Mitt Romney and the American Gospel of Efficiency

The attacks on Mitt Romney's private equity record connect because of deep fears about the country's culture of corporate productivity. Are Americans right to worry?

600 Romney Debate REUTERS Adam Hunger.jpgReuters

Newt Gingrich's attacks on Mitt Romney's record might be infuriating to conservatives, but they are connecting because they reflect a deeper fear about capitalism and the downside of the economy's efficiency machine. Romney's fantastic success as a private equity executive is, depending on your point of view, either the embodiment of productive capitalism that makes companies rich, or the perversion of a culture of productivity that leaves workers unemployed. Maybe both.

As Benjamin Wallace-Wells wrote in New York magazine, Mitt Romney's vision of private equity ushered in a new chapter in the American gospel of efficiency:
By the time Mitt Romney left Bain Capital for good, in 1999, American CEOs looked very different from the predecessors he had met in the seventies. More and more, they were pure meritocrats ... trained to look ruthlessly for efficiency everywhere. They look a great deal more, in other words, like Mitt Romney.
This is a telling story, because it is our story. Just as Bain developed a talent for identifying productive workers and letting the rest go, the economy has developed a similar talent for ruthless efficiency. Real GDP has recovered all its losses since the Great Recession. But the unemployment rate is 8.5%. We are producing more output than in 2007 with 6.6 million fewer workers! That is either the kind of efficiency that would make Bain Capital proud, or the kind of the agony that should make us all furious. Maybe both.

Statistics like these threaten to make productivity a dirty word in an angry country. It really shouldn't be. For two hundred years, the U.S. has undergone economic revolution after revolution that replaced workers and then created new industries to employ them. In fact, understanding how productivity gains in different industries shape the economy might be one of the most important, and undertold, stories of the middle class squeeze.

***

One hundred and fifty years ago, 70 percent of American workers were employed in agriculture. Today, their share is closer to 2 percent. What happened?

It's not like we need less food. The U.S. population grows every year. Judging by the size of our waistbands, Americans aren't in danger of losing our appetite. Instead, farming and food manufacturing got much more efficient. Fewer people could work on larger, more specialized, and more productive farms.

This long agricultural revolution coincided with, and enabled, another revolution in industry. In the 19th century, millions of workers moved from farms to factories, and manufacturing became the core strength of the U.S. economy. But the efficiency monster ate the manufacturing jobs, too. The same way we learned to grow more food with fewer farmers, we also learned to make more stuff with fewer people. In the 1960s, one in four U.S. workers was employed in manufacturing. In 2010, it was one in twelve. Yet with every passing decade, industrial output grew.

The gospel of efficiency is good for America. But it is not good for every American all the time. In fact, it's wrenching. Productivity gains in electronics manufacturing and media make it easier to buy a fridge and read a newspaper. But that makes it harder to be employed in manufacturing or media. The backdrop to the Great Recession -- a crisis of low demand exacerbated by a moribund housing sector -- is this Greater Recession. Efficiency gains in some industries (like manufacturing) have held down wages, while efficiency losses in other industries (like health care) have driven up costs. That is the great American squeeze.

At first blush, it seems ridiculous that productivity could ever be bad for workers. Productivity is what employers go to the labor market to buy. But when employers decide that they can get more production by skipping the U.S. labor market and buying a machine, a software program, or a foreign worker, it becomes necessary to find new jobs for workers made irrelevant by productivity gains in their old fields.

For the last ten years, many of those workers were landing in the public sector or in publicly supported and regulated sectors, like health care. Despite these employment gains (or, perhaps, because of them), they're not that productive. As Larry Summers explains in his lucid and provocative op-ed in the Financial Times on the crisis of capitalism, "as fewer people are needed to meet the population's demand for goods like appliances and clothing it is natural that more people work in producing goods like healthcare and education where outcomes are manifestly unsatisfactory."

In the decades before 2000, the fastest growing sectors by employment were also getting more productive. But since 2000, the largest productivity gains have been in sectors that lost the most workers. Too many jobs are going to non-tradable services, like health care, that aren't getting any more efficient but are getting more expensive. As a result, Americans wages are growing much faster than the cost of things like newspapers and toasters, but much slower than the cost of things like education and health care. And that, as I've said, is the upshot of the Greater Recession.

***

The quest for efficiency across the economy is neither moral nor immoral. It's amoral, indifferent to all outcomes except output. Companies trim payrolls to stay profitable. That's their job. But that's why it's the job of government to provide welfare that protects the victims of creative destruction.

This is the central economic debate of the 2012 contest: How do we encourage the winners of an unpredictable economy? And how do we protect the most vulnerable and build a sense of security and opportunity for all Americans? Our ever-efficient economy is pretty good at answering the first question. This election will decide whom Americans think will do a better job answering the second.

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

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