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Monday, October 17, 2005

Paul Krugman: The Big Squeeze

This is something we should all be worried about. The world is changing, and changing fast. Competition at the global level is becoming more intense and there is no end in sight anytime soon. Are we as a nation ready? Paul Krugman is worried about the effect global competition is having on ordinary Americans. What type of bellwether is the recent bankruptcy of Delphi? What does it tell us about the future for the working class in the United States? Will protectionism rear its ugly head as a solution to labor's emerging problems?

The Big Squeeze, by Paul Krugman, NY Times: ...There are a lot of questions about how Delphi and the auto industry in general reached this point. ... But Delphi's bankruptcy is a much bigger deal than your ordinary case of corporate failure and bad, self-dealing management. If Delphi slashes wages and defaults on its pension obligations, the rest of the auto industry may well be tempted - or forced - to do the same. And that will mark the end of the era in which ordinary working Americans could be part of the middle class. There was a time when the American economy offered lots of good jobs - jobs that didn't make workers rich but did give them middle-class incomes. The best of these good jobs were at America's great manufacturing companies, especially in the auto industry.

As Krugman notes, while America has grown wealthier since 1970, wages have barely kept up with inflation.  And as noted recently in the media and elsewhere (e.g. see here), and by Krugman as well, since 2004 the median real income of full-time male workers declined by over 2%.  That's of concern:

So what are we going to do about it? During the 1990's optimists argued that better education and worker training could restore the economy's ability to create good jobs. Mr. Miller of Delphi picked up that argument as part of his public relations campaign for wage cuts: "The world pays knowledge workers far more than it pays manual, industrial workers," he said. "And that's what's sweeping over here." But that's a very 1999 sort of answer. During the technology bubble, it was easy to believe that "knowledge workers" were guaranteed good jobs. But when the bubble burst, they turned out to be as vulnerable to downsizing and layoffs as assembly-line workers. And many of the high-paid jobs that vanished when the technology bubble burst have never come back, partly because they have been outsourced to India and other rising economies. Today, some of us like to stress the depressing effect of the dysfunctional American health care system on wages. A large part of the problem facing the auto industry and other employers ... is the cost of providing health insurance.... If we had a Canadian-style system ... the big squeeze might be averted, at least for a while. One more reason to be angry with auto executives is that they never threw their support behind national health care in this country, even though such a system is clearly in their companies' interest. What if neither education nor health care reform is enough to end the wage squeeze? That's the possibility that makes free-trade liberals like me very nervous, because at that point protectionism enters the picture. When corporate executives say that they have to cut wages to meet foreign competition, workers have every right to ask why we don't cut the foreign competition instead. I hope we don't have to go there. But denial is not an option. America's working middle class has been eroding for a generation, and it may be about to wash away completely. Something must be done.

I am not ready to give up on education and infrastructure development as a means of getting the U.S. ready to withstand competition in the future. Are we developing and supporting our educational resources and infrastructure so as to be competitive in the emerging global economy? Or are we squandering the opportunity by running up huge budget deficits for other purposes leaving few resources to use to withstand the competitive onslaught that will inevitably come at us?  Looking at this chart, and having seen many like it, I am not convinced we have invested in ways that allow the type of educational access for the middle class available in the 1960s and 1970s.  Until we've given this a good faith effort, and its hard to say we have when per student support for higher education, and education more generally, has been falling for decades, I can't yet write education off as a viable strategy.  Yes, we need to reign in health care costs, etc. that will help too, but let's not abandon knowledge and infrastructure in the process. As the world develops, we will have an comparative advantage in something and that is what we will produce - we won't outsource our comparative advantage. I would prefer it be jobs with the highest possible marginal product and compensation for all our workers.

    Posted by on Monday, October 17, 2005 at 12:34 AM in Economics, International Trade, Unemployment, Universities | Permalink  TrackBack (0)  Comments (57)


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