"Average is Over"... Should We Be Excited?

9/21/2013 03:13:00 PM
If you're reading this you're probably familiar with Tyler Cowen and his Marginal Revolution blog. You likely also know Cowen's new book "Average is Over," a commentary on the continuing decline of the American Middle Class. I heard Cowen interview on NPR on my morning commute the other day and I found myself stymied by a sense of ambivalence toward the George Mason professor: While Cowen has been correct about a lot of things (compared to other contemporary conservative economic pundits), he also holds some pretty questionable views that inform his models and predictions.

I might start with this (excellent) Noah Smith blog post as an antidote for Cowen's view. It's from a couple years ago but touches on one of the fundamental pieces to Cowen's model, which is that unskilled labor is becoming less valuable (Cowen argues an extreme position, in that he says the marginal product of unskilled labor is zero). If you read the whole post you'll see even Cowen's coauthor disagrees with his conclusions here.

That said, what Tyler was saying that morning is really more an observation of what's happened so far since the last decade rather than a vision of where things are going. The middle class has largely already been hollowed out, as you can already see retail businesses capitalizing on the new dynamic of "bifurcation" (a business euphemism for the rich/poor divide in their marketing).

While this dynamic can be expected to continue, I worry about the complacency Cowen seems to engender with his writing (although he at least pays lip service to the idea of equality). To create a thriving middle class requires institutional policies (from Gov't and other big players) to harness and channel market forces, contra the standard conservative pitch that we need to just step back and get out of the way of the market. The bifurcation we're seeing is, in my estimation, a result of weak institutional policies that are letting the forces of narrow self-interest and myopic profit maximization dominate the economy. By instituting public policies like universal education and healthcare, as well as public transit and a robust welfare state, and enforcing worker standards like fringe benefits, maternity leave, child care, and paid vacation, we mold the paths for the market forces to shape our economy. Maybe that means some sacrifice in innovation, but a) this is difficult to empirically prove (although it would be easy to contrive a mathematical theoretical basis for this idea) and b) is it a worthy sacrifice in pursuit of an egalitarian society?
I would say the models of Germany and Sweden show that a dynamic industrial/innovative economy with highly profitable companies can be compatible with a thriving middle class. Partially this reflects institutional structures; in Germany, unions hold half of the Board of Directors seats in firms where workers have in fact unionized. Besides giving labor a vested interest in the company, it eliminates the likelihood of labor strikes or unrest as well, while also helping to counteract management's bias towards capital-based technological innovation. Besides this, a thriving middle class depends on some form of redistribution on a relatively grand scale (note that the New Deal and the American Middle Class of the latter half of the 20th Century did not come into existence coincidentally). And here, in my pessimism toward our political system, my views with Cowen regrettably tend to converge.

While I might share Cowen's view of our present and future, I am highly skeptical of his optimism thereof. And particularly, I take issue with his characterization of this new economic reality as "meritocratic". As an empirical matter, Americans' individual incomes are more highly correlated with those of their parents than any time since WWII, and moreso than anywhere in Western Europe; in other words, intergenerational mobility is pretty terrible in the US, and there's no reason we should need to accept this. While one can argue we should not expect high intergenerational mobility if productivity is genetic (a point Professor Mankiw has made in defending the One Percent), we must then ask why the genetic component of labor productivity is so much larger here than in Europe. The only obvious answer is institutional differences. It's just hard to see us changing these on a national level without a pretty revolutionary change in the political environment.