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The "BS Human Capital Story"

While I enjoy some vigorous disagreements on TPMCafe almost as much as its proprietors probably do, the fight that has broken out between Ed Kilgore and Max Sawicky is actually quite dispiriting.

To summarize: Max attacked the “Bullshit Human Capital Story” - the idea that education and training is the answer to the challenges of the global economy - and “The Clintons” for promoting it; Ed defended education and Clintons.

But, look, let’s leave the Clintons out of it. Yes, it’s true: twelve or fourteen years ago, Clinton, his Labor Secretary Robert Reich, his economic advisor and later Treasury Secretary Bob Rubin, Rubin’s ally Sperling, and many others (including my boss at the time, Senator Bill Bradley) promoted the idea that the U.S. should fully engage with the global economy (that is, NAFTA) and that while that might cause disruptions in the manufacturing sector, the way to deal with it was to raise skill levels through education and training.

Was that the right answer for the early 1990s? Maybe. It was more limited than many of its advocates recognized. But it was a good-faith effort to expand the economy and the benefits of growth, in a politically viable way.

But is it the right answer today? Almost certainly not.

The problem today is that we have a polarized labor market, and, in addition, as Paul Krugman pointed out in the column originally cited by Nathan, the returns to increased productivity have gone to capital and to a highly-skilled elite, rather than to the broader minority of workers with college educations or specific training. (The top 1%, rather than the top 20%.) On top of that, almost all the benefits of tax cuts have gone to the same small elite.

The polarization of the labor market is described in this paper by David Autor, Melissa Kearney and Lawrence Katz (a Clintonite himself), and this paper by Frank Levy and Richard Murnane. Basically, their argument is that a combination of computerization and globabalization - including offshoring/outsourcing but that’s not the biggest factor - has shifted the demand for skills and the middle of the labor market has dropped out, even while there is some increased demand for minimal-skill jobs. Autor et al explain some of the conflicting evidence on income inequality through this lens, and it seems persuasive to me.

The “Human Capital Story” isn’t an answer today because it’s not really possible to move people across these two labor markets that are pulling away from each other. There isn’t enough of a middle to train people up into, and the medium-skilled are going to have a hard time moving in to the highly-skilled elite. A bachelors’ degree won’t do it: The average weekly pay of full-time workers with a bachelor’s degree fell slightly during the last five years, after adjustment for inflation. (There may be some sectors that are exceptions, such as health care, where career ladders would help people move up.)

Of course, as they say at Faber College, “Knowledge is Good.” More education is better than less. Early childhood education is important for a bunch of reasons. But the idea that equipping people with higher ed and specific skills training will help them move smoothly through the rough waters of the economy and also up into the middle class just isn’t realistic in a polarized labor market. Nor is there any one thing we can do - such as stop passing trade deals - that would restore the middle of the labor market.

Relitigating the ‘90s or our feelings about the Clintons has absolutely nothing to do with figuring out how to deal with the labor market and economic circumstances fourteen years and four tax cuts later.

But what are some answers? It seems the story has to involve accepting that a lot of people are going to be stuck in the lower part of the job market, skills or no, and the key is to improve circumstances for them:

  1. If we accept that the returns of productivity growth will flow to capital, cut more Americans in on the deal. Use universal accounts, baby bonds, universal 401(k)s and other asset-based systems to bring the returns to capital to working people.
  2. Make capital pay. Equalize tax treatment of capital income (dividends and capital gains).
  3. Tax wealth, not income. Or tax capital through a means such as a tax on financial transactions, or a Tobin Tax, focused on taxing cross-border transactions.
  4. Raise the minimum wage, by at least $2 and adjust it for inflation.
  5. Universal health care, universal health care, universal health care.

Posted by Mark Schmitt on March 2, 2006 | Permalink


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Sounds utterly sensible to me, and yet I find it depressing, because it seems so certain that no such changes will happen. I guess that's why I'm a professional stick in the mud, rather than an activist or politician. Thanks for fighting the fight.

