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Redeeming the Time

That pay raise might have to wait until 2021.  At least that is the word of economists in the latest WSJ forecasting survey:

From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marks the worst 10-year performance in records going back to 1967. On average, the economists expect inflation-adjusted incomes to rise over the next decade, but the 5% projected gain isn’t enough to reach prerecession levels.

While the recession has had a larger impact upon Americans without college degrees, but the forecasting survey has bad news for everyone:

Though the majority of the 50 economists surveyed-not all of whom answer every question-say the current generation of college graduates will have a higher standard of living than their parents, a third of respondents think it will be lower. College graduates have generally fared better in the U.S., and they currently have a 4.2% unemployment rate compared to 9.1% for the entire work force. But a college degree hasn’t been enough to ensure wage gains from 2000 through 2010. According to Census Bureau data, only advanced degree holders managed to record increases in earnings over that period.

This spells bad news for incumbents in 2012.  Working people lose jobs during a recession, and incumbents often join them.  Ten years of low wage growth will not enhance the public mood.

This is not a conventional recession; we are at an economic turning point.  The blue social model, which worked pretty well in its day, can no longer provide steady growth and rising wages.  We need to find ways to compete in a high tech world where the old advantages advanced countries used to have over developed ones aren’t as impressive as they used to be.

I remain convinced that the best way to do this is to strip out the friction in the US economy: unnecessary costs in systems like health care, education, government and law.  This drives blue model fans crazy because these are the systems where the something like the old blue model still seems to work.  To the economic nostalgist, thinking that the route to the future lies through the 1950s social system, the Post Office, the public school system, and the local hospital are the only places where the world hasn’t gone disastrously wrong.  What feels like an “attack” on the last bastions of a more communal, gentle and high wage America in the name of efficiency and competitiveness sounds like more of the crazy talk that, again from the standpoint of the nostalgist, is how we got into this pickle.

But the reality is clear: for this economy to improve, we have to compete, and cost has to be part of the package.  There must be some way in which it is cheaper to do business in America than in other places.  We don’t want it to be labor; we don’t want it to be pollution.  That really leaves only efficiency: we have to find better, cheaper, faster ways of performing all the social maintenance functions that right now chew up so much of our GDP.

By making it easier and cheaper for both foreigners and Americans to buy, build and create here, we can change our trajectory and move back to a more rapid growth path.  There has been a lot of talk about infrastructure recently as a way to spur job growth in the short term and faster economic growth further on.  That makes some sense, but there is an invisible infrastructure that is even more out of date and doing a lot more harm.  Our social infrastructure — the schools, medical system, legal system, government processes and so forth — is antiquated, inefficient and expensive.

It’s time for this country to move toward deep reform.

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  • kolya

    It would be interesting if Pew did a poll measuring the attitudes of the US electorate towards the Blue Social Model. I’d imagine a plurality of democrats would opt for doubling down on it as opposed to reform or restructuring. Perversely as long as the economy remains weak we can continue on in zombie mode with the federal government running 1.5 trillion dollar deficits every year and the Federal Reserve monetizing a significant chunk of this debt. The minute interest rates or inflation creeps up it’s game over.

  • Luke Lea

    “There must be some way in which it is cheaper to do business in America than in other places.” It’s spelled “tariffs.” Alexander Hamilton knew what he was talking about — as did the Republican Party generally in the 19th century.

    The Economist is a good magazine as far as it goes. But you need to broaden your sources. INET has good stuff nowadays.

  • dearieme

    “It’s time for this country to move toward deep reform”: surely the whole point of being a decadent empire in decline is that vested interests make that impossible?

  • WigWag

    Professor Mead is right when he says,

    “…there is an invisible infrastructure that is even more out of date and doing a lot more harm. Our social infrastructure — the schools, medical system, legal system, government processes and so forth — is antiquated, inefficient and expensive. It’s time for this country to move toward deep reform.”

    But he’s wrong when he says,

    “…the forecasting survey has bad news for everyone…”

    I guess it depends on how you define “bad news” and how you define “everyone.” After all, while median household income may have declined by seven percent during the first decade of the 21st century, there are particular sectors that have done just fine, with the financial sector being the most obvious example. Of all the multitudinous sectors of the American economy, only the bankers, the hedge fund managers, the traders, the M&A specialists and the arbitragers have figured out how to immunize themselves from American economic travails. They’ve done it by constructing a system that when profitable, benefits a tiny sliver of the American public. This same system insures that when calamity strikes, the pain will be so widespread and so severe that the government has little choice but to bail the bad guys out. The fact that it’s a cliché doesn’t make it any less true; the financial sector has figured out how to socialize risk and privatize reward.

    In part, both the Tea Party and the Occupy Wall Street movement are reactions to this phenomenon. Most Tea Partiers probably believe that the government is at fault because they shouldn’t have bailed out the banks (or the auto industry) in the first place. My guess is that the Occupy Wall Street crowd accepts the fact that refusing to bail out the banks would have resulted in more pain not less pain, but they believe that the financial sector should be heavily regulated and that people who get wealthy working in it should be heavily taxed. The anger of both groups has at least some common roots.

    The problem with Professor Mead’s thesis is that while he has correctly identified part of the long-term solution, he is extremely weak and perhaps even naive in thinking about the strategy needed to achieve that solution.

