Education Alone Is Not the Answer to Income Inequality and Slow Recovery

Our economy is now five years into an economic recovery, yet the wages of most Americans are flat. For the entire period between 1979 and 2013, median worker wages rose by just 7.9 percent while the economy’s growth and productivity rose 64.9 percent.

The top one percent has made off with nearly all of the economy’s gains since 2000.  

Is there nothing that can be done to improve this picture?

To hear a lot of economists tell the story, the remedy is mostly education. It’s true that better-educated people command higher earnings. But it’s also the case that the relative premium paid to college graduates has been declining in recent years.

If everyone in America got a PhD, the job market would not be transformed. Mainly, we’d have a lot of frustrated, over-educated people.

The current period of widening inequality, after all, is one during which more and more Americans have been going to college. Conversely, the era of broadly distributed prosperity in the three decades after World War II was a time when many in the blue-collar middle class hadn’t graduated from high school.

I’m not disparaging education—it’s good for both the economy and the society to have a well-educated population. But the sources of equality and prosperity mainly lie elsewhere.

Three big things have changed in recent years that better explain why this recovery is accompanied by flat wages.

First, the financial collapse is still exerting a drag on the economy. Until the crash of 2008, ordinary families whose incomes had not kept pace with the cost of living had been borrowing to sustain their consumption. Americans ran up credit card debts, borrowed to attend college, and above all borrowed against their homes. All of that camouflaged stagnant earnings.

But the crash ended the borrowing binge. Without increasing debt (which is the wrong remedy), household purchasing power is too low to stimulate a strong recovery.

Secondly, corporate America got increasingly into the habit of hiring people on a temporary, part time, or contracted-out basis. Traditional payroll jobs became harder to come by. The idea that employers had some reciprocal loyalty to their workers became a relic.

A small fraction of Americans turned this new insecurity into a plus, becoming entrepreneurs. But for every genuinely successful Internet startup and every truly joyous freelancer, there are dozens of people for whom working as a “consultant” is nothing but disguised unemployment.

Third, the sources of labor bargaining power have been weakened. Those included strong federal labor-market regulation and trade unionism. In the absence of these, corporations and investors are able capture the lion’s share of the economy’s productivity growth.

So, are we just stuck? Do the characteristics of the new economy simply doom us to flat incomes for most people and stratospheric gains for the few?

Actually, several things could be done to restore a better distribution of the economy’s productivity growth. But most of them are outside mainstream political debate.

A good historic parallel is the burst of deferred growth that came with World War II.

In 1940, unemployment topped 13 percent and many economists argued that technology had displaced so many human workers that this was the best the economy could do. But by 1942, unemployment had vanished.

In the intervening two years, workers did not suddenly become smarter, better educated, or more diligent. Rather, their government borrowed money and taxed the wealthy in order to massively invest in fighting World War II.

The war, in turn, became the greatest accidental economic stimulus program ever. As a side effect, wartime spending produced scientific breakthroughs and technological gains as well as more purchasing power.

Today, we don’t need another war. But we do need major investment in decaying public infrastructure and in transition to a green, sustainable economy.

The “good war” also served as a labor market policy. War production plants had to pay good wages and defense contractors had to accept unions if workers voted them in.

The wartime economy propelled America into the postwar boom and laid the groundwork for the postwar middle class. After the war, we doubled down with social investments such as the GI Bill and major infrastructure projects, as well as minimum wage regulation.

We could do it again. All that stand in our way are a lot of bad economics and a consensus of the elites that cutting deficits and rewarding speculators take precedence over rebuilding the country. The obstacles to restoring broad prosperity are not economic. They are political.

Comments

The WWII example is nonsense. Full employment is not the same thing as growth. Drafting millions into the armed forces and mobilizing civilians to manufacture war materials, mostly financed by debt, did not do anything to raise living standards.

The author stated: “In 1940, unemployment topped 13 percent…” This after a decade of profligate spending (Sec of Treasury in 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work.”) Are there any examples of spending into prosperity? Sir Winston said it fairly understandably: “We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” Cheers

I would think that with the top 0.1% dominating the income distribution increasing the number of college and graduate degrees would have the effect of forcing down the cost of hiring educated people rather than increasing the incomes of less educated people. The result would be a greater concentration of income at the top 0.1% not less.

The only solution folks is for people to be willing to work hard and get the disgustingly corrupt gigantic government out of the way. The problem is not necessarily the democrats or the republicans but just a disfunctional government.

Mr. Kuttner, I disagree with your central premise:

"If everyone in America got a PhD, the job market would not be transformed."

Not only would the job market be transformed, but our entire culture would be transformed. It is hard to imagine any slum in America occupied by people with the self-discipline and the motivation to achieve a doctoral degree, selling drugs, pimping, drinking wine on the corner with pants falling off, and speaking a sub-dialect consisting mainly of words like "mutherf**ker, babymama, bitch, hoe, nigga, and so one.

I will go so far as to suggest that if parents would only teach their children to speak the language of commerce, that ALONE would help people achieve their dreams, and better enable "...a better distribution of the economy’s productivity growth."

@ Gunthr - Really?! Of course the poor are poor because they have no self-discipline and won't work hard. They would just rather drink wine, hang out on the street corner in oversized pants with no belt, berate each other with pejoratives, and, c'mon, you want to say it, live off the government teat. Now these wouldn't be WHITE poor people in those slums, would it? All we have to do is wave the magic wand of speaking WHITE English and all would be fixed, right? This is what you meant by "the language of commerce" I assume. In your mythical America institutional racism must not exist, and everyone is solely responsible for their condition.

Economic growth requires return on investment. The USSR was chock full of Phd's, engineers and mathematicians. Fat lot of good it did them. When education requires a lifetime of debt service slavery it is no longer a positive paying investment, it is just a cost.

The federal reserve is holding interest rates at zero. This is a public acknowledgement that our economy can do no better than tread water for the foreseeable future, at least 10 years based on T-bill yields. End the fed and its policy, let interest rates float to their natural level, reflecting a balance between the supply and demand for capital, between spenders and savers.

The difference between investing and spending is return. Egypt had some fabulous spending programs, now they have moldering pyramids. A pointed reminder of the difference between costs and investments.

I agree that the obstacles are political. The elites in DC and at the fed are the problem. Their policy is to undermine the future and impoverish the present, so that the banks and the government maintain the illusion of solvency. The price is too high.

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