Last week we reviewed the work of Thomas Piketty, the French economist whose surprise blockbuster, Capital in the 21st Century, charts a growing inequality, especially in the United States. According to Piketty, this inequality is caused mostly by the mega-salaries paid to CEOs and financial moguls and by the concentration of wealth and capital in the upper 1 percent.
But inequality has two engines—not only growing wealth at the top but falling wealth everywhere else, and the bulging gap between them. Piketty argued that the rich are getting richer, but he didn’t have much to say about the rest, except by inference, which we’ll discuss later in this blog.
Some new studies have tackled this problem of the left-behinds. Much of what they have to say will ring true for Midwesterners and other Americans, especially young people seeking a toehold in the new economy.
Piketty basically said that much of what we’ve been taught about how economies work is wrong. The new studies suggest that much of the advice young people are getting—go to college, study the STEM disciplines, get digital skills—might not work.
We’re used to the idea that technology and the global economy have hollowed out the middle class—the skilled factory workers, the bank tellers, the office workers, both blue collar and white collar, anybody whose job could be automated or outsourced.
But above this middle class is another, traditionally more favored class. Call them the upper middle class. They’re the educated skilled professionals who are knocking on the door of the upper 10 percent.
At any rate, good jobs for this class didn’t seem to be a problem. As MIT economist David Autor wrote a couple of years ago , if jobs in the middle were vanishing, they were growing at the two ends of the economy, “in high-skilled, high-wage professional, technical, and managerial occupations and in low-skilled, low-wage food service, personal care, and protective service occupations.”
The low-wage jobs are still there. But the high-wage jobs seem to be disappearing. As they do, the college grads who expected to get them are being forced to take relatively low-wage and low-skilled jobs. In turn, the high school grads who once held these lesser jobs are being forced into even lower-wage, lower-skilled jobs, and so on down the ladder. At the bottom, the truly unskilled get pushed off the ladder and into unemployment
It’s a provocative theory that explains a lot.
First, it explains some of that growing inequality that Piketty and other economists have charted. Piketty argued that return on capital almost always exceeded the growth rate of the economy. Since wages traditionally grow in tandem with the economy, this equation guarantees that the gap between investors and wage-earners will get ever larger.
But at least, Piketty assumed that wages at the bottom would rise, however slowly. The rich might get richer, but everyone else should move up, too. The new data say this isn’t happening. Not only are working-class wages stagnant or falling, but good jobs for the upper middle class are vanishing. It’s a recipe for inequality. It’s also a recipe for political anger.
The data also explain the continued low employment levels, nearly five years after the recession officially ended. It explains the agonizing job searches of recent graduates of all but the elite universities. It explains the backlash against high tuitions and student debt loads, taken on in the expectation that they would pay off in something better than a barista’s job.
This work comes from three Canadian economists, Paul Beaudry, David Green, and Ben Sand, who have published other papers on this subject. It was summarized recently by Thomas B. Edsall, a Columbia professor and New York Times columnist.
The studies say that the two decades between 1980 and 2000 were the golden years for these highly-educated, highly-skilled “cognitive” workers. These also were the years when computers began to dominate and transform the economy. This coincided with the dot-com boom. When economists talked about a “return to education” and “a return to skills,” this is what they meant. Semi-skilled factory workers were out but highly-skilled digital workers were in.
And then it stopped, according to the Canadians. “In about the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal.” Instead, they say, there’s been “a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow.”
In other words, we have more smart people than we needed. Being smart, they can bump less-educated workers on the rung below them, starting a “cascade,” as Edsall calls it, down through the economy.
What happened? One was the dot-com bust: the NASDAQ peaked in March 2000, and hasn’t recovered yet. Before, investors pumped huge amounts of money into computers and electronics, creating a demand for workers to handle it. This investment collapsed in 2000-2003 and has been declining more slowly since.
By this time, the authors say, the country had most of the digital infrastructure it needed. It still requires some educated workers to maintain it, but the glory days of growth are over.
This ties in with the theories of Robert Gordon, the Northwestern University economist, who says that impact of computers on economic growth has pretty much run its course.
We’ve had three big industrial revolutions, Gordon says. The first involved steam power and railroads, lasted from 1750 to 1830 and had lasting impact on society and the economy. The second was even more transformative: it introduced electricity, chemicals, internal combustion engines, and other technology: it lasted from 1870 to 1900 but we’re living with the impact to this day.
The third brought us computers and mobile phones. It began in 1960, but its impact was spent by 2000, Gordon says.
There may be a fourth industrial revolution out there to reignite growth, but that’s a wish, not a prediction.
All this is bad news, and it has its critics. Gordon’s work is more theoretical and some economists feel he is too pessimistic. The work of Piketty and the Canadians is more firmly rooted in data: it also explains much of the current economic malaise.
But taken together, they paint an extraordinarily gloomy picture of our economic present and future. Piketty says that growing inequality is all but inevitable and that the rich shall inherit even more of the earth: he does, however, urge the youth to arm themselves with education. The Canadians say that even this education is no sure cure. And Gordon says that anything that high tech can do for us has already happened.
These jeremiads demand a response that has yet to come.