Democracy and Prosperity (part 3)

July 19, 2019

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I have been discussing the symbiotic relationship between capitalism and democracy as described by Torben Iversen and David Soskice. So far I’ve ignored variations among advanced capitalist democracies. But the authors warn against using any one country–such as the United States in discussions of the “Washington Consensus”–as a model for how ACDs have developed or should develop.  The American version of the emerging knowledge economy is only one version, and one that has its origins in a certain kind of history.

Two paths to capitalist democracy

The symbiotic relationship between democracy and capitalism developed along with the industrial economy. One link between the two was human capital development. Industrialization required a labor force with at least some basic skills, such as reading and writing, and that required some commitment to democratic institutions such as the public school.

How was the political order to be broadened to include the opinions and interests of workers? In some countries, such as Denmark, Sweden, Netherlands, Belgium and Germany, pressure from the working class itself played a major role. In others, such as Britain, U.S., France, Australia, Canada and New Zealand, the initiative came more from modernizing elites who were challenging the power of agrarian interests unsympathetic to industrialization and democracy.

Those differences had their origins in preindustrial patterns of organization:

[T]he countries in which democratization was eventually the result of working-class pressure were organized locally on a quasi corporatist basis both in towns, with effective guild systems, and in the countryside with a widespread socially rooted semiautonomous peasantry, rural cooperatives, and/or dense rural-urban linkages…. [A]ll of these states were Ständestaaten in the nineteenth century—a system in which the different estates (including organized professions) played a direct role in governing. We therefore refer to the preindustrial political economy of these societies as protocorporatist.

The authors do not give any simple definition of corporatism, but I think of it as the opposite of rugged individualism. While classical British and American liberalism celebrates the self-interested individual, corporatism sees people more as representatives of strong group interests, such as guilds or churches. To make a long story short, the protocorporatist countries provided more fertile ground for the emergence of strong worker organizations.

Things were different in Britain and America:

The elite-project societies, in essence Anglo-Saxon (apart from France, which we discuss separately), functioned quite differently: well-developed property markets with substantial freedom of labor mobility, towns with limited local autonomy, and guild systems which had either collapsed (Britain) or had hardly existed (the settler colonies and the United States, minus the South). We refer to the preindustrial political economy of these societies as protoliberal.

In both kinds of countries, some democratization accompanied industrialization, but it took different directions. In the protocorporatist countries like Denmark and Germany, “effective training systems were built on guild and Ständestaat traditions and provided a large pool of skilled workers, which in turn led to unified labor movements with the capacity to extract democratic concessions from elites.” In the protoliberal countries like Britain and America, “the absence of either guild or Ständestaat traditions led to fragmented labor movements with privileged craft-based unions but no effective training system. Here democracy emerged as the result of industrial elites compelling a reluctant landed aristocracy to accept expansion of education and other public goods required for industrialization.”

Political representation

These two paths to democracy had consequences for electoral systems. Where the working class was highly unified and organized, the more socialist left came to be better represented in politics. The elites and other prosperous members of society might resist democratization until the demands of the working class became too strong to ignore. Then they supported a system of proportional representation rather than winner-take-all elections, to protect themselves against the possibility of a working-class majority. Some of these democratic countries (Germany, Austria, Italy) reverted to authoritarian rule for a time in order to counter a perceived threat from the left, but democracy eventually prevailed.

In countries like the United States and Britain, where organized labor was weaker and more politically divided, majority rule worked better for the modernizing elites and other beneficiaries of industrial capitalism.

In these cases industrial elites had little fear of the working class, but they had a strong incentive to expand public goods, especially education and sanitation, required for the development of an effective labor force (in part to circumvent union control over the crafts). The key obstacles to this project were landowners and more generally conservatives who had no interest in an expansion of public goods and who held strong positions politically, especially at the local level. Majoritarian democracy in these cases essentially emerged as a means to force the landed elites to accept major public investments in education and infrastructure needed for modernization. At the same time, a majoritarian system with a strong bias toward the middle classes effectively excluded the radical left from influence over policies.

Iversen and Soskice see a perfect correlation between the alternative paths to democracy and the electoral systems. The “protocorporatist” countries adopted proportional representation systems that gave worker parties more voice, while the “protoliberal” countries adopted majority-rule systems where major parties had to be more-or-less centrist to win a majority.

