WASHINGTON – The main theme of the Democratic Party, as we approach the November elections, is economic justice. The Republicans gave too much to the rich. Too many poor people in America. Too many middle class families struggling. It is time to recreate some balance. Fine, we understand the picture and the rationale for change. The Republicans, in turn, do not have much to say. The somewhat feeble message is to go back to the frugal ways of the past: limited government, limited taxation, obtaining thus the magic of re-energized free enterprise.
While there is definitely more in the programs of both parties, they are both surprisingly myopic in as much as they fail to see the need to create human capital as the essential precondition for more wealth creation. To the Democrats we should say that the issue is no longer about the fairness in which the pie is sliced. No doubt, there is growing inequality in America. But the real story is not about the extravagant compensation packages of CEOs; but about America’s difficulty in growing the pie. With so much focus on economic and social inequalities, we are losing sight of the fact that the country has lost steam. For the last few years we have had bogus growth founded on delusions of wealth (the supposedly never ending real estate appreciation cash cow). People spent “found money” represented by growing equity in their homes that was not real. Now, even for the relatively prudent, the equity in their homes has been cut to size and the home equity lines of credit need to be paid pack. For the reckless, of course, it is a lot worse: foreclosure, bankruptcy and all that.
While the consequences of ill advised spending favored by the housing mirage are well known, the reality of America’s diminished wealth that was hidden underneath the spending frenzy is not in full sight and thus not fully analyzed. The fact is that, overall, as a country, we are not as wealthy as we used to be.
And to restart the engine of growth it will take more than lower taxes. This is why the Republican message is also disappointing. Sure, lower taxes, on balance, are better than higher taxes. But the issue before us is more than creating the proper macroeconomic environment that will stimulate new growth. Indeed, in order to have meaningful new growth, we need to understand that the drivers of growth have changed and thus we need to retool. And this retooling should not be impossible, as Americans are more inclined to undo and redo than most other nationalities. But the urgency to redo and retool has to sink in.
The urgency is due primarily to some of the effects of globalization. Globalization has brought into the mainstream hundreds of millions of new, relatively inexpensive workers. Like it or not, they compete with our workers. Assuming equal or comparable skills, they are more competitive because they are cheaper. This is the main driver fostering the migration of labor intensive industries to developing countries, China first and foremost, but also Vietnam, Bangladesh, the Philippines and all the others. This is systemic change. Those industries and all those jobs are gone. Tax incentives and other assorted bribes will not do much to counter this transformation.
And the fact is that we have seen only the beginning of this labor force realignment. As education standards improve in developing countries, new skills will be developed and thus better educated workers in Asia will take over other sectors, to the detriment of the skilled workforce of America. In the meantime those who are not swept away by this new current will see their income stagnate, for the obvious, if unpleasant, reason that their US employers will have to keep their cost low in order to compete with the newcomers.
The days in which American industries dominated the world are over. The days in which General Motors could negotiate generous benefits packages with the labor unions are over, because there are no longer any margins, no fat profits to be shared. Today, General Motors, aware of the financial weight caused by these stupendous costs, is trying to get out of the old arrangements in the hope of surviving.
So, once again, the main economic issue is not about fairness nor is it about fiscal incentives. The fundamental issue is about human capital, or lack thereof. Simply stated, America cannot and will not remain a first class economic power with a third rate education system. Until now the failures of American education have been masked by the surprising unevenness of the education scene. In America education is local and driven by local issues; not to mention that the rich can opt out of it altogether, sending their children to private schools. So, we have at least two types of education. One for the small elites which is good or even superior; and one for everybody else which is between mediocre and horrible. Until recently, the pipeline for the elites funneled the talent that would go and populate the super universities whose human crops could be harvested by the leading corporations. But the pipeline from private or high quality high schools to prestigious universities is too narrow these days to create and maintain an internationally competitive workforce strong enough to sustain the whole country.
