[Peace-discuss] David Brooks' voodoo economics

[David Green]

Dean Baker of Center for Economic and Policy Research
(http://www.prospect.org/deanbaker/) responds to David
Brooks last two NYT columns (usually only made
available online to those willing to pay).

The Populist Myths on Income Inequality

DAVID BROOKS
September 7, 2006

There are two schools of thought on income inequality.
Members of the first school -- populist politicians
and a few economists -- say the key issue is economic
power. 

The haves exercise more power over the have-nots. As a
result, corporate profits soar, while wages stagnate.
Money-drenched politicians push through
shareholder-friendly trade deals that outsource
American jobs while job insecurity skyrockets.
C.E.O.'s get absurd salaries while the 99 percent of
earners enjoy few benefits from productivity gains.
Unions are weakened while manufacturing wages tumble
and the middle class suffers.

In short, populists argue, the market is broken. The
rules are rigged. The reigning ideology in Washington
must be upended. Unions must be revived. Globalization
needs to be reorganized. 

The problem with this narrative is that it doesn't
really fit the facts. First, workers over all are not
getting a smaller slice of the pie. Wages and benefits
have made up roughly the same share of G.D.P. for 50
years. Second, offshore outsourcing is not decimating
employment. According to the Bureau of Labor
Statistics, outsourcing is responsible for 1.9 percent
of layoffs, and the efficiencies it produces create
more jobs at better wages than the ones destroyed.

Third, jobs are not more insecure. Workers are just as
likely to hold a job for 20 years as they were in
1969. Fourth, workers are not stuck in dead-end jobs.
Social mobility is roughly where it was a generation
ago.

Fifth, declining unionization has not been the driving
force behind inequality. David Card of the University
of California, Berkeley, has estimated that
de-unionization explains between 10 and 20 percent of
the rise in inequality, and that effect was probably
strongest decades ago. These days the working class is
not falling behind the middle or upper-middle class.
Instead, the big rise in inequality is within the
office parks, among people who were never unionized.
Middle managers are falling behind top executives.

The populists, who usually live in university towns,
paint a portrait of unrelieved misery that badly
distorts reality. It's true that middle-class wages
are lagging, but as Stephen Rose points out in The
American Prospect, over the past 25 years the share of
working-age adults in households making over $100,000
has risen by 13 percent while the share of households
making less than $75,000 has dropped by 14 percent --
after adjusting for inflation. The median household
income of people in their prime working years (25-59)
is $63,000. More than half of Americans have no credit
card debt, and half of those who do owe less than
$2,200. 

Workers continue to see their wages rise as they age.
The typical male worker with some college but no
degree has seen his income rise from $34,000 in 2000
to about $40,000 today.

Members of the second and much more persuasive school
of thought on inequality say the key issue is skills.
Lawrence Katz, formerly of the Clinton administration,
now of Harvard, puts it this way: Across many nations,
the market increasingly rewards people with high
social and customer-service skills.

A contractor who can work with customers, design
kitchens and organize jobs may earn five times as much
as one of his workers who has identical cabinetry
skills. An office worker who is creative, charismatic
and really good in fast-changing interactive settings
now gets paid much more than a disciplined middle
manager who excels at routine tasks. 

Katz describes a polarized economy. Wages are rising
in the bottom quartile for workers who provide
personal services. The middle is lagging. The real
rewards are going to the top 10 percent, especially to
those relative few who have the skills to transform
organizations from the top. 

In other words, the market isn't broken; the
meritocracy is working almost too well. It's rewarding
people based on individual talents. Higher education
pays off because it provides technical knowledge and
because it screens out people who are not organized,
self-motivated and socially adept. But even among
people with identical education levels, inequality is
widening as the economy favors certain abilities.

In short, government policy is not driving inequality
and wage stagnation. But government hasn't done much
to effectively address the problem either, even though
per-capita education spending has more than quadrupled
since 1950. What's needed is not a populist revolt,
which would make everything worse, but a second
generation of human capital policies, designed for
people as they actually are, to help them get the
intangible skills the economy rewards.