Inequality and educational opportunity

Democratic governments of different kinds have adopted many of the same policies to support the growing knowledge sectors of their economies, for example by liberalizing trade and investing more in education. All of them have experienced some increase in inequality as technological innovation has rewarded workers with the right skills and penalized those without them. However, they differ markedly in the extent of the inequality and the associated decline of economic opportunity. The U.S. Council of Economic Advisers introduced the term “Great Gatsby curve” to describe the inverse relationship between economic inequality and intergenerational mobility among countries.

In general, the countries with weak worker organization and majoritarian electoral systems now have relatively high economic inequality and relatively low social mobility. This is true of the United States, United Kingdom and France. Canada and Australia are more average in inequality and social mobility.

In contrast, the countries with strong worker organization and proportional representation systems now have relatively low economic inequality and relatively high social mobility. This is especially true of the Nordic countries: Finland, Norway, Sweden and Denmark. Germany is more average in inequality and social mobility.

I think this is an important finding, because it means that even in a world of global, hi-tech competition, countries have choices. Economic growth and global competitiveness do not necessarily require the extravagant executive salaries and tax cuts enjoyed by the American 1%! Nor do they require tossing aside former manufacturing workers without making provision for their economic security or retraining.

One of the biggest factors in economic opportunity is education, and here the international findings reflect badly on the United States. Here the authors use an index of educational opportunity based on such variables as the availability of vocational training, the public spending on preprimary education, the public/private division of higher educational spending, and the age at which students are tracked (since early tracking can restrict opportunity). Among advanced democracies, only Japan and South Korea scored lower than the U.S. on this index. The Nordic countries scored the best.

Many readers may find this puzzling because the U.S. has so many fine schools, especially major research universities. But the quality of individual schools is not the same thing as educational opportunity. A good prep school that serves only the affluent does little to provide upward mobility.

In our majority-rule system, the interests of the downwardly mobile minority are not being well served. Their interests have diverged more sharply from those of more successful workers, making it harder for the traditional party of labor to represent them. This relates very much to the next topic, the threat that populism poses to democracies with high inequality.

Continued

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Democracy and Prosperity (part 2)

July 18, 2019

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In Democracy and Prosperity, Iversen and Soskice contrast the emerging knowledge economy with the system that preceded it in the mid-20th century.

The “Fordist” political economy

What many economists call the “Fordist” system was dominated by giant manufacturing corporations such as the Ford Motor Company. They performed a range of functions from “production to logistics and sales and marketing,” and usually had a very hierarchical structure of decision-making.

Assembly-line technology featured “strong complementarities in production between skilled and semiskilled workers. The companies needed large numbers of both, and either of them could obstruct production if they were well organized but dissatisfied. By the 1970s, unionization was at a peak in the advanced capitalist democracies, and so was “wage coordination,” the cooperation of large numbers of workers and companies in setting wages and working conditions.

Economic inequality declined during this period, as even workers with limited educations could quickly acquire the skills needed for many industrial jobs. Poverty declined, even for segregated racial and ethnic groups. “The Fordist economy was…by and large a force of integration and equalization of incomes across industries, skill groups, and geographic space.” The most advanced companies were concentrated in big cities, but peripheral areas often supplied them with materials or components for their products.

National governments helped organize and maintain the system. They supported the collective bargaining rights of labor. They provided a safety net of unemployment and retirement benefits, which gave workers a source of security in addition to short-term wage demands. They invested in public goods like infrastructure and education. They often engaged in Keynesian economic policies, using government spending to stimulate the economy and maintain low unemployment. It was a period of rapid economic growth and relative harmony among business, labor and government.

The knowledge economy

Much of this has changed since around 1980. Information and communication technologies have not affected all jobs equally, but have most easily substituted for routine semiskilled tasks. In some ways, this is a blessing, as such work was often deadly dull and uncreative. But, “As less-skilled workers became increasingly segregated into a growing tier of low-productivity service sector occupations–especially in low-end personal and social services–the complementarities between high- and low-skilled workers unraveled.” Inequality generally increased in advanced capitalist democracies, although with important variations to be discussed later.

New technologies can put a lot of computational power into the hands of individual workers, if they have the analytic skills to use it. In organizations of knowledge workers, decision-making becomes less vertical (hierarchical) and more horizontal (network-based), and relational skills also become more important. Knowledge workers benefit by participating in skill clusters, in which they can play specialized roles, and yet find other work within the cluster when and if a particular role is no longer needed.

