Fault Lines: How Hidden Fractures Still Threaten the World Economy Read online

  Over the years, many of those who started in positions similar to Jane’s have lost their jobs. The advent of the computer—first the mainframe, then the personal computer—eliminated much of the routine work of assistants. Midlevel supervisors and managers learned to type their own documents. Presentations and basic analysis were outsourced, sometimes to far-off countries, where workers did what was necessary overnight. Most files became electronic, stored on disks rather than in physical cabinets. And as Jane’s bosses turned to communicating by e-mail, phone calls became rarer and rarer: they were not in a fast-moving business requiring constant verbal contact with their clients. As a result, Jane’s secretarial job too became endangered, and eventually she was laid off.

  Jane, however, survived the onslaught of the machines, largely by reinventing herself. She quickly found another job within the organization. She has become a sort of “fixer” for her new bosses, taking on tasks that they have little time or capacity to handle—such as picking the restaurant and ordering the menu for an office dinner, inviting speakers to the organization and managing their schedules, heading off irate clients and ensuring their problems are dealt with, or following up with an obdurate office accountant questioning a bill submitted by one of her bosses. Because Jane has transformed herself into one who takes care of the unusual tasks, ones that machines cannot handle, she has to report to more bosses—nine at last count. Work is exhausting, because demands come from all sides, but Jane is thankful she still has a job. And it is more interesting now.

  Jane’s bosses have benefited hugely from the revolution in computers and communications. The research papers and articles they write receive much wider circulation. In the past they had to be photocopied and sent by mail to a small list of the truly interested, but today they are uploaded to a website and quickly seen by many. Their presentations are more colorful and their seminars more interesting, which means that their audiences pay closer attention when they speak. They routinely field requests from strangers who have come across their work somewhere on the Web, to speak, consult, or give expert testimony.

  Thus advances in technology have wide-ranging effects across the population. The routine tasks done by secretarial and clerical workers like Jane, typically those with a high school education and perhaps even with some college experience, have been automated. But the nonroutine, creative tasks typically undertaken by those with advanced degrees have been aided by technology. From CEOs, who can see their firm’s latest inventory position by tapping on a few keys, to analysts and consultants, whose reports can be accessed around the world, the influence and reach of the skilled and the creative has increased.1 Technology has increased their productivity even while rendering others redundant.

  Typically, however, technological advance is a good thing for everyone in the long run. It eliminates drudgery while giving the worker the time and capacity to make use of her finer talents. We are surely better off posting a document on an accessible website than asking a clerical worker to affix thousands of stamps and destroy so many trees to send physical mail that will ultimately be thrown away. But in the short run, technological advances can be extremely disruptive, and the disruption can persist into the long run if people do not have the means to adapt.

  America has adapted to technological change before. As agriculture gave way to manufacturing in the mid-1800s, the elementary school movement in the United States created the most highly educated population in the world. As factory work became more sophisticated, and as demand grew for office workers to handle myriad activities in the emerging large, multidivision firms, the demand for workers with high school training increased. The high school movement took off in the early part of the twentieth century and provided the flexible, trained workers who would staff America’s factories and offices. In 1910, fewer than one-tenth of U.S. workers had a high school diploma; in the 1970s, when Jane started her career, more than three-quarters did.2

  Although earlier episodes of adaptation were very successful, the next phase of the race between technology and education, as the Harvard economists Claudia Goldin and Lawrence Katz have put it, has been far less satisfactory in the United States. Recent technological advances now require many workers to have a college degree to carry out their tasks. But the supply of college-educated workers has not kept pace with demand—indeed, the fraction of high school graduates in every age cohort has stopped rising, having fallen slightly since the 1970s.3 Those who are fortunate enough to have bachelor’s and advanced degrees have seen their incomes grow rapidly as the demand for graduates exceeds supply. But those who don’t—seven out of ten Americans, according to the 2008 census—have seen relatively stagnant or even falling incomes.4

  Faced with a weak safety net and continuing uncertainty about jobs that could easily be eliminated by the next technological advance or wave of outsourcing, many Americans find it hard to feel optimistic about the future. Although Americans have, by and large, been flexible in their search for opportunity—willing to uproot themselves and travel across the continent to take a new job—the demands on them are far greater now. Many have to go back to school to remedy a deficient high school education before they can derive the full benefit of further education, all for distant and uncertain job prospects. Some lack the fortitude and strength of purpose to do so; others simply do not have the resources. For a single mother of two, for example, who is barely making ends meet with two low-paying jobs, further education is simply not a feasible option.