Posted by: MT | Mar 2, 2006 9:32:36 PM

"a lot of people are going to be stuck in the lower part of the job market"

Wait a minute. The point of the whole post seemed to be the disappearance of the middle class, and you end with a safety net for the poor? We are going to become a two-tier society, a neo-feudalist banana republic or cargo-cult culture, and them's the breaks? Leaving alone the morality, you think this is viable? Especially in America?

A) It is a planned feature, not a bug or an accident of history.
B) It is not inevitable, and no "progressive" should accept it.

Posted by: bob mcmanus | Mar 2, 2006 9:41:25 PM

When in the past 25 years have the returns on productivity growth spread beyond a tiny fraction of the labor force?

I think your argument is still stuck between the concern for the overeducated and the overpaid.

Uneven development isn't exactly a new term and globalization has never done anything to mitigate it - whether we're talking the past five years of the past fiften years.

In any event, your ideas still smack of neoliberalism which I hope is not being refashioned as progressive politics.

Posted by: gatherdust | Mar 3, 2006 8:59:25 AM

Jesus Christ, I know you are a wonk, but don't you think that strengthening unions and increasing union density might be part of the solution?

Posted by: Robert Clark | Mar 3, 2006 10:16:41 AM

Hey, what if we give everyone a stake in the capital market by allowing them to invest a portion of their Social Security in private markets?!!

Oh wait. Chimpy Bushitlerburton already propsed that. Forget it.

Posted by: Murphy | Mar 3, 2006 11:51:42 AM

Educational investments (whether rationally systematic or random) will tend to produce increases in purchasing power for somebody ... but who?

How much will go to the ones who received the education? How much to the ones who paid for the education? And how much to somebody else entirely (oligarchs, entrepreneurs, consumers at large, lenders at large, etc.)?

Where every skill is in surplus, and relative gains drain rapidly into the coffers of a limited number of franchise-holders, none of the above good measures will balance the equitable accounts.

Posted by: RonK, Seattle | Mar 3, 2006 6:43:37 PM

I'd like to see cities taking up living wages, as opposed or in addition to raising the minimum wage. And what about universal healthcare? Can't forget that.
What you can forget is the stregthening unions...

Posted by: portwood | Mar 3, 2006 7:08:06 PM

Hey portwood, you're a dumbass. Union households vote Democratic 65%-35%, roughly the reverse of unorganized ones. If you forget about strengthening unions, you can forget about getting anything you think is best for the country because you are not going to have the electoral strength to do anything but dream about policy on comments to blogs, cities or no. Without organization the white working class is going to continue voting Republican, and we'll get more of the same. Even if you reverse cause and effect, living wages don't get anyone out of poverty, just out of starvation, and it won't buy any electoral loyalty beyond a single election.

Posted by: lincolnlogs | Mar 3, 2006 11:14:50 PM

Good Lord. You actually convinced me to change my views on this subject.

Posted by: Rob W | Mar 4, 2006 5:07:37 AM

Your interpretation of Katz et al is very generous and reflects their description. What their data show is that in the 1980's there was at least a reasonable case that the more skill/education you had the better you would fare in the labor market. However, they now acknowledge what their critics (including me and Jared Bernstein, David Card and John DiNardo, David Howell, Michael Handel) have been saying for years--that since the early 90s or before that the middle was faring worse than the bottom and that the only group making any progress was the upper 5% or so of wage earners (except for the broad-based grwoth in the later 90s induced by low unemployment). You can give this a technology or skills story (basically relabeling their previosu story to now say the effect of technolgy has a new pattern), as they do. But it is hard to square any education or training policy or most of the rhetoric in the public sphere with astory that says the skilled that are helped by technological change is a small minority of less than 10% of the workforce and that everyone else is medium or low-skilled losers.
My view is that technolgy has been leading to the need for more skills and edication for decades. We need to assure that there's enogh supply of skills and education. However, there's no evidence that the growth in the number of skilled or college-educated workers has fallen short of what employers need. Evidence is that the wages of college grads have fared worse than college grads in the last five years (as Krugman points out; Jared and I show the same thing in an EPI Snapshot).
Your policy solutions are commendable, although I wish that an 'assett strategy' would clearly be described as redistributing assets to low-income families through a progressive tax system--people seem to leave out where the money comes from to provide assets.