The innovation produced at the top level no longer generates enough surplus to give buoyancy to the rest of a society –a society that may be hard working but that is unskilled and thus uncompetitive and for this reason poorly paid. And so we have at least two economies: the competitive sectors that thrive in the new globalized environment and those who suffer from globalization because they cannot adequately compete with the new comers from the emerging economies. If we ignore this fact: an increasingly uncompetitive workforce, we can try and twist this issue of the American economy in every way it would please politicians, but we shall not improve the underlying fundamentals.
Of course it is easy for Democratic contender Barak Obama, seeking the votes of the underprivileged and of a struggling middle class, to affirm that it is all about fairness and thus the need for redistribution of what appear to be excess profits going to very few at the top. So, a little bit of Robin Hood politics should do all some good. Some of the very rich may have to pay more taxes and, who knows, may have to give up their shares of the private jet. The poor will get a little relief. Indeed. For the millions who do indeed have immediate pocket book issues, relief is appealing.
On the other side of the divide, the idea of tax relief and disciplined public spending may appeal to struggling business people who would like to grow their activities.
But, yet again, the issue is no longer about the most appropriate fiscal or macroeconomic environment. The issue here is about the very foundation of a competitive knowledge economy and that foundation rests on superior human capital. Lacking such capital, we are in trouble. We are no longer on top. We struggle and, inevitably we shall fall behind. In this context fighting for deciding who gets what may be expedient in the short term. But, long term, it does not resolve the systemic problem of declining incomes due to a progressively uncompetitive workforce.
Even Karl Marx, if I may digress, postulated a successful socialist society on a prosperous economy. Socialism, let us not forget, was not about equality, it was about a (supposedly) more rational use of all economic assets to increase the general welfare. Socialism was not about socializing poverty. It was about socializing wealth. Such wealth must be produced and today it is all about brains and very little about muscle.
If this were not enough, the education gap in America is exacerbated by the race issue. Simply stated, in Black or Latino neighborhoods, the public schools are usually at the bottom in terms of quality. So, those who need the education ladder the most in order to extricate themselves from poverty, low paying jobs, marginalization and worse are those who are treated the worst.
If the middle class accountant is in trouble as his job may soon find its way to Bangalore, the poor inner city kid who goes to a dismally dysfunctional school has even fewer chances. He may drop out and thus be illiterate or semi-illiterate. Or he may get a diploma which in the real world is almost useless, given the low quality of education that he received.
In the past, Blacks were poor because they were openly discriminated against. No access to this or that. Today Blacks and Latino are more likely to stay poor because they are without access to quality education. A lower income uneducated person has next to zero chances to improve his/her lot. Thus the underclass will stay underclass. This is the immense unfairness of a society in which we would like to think that “Access” is our motto, as everybody should have a chance. No, a ghetto kid is trapped by the circumstances of his birth. Very much like a poor person in a third world village, for him/her birth is destiny. Politicians may come along promising aid and relief. But, unless this relief comes in the form of meaningful education, it is not worth much.
If the situation and the chances of those at the very bottom of the American society is truly dire, for most of the others the prospects are not that rosy either. They will have to compete with equally educated and very eager Asians. Unless their skills improve substantially, everything else being equal, lower labor cost will prevail. Of course, eventually this cost advantage will be eroded. But this is many years in the future. In the meantime we have to appreciate the new competitive environment and retool accordingly by creating a first class workforce that will work in the high value industries of tomorrow.
For the time being, the educated elites are doing reasonably well. In the ocean liner Globalization they have the education, the skills, the knowledge and thus the first class arrangements. They run the competitive, innovative industries. They get to export to the emerging markets. They benefit from trade.
But the second and third class uneducated passengers, upon arrival, do not have the chance to improve their lot through hard work and ingenuity. They are cheap, unskilled labor, competing with illegal immigrants at home and new workers abroad. We need someone to go down to the third class with lots of books and a lot of energy. With proper training, when we get to port, the third class passengers –who happen to be mostly our minorities– may have a chance.
This is what the current political debate should be about: how to give proper education to all, so that, as a society we may stay internationally competitive and prosper. Either we get new skills for all or those who are left behind or we shall be progressively poorer. Not a good future for this Land of Opportunity.