NEW YORK (Reuters) - President Barack Obama's State of the Union speech this week confirmed it: The pre-eminent political and economic challenge in the industrialized democracies is how to make capitalism work for the middle class.
There is nothing mysterious about that. The most important fact about the United States in this century is that middle-class incomes are stagnating. The financial crisis has revealed an equally stark structural problem in much of Europe.
Even in a relatively prosperous age — for all of today's woes, we have left behind the dark, satanic mills and workhouses of the 19th century — this decline of the middle class is more than an economic issue. It is also a political one. The main point of democracy is to deliver positive results for the majority.
All of which is why understanding what is happening to the middle class is urgently important. There is no better place to start than by talking to David Autor, an economics professor at the Massachusetts Institute of Technology. Autor is one of the leading students of the most striking trend bedeviling the middle class: the polarization of the job market. That is a nice way of saying the economy is being cleaved into high-paying jobs at the top and low-paying jobs at the bottom, while the middle-skill and middle-wage jobs that used to form society's backbone are being hollowed out.
But when I asked him this week what had gone wrong for the U.S. middle class, he gave a different answer: "The main problem is we've just had a decade of incredibly anemic employment growth. All of a sudden, around 2000 and 2001, things just slowed down."
Academics can usually be counted on to have a confident explanation for everything. That is why I was surprised and impressed by Autor's answer when I asked him where the jobs had gone. "No one really understands why that is the case," he said.
It was a winningly modest reply. But work by Autor and two colleagues — David Dorn, a visiting professor at Harvard, and Gordon Hanson of the University of California, San Diego — is starting to untangle the two forces that both the conventional wisdom and the academy agree are probably responsible for a lot of what is happening to the middle class.
Those forces are technological change and trade. The easy assumption is that the two go together. After all, trade needs technology — it is hard to imagine outsourcing without the Internet, sophisticated logistics systems and jet travel. Technology is dependent on trade, too: The opportunity for global scale is one reason technological innovation has yielded such outsize rewards.
But in a careful study of local labor markets in the United States, Autor, Dorn and Hanson have found that trade and technology had very different consequences for jobs.
"We were surprised at how distinct the two were," Autor said. "We found that the trade shock had a very measurable impact on the employment rate. Technology led to job polarization, but its employment effect was minimal." Trade, at least in the short term, really did ship jobs overseas. Technology did not kill jobs per se, but it did hollow out those essential jobs in the middle.
The big surprise, at least for believers (like me) in the classic liberal economic view that trade benefits both parties, is the strong and negative impact of globalization on U.S. workers — Autor estimates it accounts for 15 to 20 percent of jobs lost.
"The rise of China was such a huge change. It really did matter," Autor said. "First, China is such a huge country. Two, China was 40 or 50 years behind in technology, so it had a lot of catching up to do. Third, it happened so fast."
What is striking, and frightening, is the extent to which, at least in the U.S.-China trade relationship, the knee-jerk, populist fears intellectuals tend to deride actually turned out to be true.
"U.S.-China trade is almost a one-way street. This trade relationship doesn't clearly give you the benefit that you can sell a lot of stuff to your trade partner," Dorn said. "If you talk to someone who is somehow involved in the promotion of free trade, they may say that maybe the headquarters of Apple (AAPL.O) benefits. That may be true. But the first-order effect is of job loss."
The impact of technology is more familiar. Autor, Dorn and Hanson found that it did not create fewer jobs overall, but it did hollow out the jobs in the middle.
"Technology has really changed the distribution of occupation. That doesn't necessarily go hand in hand with reduced unemployment, but it creates a more bimodal set of opportunities," Autor said. "There is an abundance of work to do in food service and there is an abundance of work in finance, but there are fewer middle-wage, middle-income jobs."
What is challenging about both of these trends, and what makes the hollowing out of the middle class a political problem as well as an economic one, is how different they look depending on whether you own a company or work for one.
Shipping middle-class jobs to China, or hollowing them out with machines, is a win for smart managers and their shareholders. We call the result higher productivity. But, looked at through the lens of middle-class jobs, it is a loss. That profound difference is why politics in the rich democracies are so polarized right now. Capitalism and democracy are at cross-purposes, and no one yet has a clear plan for reconciling them.
(Chrystia Freeland is a Reuters columnist. Any opinions expressed are her own.)
(Chrystia Freeland is managing director and editor, Consumer News, for Thomson Reuters. Before that, she was editor of Thomson Reuters Digital. Prior to joining Thomson Reuters, she was U.S. managing editor of the Financial Times. Her time at the Financial Times also included posts as deputy editor of the FT in London, editor of the FT's Weekend edition, editor of FT.com, UK News editor, Moscow bureau chief and Eastern Europe correspondent. From 1999 to 2001, Freeland served for two years as deputy editor of the Globe and Mail, Canada's national newspaper. She began her career working as a stringer in Ukraine, writing for the FT, the Washington Post and the Economist.)
Editing by Jonathan Oatis