Posted by: Larry Mishel | Mar 4, 2006 12:05:24 PM

I don't have near the expertise of some on this thread. But it seems to me the issue is that we're disinvesting from basic education at a time when education is becoming increasingly accessible to the people of India and China. Which inevitably will mean we are no longer competitive in all those service jobs we expected the US to compete advantageously in during the 1990s. First it was call centers, now it is software engineers, movie production, there is increasing medical tourism in other countries. And it strikes me that the US is desperately attempting to cling to some advantage, however little or unenforceable, by playing IP cop around the world. We may not be able to offer all of our PhD chemists jobs anymore, but we can make sure the companies that recently laid them off continue to make money off the drugs they developed for the next 10 years.

Now in the near term, it seems like the only way to increase the outcomes for Americans is to ensure that low-skill service jobs actually pay well enough to support the people who work in them.

But in the long run, it strikes me it is always a question of whether the US can compete on a global scale. There are still advantages to capital investment in the US (and therefore some jobs that will remain here). But it's not clear how a US worker at $20 an hour can compete against an Asian worker at $2 an hour over the long term.

So the one other thing we can do is to make sure we are not externalizing the costs of globalized production. Is it really the best decision to source heavy manufactured goods in other countries, if it ensures our society continues to decline? I'm not calling for protectionism. I'm calling for making importers pay the full cost of port security, pay unsubsidized rates for transportation, and so on.

Posted by: emptywheel | Mar 4, 2006 2:51:13 PM

This discussion seems to me to be missing the main question here. That question is WHY?

Why is it that capital is getting the lions share of productivity increases. I saw a discussion recently on Brad DeLongs blog asking why it was that real wages were stagnant and falling and profits were rising even as investment was falling or flat. Why weren't prices falling instead. There must be issues about barriers to entry and market structures involved here. I think we badly need more focus on Micro-economics now, not wishy-washy macro-economics.

Economic theory says that people will continue to be employed so long as their marginal productivity exceeds their wages. So if productivity is rising, and wages are falling where is the rub?

One factor could be that computerisation has vastly increased the returns to scale so that the relationship between MARGINAL productivity and AVERAGE productivity has changed. This may have been exceberated by an increased concentration of power and an ongoing worsening of corruption in the political process.

I tend to agree we need to start talking about redistribution of net results again (and loudly). After all, I think it is well established that very unequal societies are unstable and liable to stagnation, which would not be in anybody's interest.

But please, we need to realise that the problem is that the market has ceased to be properly competitive, both in labour and product markets, and micro-economic reforms are badly needed.

Posted by: reason | Mar 6, 2006 5:09:07 AM

.... At Last

Posted by: thepoetryman | Mar 7, 2006 4:16:25 PM

poetryman - who chose your colour scheme?

Posted by: reason | Mar 8, 2006 7:56:06 AM

Mark, do you realize that getting any of policy recommendations 1-5 would require the Democratic Party to take the White House and the Senate and the House? And probably not just for a few years, either.

I'm afraid that your post is pretty much pointless policy wanking. There's a need for policy wanks (I'd be one much more than a political wank), but this is just wishing for a pony.

Posted by: Barry | Mar 8, 2006 2:53:37 PM

really, really like the post, but I think you're wrong about one thing -
We are going to have relitigate the Clintons.

Hillary is running for president in 2008, and She does not stand for any of these things and will NOT make them happen.

So, now what?

Posted by: MDtoMN | Mar 8, 2006 6:13:20 PM

That seems perfectly reasonable. I see no reason why any Democrat, from the moderates like the Clintons to the very liberal ones like Dennis Kucinich, shouldn't accept it.

Posted by: Brian | Mar 9, 2006 2:23:49 PM

You are symptomatic of the thinking of the age, where economics has trumped politics.

The "knowledge workers" demanded by the Fat Cats to pad their bottom lines, and a Well-Educated Citizenry, are two entirely different things.

With the former, which neo-liberal Clinton supported, profits rise. With the latter, which Rupert Murdoch and any anti-intellectuals would hate, the level of discourse rises.

Unions good.

Graph of the share of the total income stream garnered by the top oh point oh one percent (0.01%), 1913-2001, and it's only gotten much worse since then.

