The Post-American World: Release 2.0 (26 page)

The Hollowing Out of the Middle

When I travel from America to India these days, it’s as if the world has been turned upside down. Indians are brimming with hope and faith in the future. After centuries of stagnation, their economy is on the move, fueling animal spirits and ambition. The whole country feels as if it has been unlocked. Meanwhile, in the United States, the mood is sour. Americans are glum, dispirited, and angry. The middle class, in particular, feels under assault. In a
Newsweek
poll in September 2010, 63 percent of Americans said they did not think they would be able to maintain their current standard of living. Perhaps most troubling, Americans are strikingly fatalistic about their prospects. The can-do country is convinced that it can’t.

Americans have good reasons to worry. We have just gone through the worst recession since the Great Depression. The light at the end of the tunnel is dim at best. A year and a half after the official end of the recession, the unemployment rate remains higher than it was in the depths of all but one of the postwar recessions. And as government spending is pared back, the economy shows new signs of weakness.

Some experts say that in every recession Americans get gloomy and then recover with the economy. This slump is worse than most; so is the mood. Once demand returns, they say, jobs will come back and, with them, optimism. But Americans are far more apprehensive than usual, and their worries seem to go beyond the short-term debate over stimulus versus deficit reduction. They fear that we are in the midst of not a cyclical downturn but a structural shift, one that poses huge new challenges to the average American job, pressures the average American wage, and endangers the average American dream. The middle class, many Americans have come to believe, is being hollowed out. I think they are right.

For a picture of the global economy, look at America’s great corporations, which are thriving. IBM, Coca-Cola, PepsiCo, Google, Microsoft, Apple, Intel, and Caterpillar are all doing well. And they share a strategy that is becoming the standard for success. First, technology has produced massive efficiencies over the past decade. Jack Welch explained the process succinctly on CNBC last September. “Technology has changed the game in jobs,” he said. “We had technology bumping around for years in the ’80s and ’90s, and [we were] trying to make it work. And now it’s working. . . . You couple the habits [of efficiency] from a deep recession [with] an exponential increase in technology, and you’re not going to see jobs for a long, long time.” Welch gave as an example a company owned by the private-equity firm with which he is affiliated. In 2007 the business had 26,000 employees and generated $12 billion in revenue. It will return to those revenue numbers by 2013 but with only 14,000 employees. “Companies have learned to do more with less,” Welch said.

Next, companies have truly gone global. By turning their direction outward, America’s great corporations access global markets, easy credit, new technologies, and high-quality labor at a low price. Many have had to cut jobs at home, where demand is weak, and have added them in the emerging markets that are booming. They are not “outsourcing” jobs. That word makes little sense anymore. They simply invest in growth areas and cut back in places where the economy is weak. None of them will ever give up on the American market—it is too large, too profitable, and too central to their businesses—but the marginal dollar is more likely to be invested abroad than in the United States.

While businesses have a way to navigate this new world of technological change and globalization, the ordinary American worker does not. Capital and technology are mobile; labor isn’t. American workers are located in America. And this is a country with one of the highest wages in the world, because it is one of the richest countries in the world. That makes it more difficult for the American middle-class worker to benefit from technology and global growth in the same way that American companies do. Consider two numbers. In 2010, the entire U.S. economy added 937,000 jobs. The same year, Foxconn, a Taiwanese manufacturer that builds gadgets for companies like Apple and Hewlett-Packard, added 300,000. A single foreign company created nearly a third as many jobs as the entire United States.

At this point, economists will protest. Historically, free trade has been beneficial to rich and poor. By forcing you out of industries in which you are inefficient, trade makes you strengthen those industries in which you are world-class. That’s right in theory, and it has been right in practice. As countries have traded with one another over the past two centuries, they have prospered, and average living standards in those countries (primarily in the Western world) have soared. Those places that kept themselves protected (mostly communist and Third World nations) found that they had inefficient industries, shoddy goods, massive corruption, and slow growth.

And yet something feels different this time. Technology and globalization are working together at warp speed, creating a powerful new reality. Many more goods and services can now be produced anywhere on the globe. China and India have added literally hundreds of millions of new workers to the global labor pool, producing the same goods and services as Western workers at a fraction of the price. Global competition is having a new impact on life in the United States.

Toward the end of 2010, for example, I sat in a Nano, the revolutionary car being produced by Tata Motors in India. It’s a nice, comfortable midgetmobile, much like Mercedes-Benz’s Smart car, except that rather than costing $22,000, it costs about $2,400. Tata plans to bring it to the United States in two to three years. Properly equipped with air bags and other safety features, it will retail at $7,000. Leave aside the car itself, which may or may not succeed, but whose price will surely put a downward pressure on U.S. carmakers. Just think about car parts. Every part in the Nano is made to global standards but manufactured in India at about a tenth of what it would cost in America. When Ford orders its next set of car parts, will they be made in Michigan or Mumbai?

This is not a hypothetical. Steven Rattner, who helped restructure the automobile industry, tells the story of getting a new General Motors plant online in Michigan by bringing management and unions together. “The unions agreed to allow 40 percent of the new plant to operate at $14-an-hour wages,” he says, “which is half of GM’s normal wages. The management agreed to invest in this new plant. But here’s the problem: workers at GM’s Mexican operations make $7 an hour, and today they are as productive as American workers. And think of this: $14 an hour translates into about $35,000 a year. That’s below the median family income. The whole experience left me frightened about the fate of the American worker.”

