Thursday, September 1, 2011

One Economy or Two?

Good writing can expose you to something new, or it can organize thoughts and facts you already have into a more coherent picture. That happened to me the other day when I read David Goldman (who often writes as "Spengler) explain that we have a 'winner' economy and a 'loser' economy.

The main thrust of his argument is that for a significant portion of the country, things are actually going quite well. But instead of success at the top pulling everyone along into economic revival, the successful are pulling away and leaving a significant group of Americans behind. So far this sounds like the standard liberal critique of the economy since the days of Reagan. But Goldman is no liberal, and he is making a more important and unusual point:
Perhaps we should think about America the way we think of an emerging market, except that America is submerging instead. The Chinese have warned for years that they are two countries, a First World country on the seacoast and a Fourth World country in the interior. We know that India has two economies, a small modern one and a vast backward one, and we are not particularly concerned with the GDP of impoverished rural people (if indeed we could measure it). We want to know what Tata Industries or Reliance Industries are up to.

China and India have become a dual economy because a portion of their population has clambered up into prosperity; America has become a dual economy because a portion of their population has tumbled into destitution. But the fact that larger American corporations have had a strong recovery should reassure us that America is capable of a broader recovery.
The suggestion here, I think, is that none of the typical efforts to get the economy as a whole moving again are likely to work as king as some people (and maybe some entire regions) lack the skills and resources to compete in the modern global economy.

We have enjoyed almost seven decades since the end of World War II where our country was the center of the economic universe, which allowed us to find something to do for nearly everyone who wanted to work. In the past few decades, though, as stiffer economic competition has emerged, our advantages have lessened. The acceleration of our borrowing in recent years can be seen in part as an effort to delay dealing with that fact by handing out benefits that the country hadn't earned. But now that game is up.

As a thought experiment, let's imagine 70% of people can partake of the modern 'winner' economy, while the other 30% bump along in the uncompetitive 'loser' economy. Will the 70% subsidize the others when doing so means higher taxes instead of just more borrowing? Or will the 30% be left to fend for themselves, making the divide that much more apparent?

The myth Democrats tell themselves is that they can find ways to subsidize the poor without bankrupting the country and disincentivizing work further. The myth Republicans tell themselves is that removing the support will encourage effort and individual initiative among the 'losers' and ultimately help them more than the subsidies. But the reality is that a large and growing number of Americans probably don't have the skills and talent to compete, and without some sort of assistance will live more miserable, unfulfilling and unhealthy lives. As will their children.

Our divided economy doesn't look to be going away any time soon. But what do we do about it?

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