I'm far more worried about the state of our political system than how rich rich people are getting.

I'm pro-minimum wage, and not for universal health care, but I am for some government health care. I think of my step-brother, who does motocross and has broken his bones a dozen times and that no one should force you to pay for that.

Posted by: JS Narins | Mar 10, 2006 9:58:25 AM

interesting thread, and it seems like most progressives would agree on some sort of strategy to promote organized labor (which foucses on a fairer distribution of the economic pie beforehand), AND the kind of measures Mark proposes (which focus on using the tax system to modestly redistribute income & wealth after the fact, and using the law to raise the floor on wages and economic security).

i think one area we need to think much harder about is, what should that labor strategy look like? i think the shop-focused version of organized labor that we've got now has pretty much run its course, and unions need to shift from being the organized representative of employees in a given shop, to a provider of labor to corporations who compete with the firms to hire the best staff & organize work better to deliver better results. i work for a consulting firm that does a lot of government contracting - and in a lot of ways, i think the unions representing the government employees we (to some extent) compete with could benefit a lot from following our model. If they went from representing their members to employing them, and then selling their services back to the state on the same basis we do, they could probably be pretty competitive with us - and i think they'd unlock a lot of productive potential among their workers, they could probably afford to pay them more, etc. as it is, so many of their members jump over to consulting firms after a few years, or switch from "state employee" to "independent contractor" once they've earned their retirement benefits.

Posted by: TW | Mar 11, 2006 4:54:47 PM

I liked this post a lot, but I agree that actually enforcing the laws that gurantee workers to right to free association without interference from their employers is crucial. By hook or by crook, a lot of people in this country will spend their working lives in the retail, lodging, food service, construction, transportation, and health care industries. These industries, by and large, are not traded internationally, and so "globalization" is not really a factor wage determination. But low union density is, and allowing workers to organize is a sure-fire way to keep real wages rising with productivity. I'd also add that it would be a good idea to index the minimum wage to productivity, so that we don't have to keep trying to boost it every five years.

Posted by: Rich C | Mar 12, 2006 2:21:42 PM

"the returns to increased productivity have gone to capital and to a highly-skilled elite, rather than to the broader minority of workers with college educations or specific training."

You could make a better case for "well-placed" than "highly-skilled" to modify "elite," especially considering the dispiriting stats on generational economic mobility.

Posted by: deRien | Mar 13, 2006 6:01:23 AM

It would really help, if liberals would eschew the theory that the change in income distribution is the result of a complex process, the important elements of which are beyond our control. The meterological metaphor serves reactionary interests.

Since Reagan first cut taxes on the rich and increased taxes on the working classes, we have shied away from simply stating clearly that much of what has happened is the result of political choices.

It is not just taxes and trade, either. It is also antitrust policy, which has allowed everyone from supermarkets to cable companies to inch up prices.

The largest shift in the income distribution has come as corporate executives, the class that provides most of the financial support for the Republican Party, and which, not incidentally, now controls all News and Entertainment Media in the U.S., have held down wages and employment, while siphoning off ever increasing amounts in salaries and bonuses. It is not all that mysterious really. That huge gain by the top 1/4 of 1% over the last 25 years consisted, for example, of Michael Eisner, CEO at Disney, taking home the odd ten billion dollars, and of dozens of other CEOs just like him, exercising their power at the expense of wage earners and investors alike.

Posted by: Bruce Wilder | Mar 13, 2006 7:53:38 PM

Since others are giving themselves credit in this debate, I'll do the same.

I debunked the "skill-biased technological change" myth in my book Created Unequal (Free Press, 1998), years before it was fashionable. And it *is* a myth, as a number of serious people (David Card, Robert Lawrence) got around to realizing some years later.

But my work (and the preponderance of other professional work at the time) also showed that increased trade accounts for at best a small part of the rise in inequality in pay structures.

Much more was due to poor economic performance -- high unemployment and low weekly hours for wage earners -- combined with the declining real value of the minimum wage and the attack on unions. Fix these things, as you say, and much of the rise in pay inequality would go away.

Evidence: From 1994 through 2000, pay inequalities in the U.S. declined as the economy moved to full employment, in spite of the huge diffusion of new technologies in those years.