These skill clusters are also embedded in larger social networks in which educated workers participate. “Big-city agglomerations” of knowledge are the “dynamic drivers” of the knowledge economy. They are usually places that already had a range of professional services and a strong university or two. Fordist-era cities whose prosperity rested on a single manufacturing industry, such as steel, have had trouble adapting, and many smaller cities have been left behind altogether. (Rapid transit between thriving cities and peripheral areas would help, but people who are already doing fine in the city may not have much incentive to support it with their tax dollars.)

The fact that education, urbanization and high incomes tend to go together increases the inequality among both households and places. Educated people live and work with other educated people, and also socialize with them and marry them, often forming affluent, two-income households. By clustering together, affluent households drive up the cost of good schools and housing in the successful cities, creating barriers to entry for the less educated.

The dynamic cities in the advanced economies of America, Europe and Asia compete with one another to attract capital and market their innovations. “Multinationals play a central role in tapping into multiple skill clusters and tying together complementarities of knowledge. The result is a major increase in multinational investment, trade and competition.

The “embedded knowledge”-based political economy

A central point of Iversen and Soskice’s argument is that knowledge within the knowledge economy is geographically embedded in innovative urban centers within the advanced democratic countries. That gives governments some power over activities that cannot easily be moved from where they are. It also gives them an incentive to support the knowledge sectors of their economies, for the good of the nations where they reside.

The availability of information and communication technologies does not automatically transform an economy. The authors believe that the Soviet Union collapsed partly because it resisted the decentralizing power implied by the new technologies. “It was felt necessary to maintain prohibitions on personal computers until the late 1980s.” The lesson to be drawn: “Without politically initiated reforms economies stagnate, even when they possess the necessary technologies and know-how.”

Beginning in the 1980s, advanced capitalist democracies made a number of “strategic choices” to promote the growth of their knowledge sectors. “Knowledge economies have been enabled by a different political economic framework from that which supported Fordism. We describe this framework as “embedded knowledge-based liberalism.” (In Britain and the United States, many of the leaders in this effort–Thatcher, Reagan–are known as conservatives, but they were working to liberate economic activity from what they saw as outdated restrictions. In that way, they were acting in the tradition of classical liberalism.)

Governments generally worked to reduce barriers to competition, free trade and international flows of capital. The authors measure this with an index of regulation covering eighteen regulatory domains, including such matters as trade barriers, differential treatment of foreign suppliers, and administrative burdens on creating new enterprises. The U.S. and Britain led the way toward competitiveness and away from protectionism, and the rest of Europe followed.

Governments also worked to transform the financial and insurance sectors, so that they went beyond their traditional financial products to provide more complex and customized services for knowledge workers and enterprises. Greater access to credit was important for new businesses, but also for workers following more complicated careers, with many changes in jobs, periods of schooling, and shifts in work/family arrangements.

Governments shifted their macroeconomic priorities from fighting unemployment to fighting inflation. One reason for this was the decline of unions and large-scale wage coordination, which had provided a degree of predictability and moderation to wage demands. A tight monetary policy was a more centralized way of curbing wage-price spirals. Another reason was to stabilize the exchange rates among national currencies for purposes of global trade and investment. Other countries would not be eager to invest in America if they couldn’t count on receiving their returns in dollars with a stable value.

And of course, governments continued to work for an educated workforce, again with important variations to be discussed later. Over the past twenty-five years, attainment of higher education has more than doubled in the ACDs.

Such policies have been most responsive to the needs of knowledge industries and knowledge workers, but less so to the needs of less-educated workers displaced or threatened by new technologies. “Unlike the Fordist economy, there is nothing that binds together the interest of the main social classes. A majority gains, and a small minority gains a great deal, but a large minority loses.” Whether that continues to be the case is an important question for the future.

Continued

 

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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.

 

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Kids These Days

January 31, 2018

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Malcolm Harris. Kids These Days: Human Capital and the Making of Millennials. New York: Little, Brown and Company, 2017.

This is an unusual book, a portrait of a particular generation’s experience, interpreted in the context of a changing capitalist society. I found it reminiscent of Paul Goodman’s Growing Up Absurd from the 1950s, a book that resonated with many young Baby Boomers. Here the focus is on the Millennial generation, who were born between 1980 and 2000 and make up today’s young adults 18 to 38. Malcolm Harris himself is one of them.