  The gap between the growing technological demand for skilled workers and the lagging supply because of deficiencies in the quantity and quality of education is just one, albeit perhaps the most important, reason for growing inequality. The reasons for rising inequality are, of course, a matter of much debate, with both the Left and the Right adhering to their own favored explanations. Other factors, such as the widespread deregulation in recent decades and the resulting increases in competition including for resources (such as talent), the changes in tax rates, the decrease in unionization, and the increase in both legal and illegal immigration, have no doubt all played a part.5 Regardless of how the inequality has arisen, it has led to widespread anxiety.

  Many have lost faith in the narrative of America as the land of unbounded opportunity, which in the past created the public support that made the United States a bastion of economic freedom. Politicians, always sensitive to their constituents, have responded to these worrisome developments with an attempt at a panacea: facilitating the flow of easy credit to those left behind by growth and technological progress. And so America’s failings in education and, more generally, the growing anxiety of its citizenry about access to opportunity have led in indirect ways to unsustainable household debt, which is at the center of this crisis. That most observers have not noted these links suggests this fault line is well hidden and therefore particularly dangerous.

  The Growing Inequality of Incomes

  Incomes in the United States, of which wages constitute the most important component, have been growing more unequal. The wages of a 90th-percentile earner—that is, a person earning more than 90 percent of the general population—increased by about 65 percent more over the period 1975–2005 than the wages of a 10th-percentile earner. (This difference is known as the 90/10 differential.) In 1975, the 90th percentile earned, on average, about three times more than the 10th percentile; by 2005 they earned five times more.6 All of this growth was concentrated at the top: the wages of those in the middle relative to those at the 10th percentile have not gone up anywhere near as much as the wages of the 90th percentile have grown relative to those in the middle.

  Many commentators, both in academia and in the popular press, have focused on the income gains made by the top 1 percent or even the top 0.01 percent of earners, perhaps because it is more customary to look up than down. I believe the more troublesome trend for the United States is the 90/10 or 90/50 differential, which reflects the changes most Americans experience.

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p; Much of the 90/10 differential can be attributed to what economists call the “college premium.” The ratio of the wages of those who have only a bachelor’s degree to those who only have a high school degree has risen steadily since 1980. The 2008 Current Population Survey by the Census Bureau indicated that the median wage of a high school graduate was $27,963, while the median wage of someone with an undergraduate degree was $48,097—about 72 percent more. Those with professional degrees (like an MD or MBA) earn even more, with a median wage of $87,775.7 That the 90/10 differential is largely due to the college premium also explains why the 50/10 differential has not moved as much—neither the 50th percentile earner nor the 10th percentile earner has been to college. In fact, the 50th percentile typically consists of white-collar workers like Jane and her colleagues, who have been most squeezed by the technological change.

  Why has the college premium increased? One view is that it is because technology has become even more demanding of skills, reflecting what economists term “skill-biased technical change.” But Goldin and Katz argue that the pace of technological change and its demand for greater skills has been relatively steady: the automobile and the airplane were as disruptive to lifestyles in the beginning of the twentieth century as the Internet and organizational change were at the end. Rather, what has changed is the supply of the educated. Between 1930 and 1980, the average years of schooling among Americans age 30 or older increased by about one year every decade. Americans in 1980 had 4.7 years more schooling on average than Americans in 1930. But between 1980 and 2005, the pace of increase in educational attainments was truly glacial—only 0.8 years over the entire quarter century.8

  In part, the reason for the slower increase in supply has been the relative stagnation of high school graduation rates. Although the United States has led historically in the fraction of the population with high school degrees, that fraction has not increased since 1980, and other countries have caught up and surpassed the United States. Moreover, while more and more Americans in the 20–24 age group are going to college (61 percent in 2003, up from 44 percent in 1980), no doubt in part attracted by the potential boost to wages, college graduation rates have not kept pace: too many students like Jane are dropping out of college despite an increasing college premium over time. College graduation rates for young men born in the 1970s are no higher than for men born in the 1940s—a shocking fact when one considers how much greater demand there is now for workers with college degrees.9

  One possible explanation of the relative stagnation in education is that there might be a natural limit to how much education a population can absorb. After all, not everyone has the aptitude or inclination to write a PhD thesis. If that is the case in the United States, however, the rest of the world does not seem to sense such a limit. Despite leading the world in the past, the United States has fallen behind twelve other rich countries in four-year-college graduation rates.10 When we also note that its high school graduation rates put it in the bottom third among rich countries, we can see why the United States is falling behind both its own historical record and its competitors.

