The Greater Recession: America Suffers From a Crisis of Productivity

What's really behind the 30-year collapse of the middle class? One statistic, often ignored, begins to provide a clearer picture.

marvin l stressed worker.png

Reuters

Before the Great Recession, there was a greater recession for the American worker. And it's been much worse than most of us thought.

The Great Jobs Debate: An Atlantic/McKinsey Report

Here's what we thought we knew. In the last three decades, gross domestic product doubled but the typical worker's real wages barely increased. For those with only a high school degree, salaries fell slightly. Some economists called this period of lazy wage growth the "Great Stagnation."

It turns out that "stagnation" was too optimistic.

In fact, real wages for middle class men have declined by 28 percent since 1969, according to a report from the Hamilton Project. For men without a high school degree, they've fallen by a whopping 66 percent. "Stagnation is too weak a word," said Michael Greenstone, author of the report. "This is decline."

"The decline in earnings shakes the core of the American Dream."

Economists got it wrong, Greenstone said, because they compared wages among all working men rather than among all "working-age" men. That distinction is key, because fewer and fewer working-age men are actually working. Since 2009, one in five has been idle. When you factor in millions of men without weekly salaries, male wages sink to their lowest level since the 1950s.

"This decline in the earnings opportunities for men has had profound influences on American society," Greenstone said. "It upends families. It increases our demands from government, even as it increases our aversion to taxes and our distrust of government. It shakes the very core of the American Dream."

This finding has deep implications. It means that wages have been falling since before the credit crisis, the housing bubble, the Bush tax cuts, the Clinton boom, the wave of deregulation, the Reagan recovery, and the Nixon years. Something older and bigger than all of these things is at work. Before the Great Recession, there was a greater recession for the American worker. And its origin might surprise you.

ALL ABOUT PRODUCTIVITY
(or: If We're Working Less, Who's Working More?)

Americans have a complicated relationship with productivity. We obsess about our personal efficiency, but we don't think much about efficiency across broad swaths of the economy. Productivity is the not-so-secret sauce in our GDP. We're the second-largest manufacturer in the world even though manufacturing jobs have shrunk to less than 10 percent of our economy. We're the world's third-largest agricultural nation even though only 2 percent of us farm. The reason we can do so much work with so little is that the U.S. economy is incredibly, and increasingly, efficient at making some things cheaply.

Don't ask David Allen to explain this. Ask David Autor. He's the MIT economist who, in last month's cover story, "Can the Middle Class Be Saved?", told Don Peck that technology and offshoring is replacing jobs for the middle-educated middle-class. "Almost one of every 12 white-collar jobs in sales, administrative support, and nonmanagerial office work vanished in the first two years of the recession," Peck writes, and one in six blue-collar jobs disappeared in production, craft, repair, and machine operation.

We know where the jobs are going -- to machines, software, and foreign workers. We also know why they're going away. Global competition gives companies the incentive to be more productive, and technology and foreign labor gives companies the means to be more productive. Automation lets one employee handle the work of three, or three hundred. Off-shoring lets ten Asian workers receive the salary of one. As these corporate Getting-Things-Done strategies make the typical worker increasingly expendable, real wages have stagnated, or declined, to their 1950s levels.

What's so bad about 1950s wages, anyway? you may ask. They worked for the 1950s. We could make do with them today if the price of everything -- from socks, to televisions, to medicine -- moved at the same rate. But that is not what's happened. Instead, socks got cheaper, televisions got more complex, and health insurance got much more expensive.

There are many reasons why some prices fall, while others move in line with wages, while others spiral out of control. The most important factor might be productivity.

GOOD NEWS: JUST ABOUT EVERYTHING IS GETTING CHEAPER
(Or: Can You Be in Poverty With Two Televisions?
)

Poverty is overrated. That was the unmistakable conclusion of a report from the Heritage Foundation released this July.

