqueness. Perhaps they underestimate what some individuals can accomplish, as much as Americans overestimate it. But the upside of that pessimism is that Nordic citizens are less tolerant of social conditions that impede the development of whole classes of people. “They are quick to demand real changes that improve their external circumstances.”

Trying to find some middle ground, Partanen suggests combining American positive thinking with Finnish realism. For Americans, that means recognizing that individuals do have great potential, but they need supportive social structures and policies to help them fulfill it.

Toward a stronger economy

Defenders of the American system like to treat some of its worst features–notably, the extreme gap in wealth and income between social classes–as unavoidable side effects of a dynamic and growing economy. We must reward the biggest winners, even if there isn’t enough left over to provide other people with a decent life. The Nordic societies undercut that argument, since they have achieved economic growth and general prosperity with far less inequality.

The United States and Nordic countries both “rank among the most business-friendly nations in the world,” but accomplish this in different ways. U.S. businesses benefit from weak unions, low minimum wages, loose regulation, and, Partanen argues, government assistance to the poor. She points out that American taxpayers subsidize the fast-food industry by providing over half its workers some form of public assistance, so they can survive on low wages. Nordic businesses may have to negotiate with better organized workers, pay higher wages, and provide more family leaves, but they get workers who are on the average healthier, better schooled, and less stressed.

As in other books I’ve reviewed lately, human capital is key here. “…The Nordic nations have cultivated the single most valuable resource a society can have in the twenty-first century: human capital. That dynamism, innovation, and prosperity result should come as no surprise.”

There was a time after World War II when business was booming, unions were strong, and most Americans believed that business and labor could prosper together. Somehow we have gotten into a zero-sum mindset, believing that worker gains can only come at business’s expense. Investors interpret a modest rise in wages as a sign that the economic expansion is coming to an end, so it’s time to dump stock. The Nordic countries seem to have a better grasp of a basic truth–that if a country wants its people to prosper, it has to invest in them. The investment can pay off in higher productivity and a larger economic pie to be shared by all.

 


The Nordic Theory of Everything

February 7, 2018

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Anu Partanen. The Nordic Theory of Everything: In Search of a Better Life. New York: Harper, 2016.

This book nicely complements George Lakey’s Viking Economics, which I reviewed last summer. Both authors are interested in comparing the United States to the Nordic countries. While Lakey focuses especially on Norway, Partanen focuses on Finland. Lakey is more factual and sociological, while Partanen is more impressionistic and journalistic. Partanen emigrated from Finland in 2008 to the US to be with her future husband, an American she met at a conference. She became a US citizen in 2013.

Partanen is hardly anti-American, and she expresses her admiration for “all-American optimism, gumption, ingenuity, and knack for magically transforming challenging circumstances into profitable advantage.” Nevertheless, she finds much to criticize here. Having grown up in Finland, she finds many aspects of American life curiously backward: “…To leave Finland or any other Nordic country behind and settle in America at the beginning of the twenty-first century was to experience an extraordinary—and extraordinarily harsh—form of travel backward in time.” She felt that she was “…lost in a wilderness. And in the American wilderness, you’re on your own.” She says that America has been looking toward its “Wild West past,” while Nordic countries are looking more to the future.

Who’s really modern? Who’s really free?

American society has been celebrated for providing certain “benefits of modernity,” especially freedom, independence and opportunity. But Partanen observes:

…In order to compete and to survive, the Americans I encountered and read about were being forced to depend more and more on one another, in a throwback to the traditional relationships of old. And in the process, individuals were becoming beholden to their spouses, parents, children, colleagues, and bosses in ways that constrained their own liberty.

As she sees it, the problem is that American families lack forms of social support that are essential for achieving and thriving in today’s world:

American society, despite all its high-tech innovation and mobility, just doesn’t provide the basic support structures for families—support structures that all Nordic countries provide absolutely as a matter of course to everyone, as does nearly every other modern wealthy country on the planet.

Compared to Finnish children, American children are economically dependent on their parents for a longer time, since they get less help obtaining the education and vocational training they need to succeed. Elderly parents are more dependent on their adult children, because less elder care is provided as a universal social service. Workers are more dependent on employers for health insurance and retirement plans. Because the US is behind the Nordic countries in gender equality, American women are more dependent on their husbands’ careers, along with the health and retirement benefits that come with them.

Partanen describes a “Nordic theory of love,” which asserts that “authentic love and friendship are possible only between individuals who are independent and equal.” Americans believe in strong families, but put severe strains on them by weighing them down with more responsibilities than many couples can bear. Partanen does not say “It takes a village,” but that’s the general idea. Americans pursue an extreme idea of independence that doesn’t really work out in practice, while Finns share social responsibilities in ways that leave individuals better off.

In an interesting formulation that I hadn’t heard before, Partanen says that the Nordic societies have “taken modernity to its logical conclusion.” Universal social services available as a matter of right create a “new culture of personal self-sufficiency” that is more relevant to the demands of modern life. The result is actually more freedom, independence and opportunity than Americans have.  As Ed Miliband, leader of the British Labour Party, said several years ago, “If you want the American Dream…go to Finland.”

“Welfare” or well-being?

I can hear defenders of the American system now, objecting that what Partanen is calling independence is really just dependency on “Big Government.” How true that is may depend on whether public benefits are designed to enable individual achievement or replace it.  As Partanen describes Finnish public policy, the emphasis is not on paying people not to work, but helping them obtain the qualifications for work and balance their careers with family responsibilities. For example, paid parental leaves are kept short because they are “meant to be breaks in steady careers, not a way of life.”

Partanen says that she never heard the terms “Big Government” or “welfare state” until she came to the United States. She had to learn that for many Americans these are pejorative terms, conjuring up images of lazy people collecting unearned benefits. That explains why so many Americans are critical of government social programs, even as the need for those programs has expanded from the poor to the middle class. A large proportion of the population relies on Medicaid to pay for nursing homes, federal loans to go to college, CHIP to pay for children’s health care, Social Security to retire without falling into poverty, and on and on. But Americans often resent the government for providing these things and vote against the taxes to pay for them, even if that means starving the very programs on which they rely. The result is a patchwork of benefits that leaves too many needs unmet.

When Americans hear that Nordic countries provide more public benefits than we do, they imagine those countries as even bigger welfare states, presumably robbing their citizens of their independence and initiative. Partanen prefers to call them “well-being” states, and she describes them as liberating rather than subordinating their citizens:

Unlike in some bogeyman welfare state, participation in a well-being state does not require you to bow in submission before the altar of altruism, sacrificing your own advancement to help the unlucky. It supports your own personal freedom, your own autonomy, and each individual’s ability to determine his or her own fate, since we don’t need to depend on the financial largesse of parents, spouses, or employers for the fundamental services—health care, education, and aid during times of crisis—that each of us requires to fulfill our potential. On top of that there’s a less tangible benefit: the pride and satisfaction of participating in a society that truly enables equality of opportunity for all.

Citizens of Nordic countries do pay higher taxes, but not as much as many Americans imagine. The average Finn pays about 6% more than the average American. Partanen sees that as a reasonable price to pay for all they get in return.

In the next post, I’ll address the question of whether the Nordic approach fosters or undermines excellence.

Continued