What would a set of second-generation human capital
policies look like? I'll come back to that in a few
days.
__________________

 
David Brooks Swings and Misses in Inequality Debate
Dean Baker
NYT columnist David Brooks weighed in on the origins
of inequality in his column (sorry—it’s NYT select and
therefore not linkable). While he wants to assure
readers that inequality is not a serious issue, and
not caused by policy, he gets almost everything in his
article wrong. 
Briefly, here are the highlights:
1) He claims that the labor compensation share of GDP
has not fallen due to rising profits. Actually, the
labor compensation share of net income in the
corporate sector (this is the place to look for
redistribution – there are no profits in government or
non-profits) fell by 1.7 percentage points from the
profit peak of the 1970s cycle (1977) to last year.
This redistribution is equal to 5.9 percent of the
family income of the bottom 60 percent of the income
distribution. (Think of this as a profit tax.)
2) He assures readers that globalization has not been
a problem because outsourcing accounted for only 1.9
percent of layoffs. I’m not sure what this means. The
biggest impact of outsourcing would be on jobs not
created and also the threat effect (as in, “give us a
pay cut of 20 percent or we move your jobs overseas”).
So, I’m not really sure what we are supposed to make
of the fact that only 1.9 percent of laid off workers
are told that they lost their jobs due to outsourcing.

3) He tells us that job tenure hasn’t changed over the
last 40 years. This is a bit tricky. Job tenure has
gotten longer for women, because they are entering and
staying in the labor force in higher numbers. But, if
we look at the situation for men, there is very sharp
fall in tenure since 1983, the period for which we
have reliable data. In 1983, median job tenure for
workers ages 35-44, 45-54, and 55-64 was 7.3 years,
12.8 years, and 15.3 years, respectively. By 2004 (the
most recent survey), these numbers had fallen to 5.2
years, 9.6 years, and 9.8 years. 
4) He assures readers that income mobility has not
declined. His unsupported assertion contradicts a
recent study by Mary Corcoran and Jordon Matsudaira
(cited in The Sate of Working America) showing that
whites born in the bottom quintile between 1962-1969
were 40 percent less likely to end up in the top
quintile than their counterparts born a decade
earlier. For blacks, the figure was 45 percent. 
5) He assures us that the weakening of unions only
accounts for 10-20 percent of the increase in
inequality. We will call this 10-20 percent share on
the increase in inequality a "de-unionization tax" for
workers at the middle and bottom of the wage
distribution. If we say that income has fallen by
20-30 percent for these workers due to rising
inequality, this de-unionization tax amounts to
between 2-6 percent of income. I suspect that Mr.
Brooks would be concerned if we proposed to increase
taxes on high income people by between 2-6 percentage
points. 
6) He assures us that for most workers wages still
rise over their working lifetime. Well yes, wages for
workers in their peak earning years (ages 45-54) are
typically 50 to 80 percent higher than in their entry
years (ages 18-24), with the rise depending on gender
and education. Things have not gotten so bad as to
reverse this pattern, but it’s not clear what this
shows.
7) Brooks tells us that the wage for typical male
worker with some college rose from $34,000 in 2000 to
$40,000 today. This refers to nominal wages, serious
people adjust wages for inflation. According to the
State of Working America, the average hourly wage for
men with some college fell from $17.95 in 2000 to
$17.76 in 2005 (in 2005 dollars).
To sum up, David Brooks comes up with almost nothing
in his column that would contradict the vast body of
evidence showing that most workers have not been
benefiting from the economy’s growth over the last
quarter century – and that this is the result of
deliberate policy decisions. You can get the real
story in The Conservative Nanny State: How the Wealthy
Use the Government to Stay Rich and Get Richer, a free
downloadable e-book. 
_____________________

Investing In Human Futures

DAVID BROOKS

September 10, 2006

Imagine a classroom of first graders. Now imagine we
could get every kid in that classroom to graduate from
college, and that we could get every kid in every
classroom to graduate from college. Don't you think
that's the most important thing we could do to make
America a richer and fairer place?