Alan Blinder is also worried. A distinguished economist and Princeton professor, Blinder is a former vice chairman of the board of governors of the Federal Reserve. In a now famous essay in Foreign Affairs, he argues that while we recognize the pressures placed on manufacturing jobs by international competition, technology ensures that service jobs are now similarly exposed. Since the service sector is a much larger part of the economy, Blinder estimates that 28 million to 42 million jobs will be “susceptible” to being shipped offshore—jobs such as those of customer-service representative and stock analyst, which we tend to think of as local. Blinder understands the benefits of free trade but worries that the new wave of offshoring is so big and fast that Western societies will have difficulty adjusting. The crucial distinction for the future, he argues, might be not between highly educated and less educated workers but between those jobs that can be done abroad and those—such as that of nurse or pilot—that cannot.

You can divide the American workforce in many ways, but however you slice it, you see the same trend. People who get paid a decent wage for skilled but routine work in manufacturing or services are getting squeezed by a pincer movement of technology and globalization. David Autor, an MIT economist, has done an important study on what he calls “the polarization of job opportunities” in America. Autor finds that job growth divides neatly into three categories. On one side are managerial, professional, and technical occupations, held by highly educated workers who are comfortable in the global economy. Jobs have been plentiful in this segment for the past three decades. On the other end are service occupations, those that involve “helping, caring for, or assisting others,” such as those of security guard, cook, and waiter. Most of these workers have no college education and get hourly wages that are on the low end of the scale. Jobs in this segment, too, have been growing robustly.

In between are the skilled manual workers and those in white-collar operations like sales and office management. These jobs represent the beating heart of the middle class. Those in them make a decent living, usually above the median family income ($49,777), and they mostly did fine in the two decades before 2000. But since then, employment growth has lagged the economy in general. And in the Great Recession, it has been these middle-class folks who have been hammered. Why? Autor is cautious and tentative, but it would seem that technology, followed by global competition, has played the largest role in making less valuable the routine tasks that once epitomized middle-class work.

As this hollowing out of the middle suggests, there really isn’t a Third World anymore. China, India, and the United States all compete on a level playing field. What, then, is America’s competitive advantage? The answer lies in something the economist Martin Wolf noted. Describing the changing world, he wrote that economists used to discuss two basic concepts,
capital
and
labor
. But these are now commodities, widely available to everyone. What distinguishes economies today are ideas and energy. A country must be a source of either ideas or energy (meaning oil, natural gas, coal, etc.). The United States has been and can be the world’s most important, continuing source of new ideas, big and small, technical and creative, economic and political. But to do that, it has to make some significant changes.

A Do-nothing Politics

The United States has a history of worrying that it is losing its edge. This is at least the fourth wave of such concern since 1945. The first was in the late 1950s, a result of the Soviet Union’s launch of the
Sputnik
satellite. The second was in the early 1970s, when high oil prices and slow growth in the United States convinced Americans that Western Europe and Saudi Arabia were the powers of the future, and President Nixon heralded the advent of a multipolar world. The most recent one arrived in the mid-1980s, when most experts believed that Japan would be the technologically and economically dominant superpower of the future. The concern in each of these cases was well founded, the projections intelligent. But none of these scenarios came to pass. The reason is that the American system was proved be flexible, resourceful, and resilient, able to correct its mistakes and shift its attention. A focus on American economic decline ended up preventing it. The problem today is that the American political system seems to have lost its ability to create broad coalitions that solve complex issues.

The economic dysfunctions in America today are real, but, by and large, they are not the product of deep inefficiencies within the American economy, nor are they reflections of cultural decay. They are the consequences of specific government policies. Different policies could quickly and relatively easily move the United States onto a far more stable footing. A set of sensible reforms could be enacted tomorrow to trim wasteful spending and subsidies, increase savings, expand training in science and technology, rationalize the tax code, create a workable immigration process, and achieve significant efficiencies in the use of energy.
*
Policy experts do not have wide disagreements on most of these issues, and none of the proposed measures would require sacrifices reminiscent of wartime hardship, only modest adjustments of existing arrangements. And yet, because of politics, they appear impossible. The American political system has lost the ability for large-scale compromise, and it has lost the ability to accept some pain now for much gain later on.

As it enters the twenty-first century, the United States is not fundamentally a weak economy, or a decadent society. But it has developed a highly dysfunctional politics. An antiquated and overly rigid political system to begin with—about 225 years old—has been captured by money, special interests, a sensationalist media, and ideological attack groups. The result is ceaseless, virulent debate about trivia—politics as theater—and very little substance, compromise, and action. A “can-do” country is now saddled with a “do-nothing” political process, designed for partisan battle rather than problem solving. By every measure—the growth of special interests, lobbies, pork-barrel spending—the political process has become far more partisan and ineffective over the last three decades.

It is clever contrarianism to be in favor of sharp party politics and against worthy calls for bipartisanship. Some political scientists have long wished that America’s political parties were more like European ones—ideologically pure and tightly disciplined. Well, it has happened—there are fewer and fewer moderates on either side—and the result is gridlock. Europe’s parliamentary systems work well with partisan parties. In them, the executive branch always controls the legislative branch, and so the party in power can implement its agenda easily. The British prime minister doesn’t need any support from the opposition party; he has a ruling majority by definition. The American system, by contrast, is one of shared power, overlapping functions, and checks and balances. Progress requires broad coalitions between the two parties and politicians who will cross the aisle. That’s why James Madison distrusted political parties, lumping them together with all kinds of “factions” and considering them a grave danger to the young American Republic.