from Follow the Money

What risks should the American workforce assume in a more global economy?

November 6, 2005

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Sebastian Mallaby had an interesting column in last Monday's Washington Post.   Mallaby highlights what he calls the biggest economic argument of the day -- namely, what role does the government have in helping the aging American work force adopt to the challenges greated by greater global competition?  

What role, that is, other than keeping interest rates relatively low, making it easier for workers to shift into the housing sector.  And, of course, letting still others from small towns that the global economy has left sort of behind find a job with the US army.   The US strategy for managing competition from China and India generally has been to get out of their way, not to compete in manufactured trade - and to get into housing and health care.  Actually, our strategy has been to get out of the way and to cut taxes on capital income more than on labor income - though Glenn Hubbard thinks we need to go further, since capital is still over-taxed ...

Sebastian Mallaby argues that the key challenges facing the US (and Europe) are "graying" and "globalization."  We are getting older, and changes in the global economy have added a lot of eager workers to the effective global labor force.    That broadly speaking should be good for capital but not labor.   Right now, though, it seems like the workers in China and India save more than old workers in the states, creating a glut of savings as well as labor, and driving down returns on new investment even as they drive up the value of existing assets.  But that may not last. 

The key question is what, if anything, the government do to help those with labor but not much capital adapt to this new reality. 

Sebastian says not much.  Americans households are now rich enough that they can manage "globalization risk" on their own, with individual rather than collective solutions and private insurance rather than social insurance. 

I disagree.  

I also think Sebastian is wrong to say this is the biggest argument in economics today -- at least if he is talking about arguments that generate real public debate.   Political attention has been focused on tax cuts, not managing economic insecurity -- and even the public debate on social security was framed by the President as fixing a broke system (never mind that his fix would take revenue out of the system .... ), not as "the government guarantees too much retirement security to already pretty well off American workers who should be able to manage this risk on their own." 

But Sebastian is right on one thing: this debate is a good proxy for the left/ right debate:

"The big economic argument today ... [is] about the risks created by going gray and going global at the same time -- and about how much individuals can cope with unaided.  This question is probably the best indicator of whether you belong on the left or on the right, at least in terms of economics."

Sebastian correctly notes that one potential response to "globalization risk" is more precautionary savings.  And he also notes that is something Americans clearly are not doing. 

But Sebastian also argues that there is no reason why private savings and private insurance could not help individual American manage "globalization risk" in the future.  American households are richer today than they were thirty or so years ago, when the world was lots less globalized.   So Americans could save more to manage a risky world and buy more insurance and still be better off than they were some time ago.

Maybe. 

But I would emphasize four other things:

1) Real wages for many Americans have not increased substantially over the past thirty years.  They went up briefly in the late 1990s, amid a surge in productivity and the .com investment boom.  But even then, they increase was not all that stellar -- the median hourly wage was basically flat for twetny years. The EPI wrote back in 2002:

However, despite the strong wage improvements in recent years, it was not until 1998 that the wage level for middle-wage workers (the median hourly wage) jumped above its 1979 level. The median male wage in 2000 was still below its 1979 level, even though productivity was 44.5% higher in 2000 than in 1979.

Real household income is up largely because the average household works more now than it did then. 

Whereas real median family income grew 2.8% annually between 1947 and 1973, growth slowed to 0.4% between 1973 and 1995. Between 1995 and 2000, though, growth accelerated to 2.2% per year. The least advantaged-younger families, minority families, and families headed by single mothers-benefited most from the tight labor markets that prevailed in the latter half of the 1990s. ....  The larger gains by lower-income families also meant that inequality grew more slowly in the 1990s. Inequality did not, however, stop growing, nor did it reverse course. The richest families continued to pull away from the pack over the decade: the income of the top 1% of taxpayers (including their realized capital gains) grew by 59% from 1995 to 1999 (the most recent available data of this type) while that of the bottom half grew by 9%. Thus, while full employment gave low- and middle-wage workers the bargaining power that was missing over prior decades of stagnant growth, it did not correct structural inequities that persist in the economy.