Some people, actually, don't think that. Some people
don't think wage stagnation is mainly about education
and skills. They think the economy is so broken, the
Republican Party so malevolent and all-controlling,
that almost all the gains would go to the top 5
percent or 1 percent anyway. 

I may be a sucker, but I think they're wrong.

I may be a sucker, but I doubt we can achieve
broad-based social mobility unless workers possess the
skills that a global economy now rewards. I may be a
sucker, but I suspect the most important thing we can
do to increase social mobility is to come up with
second-generation human capital policies.

The first-generation policies gave people access to
schools, colleges and training facilities. The
second-generation policies will help them develop the
habits, knowledge and mental traits they need to
succeed once they are there.

That means, first, strengthening the family, the
nuclear core of human capital formation. Ramesh
Ponnuru of National Review points out that investments
in human capital are overtaxed. He suggests raising
the child tax credit to $5,000. That would be part of
a plan to lighten the tax burden on families while
they are raising kids and shift it to when they are
done. It would enable more parents to stay home if
they wanted and invest more in those crucial early
years.

Second, it means strengthening marriage. Only half of
American kids can expect to live with both biological
parents at age 15 (compared with two-thirds of kids in
Western Europe). That has calamitous effects on
education and development. There are many cultural
ways to strengthen marriage, but financially, the
government could extend the earned income tax credit
to single males. That would not only induce more young
men to enter the labor force, it would also make them
more marriageable.

Third, it means encouraging people to think about the
future. Senator Jeff Sessions has a proposal (similar
to a program earlier supported by Senators Santorum
and Schumer, and others) that would give every child
$1,000 at birth for a savings account, which could
then be built up over a lifetime. Among other things,
that sort of asset building awakens a sense of future
possibilities.

Fourth, children from disorganized homes need quality
preschool. As a mountain of research has shown,
children who have not developed mental traits like
self-control by age 3 are much less likely to exercise
them later on. Their prospects are permanently
diminished. 

Fifth, schools need to be tailored to the way children
actually are. Different human beings have radically
different learning styles. So long as diverse
individuals are forced to sit in the same classroom
and endure uniform teaching techniques, they'll
underperform. It doesn't matter whether the school is
public, charter or administered by Martians. 

I'm hinting at an agenda that is socially conservative
and economically progressive, because when it comes to
building human capital, the two go hand in hand. To
pay for this stuff, I'd trail along behind Sebastian
Mallaby of The Washington Post: Cut the mortgage
interest deduction so it doesn't subsidize people who
want million-dollar homes, and reform the savings and
health insurance tax incentives that subsidize rich
people to do things they'd do anyway. I'd also keep
the inheritance tax (I don't want a bunch of spoiled
heirs starting lefty foundations).

When you ask free-market purists about wage
stagnation, they either deny it's a problem or brag
about how Republicans have increased disposable income
by reducing the tax burden. When you ask orthodox
liberals about wage stagnation, they never tell you
exactly what they would do to counteract the epic
forces of globalization and technological change, but
they seem to imply they can restructure the economy
with the right trade, minimum-wage and union rules to
create middle-class wealth.

But this debate is not going to be won either by the
free-market fatalists or by the angry but amorphous
populists. It'll be won by the human capital
reformers, the alliance of progressive conservatives
and conservative progressives (like the Clintonites)
who believe that the market fundamentally works and
that social mobility requires what it has always
required, skill and effort. 

_________________

David Brooks and Inequality: Round II

Dean Baker

After getting a few things wrong in his last column,
David Brooks is back to tell us his remedy for the
problem of inequality: education (sorry, it’s Times
Select and therefore not linkable). He proposes an
agenda that would promote educational opportunity for
middle class and poor kids. I question whether his
route is the best one for this task (universal child
care and health care would rank higher on my list),
but promoting educational opportunities for the less
advantaged is certainly a good thing. 
But, I want to avoid straying too far into the policy
prescriptions of the punditocracy and stick more to
the facts and here Mr. Brooks once again provides some
rich material for BTP. He tells readers that:

“When you ask orthodox liberals about wage stagnation,
they never tell you exactly what they would do to
counteract the epic forces of globalization and
technological change, but they seem to imply they can
restructure the economy with the right trade,
minimum-wage and union rules to create middle-class
wealth.”

