Capitalism's Failure?

One of my students sent me the following paper. I thought it portrayed some of the "failure" of economics/economists today.

Chrystia Freeland
Global capitalism leaving U.S. middle class behind
From Friday's Globe and Mail
Published Thursday, Apr. 14, 2011 7:02PM EDT
Last updated Friday, Apr. 15, 2011 8:28AM EDT

Global capitalism isn’t working for the American middle class. That isn’t a headline from the left-leaning Huffington Post, or a comment on Glenn Beck’s right-wing populist blackboard. It is, instead, the conclusion of a rigorous analysis bearing the imprimatur of the U.S. establishment: the paper’s lead author is Michael Spence, recipient of the Nobel Prize in economic sciences, and it was published by the Council on Foreign Relations.
Mr. Spence and his co-author, Sandile Hlatshwayo, examined the changes in the structure of the U.S. economy, particularly employment trends, over the past 20 years. They found that value added per U.S. worker increased sharply during that period – 21 per cent for the economy as a whole, and 44 per cent in the “tradable” sector, which is geek-speak for those businesses integrated into the global economy. But even as productivity soared, wages and job opportunities stagnated.
The take-away is this: Globalization is making U.S. companies more productive, but the benefits are mostly being enjoyed by the C-suite. The middle class, meanwhile, is struggling to find work, and many of the jobs available are poorly paid.
Here’s how Mr. Spence and Ms. Hlatshwayo put it: “The most educated, who work in the highly compensated jobs of the tradable and non-tradable sectors, have high and rising incomes and interesting and challenging employment opportunities, domestically and abroad. Many of the middle-income group, however, are seeing employment options narrow and incomes stagnate.”
Mr. Spence is neither a protectionist nor a Luddite. He prominently notes the benefit to consumers of globalization: “Many goods and services are less expensive than they would be if the economy were walled off from the global economy, and the benefits of lower prices are widespread.” He also points to the positive impact of globalization on much of what we used to call the Third World, particularly in China and India: “Poverty reduction has been tremendous, and more is yet to come.”
Mr. Spence’s paper should be read alongside the work that David Autor, an economist at the Massachusetts Institute of Technology, has been doing on the impact of the technology revolution on U.S. jobs. In an echo of Mr. Spence, Mr. Autor finds that technology has had a “polarizing” impact on the U.S. work force – it has made people at the top more productive and better paid and hasn’t had much effect on the “hands-on” jobs at the bottom of the labour force. But opportunities and salaries in the middle have been hollowed out.
Taken together, here’s the big story Mr. Spence and Mr. Autor tell about the U.S. and world economies: Globalization and the technology revolution are increasing productivity and prosperity. But those rewards are unevenly shared – they are going to the people at the top in the United States, and enriching emerging economies over all. But the American middle class is losing out.
To Americans in the middle, it may seem surprising that it takes a Nobel laureate and sheaves of economic data to reach this unremarkable conclusion. But the analysis and its impeccable provenance matter, because this basic truth about how the world economy is working today is being ignored by most of the politicians in the United States and denied by many of its leading business people.
Consider a recent breakfast at the Council on Foreign Relations that I moderated. The speaker was Randall Stephenson, chief executive officer of AT&T. Mr. Stephenson enthused that the technology revolution was the most transformative shift in the world economy since the invention of the combustion engine and electrification, leading to a huge increase in “the velocity of commerce” and therefore in productivity.
One of the Council of Foreign Relations members in the audience that morning was Farooq Kathwari, CEO of Ethan Allen, the furniture manufacturer and retailer. Mr. Kathwari is a storybook American entrepreneur. He arrived in New York from Kashmir with $37 in his pocket and got his start in the retail trade selling goods sent to him from home by his grandfather.
Here’s the question he asked Mr. Stephenson: “Over the last 10 years, with the help of technology and other things, we today are doing about the same business with 50 per cent less people. We’re talking of jobs. I would just like to get your perspectives on this great technology. How is it going to over all affect the job markets in the next five years?”
Mr. Stephenson said not to worry. “While technology allows companies like yours to do more with less, I don’t think that necessarily means that there is less employment opportunities available. It’s just a redeployment of those employment opportunities. And those employees you have, my expectation was, with your productivity, their standard of living has actually gotten better.”
Mr. Spence’s work tells us that simply isn’t happening. “One possible response to these trends would be to assert that market outcomes, especially efficient ones, always make everyone better off in the long run,” he wrote. “That seems clearly incorrect and is supported by neither theory nor experience.”
Mr. Spence says that as he was doing his research, he was often asked what “market failure” was responsible for these outcomes: Where were the skewed incentives, flawed regulations or missing information that led to this poor result? That question, Mr. Spence says, misses the point. “Multinational companies,” he said, “are doing exactly what one would expect them to do. The resulting efficiency of the global system is high and rising. So there is no market failure.”
This conclusion is a very big deal – Mr. Spence is telling us that global capitalism is working the way it should, but that the American middle class is losing out anyway. Since global capitalism is the best way we’ve come up with so far to run our economy, that creates quite a dilemma.
Mr. Spence is honest enough to admit that he has no easy answers. But he has posed the right question. American politicians in both parties are focused on a budget debate that is superficial, premature and ultimately about something pretty easy to figure out. Instead, we should all be working on the much bigger problem of how to make capitalism work for the American middle class.
© 2011 The Globe and Mail Inc. All Rights Reserved.


Has the middle class in the U.S. been left behind or even destroyed by globalism? Have the rich gotten richer while the middle class and poor got poorer? Depending on what numbers you want to focus on the answer could be yes, no or maybe. But what is it we should ask regarding the question of income inequality. Are people in any class worse off? Pre tax and pre government transfer income data show poor households becoming worse off over the past two decades. But these data show us nothing. The tax code is highly progressive and government transfers to individuals highly regressive. So once taxes and transfers are taken into account it is not so clear that the middle class have been hurt. Going further, it is really consumption that matters, not income. Are the lower income classes losing out on the basis of consumption? The answer is absolutely not. Not only have the prices of items the lower income classes spend money on declining while many items the rich spend money on rising, but total consumption between the two groups is not much different.

The real problem as I see it is that Michael Spence, nobel prize winner, is seeking to attack capitalism and its global aspects without having to resort to a so-called "market failure". Just think, if capitalism leads to disasters, inefficiencies, class warfare, etc., then it will take the learned elites to determine who gets what and how people behave. No longer will it be necessary to say the government needs to intervene when there are externalities or public goods but needs to intervene always.