Don't Blame Technology For Shrinking Middle Class

Thomas Edsall devoted his blog post [1] today to several economists who claim that the upward redistribution we have seen over the last three decades is a result of revolutions in technology and that it will be difficult to reverse this development. In fact, much of this economic analysis is quite sloppy and it is easy to show that many of the factors leading to upward redistribution had nothing to do with technology. 

For example, the post features a graph that shows for the first time a sustained decline in the employment-to-population ratio (EPOP) even as output has continued to rise. While the graph is accurate, it is wrong to imply that this demonstrates any new impact of technology.

In prior decades the employment-to-population ratio was consistently rising because women were entering the labor force and because the baby boom cohorts were entering the labor market. At this point, the vast majority of working age women are already working. And, the baby boom cohorts are beginning to retire. These developments mean that the EPOP is likely to be largely stagnant or falling going forward regardless of what happens with technology. (The recent drop is due to the weak economy.)

Much of the rest of the analysis is similarly confused. For example, the piece refers to the millions of manufacturing jobs that the United States lost over the last decade. The biggest factor behind the job loss was not technology; productivity growth in manufacturing was not markedly faster in the 2000s than in prior decades. The main factor leading to job loss was the growing U.S. trade deficit.

This, in turn, was the result of a conscious policy decision by Robert Rubin to have an overvalued dollar. Robert Rubin's high dollar policy was put into practice with the muscle of the International Monetary Fund as it engineered the bailout from the East Asian financial crisis in 1997. As a result of the harsh terms of the bailout, developing countries decided to acquire massive amounts of reserves, which meant deliberately keeping down the value of their currencies against the dollar so as to run trade surpluses.

The predicted result of an overvalued dollar is the loss of jobs and lower wages in the sectors of the economy that are exposed to international competition. However, the availability of low-cost imports raises the living standards of those who are protected from international competition.

The latter group would include highly paid professionals, like doctors and lawyers. Note that it is not technology that protects these professionals from seeing their wages depressed by competition from their low-paid counterparts in the developing world, it is deliberate policy. While it has been the explicit goal of trade policy to put manufacturing workers in direct competition with workers in the developing world, the barriers that make it difficult for qualified doctors, dentists, and lawyers in the developing world to work in the United States have been left in place or strengthened.

The economic reality has closely followed the predictions of theory. We have lost millions of manufacturing jobs due to trade, this has led to downward pressure on the wages of middle income workers more generally. If the dollar were to fall enough to bring trade into balance, it would give us close to 5 million new manufacturing jobs. That would provide a huge boost to the wages of large segments of the workforce.

The high pay received by people at the top also has little to do with technology. Many of the top incomes are in the financial sector. Those earning these incomes are able to pocket tens of millions or hundreds of millions a year largely due to their political power. The government provides tens of billions in subsidies each year to major banks in the form of implicit "too big to fail insurance."

It also largely turns a blind eye to massive corruption in the industry such as the mortgage fraud that took place in the housing bubble years and the LIBOR scandal now being exposed in the United Kingdom. It is unlikely that anyone will go to jail in the latter even though hundreds of millions of dollars, perhaps billions, were stolen through this fraud.

The high pay going to top executives in the United States also has little to do with technology. Top executives of successful companies in Europe and Asia rarely pocket the tens or hundreds of millions of dollars that are standard in the United States. This is also due to institutional structures. While corporate boards put a check on abuses by top management elsewhere, here corporate boards are essentially paid off [2] to allow CEO's to take what they want and not say anything. 

In short, it is easy to trace the vast majority of the upward redistribution over the last three decades to deliberate policy choices, as I argue in "The End of Loser Liberalism: Making Markets Progressive" (free download available [3]). It is seriously misleading to imply that this upward redistribution was just the result of technology.