I might be missing something here, but a higher
minimum wage, respect for the right of workers to
organize unions, and a restructured trade policy
(described below) seem like fairly specific policies.
Brooks may not like these policies, or not think that
they would be as effective as do the orthodox liberals
he criticizes, but they are specific policies. Like
most progressives, my list is longer. For example, it
includes full employment monetary policy, reformed
rules on corporate governance, and reformed rules on
intellectual property, but Brooks’ list is a good
start. (see The Conservative Nanny State: How the
Wealthy Use the Government to Stay Rich and Get Richer
for my full list.) 
I want to focus on the trade story. At the risk of
boring BTP regulars, I am going to write this so that
even David Brooks can understand it. 

The fact that some types of labor (e.g. factory
workers and custodians) have been subjected to
international competition through globalization, while
other types of labor have remain largely protected
from competition (e.g. doctors, lawyers, economists,
and newspaper columnists) was not an accident. It was
a deliberate decision by U.S. trade negotiators from
both political parties. Trade deals like NAFTA were
designed to place U.S. manufacturing workers in direct
competition with manufacturing workers in Mexico. To
do this, the treaty includes extensive rules on
investment, providing the insurance that U.S.
corporations needed to set up factories in Mexico.
They also got assurances that the output from these
factories could not be blocked from the United States
by future tariffs or safety and environmental
regulations imposed at various levels of government. 

Instead of focusing on removing barriers to trade in
manufactured goods, our negotiators could have
structured NAFTA to remove the barriers that prevent
smart kids in Mexico from studying to become doctors,
lawyers, economists, and columnists in the United
States. Just as manufacturing workers in Mexico are
willing to work for much lower wages than their
counterparts in the United States, so are
professionals in Mexico. 
If our negotiators sought to remove the barriers that
prevented competition from professionals in Mexico and
other developing countries, the U.S. economy would
benefit from an enormous influx of talented
professionals (educated to U.S. standards). This would
lead to much lower prices for health care, education,
and all the products in which the cost of these
professional services are a major factor. (Don’t worry
about brain drain – in ten seconds any competent
economist can give you an easy solution that ensures
developing countries gain as well in this story.) This
trade policy would have led to enormous economic gains
to the United States, and it would have promoted
equality rather than inequality.

My guess is that David Brooks, like most other
beneficiaries of U.S. trade policy, thinks that he is
already competing with people from the developing
world. He would point to his Indian doctor or a
Chinese born economist he knows. This is known as the
“Mexican avocado” theory of trade. The story goes like
this: because I can get a Mexican avocado at the
grocery store, we have free trade in agriculture. Of
course this is absurd; we have all sorts of protection
in agriculture. 

In the same vein, the fact that some very talented and
ambitious professionals from the developing world are
able to circumvent our trade barriers doesn’t mean
that barriers don’t exist. Real free trade in
professional services means providing the same sort of
guarantees as were put in place for manufacturing. A
12-year old living India will not prepare herself to
work as a professional in the United States unless she
knows that she will have the opportunity to compete on
an equal footing with her counterparts growing up in
Chicago. Similarly, the schools in India will not
train students to meet U.S. professional standards
unless they know that their students will actually
have the opportunity to work as professionals in the
United States. And competition won’t really be free
until hospitals, law firms, universities and
newspapers can hire foreign professionals with as much
ease as Wal-Mart buys toys from China. That would be
free trade in professional services, and we don’t have
anything like it now. 

Unfortunately, David Brooks will never hear this
argument on the Lehrer New Hour, so we can probably
expect many more ill-informed columns on this topic in
the future. 




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