The Leaner Welfare State: New ‘citizen benefits’ could help restore American competitiveness

National Review

Should American workers fear the economic future? As recently as the early 1990s, many academic and political elites were convinced that the United States was doomed to become a backwater, an economic also-ran. From 1973 to 1995, average labor productivity increased by 1.4 percent a year, a marked decline from the 2.7 percent annual growth rate that drove post-war prosperity from 1948 to 1972. Because Germany, Japan, and a number of other industrial economies had surpassed the United States in productivity growth over that period, it seemed likely that our country would slowly slip behind in the economic league tables.

That’s not what happened. Between 1995 and 2000, productivity growth increased to 2.6 percent as heavy investments in information technology began to pay off. The American economy had, by any objective standard, made an extraordinary comeback. The recession that followed was short and shallow, but it offered a glimpse of the wrenching change to come. From 2001 to 2003, productivity growth reached a white-hot 3.6 percent. Yet the 2000s were no one’s idea of an economic Golden Age. Even before the Great Recession, the last decade had been characterized by a pervasive if ill-defined sense of economic unease. Many on the left have exploited this unease, yoking to it an expansion of the existing welfare state that threatens to stifle growth and innovation.

Before we can offer an alternative, we have to understand the source of our economic woes.

During the post-war era, the United States was without peer as the ruined economies of Europe and East Asia struggled to recover from the ravages of war. The years from 1973 to 1995 saw those regions flourish, creating a market for U.S. goods and services as well as competition for U.S. firms, most strikingly in the manufacturing sector. Now, as workers in China and India upgrade their skills, the global economy is entering a new phase. Harvard economist Richard Freeman has warned of a global surplus of skilled labor. “As the low-income countries catch up with the advanced countries,” Freeman writes, “the pressure of low-wage competition from the new giants will battle with the growth of world productivity and the lower prices from goods produced in low-wage countries to determine the well-being of workers in higher income economies.” There is good reason to believe that growth in low-wage countries will prove overwhelmingly beneficial to U.S. workers overall, not least by creating a wave of low-cost, innovative goods. Yet there is also no question that it will continue to increase downward pressure on the wages of workers in tradable economic sectors, from manufacturing and programming to legal services and perhaps even education.

Another source of our economic discontent lies in the subtle difference between the two most recent productivity booms, which economists Erik Brynjolfsson and Adam Saunders describe in their book, Wired for Innovation. The 1990s boom can be directly traced to IT investments, particularly in the retail sector, which had seen sluggish productivity growth for decades. The productivity surge from 2001 to 2003 was driven by investments in organizational capital, a catch-all term for productivity-enhancing business practices.

Many U.S. firms invested heavily in technology. But the most successful firms — which Brynjolfsson and Saunders call “digital organizations” — also embraced incentive systems and decentralized decision-making to allow their most talented, driven, and well-trained workers to use new technologies effectively. To put it simply, digital organizations reward workaholics and weed out weak performers. Suffice it to say, the workers who flourish in these firms are not replaceable cogs. Rather, they are valuable assets, and they demand and receive generous compensation. While digital organizations tend to be culturally egalitarian, they are a major driver of wage dispersion. Google and Facebook, for all their progressive bona fides, spend far more on top-flight engineers than on custodial staff, and they always will.

The rise of digital organizations is one reason productivity growth has continued during the Great Recession. One of the most striking facts about this downturn has been that employment has declined far more than output. As jobs evaporated throughout 2009, productivity increased by 3.8 percent, the largest increase in seven years. Comparatively few productive workers were let go, and many of those who were worked in firms that simply discovered a way to do without them, in part by offshoring a range of tasks.

As Dirk Pilat, an OECD economist, observed in 2004, these developments “are part of a process of search and experimentation, where some firms succeed and grow and others fail and disappear.” Countries that allow this process of creative destruction have an edge, Pilat suggests, in reaping the full benefits of technology investment.

The job losses we’ve seen over the last few years have affected American workers unevenly. Those with some college, 26 percent of the adult population, have an unemployment rate hovering around 8.3 percent. For the 30 percent with only a high-school diploma, the unemployment rate is 10.1 percent. And for those without a high-school diploma, 13.4 percent of the population, the unemployment rate is 13.8 percent.

Meanwhile, the 30 percent of adults over the age of 25 with a college degree or more have fared well, with an unemployment rate around 4.5 percent as of July. These are the workers who — a handful of brilliant dropouts aside — staff the digital organizations that are driving the economy forward. This is also the group that tends to outsource household labor — by buying meals outside of the home, day-care services, and much else — providing employment opportunities for large numbers of less-skilled workers. For better or for worse, all of us depend on the success of digital organizations. The value they create spreads throughout the wider economy. America’s economic mission should thus be to attract, retain, and develop talent, and to guarantee that the barriers to grassroots entrepreneurship are as low and as few as possible.

For more, see the original article at National Review.