Most of the 30 million Americans in families making under $21,000 "are not poor in any ordinary sense of the term," the conservative think tank claimed, because they have widespread access to air conditioning, television, and a car. "They are well housed, have an adequate and reasonably steady supply of food, and have met their other basic needs, including medical care," the authors wrote.

Behind the triumph of productivity, there is darker theme. Cheaper goods need cheaper workers.

Critics savaged the survey by pointing out that many families in poverty rent apartments where fridges and air conditioning units come automatically. But the study made an important point: The ubiquity and affordability of consumer technology is an astounding testimony to productivity in the electronics sector.

In fact, eating and clothing ourselves is getting easier all the time. Before the Great Depression, about 35% of family expenditures went to food and threads. Today, we spend only 10% of our income on food and 3% of our income on clothes. Again, this is an achievement of manufacturing and farming efficiency.

It doesn't end there. Behind the most important technology stories of our time, there is a clear theme: The triumph of software. Consider the rise of Netflix over Blockbuster, music sharing over albums, Flickr over Kodak, Amazon over Borders, wireless Verizon over wired Verizon, webpages over printed pages. Everything getting cheaper feels the touch of innovation -- especially online innovation, IT, and computer software.

But there's a dark side behind the advance of productivity: Cheaper goods need cheaper workers.

BAD NEWS: ESSENTIALS ARE GETTING MORE EXPENSIVE
(Or: The Crisis in Meds, Beds, and Higher Ed)

You could say that everything is getting cheaper except for almost everything you need. We need places to live, energy to move, education to move up, and insurance to stay healthy. The productivity revolution isn't doing much to make those things more affordable.

Even after decades of building up and building out, homes and apartments are still prohibitively expensive in our most productive cities. Adjusted for inflation, home energy costs doubled between 1967 and 2003, and continued to rise in the last ten years. The cost of medical insurance is growing faster than wages. Tuition and higher education fees are growing even faster.

Look at this graph. Study it. It is the answer to the question "What's wrong with 1950s wages in 2011?" The core of our life -- gasoline, electricity, homes, health care and higher education --  is getting expensive faster than general inflation. Meanwhile, average wages are barely keeping up with the yellow line. When the middle class talks about feeling squeezed dry and sped-up, this is what they're talking about.

Committing the graph to memory is easy. Coming up with a theory is the hard part. Let me try. The reason why toasters are cheap and health insurance is not is that the productivity gains that made toasters -- not to mention computers, media*, durable goods, food, and clothes -- more affordable are not spilling over into health care. The next chart from McKinsey tells the story: More than half of total productivity growth comes from computers and information technology. Practically zero comes from health care and education. In fact, one reason why heath and education are adding the most jobs today is that employers can't meet new demand with technology or offshoring. They have to keep hiring people.

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Health care isn't cost-effective because .... well, there are so many reasons. But perhaps the most important reason is that there are not clear incentives to make it more cost-effective, said Ross DeVol, executive director of economic research at the Milken Institute. "Where you have international competition, there are major incentives for innovation andhealthcaresidebar.png efficiency," he said. "For instance, there is enormous international competition in computers. On the other hand, health care and education are inherently local services that are labor intensive, and there's little international pressure to raise efficiency to compete. Medical tourism [traveling to another country to see a doctor], for example, is still small. There are very few pressures to raise efficiency."

Martin Baily, an economic researcher at the Brookings Institution, echoed DeVol: "Health care is a fragmented industry without a Toyota, a player who will come in and shake up the production process. If you're in a doctor's office, you can make money by having an MRI machine and running half a dozen people through it. That's not a productive structure."

In education, too, Baily said, "we're still stuck in the middle ages in terms of how we teach. There's no big online, national innovation breakthrough to bring down the cost of college."