While these recent developments have lifted family incomes throughout the income scale, longer-term stagnation among low- and middle-income families led to large increases in the amount of time families spend at work. Over the last 30 years, workers in middle-income married-couple families with children have added an average of 20 weeks at work, the equivalent of five more months.

The EPI was working off data through 2000. Recently, most of the gains of improved productivity have shown up as corporate profits, not labor compensation.  See Kash of the Angry Bear, among others, including Stephen Roach.  Indeed, some workers are likely to soon see their wages shrink in nominal as well as real terms.  Talk to someone who works for Delphi (or perhaps GM) in a couple of years. 

2) Low household savings may be a result of the absence of real wage growth.   When wage growth did not keep up with expectations, spending expectations were not ratcheted down.  Savings got ratcheted down and debt got ratcheted up.  American workers could keep on spending even if their wages were not growing by borrowing more - sometimes by borrowing against the rising value of their existing assets (namely their homes), sometimes by just borrowing (credit cards).  That leaves many Americans poorly positioned to manage future risks and America's large trade deficit suggests that some big changes - and perhaps new risks - loom on the horizon. 

3) Income volatility seems to be increasing, and not just at the very-low end of the labor force.   Read Peter Gosselin.  Or Jacob Hacker.  

4) "Welfare capitalism" - to use Dan Gross's favorite term -- is under massive strain.    The old "work for us for 30 years, and we will cover your retirement and health care afterwards" model is under massive strain.  In ten years, will GM still be a health care company?  I doubt it.    And perhaps more importantly, the "work is your health insurance pool" model is under massive strain.   Fewer and fewer workers are covered by their employer.  Those who are covered are getting less coverage (see the Wal-mart debate).  And more and more workers - in a world with more job churn - will go through periods of life when they don't belong to any employer-sponsored health insurance plan. 

That includes some high income workers who opt to work for start-ups, not just low income workers feeling squeezed by some combination of technological change and global competition. 

So in the absence of new government programs, workers are likely to be exposed to more risks than they were thirty years ago -- since risks formerly assumed by companies are being shifted to individuals.

Add it up - stagnant real wages for many, more income volatility, less retirement security, less access to group insurance through work.   That is an unpleasant combination for many.  

Particularly if globalization means higher gas prices too.  Chinese competition factors in their too.  No one mentioned a few years back that China meant higher gas prices as well as cheap electronics ....

Over time, health insurance probably will be decoupled from someone's job. 

That to me suggests a government role providing people with access to a health insurance pool.  And subsidizing access to heath insurance is one way the winners of globalization (right now, economists and economic opinion writers ... ) can help the losers. 

Count me among those who think globalization risk needs to be shared.

UPDATE: for a discussion of some of these issues with someone who may really matter (though he works for the side of the aisle now out of power), check out the TPM Cafe Book Club with Gene Sperling.  An except from Gene's first post:

"For policymakers the current options are often to either impose protectionist measures that are likely to feed retaliation or to sit back and watch communities get whacked - and then after the fact offer a sprinkling of retraining assistance. There has got to be a better way. To start progressives on both sides of the trade debate should be more open in recognizing the exaggerations and flaws in their arguments. In the book I try to do my part by recognizing places where our critics turned out to be right and where we may have overstated our claims.  I also think if we are to do something serious about the adjustment policies that workers understandably call "burial insurance," we have to get out of this pattern of incremental, ad hoc measures and call for a vast overhaul of our adjustment policies - including pre-emptive policies, bolder wage and health and even mortgage insurance with true one-stop shopping."

No doubt more will follow.   The mortgage insurance proposal interests me: one of the big inequities I have noticed is that communities where a plant shuts down often are left out of the national housing market boom -- since there is a local real estate glut ... so workers experience a correlated shock to both their income (i.e. no job) and the value of their most important asset (their home).


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