  Finally, wages are not the only component of income. Income from property such as stocks and bonds also adds to overall income, while taxes subtract from it. Interestingly, even for the richest 0.01 percent of Americans toward the end of the twentieth century, 80 percent of income consisted of wages and income from self-owned businesses, and only 20 percent consisted of income from arm’s-length financial investments.11 This ratio is in stark contrast to the pattern in the early part of the century, when the richest derived most of their income from property. The rich are now the working rich—whether they are entrepreneurs like Bill Gates or bankers like Lloyd Blankfein of Goldman Sachs—instead of the idle rich. At a time when wealth seems to be within the grasp of anyone who can get a good job, it is all the more unfortunate that so many Americans, by dint of their poor education, are locked out of the productive jobs that would make them better off.

  I have used the term education so far, even when I refer to employability, but a better term is human capital, which refers to the broad set of capabilities, including health, knowledge and intelligence, attitude, social aptitude, and empathy that make a person a productive member of society. Formal education plays perhaps the most important role in forming an individual’s human capital, but family, community, and employers also play important parts. In what follows, I focus on education, but I also refer to these other elements, especially in Chapter 9 when I turn to remedies.

  Education plays a far greater role than simply improving an individual’s income and career prospects: it has intrinsic worth of its own, allowing us to make use of our finer faculties. In addition, studies show that the educated typically take better care of their own health, are less prone to indulging in criminal activities, and are more likely to participate in civic and political activities. Moreover, they influence their children to do the same, so that their education has beneficial effects on future generations also. So as it falls behind in education, America is diminishing the quality of its society.

  Why Is the United States Falling Behind?

  Why is the educational system failing the United States? With a university system that is still considered the best in the world, and which attracts students from every corner of the globe, the failure clearly does not lie in the quality of university education. Instead, there are three obvious problems that my earlier discussion suggests. First, the quality of the learning experience in schools is so poor that far too many students drop out before completing high school. Second, in a related vein, even among those who graduate from high school, many are unprepared for the rigors of university education. Finally, as the college premium increases, the cost of higher education also increases: it is a service that is provided by the well-educated with very small increases in productivity over the years (college class sizes have not increased dramatically at my university despite all the improvements in communications technology, though the learning experience has probably improved). Despite attempts to expand financial aid, a quality education at a private university is passing beyond the reach of even middle-class families. And with tight state budgets, even state schools are raising fees significantly.

  Of course, learning does not take place only in the classroom. Differences in aptitude for education emerge in early childhood as a result of varying nutrition, learning environments, and behavioral expectations. The family matters immensely, as do the kind of role models children want to emulate and the attitudes their friends have. At my daughter’s university-affiliated school, the smartest kid in class is pushed to excel and is secretly admired even if she does not belong to the popular set. Advanced students take university courses in high school and even sign up for research projects with professors. However, in too many schools in America, being smart can be positively dangerous, as children resent and set upon those who dare to try to escape the trap of low expectations. Here again, advantage breeds more advantage. The rich can afford to live in better neighborhoods, can give their children the health care and nutrition that allow them to grow up healthy, and can hire tutors and learning aides if their children fall behind. Even dysfunctionality hurts children less if their parents are rich. As the political analysts Ross Douthat and Reihan Salam put it: “The kids in Connecticut prep schools smoked pot and went on to college like their parents; kids in rural Indiana smoked meth and dropped out; kids in the South Bronx smoked crack and died in gang wars.”12

  Family instability, too, is harder on poor children. Poor, less well-educated couples are more likely to break up, and when that happens the economic consequences are more severe than for the well-off: the cost of maintaining two establishments, shuttling children between the two parents, and child care eat up a much bigger fraction of the poor parents’ income, leaving less for other basic necessities, let alone counseling and remedial tuition to help devastated children cope with the breakup. Divorce therefore affects the children’s heal
th and schooling far more in a poor family than in a rich family. Inequality tends to further perpetuate itself through the social environment.

  We do not need to get into the moral issues surrounding extreme inequality to understand that it is a thoroughly undesirable state of affairs. To the extent that it is caused by a significant part of the population’s not being able to improve themselves because of lack of access to quality education, it signifies tremendous inefficiency. A mind is a terrible thing to waste, and the United States is wasting too many of them.

  Other Reasons for Inequality

  Differences in educational attainment in the face of rising technological demand for skills are, of course, only one reason for the growing inequality. There are other reasons why measured inequality might rise.13 Rising inequality in the United States in the past three decades coincides with a period of deregulation. Increasing competition does increase the demand for talented employees, thus increasing the dispersion of wages within any segment of the population. In general, this would increase inequality, although by increasing the costs of discriminating against the poor but talented, it could reduce inequality. Deregulation can also lead to more entry and exit of firms, which increases the volatility of each worker’s earnings: an entrepreneur who earns nothing for a few years and then makes millions adds to both the bottom and the top of the distribution curve in different years. (So does a penurious graduate student before becoming a well-paid professor!) These effects may account for up to one-third of the increase in measured inequality.14