    Professor Mead is right that America’s comparative advantage has historically been our willingness to embrace creativity, ingenuity and new technologies. The nimbleness of Americans accounts for the historical productivity and dynamism of our economy. Professor Mead is also correct that the same creativity and ingenuity that characterizes the private sector needs to come to characterize “our social infrastructure — the schools, medical system, legal system, government processes and so forth.”

    What he fails to understand is that if our society is going to move in the direction that he recommends without social turmoil so severe that it destroys America’s leadership position in the world, then Americans are going to need to be convinced that the pain is being shared in a reasonably equitable manner.

    Cutting pensions while Wall Street bonuses escalate to the heavens is just not going to be socially feasible. Reducing Medicare and social security, while hedge fund managers are taxed at lower rates than their secretaries is not compatible with social harmony. Laying off teachers, college administrators and librarians while the wealthiest one percent of Americans continue to see their share of national income and wealth increase, just isn’t feasible.

    Without social harmony and a broad national consensus, there is very little chance that Americans will be willing to support a military establishment that is the strongest in the world. If Americans start demanding “butter” in the place of “guns” our military will decline at just the moment that China is dramatically ramping up its military expenditures. This is a recipe for dramatic and perhaps rapid decline.

    Unless Americans feel that pain is being shared equitably, the transformation that Professor Mead advocates will be far more painful than it needs to be and will come at tremendous cost.

    Professor Mead makes another mistake in both this essay and many of his other essays on the subject; he tends to underestimate the importance of macroeconomic factors. While he may or may not be right that we are at an inflection point in the structure of the economy, it is also apparent that many of our current economic problems stem from the same cycle of boom and bust that capitalist economies always experience. While this downturn may be especially severe, it is different in degree, not kind. The same type of countercyclical government action is called for now, just as it is always called for during times where the economy is experiencing insufficient aggregate demand. Eliminating all the government regulations and red tape in the world won’t inspire companies, large or small, to hire more people if no one is buying their products. Why Professor Mead finds this so hard to understand is a mystery.

    The transformation that Professor Mead recommends is coming hell or high water. There may be no economy in the world better positioned to take advantage of the major reductions in cost that come from disintermediation than the United States. Just today, the New York Times reported on an example of this; Amazon is reducing costs by eliminating the middleman publishers and contracting directly with authors to sell their books. More can be found here,

    Mead is right; the public sector is crying out for the same kind of innovation.

    The only question is whether America will transform its economy in a manner that brings Americans closer together or will it do so in a manner that rips America apart.

    The answer to that question will determine whether the United States continues to be the strongest country in the world.

  • Anthony

    WRM, economic displacement and technological change (albeit both historic features of modern capitalism) create both opportunity and despair; such that, during this period of international market turmoil, economists of all stripes are examining models and identifying causes. Yet, we must admit that both as a world and a country we are verging on dynamic configuration that have us puzzled – as we seek reformulation (definition) and sense of control.

  • ms

    I’ve always been a little confused about the idea that children should always have a better life than their parents. How far can this really go? I like the old saying “enough is as good as a feast.” Of course there are social problems and there are too many poor (but realistically, the poor will always be with us) and the current economy is terrible, but do we really need to have an ever expanding standard of living? Basically, we need to take advantage of technology so that we can retain the good standard of living that most Americans already have, or had before 2008.

  • WigWag

    In addition to his failure to understand that we need an expanding social safety net rather than a declining social safety net to help ease the transition to the new economy that he sees on the horizon, Professor Mead makes other mistakes as well. It’s not only that redistribution of income will be more necessary not less necessary as the economy experiences rapid change, the nation’s regulatory structure will have to get bigger and more complex.

    Professor Mead is part of a significant coterie of pundits who decry what they believe to be unnecessary and ultimately counterproductive regulations. They believe that these regulations on the local, state and federal government hinder job growth and economic expansion.

    They are certainly right that the regulatory structure as practiced by government at all levels is in many ways outmoded. But they are wrong to think that reducing the regulatory burden will make things better; actually, we have evidence that it will make things worse.

    Long before the music industry, the publishing industry and the travel industry began to experience the cost reducing, efficiency enhancing results of disintermediation, the financial industry was experimenting with this new form of financial organization.

    Disintermediation first hit the financial industry as it began to rebuild from the savings and loan crisis of the 1980s. Banks gave way to money market funds and full service brokerage firms gave way to online, cut rate brokerage firms. Banks became mortgage originators as opposed to mortgage owners as home loans were diced and chopped up and sold in parcels to thousands of different owners all over the world. The advent of 401Ks and IRAs that could be invested in almost anything brought the disintermediated financial world to the door step of consumers. Even financial news experienced disintermediation as staid and well-respected publications like Business Week, Forbes and Fortune gave way to Bloomberg terminals and the Dow Jones News Wire.

    The recent financial collapse has its genesis in the disintermediation of the financial industry and it is a direct result of the failure of the regulatory scheme to keep pace with the new developments in the financial world. A legislative and regulatory structure created during the New Deal to address the financial problems of the 1930s just didn’t measure up to the test offered by a newly disintermediated financial industry.

    In essence, in 2008 we experienced what it was like to have an inappropriately regulated financial industry; the result was almost disastrous.

    In order to avoid repeating that experience, we don’t need less regulations, we need a more robust, intrusive and modern regulatory scheme. This is not only true for regulation of the financial sector; my guess is that this will turn out to be equally true as other sectors of the economy begin to disintermediate.

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