Capitalism with a Safety Net?

The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World, Lester C. Thurow (New York: William Morrow and Company, 1996). Robert Allen is a most unlikely villain. Quiet, mild-mannered, and visibly uncomfortable in the spotlight, the chairman of AT&T has spent the past eight years trying to transform one of the world’s largest corporations from a sluggish heavyweight into a far more light-footed fighter. He’s had his failures, including the ill-fated pen-computer venture Eo and his $ 7.4 billion purchase of NCR Corporation. But, by and large, Allen has done well—at least in the stern judgment of the stock market. Who could have foreseen that, by laying off 40,000 employees, Allen would land in the middle of an election year storm? By firing thousands while giving himself a raise, Bob Allen performed a public service. Inadvertently, he brought clarity to one of the United States’ most muddled political discussions. AT&T, after all, was and is an extraordinarily healthy company. There was no decline to lament, no foreign competitor to bash, no serious argument that fundamental changes in telecommunications hadn’t left the company in need of a major restructuring. There was no need to debate causes or to assign blame. That left the public squarely facing a most basic question: as businesses try to survive in a time of extraordinary economic change, what is going to happen to the workers who are left behind? A most obvious question? You’d think so. But it’s been a question many in the United States have carefully avoided. Helping workers adjust to shifts in the economy has never been a priority. The shifts themselves have been encouraged. Trucking, airlines, and now telephones have been deregulated, and deregulation has led to more intense competition and a higher risk of job loss. Foreign trade has ravaged some manufacturing sectors, such as apparel and shoes. Productivity advances have eliminated hundreds of thousands of jobs in banks and steel mills. In every case, the economy as a whole has benefited from higher efficiency and lower costs. But that macroeconomic gain masks many, many individual losses. Theoretically, as every economics undergrad learns, the winners can use some of their gains to compensate the losers and leave everyone better off. In reality, however, the losers are quickly forgotten. Free-market conservatives define the problem away. Lower taxes and less regulation will make the economy so dynamic that anyone who loses a job will quickly find another, they argue. Whether he or she ends up as well off as before isn’t an important question. On the opposite side of the political spectrum, those who favor activist government have been more concerned about fending off change—by fighting deregulation and freer trade—than about dealing with those who suffer from deregulation’s negative consequences. And in between those poles, the intellectuals who shape the public agenda have worried less about helping ordinary people face change than about helping businesses face change. The last time the United States elected a president, in 1992, that business-oriented thinking dominated the economic debate. The buzzword was competitiveness. No one ever bothered defining competitiveness with enough precision for an economist to measure it, but for rhetorical purposes the import was clear enough: Foreigners were eating our lunch. U.S. industry needed help, and living standards would suffer if government didn’t respond. Consider the following quotations from four influential thinkers of that unhappy recession year: Relative to Japan and Germany, our economic prospects are poor and our political influence is waning. Their economic underpinnings—trends in investment, productivity, market share in high technology, education, and training—are stronger. Their banks and industry are in better shape. Their social problems are far less severe than ours.1 [I]n the full flush of geopolitical triumph, we are teetering over the abyss of economic decline… The debate in Washington has shifted from whether the nation has a competitiveness problem to what should be done to solve it.2 The Department of Commerce reported in 1990 that the United States was losing ground to Japan in all but three of twelve key technologies. The report was among dozens of government studies warning of the erosion of the nation’s technological dominance, an erosion that spelled disaster for U.S. industries that relied upon those technologies and therefore lost their competitive edge. It meant lost jobs, lost national income, lost market share, a lower standard of living, and an increased trade deficit.3 Ask Japan, Germany, and the United States to name those industries that they think are necessary to give their citizens a world-class standard of living in the first half of the twenty-first century, and they will return remarkably similar lists—microelectronics, biotechnology, the new materials-science industries, telecommunications, civilian aviation, robotics plus machine tools, and computers plus software. What was an era of niche competition in the last half of the twentieth century will become an era of head-to-head competition in the first half of the twenty-first century. Niche competition is win-win. Everyone has a place where they can excel; no one is going to be driven out of business. Head-to-head competition is win-lose. Not everyone will get those seven key industries. Some will win; some will lose.4 The first analysis, warning that a “cold peace” among Germany, Japan, and the United States would dominate the post-Cold War world, earned Jeffrey E. Garten a prominent place in Bill Clinton’s Commerce Department. The second thesis was so persuasive that Clinton named the author, Laura D’Andrea Tyson, to head his Council of Economic Advisers. The third, by academic Susan J. Tolchin and journalist Martin Tolchin, fed fears that foreigners were staking claim to the United States’ most valuable assets. The best seller among 1992’s policy tracts, though, was the fourth. The author was Massachusetts Institute of Technology economist Lester Thurow, and the lesson of his book Head to Head was that America could thrive only by becoming more like its global competitors. “The communitarian Japanese business firms’ modes of play are quite different from those of the Anglo-Saxons, and their success is going to put enormous economic pressure on the rest of the industrial world to change,” Thurow warned. Nevertheless, he offered a bold prediction: “Future historians will record that the twenty-first century belonged to the House of Europe!” Even by the standards of election year analysis, all these pearls of wisdom were wildly off the mark. Deindustrialization was a fiction, the competitiveness crisis a nonevent. Even without the crash research and industrial-promotion programs these economic experts called for, the U.S. economy has fared extraordinarily well. Labor shortages are severe enough that Clinton’s 1992 call for a plan to raise the share of manufacturing jobs in total employment has an almost quaint ring. Today rejuvenated midwestern manufacturers are running near capacity, and Silicon Valley is spilling out wave after wave of new technology. Meanwhile, as Japan emerges from three years of deep recession, its economic planners don’t seem so omniscient, and Germany’s passion for training and quality hasn’t spared it a double-digit unemployment rate. Even by the standards of election year analysis, all these pearls of wisdom were wildly off the mark. In hindsight, it’s clear that the United States, in reckless pursuit of individual profit, went through a far deeper economic revolution in the late twentieth century than its supposedly better-structured, better-subsidized trading partners adhering to farsighted plans. If the country seemed more troubled than other nations, that’s because it faced the trauma of moving from an industrial economy to an information economy while others were still basking in the waning sun of the industrial age. The United States has made the transition to the twenty-first century; the Europeans and the Japanese, meanwhile, have been left to worry about overweening governments, inflexible businesses, and workers inadequately trained for the information age. They’re no longer so confident, and the United States is no longer so troubled. If the reports of a U.S. industrial demise were dead wrong, the other half of the declinists’ argument—that a more competitive economy would reverse the decline in real hourly wages that began back in 1972—proved equally false. That, after all, is why competitiveness became such an important issue in 1992. A competitive economy would offer, in Bill Clinton’s memorable phrase, “good jobs at good wages.” The presumed relationship between U.S. technological strength, corporate health, and the incomes of average citizens was so clear that it didn’t even merit debate. That linkage, however, has turned out to be a tenuous one at best. Even as business racks up record profits and U.S exports grow by leaps and bounds, many people still don’t feel prosperous. In The Future of Capitalism, a volume timed for the 1996 election, Thurow asks why. He has left his enthusiasm for other economic systems far behind. Although he still admires Europe, which he’d marked as tomorrow’s winner only four years ago, he now acknowledges about the region that “something fundamental has to change, but no one wants to make those changes.” Japan, meanwhile, faces a similar crisis: “It will have to change despite the fact that it is a winner. Nothing in recent Japanese behavior even hints that such changes are possible—much less likely.” Instead of plotting how to steer their nation-teams to victory in the World Cup final of a win-lose global economy, policy makers, according to Thurow’s new lights, are perplexed by an entirely different issue: how to confront the widening inequality of incomes and opportunities that intense competition brings in its wake. This time, Thurow is finally focusing on the right question. Thurow’s analysis begins with a concept newly discovered by economists but long known to evolutionary biologists: punctuated equilibrium. The theory of punctuated equilibrium challenges the notion that the earth’s environment and the species within it are constantly evolving and adapting. Instead, the environment may be relatively stable for eons—and then, overnight, may be disrupted by a chaotic transformation that destroys species ill suited to the new conditions (dinosaurs) and leaves openings for creatures that previously couldn’t thrive (mammals). Applied to economics, punctuated equilibrium implies periods of relative tranquillity followed by tumult that turns the existing order upside down. That’s where we are now, Thurow says, as the world economy shifts from the age of mass production to the age of brainpower. This period of disequilibrium, Thurow contends, poses extreme challenges for capitalist economies. Economic inequality is increasing everywhere, he argues, in good part because skills that were valuable yesterday are suddenly obsolescent. As the gap widens between rich and poor, between high earners and average workers, frustration and anger will tax the resilience of democracy. Government will be hard pressed to fill its traditional role of including the unincluded in capitalism. “How far,” Thurow worries, “can inequality widen and real wages fall before something snaps in a democracy?” It’s a question that even Republicans ought to ponder. As the gap widens between rich and poor, frustration will tax the resilience of democracy. Before attempting an answer, let’s take a brief dive into the morass of the living-standard debate. The statistics are exceedingly muddy. But the reality they describe, much twisted by politicians and pundits, is surprisingly clear—albeit not exactly as Thurow depicts it. Are