***

Health care and education are productivity failures, but what makes them unreceptive to automation, offshoring, and other efficiencies? One theory is that they both require highly educated, highly skilled, local labor that cannot (or will not) be replaced. Administrators and machinists can be automated and offshored with ease. Not doctors or teachers. Since we have not reduced the number of labor hours needed to "produce" a Psychology 101 lecture, the cost of professors (and by extension, college) is rising faster than the cost of a shirt or a television.

higheredsidebar.png

A second theory is that government has determined that health care and education are important enough to subsidize. In doing so, they might be making these industries more inefficient.

A third theory is that innovation requires aggressive experimentation that we naturally resist in schools and hospitals. If a product at Google fails, the company learns from the flop and makes something else. No big deal. But in hospitals, the "product" is a patient, and a failed experiment is a dead person and a lawsuit. Big deal. So big, in fact, that it's reasonable to consider an "aggressively experimental" health care system to be somewhat undesirable.

WHY DO YOU FEEL SQUEEZED?
(Or: It's the Productivity, Stupid)

Let's review what we know. From 1950 to 1970, earnings rose 25 percent each decade. From 1970 to 2010, real GDP doubled while real earnings fell by 28 percent. Two labor trends helped to offset this reversal. First, and very happily, women stormed into the workforce and supported their families with income. Second, and less joyously, everybody worked much harder. The typical two-parent family worked 26 percent more hours in 2010 than in 1975 but the middle class still feels incredibly squeezed.

The theory of this essay is not that productivity is bad, but that a great divergence between the productivity of different industries is making our work cheaper while it makes our necessities more expensive. As Tyler Cowen, the author of The Great Stagnation, put it: "In most typical household budgets, housing, education, and health care are very important. Higher prices in those areas, above what productivity gains can justify, are driving much of the progress slowdown." That's the productivity divergence. That's why you feel squeezed.

If you're looking for somebody to blame, blame everybody. Blame the corporations who turned jobs over to machines and foreigners. Blame investors who reinforced the culture of productivity by rewarding companies for good quarterly earnings. Blame consumers who bought more of the cheaper stuff. Blame the culture of productivity.

But also, blame the culture of un-productivity. Blame doctors for too many treatments, and university presidents for too many new buildings, and city planners for strict zoning laws, and government for subsidizing industries and obscuring incentives to be more efficient.

THE RACE THAT MATTERS

The progress of labor has been described as a race between education and technology. Today technology (tag-teaming with globalization) seems to be winning. The share of young Americans with bachelor's degrees has stalled around 30 percent. The road to better wages leads through our colleges, and higher education education needs a nudge.

Ironically, the nudge will come from technology. The best way to reduce the cost of college is to automate classes and make the college experience place-neutral. As for health care, the world is still searching for a silver bullet to kill high medical inflation. In all likelihood, there is no "bullet," but there are perhaps few dozen arrows we'll discover along the way.

The bottom line is that government has a clear role to play in the Great Recession. This is a demand shortfall. We need more money. But the solution to the Greater Recession described above won't come from more stimulus. It will come from innovative breakthroughs from surprising corners of the country. Some of these achievements will have Washington's support. Some will succeed miles from government's shadow. But they'll come. The preservation of the middle class depends on it.

______________________________________________________________

* The Internet is a complicated place to talk about productivity and output. Tyler Cowen deals with this question at length in his book and smart guys like Hal Varian and Brad DeLong respond to him in this Economist debate that you should read.

The ways in which the Internet improves efficiency aren't as simple as offshoring and automation. Consider the newspaper, a bundle of news across a variety of subjects supported by interspersed advertising. The Internet stripped away this cross-subsidy, as James Fallows so wonderfully put, by turning the car and restaurant sections into discrete websites that attract discrete advertising. That makes advertising more efficient and creates value for readers who can go straight to an auto site rather than buy the entire newspaper to read a Lexus review. Good for readers! Fine for advertisers. Bad for newspaper jobs.

______________________________________________________________

APPENDIX: WHAT'S NOT GETTING CHEAPER?

HOME PRICES

Graph of historical house prices


HOME ENERGY COSTS

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AVERAGE TUITION, FEE, ROOM AND BOARD

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HEALTH CARE COSTS

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Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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