The Collapse of the Middle

Our candidates are talking to voters about getting America back to work, but economists are talking to each other about how this is not likely to happen.  The changes that have occurred are, as they say, “fundamental,” “structural.” They are not reversible.

In a new book, Thomas Edsall of Columbia University points to trends of increasing unemployment and inequality.  In an article in The New York Times, he notes that a number of highly respected economists believe that capitalism has all too successfully again run its course in efficiently realigning job markets, leading to “the weakening of the social fabric.”

In a paper written for the Council of Foreign Relations, Nobel prize winning economist Michael Spence, argues that “the employment problems of the United States do not result from market failure.  Just the opposite: the problems arise from an exceptionally efficient global marketplace.”

Other economists worry that “large segments of the American workforce — millions of people — [are] at a structural disadvantage in the face of global competition, technological advance and ever more sophisticated forms of automation.”

Moreover, Richard Freeman of Harvard point out that “economic interests of small groups of “crony capitalists” have come to dominate government responses to the financial crisis and ensuing recession. The danger is . . . of a move to economic feudalism . . . and the failure of democratic capitalism.”

As a result, it is “possible that in the United States and Europe, democratic free market capitalism is no longer capable of providing broadly shared benefits to a solid majority of workers.”

Francis Fukuyama, at Stanford’s Center on Democracy, notes that elites are particularly good at holding on to power.  “There are a lot of reasons to think that inequality will continue to worsen.”  That means that it is unlikely that they will support calls for a more equal distribution of wealth through taxation or more effective social safety nets.

David Autor at M.I.T. “found that the combination of three trends — automation; the emergence of a trade-based international labor force; and the movement of jobs offshore — has polarized the job market.  There is growth at the high and low ends, but the middle collapses.”

Solutions are possible, but it is unlikely we have the political capacity to implement them.  Social democracy ­– “capitalism plus a hefty dose of state support for families, education, early childhood development, higher education, and active labor market policies — can still do the job,” argues Jeffrey Sachs at Columbia. “The performance of northern Europe, around 120 million people including Germany, Austria, the Netherlands, Denmark, Sweden and Norway, provides a good illustration of this success.”

But Edsall notes that our “political system instinctively avoids this debate . . . because the political costs of engagement are likely to substantially outweigh any potential gains.” In other words, the public doesn’t want to know how bad things really are.  And politicians won’t tell them.

“At an undetermined point in the not too distant future, as the ‘gale of creative destruction’ blows through the heartland, the debate will become inescapable.”  But, again, will the economists be talking to each other or to us? Will the politicians continue to look the other way? (See, “Is This the End of Market Democracy.”)