people in the United States really worse off than they used to be? Some of the government’s wage and salary statistics say that pay has been falling since 1972. Thurow claims, “By the turn of the century, the real wages for nonsupervisory workers will be back to where they were at midcentury”; and if you believe the official figures on hourly wages, he’s right. But there’s plenty of reason to disbelieve them. Although average wages as reported by workers have lagged behind the consumer price index, the CPI is known to overstate inflation significantly. When one measures weekly earnings against another government price index—namely, the deflator used to calculate the gross domestic product—one can see that wages have risen faster than inflation since the end of the 1992 recession. Employers’ reported wage and salary costs are climbing faster than employees’ reported hourly wages, another indication that the story of shrinking pay packets isn’t true. Most important, by every indisputable measure of economic well-being—life expectancy, housing, ownership of cars and consumer goods, access to medical care and education—every income group is experiencing rising living standards. Identifiable groups of workers have suffered major wage declines at particular points in time: trucking, railroad, and airline deregulation devastated transportation workers’ average real pay during the 1980s and early 1990s, and health-care cost containment has pressured the earnings of health service workers since about 1992. But the claim that economic change has made most Americans or even a large minority of Americans worse off in the 1990s doesn’t hold water. Is inequality rising? Politicians and pundits, Thurow included, tend to jumble the issues of incomes and inequality. In fact, they’re two completely different matters. Although, on the whole, living standards in the United States are rising from year to year, some people are clearly prospering more than others. The pay of highly educated workers is rising sharply compared with the pay of the less educated. The proportion of workers in middle-income jobs is diminishing, while the proportion earning either well below average or well above average is on the rise. The trend in household incomes, which include dividends and capital gains as well as wages, is even more striking. The Gini index (named for statistician Corrado Gini and widely used to measure household inequality) reached its highest level ever in 1993.5 Some conservatives argue that the rise in inequality is illusory because people often move from a low-income group to a higher group, but the evidence points in the other direction: there is much less upward mobility in the 1990s than there was in the 1970s.6 Has insecurity increased? Whether or not they’re actually losing ground today, a large number of people in the United States fear that they might in the future. They’re not entirely wrong. It’s true enough, as repeated studies have found, that the probability of being laid off permanently isn’t much greater in the 1990s than it was in the fondly remembered past. Nor, despite the widespread belief that the microprocessor is making workplace skills obsolete overnight, do today’s laid-off workers seem to fare worse than yesterday’s. Workers displaced in 1990, for example, found new jobs more quickly than workers displaced in 1984 and were far more likely to land a job paying better than the one they lost.7 People may not really be losing ground today, but large numbers fear that they might in the future. But although statistical probability of displacement isn’t much changed, pink slips now carry a different import. Older, more educated workers with considerable tenure are far more likely to be dismissed than in the seniority-based industrial layoffs of the 1980s; when people complain that loyalty has no reward, they accurately describe the current trend. The public is correct, as well, in believing that a layoff is now more likely to mean permanent separation instead of a temporary break. And those who tumble from their professional perches in the 1990s know that only the weakest of safety nets spreads below. The average displacee in the 1980s was a blue-collar worker who could expect unemployment compensation to replace perhaps 60 % of his take-home pay for as much as a year. For the average marketing manager or bank vice president displaced today, by contrast, unemployment compensation is little more than a token—and a taxable token at that. Overall, the reality confronting workers in the United States is far less grim—and far more nuanced—than that portrayed in The Future of Capitalism or in the much-noticed series “The Downsizing of America” in the New York Times. The nation isn’t in the midst of the epochal crisis of capitalism that Thurow portrays. There is no dearth of good jobs and no sign whatsoever that today’s young people, once they’ve reached the first rung of the career ladder, won’t enjoy higher living standards from year to year just as their parents did. The impoverished retirement that purportedly awaits the spendthrift baby boomers is largely a creation of the financial industry’s marketers, and the shortsighted lack of investment that supposedly threatens future economic growth may in fact indicate a healthy financial market that rightly questions the wisdom of every dollar of investment. The massive structural changes Thurow calls for are not only unlikely, they’re unnecessary. The real problems the United States does face are an increasingly skewed distribution of income and a highly elevated fear of falling. The political consequences of those trends are visible in the ground-swells for presidential candidates Ross Perot in 1992 and Pat Buchanan in 1996 and in the public’s deep discomfort with immigration, foreign trade, and big business. The broad trends are not simple to address. After years of research, economists still cannot pin down the major causes of rising