Here he describes the book’s goal:

The only way to understand who we are as a generation is to look at where we come from, and the social and economic conditions under which we’ve become ourselves. What I’m attempting in this book is an analysis of the major structures and institutions that have influenced the development of young Americans over the past thirty to forty years.

Harris is not a social scientist, but just a “committed leftist and a gifted polemicist with a smart-aleck bent,” according to one reviewer. He provides no deep analysis of capitalism, but makes a broad claim that the frenetic quest for profits is now bringing society to some kind of breaking point:

Lately, this system has started to hyperventilate: It’s desperate to find anything that hasn’t yet been reengineered to maximize profit, and then it makes those changes as quickly as possible. The rate of change is visibly unsustainable. The profiteers call this process “disruption,” while commentators on the left generally call it “neoliberalism” or “late capitalism.” Millennials know it better as “the world,” or “America,” or “Everything.” And Everything sucks.

The burden of this supercharged capitalism is falling most heavily on Millennials. They will either by crushed by it, as America becomes some sort of fascist dystopia, or else lead a revolution against it. Harris sees little middle ground.

Human capital and hypercompetition

For Harris, the key to understanding what is happening to the younger generation is the idea of human capital. “We need to think about young people the way industry and the government already do: as investments, productive machinery, ‘human capital’.” Human capital is the economic value placed on the capacity for future work. New technologies can reduce that value by making existing capacities obsolete, most obviously when manual labor is replaced by machinery. But future workers can enhance their value by acquiring new capacities, enabling them to master technologies or provide some essential human input. This puts young people under pressure to become one of the value-enhanced winners instead of the devalued losers.

Isn’t this just the same old competition for success that has been a hallmark of modern society? Harris obviously sees it as more than that. As the development of human capital has become more extensive and more costly, paying for it has become a systemic problem. Society is currently organized in such a way that the benefits of human capital formation go primarily to capitalist organizations and their shareholders, while the costs fall primarily on individuals and their families. Investment in human capital is good for society, but it is risky for individual employers, since they do not normally own their workers and their future labor. Workers can leave and take their newly acquired human capital with them. So employers find it more profitable to hire workers who are already capable–or nearly capable–of doing the job; or just replace workers with robots, whose future labor they do own.

The intensified competition for good jobs becomes more than an individual competition to demonstrate merit. It is a competition among families to raise the most accomplished children they can, with the most expensive educations and all the trimmings–the music lessons, science projects, field trips, SAT prep classes, and so forth. Families of limited means are at a big disadvantage.

The paradox of productivity

In theory, the higher productivity resulting from new technologies and skills could lead to higher wages and/or more leisure. If people are more productive, why shouldn’t they enjoy a higher standard of living? And why shouldn’t the most tech-savvy generation be on its way to the highest standard of living of all? There’s little sign of that so far. “As it turns out, just because you can produce an unprecedented amount of value doesn’t necessarily mean you can feed yourself under twenty-first-century American capitalism.”

The problem goes to the heart of the capitalist system. Producing more per hour doesn’t translate into higher pay per hour if the extra output and its economic value belong solely to the employer. In that case the employer gets the benefits, in the form of higher revenues and lower labor cost per unit of output.

On the one hand, every kid is supposed to spend their childhood readying themselves for a good job in the skills-based information economy. On the other hand, improvements in productive technology mean an overall decrease in labor costs. That means workers get paid a smaller portion of the value they create as their productivity increases. In aggregate, this operates like a bait and switch: Employers convince kids and their families to invest in training by holding out the promise of good jobs, while firms use this very same training to reduce labor costs.

We may wonder why competition among employers for good workers doesn’t force them to raise wages. It does, but mainly in specialized occupations where needed skills are actually in short supply. What is remarkable is how little wages have risen in recent decades, even for college graduates. “Wages for college-educated workers outside of the inflated finance industry have stagnated or diminished, with real wages for young graduates down 8.5 percent between 2000 and 2012.” What seems to be working in favor of employers is a system that delivers a large enough supply of human capital to hold wages down, while making families bear the costs of developing that capital.