There are not really two labor markets.

Rather, there are people who work for wages and salaries paid out of cash flow, and people who get capital income, directly or indirectly. Some of the latter looks like cash-flow salary income, but it isn't really. In the tech boom firms in the bubble sector were making big payouts out of their capital inflows, not their sales. Behavior in this case is very different.

Thus the statement that "capital" received most of the increases in income (in say, the late 1990s) is true but misleading. Much of what "capital" received was simply an artifact of the increase in equity valuations. And these were extraordinarily concentrated. In a working paper on the UTIP web-site, Travis Hale and I show that if you take just four counties (of 3150!) out of the income mix, the between-county component of the increase in income inequality in the late 1990s goes away. Which counties? Santa Clara, San Francisco and San Mateo, CA; King WA. It was the bubble.

Now, here's a cautionary word for progressives. I'm all for taxing capital income at ordinary rates, but I can't really see why a boom in capital valuations, leading to a rise in *income* inequality but a *decline* in wage inequality, is such a bad thing. I thought the late 1990s were a lot better than the years since. Yet *income* inequality peaked in 2000, and has fallen in the one or two years for which we have measures since.

I warned the ADA about this in 2002, saying that George Bush was such a great leveler that if he applied for admission, we'd either have to let him in, or change the organization's name to "Americans for Thoughtful Democratic Action."

James Galbraith

Posted by: James Galbraith | Mar 15, 2006 5:41:55 PM

I think we are allies here. Anti-trust - add a bit on leveraged hostile takeovers, and on employment law changes to stop some egregarious abuse of monosopsony power and we are definitely talking the same language.
I once thought that EDS was heading in the direction you are indicating, but is that what we really want - a monopsony employer? Surely, employees want choice and competition for their services. Ultimately, we need to look at institutional factors in the labour market. How can we get very high levels of demand for labour without creating inflation? How can we get a more equitable sharing of risk?

For instance, when an employer suffers a fall in demand - he can reduce the hours and pay of all employees or sack some of them. If he chooses the second in a recession the result is that he preserves his profits, but families receive a very heavy burden. If he chooses the first, the burden is shared - but will his employees reward his loyalty to them in better times? In good times, however, the adjustment is more complex - if he chooses path 1 he may end up losing his best workers (who can easily find other jobs and will do as their income falls) and go bankrupt hurting the other workers. But none the less, I would think it must be possible to encourage burden sharing arrangements of some sort via institutional measures. I want to see to workers be pulled into growing industries by offers of better conditions, not pushed out of declining industries and forced to take what they can find. Micro-economic institutions are more important than most people give them credit for.

I'm not sure that your comments will be born out when the latest data is available. The rise in profits of a percentage of national income is not just a function of asset price inflation.

And the distribution of net outcomes (including services such as public facilities, education and health insurance) is even worse.

Not taxing capital income (dividends not capital appreciation) will naturally (as it is meant to) result in increases in inequality of wealth even greater than the increase in inequality of income. And wealth means unfortunately power. It is nothing less than stability of democracy that is a stake. I'm of the view that the excessive payments to executives are a way to make them part of a class war that the very wealthy are waging.

Posted by: reason | Mar 16, 2006 7:01:35 AM

"I think of my step-brother, who does motocross and has broken his bones a dozen times and that no one should force you to pay for that."

Have a heart. We all live risky lives to some extent, and we all do things to harm our own health. Mind body medicine teaches that we have enormous control over our mental and physical health, but few take advantage of that fact. Circulation, skin flare ups, immunity, long term pain, many small and large health issues can be healed or at least managed on our own, free of charge, or if you prefer, with a little help from a biofeedback specialist, for example, or some yoga classes.

National teachers are becoming too numerous to name: Jon Kabat-Zinn, Herbert Benson, Al Siebert, Eckhart Tolle, and the one and only Thich Nhat Hanh.

"This is it."

And don't get me started on the waste, damage, death, and mix ups in the allopathic health care industry. Their own journals are finally admitting it, and books too, by Marcia Angell, John Abramson, etc. The profession is a mess.

Posted by: Anne | Mar 17, 2006 8:56:44 PM