inequality, much less suggest measures short of nationwide wage setting to reduce it. But that does not mean that the state is impotent in the face of widespread public frustration and fear. Just as government used unemployment compensation and disability benefits to help smooth capitalism’s sharper edges in an earlier age, it could do much now to ease the fear of displacement and impoverishment at a time of traumatic change. Government can still play a role in easing the fear of displacement. The welfare state, of course, is much out of fashion these days. A vociferous antigovernment lobby, heavily financed by business interests, stands ready to attack the mere suggestion that government can play a useful role in enhancing workers’ sense of security. The arguments are predictable: mandates for almost anything, whether funded by taxpayers or simply required of employers, will dampen economic dynamism, discourage job creation, impede productivity improvement, and drag us into a European-style stagnation in which slow growth is the norm and companies do their utmost to avoid hiring. The economic cost of dislocation, in the form of workers’ diminished motivation and companies’ systematic underinvestment in the training of workers who won’t be around tomorrow, never seem to merit much attention in the studies carried out by the antigovernment lobby. And the potential costs of social conflicts arising from greater inequality and insecurity are ignored. They shouldn’t be. Already, those costs are apparent in the high crime rates of inner-city neighborhoods whose former manufacturing base has relocated to unreachable suburbs. If broad economic anxiety among people in the United States leads to an upsurge in import protection and stultifying regulation, the economic cost of failing to address that anxiety may be very great. It’s true that many government programs haven’t worked or no longer work well. But that’s not an argument for refusing to extend a hand to those who lose as a result of economic change. What might help reduce the country’s nagging sense of insecurity without counterproductive steps such as barring layoffs? Mandatory severance pay (the United States is one of the few wealthy countries where workers can get the boot with no advance notice or compensation) would assure workers that they wouldn’t suddenly be left penniless. AT&T handed out generous severance packages, but more than half of employers dismiss workers empty-handed. Guaranteeing continued health insurance would address another major source of insecurity. Requiring shorter waits to join corporate savings or profit-sharing plans and encouraging pension plans that don’t punish middle-aged workers for changing jobs would eliminate the penalty that displacement almost always exacts on retirement income. Unemployment insurance could be more useful, too, if it provided higher initial benefits that were gradually phased out—instead of today’s level benefits. That would both mitigate the immediate loss of income from a layoff and provide a stronger incentive to find new work fast. Like most economic policies, any of these measures could cause serious economic damage if carried too far. But that’s no argument for the antigovernment nihilism passing for public-policy thinking in many circles today. Demanding perfect policies—with no adverse effects or perverse incentives—is an excuse for inaction. The challenge for government is to find small steps that concretely address real social problems at minimal cost. To be sure, this is tinkering, not drama. It doesn’t therefore much interest Thurow. “Appropriate public policies aren’t the current issue,” he insists. “The current issue is persuading ourselves that the world has changed and that we must change with it.” Thurow doesn’t see them, but there are signs that this change is under way. The resurrection of the vocationally oriented community-college system, which now enrolls 6 million students, is evidence that all three parties to the equation—government, business, and workers—understand that in a more unstable economy, there is a need for higher skills. Major employers are examining new types of defined-benefit pension plans that let accrued benefits rise with inflation even after the employee has left the company—an innovation that breaks the connection between a pension and long-term employment. Business groups are belatedly reevaluating the need for government social policies better suited to today’s economy.8 In April, a U.S. Senate ruled by ideological conservatives unanimously supported a bill to keep job-losers from losing health insurance. Those are only beginnings, but perhaps even capitalists are coming to realize that capitalism cannot thrive without a safety net. One can only hope. 1. Jeffrey E. Garten, A Cold Peace: America, Japan, Germany, and the Struggle for Supremacy (New York: Times Books, 1992), p. 221. 2. Laura D’Andrea Tyson, Who’s Bashing Whom? Trade Conflict in High-Technology Industries (Washington, D.C.: Institute for International Economics, 1992), p. 1. 3. Martin and Susan J. Tolchin, Selling Our Security: The Erosion of America’s Assets (New York: Alfred A. Knopf, 1992), p. 4. 4. Lester Thurow, Head to Head: The Coming Battle Among Japan, Europe, and America (New York: William Morrow and Company, 1992), p. 30. 5. See Paul Ryscavage, “A surge in growing income inequality?” Monthly Labor Review, August 1995. 6. See Moshe Buchinsky and Jennifer Hunt, “Wage Mobility in the United States,” National Bureau of Economic Research Working Paper No. 5455 (Washington, D.C.: 1996). 7. See Henry S. Farber, “The Changing Face of Job Loss in the United States, 1981–1993,” National Bureau of Economic Research Working Paper No. 5596 (Washington, D.C.: 1996). 8. See, for example, American Workers and Economic Change (Washington, D.C.: Committee for Economic Development, 1996).

Capitalism with a Safety Net?

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