You’ve heard all about this. Well, at worst, U.S. middle class earnings have been pretty flat; though actually that doesn’t mean flat living standards, as technological advancement improves quality of life in ways beyond counting. And indeed, for all the whining, the great majority of Americans still live far better than most people elsewhere, and virtually everyone throughout past history.
Nevertheless, we are not complacently satisfied, and that’s a good thing. So how do we ever boost incomes? Answer: by producing more. Many fail to get this simple point. Rich countries are rich because they produce a lot. A poor country like Haiti is poor because it doesn’t. By producing things people want to buy, the poor can get richer without making the rich any poorer.
So what about us producing more? Well, actually, we do. But David Brooks recently wrote about a bifurcation of the U.S. economy. “Economy I” is the competitive, globalized, dynamic part, where businesses face life-or-death pressure to be fiercely productive. “Economy II” mainly comprises three gigantic industries — government, health care, and education—free from this global economic competition. Around half of us live in Economy II. And the key fact, noted by Brooks, is that Economy II is growing in job numbers, but (not surprisingly) lagging in productivity, compared to Economy I.
Indeed, it’s precisely because of Economy I’s increasing productivity that Obama and Democrats are wrong to harp on “manufacturing” as a jobs panacea. Productivity means producing more with less labor. The factory of the future has only two employees: a man and a dog. The man’s job is to feed the dog. The dog’s job is to keep the man away from the machines.
The economic divide is also political. As Brooks observes, Democrats and liberals are basically Economy II people. That’s their comfort zone. They don’t really understand Economy I and often actually hate it – in their eyes, brutal dog-eat-dog capitalism that needs being restrained. Republicans have an opposite perspective: Economy II is suffocating us, and getting in the way of Economy I, where our future prosperity lies (if at all). (Not in old-time manufacturing, but in services and brain work.)
Another revealing economic dichotomy is elucidated in the recent book, Why Nations Fail, by Daron Acemoglu and James Robinson. They distinguish between “extractive” economies, structured for the few to leech off the many, and “inclusive” ones (with dispersed power, rule of law, and free markets) where the many can thrive. It’s the difference between, say, Zimbabwe and America.
Of course, the 99-percenters think the few milk the many in America too – again forgetting most Americans live better than people ever have anywhere. But The Economist has published an interesting essay suggesting that two segments, at least, of Western economies are indeed “extractive” in the sense described by Acemoglu and Robinson. One (the 99-percenters will enjoy hearing) is the banking/financial sector. But the other is government.
(Some recent personal bills, for health care and university tuition (Economy II), seem awfully extractive to me as well.)
The Economist suggests that the banking/financial industry has amassed such economic power that it can extract wealth from the rest of the economy, regardless of the true worth of its “products.” That may be arguable; but the case of government is much more clear. The poster boy is Greece, where a public sector racket soaks up the wealth that society produces (or, worse yet, doesn’t produce). We also saw it in the battle of Wisconsin where, basically, public employee unions had colluded with politicians to milk taxpayers. Gov. Walker broke that up, and his now defeating the union-promoted recall is a tremendous victory for the public over government extractionism.* (See my past post on the scandal of so-called “collective bargaining” by government worker unions.)
I have written about a local pizza joint fined heavily for breaking an obscure government rule. Just recently a nearby family-owned pharmacy was cited for inadvertent paperwork mistakes. The fine? $1.46 million. The local paper’s story makes clear that protecting the public is merely camouflage for the state regulatory agency’s true mission of filling New York’s revenue coffers by draconian application of a byzantine rulebook. This is extraction. This is Economy II sucking the blood of Economy I.
All this is relevant to middle class income stagnation. What can you expect when ever more of us are in Economy II, while Economy I is where the productivity growth, wealth creation, and profits are? Economy II (again, government, health care, and education) tries to subsidize itself by extracting the profits of Economy I. That effort is supported, in effect, by liberals and the 99-percenters. It completely undermines their professed aim of improving middle class prosperity.
And, unfortunately for them, it isn’t really 99% against the rest; it’s more like 50%. A 99-to-1 class war would be mercifully short. But beware a 50-50 conflict.
*Those who say Walker’s victory was “bought” are simply wrong. They forget the amounts spent, and the union manpower mobilized, on the other side (much by outsiders too). It was a pretty even fight.