Harris notes that men and women have experienced this situation differently. “Median wages for men (50th percentile) have remained stagnant, at nearly $18 per hour, while median wages for women have increased from $11.28 in 1973 to $14.55 in 2009.” Women’s improvement in labor force participation and wages is a mixed blessing. Putting wives as well as husbands into the labor force is one way for families to try and get ahead. But it places the burden on families to work harder instead of on employers to pay better. “All work becomes more like women’s work: workers working more for less pay. We can see why corporations have adapted to the idea of women in the labor force.”

To summarize:

Technological development leads to increased worker productivity, declining labor costs, more competition, a shift in the costs of human capital development onto individual competitors, and increased productivity all over again. Millennials are the historical embodiment of this cycle run amok….

Education: The labor of enhancing one’s labor

One of my graduate school professors used to say that the social function of higher education was not to produce and disseminate knowledge, but to keep young people out of the labor force so they could serve the economy as needed consumers rather than unneeded producers. Maybe that made sense at a time when people were enjoying the new prosperity and leisure of the post-Depression, postwar era. Having recently achieved good wages and a shorter work week, unions weren’t eager to see a horde of young people enter the labor force and drive wages and working conditions down.

Harris’s take on youth and education is very different, and probably more relevant to our times. Not only are a large percentage of young people in the labor force already–70% of college students, for example–but they are working very hard at their own human capital development, primarily for the benefit of their future employers. As a result of the economic conditions described, “Every child is a capital project.”

…It’s cheaper than it used to be to hire most workers, and extraordinarily hard to find the kind of well-paying and stable jobs that can provide the basis for a comfortable life. The arms race that results pits kids and their families against each other in an ever-escalating battle for a competitive edge, in which adults try to stuff kids full of work now in the hope that it might serve as a life jacket when they’re older.

In theory, new information technologies ought to make it easier to learn. My generation could have saved many hours digging for information in the library if we could have accessed a whole world of knowledge on a laptop (not to mention the time we could have saved on a term paper if we had word processing). Paradoxically, Harris reports that American children spend more time in school, more time on homework, and less time on unsupervised play than they used to. And they are producing a lot: “Nongrade measures of educational output–like students taking Advanced Placement classes or tests, or kids applying to college–have trended upward….” Grades have risen too, and Harris is not so quick to dismiss that as mere grade inflation.

A government study reported that “the number of applicants to four-year colleges and universities has doubled since the early 1970s, [but] available slots have changed little.” That form of intensified competition allows schools to raise tuition and fees dramatically. Only part of this increase is due to reduced public funding, since the increase by private schools is almost as great. The additional revenue has not gone into instruction; on the contrary, the ample supply of graduates seeking academic employment has allowed colleges to hire more lower-paid, part-time and temporary teachers. Instead it goes mainly toward administrative salaries or amenities to attract well-heeled students.

What this all amounts to is a clear tendency for both public and private colleges to behave like businesses, passing off a lower-quality product at a higher price by tacking on highly leveraged shiny extras unrelated to the core educational mission. Stadium skyboxes, flat-screen monitors, marble floors, and hors d’oeuvres for the alumni association. Consultants of all flavors and salaried employees to make sure it’s all efficient. Competition hasn’t improved the quality of higher education, it has made colleges more like sleepaway camps or expensive resorts.

Because they are defined as students rather than real workers, students can be made to work very hard for someone else’s profit. College sports generate substantial revenue, but not for the athletes, who regularly spend thirty to forty hours a week on their sports without being paid. Many students try to enhance their credentials with unpaid internships, although research has found no more than a slight impact on job offers.

Even the time spent on social media can be seen as exploitable unpaid labor. “These technologies promise (and often deliver) connectivity, efficiency, convenience, productivity, and joy to individual users….” Older adults may see them as a frivolous form of leisure. But they are also a way that young people self-publish their creative work and build an audience for it. That also generates profits for others, most obviously for the big companies that run the sites, but also for record producers that are spared the costs and risks of developing talent themselves. They can wait and see who is becoming popular, and only then offer a recording contract.

Not only do students get little immediate reward for their hard work, but most of them have to borrow against their future earnings to finance their higher education. They have to indenture themselves to obtain an enhancement in earning power that may or may not materialize. If their schools educate them poorly–and some for-profit schools seem to make that part of their business model–borrowers are still on the hook for the money. Excessive debt is one of the reasons why today’s young adults have relatively low net worth, not just in comparison to today’s older adults, but also in comparison to young adults of an earlier time. Between 1983 and 2010, net worth dropped 21% for the 29-37 age group.

Overall, Malcolm Harris finds that the pressure to develop their own human capital has forced Millennials to compete harder for a limited supply of rewards. What they get for their harder work is the mere promise of a higher standard of living–someday. So far at least, someday has not arrived.

Continued

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The New Geography of Jobs (part 2)

October 17, 2014

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Enrico Moretti makes a good case that where a worker lives still matters, and that job opportunities are unevenly distributed across metropolitan areas of the United States. The best jobs in the innovation sector of the economy are to be found primarily in a small number of thriving metropolitan areas.

I find Moretti less convincing when he addresses more general economic questions, such as how many good jobs the new economy can create. He presents a rather rosy view of job creation that would be contested by other authors.

How much opportunity?

Moretti cites the spectacular growth rates of certain kinds of jobs, such as in software, scientific research and development, and pharmaceuticals. But even in these areas, the absolute numbers of jobs are not as impressive as the growth curves (which tend to rise steeply when they are starting from close to zero). Moretti says that the innovation sector can be the main engine of economic growth without providing a majority of the jobs, but one would still like to know how much it can grow beyond its estimated 10% of jobs today, considering that manufacturing jobs used to employ 30% of the labor force.

Moretti asserts that “2.6 jobs are typically created for every one destroyed,” but he doesn’t suggest a time frame for that process or explain why job creation has been so sluggish and unemployment so high during this particular transition.

Consistent with his rosy view of job creation, Moretti regards the concentration of good jobs in certain metropolitan areas as a temporary state of affairs:

Just like people, industries have life cycles. When they are infants, they tend to be dispersed among many small producers spread all over the map. During their formative years, when they are young and at the peak of their innovative potential, they tend to concentrate to harness the power of clusters. When they are old and their products become mature, they tend to disperse again and locate where costs are low. Thus it is not surprising that the innovation sector— the part of the economy that is now going through its formative years— is concentrated in a handful of cities.

Cities that have fallen behind can catch up by means of a “big push: a coordinated policy that breaks the impasse and simultaneously brings skilled workers, employers, and specialized business services to a new location.” Apparently this is only theory, however, since “looking at the map of America’s major innovation clusters, it is hard to find an example of one that was spawned by a big push.”

I would suggest that the jury is still out on whether the information society can create as many well-paid, full-time jobs as the manufacturing society in its heyday. The last book I reviewed, Jeremy Rifkin’s The Zero Marginal Cost Society, argues that it cannot. Rifkin believes that the information age is calling into question the whole idea of the paid job as defined by capitalism. The fact that knowledge is so easily shared may place a limitation on how much it will be bought and sold in the marketplace. When people can access the ideas of the most renowned scholars on the Internet for free, how many intellectuals will be paid to think?

I accept the assumption that as machines do more of the routine work, people will be liberated to engage in more creative activity. The question is how much of that creative activity will take the form of paid work. Maybe we will do less paid work in the aggregate, but distribute what paid work there is more evenly.

Why inequality?

Moretti’s take on inequality is consistent with his belief that the demand for qualified employees is ample, and the problem is on the supply side. In other words, the system is a meritocracy, with low pay and unemployment resulting from inferior qualifications. The way to remedy that is to invest more in education and/or admit more educated immigrants. (He notes that highly skilled immigrants can be job creators rather than job stealers because of their contribution to innovation and its economic multiplier effects.)

This meritocratic view is contested by other economists, notably Thomas Piketty in Capital in the Twenty-First Century. (See my review, especially Part 3.) In his view, the distribution of income depends not just on merit but on institutional factors, such as the organization and bargaining power of unions and the influence of executives over their own compensation. The widening pay gap between executives and other workers cannot be accounted for by a widening education gap. The distribution of income also depends on the share of national income going to owners of capital, which has been rising recently (from a range of 15-25% in rich countries in 1970 to a range of 25-30% recently). This happens when the return on capital remains high although the rate of general economic growth has slowed. Getting ahead through wage growth becomes harder compared to profiting from accumulated wealth.

Moretti makes a contribution to economic geography, but his general view of the job market never gets beyond the conventional wisdom to address the more interesting controversies.

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Posted by Ed Steffes

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