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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Affluence Trap



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I have an idea for a National Review essay.

Basically, I think we’re in an affluence trap. We’re rich enough to have a lot to lose, but not rich enough to afford the growth-dampening policies we’re pursuing. 

This is part of what I was trying to get at in my last Forbes.com column, but there’s more to the phenomenon. To requote:

During the sharp recession of the early 1980s Ronald Reagan and Paul Volcker subjected American families to extreme economic pain, and hundreds of thousands of industrial jobs evaporated and never returned. Had Reagan and Volcker decided to do everything in their power to preserve the economy of the late 1970s in amber, the world would look very different today. To put it bluntly, there is good reason to believe that the United States would be an economic backwater, and that the most innovative firms would have taken root elsewhere. Many say that Barack Obama, like Reagan, will suffer a serious political reversal in the midterm elections if high rates of unemployment persist, as seems likely. This comparison belies an important distinction. Reagan and Volcker made the difficult decision to allow painful restructuring. The Obama administration has, in contrast, tried to cash-for-clunker its way over the economic abyss instead of staring into it.

The truth is that America has changed over the intervening years. In the 1980s a large number of Americans still remembered the extreme deprivation that defined the interwar years. Now, in contrast, few American adults have previously seen real economic pain. One can hardly blame the president for this broader cultural shift. He can be blamed, however, for failing to understand how the restructuring of that earlier era really worked.

A lot of this dynamic is psychological. What is your context for understanding economic pain? Friends of mine and colleagues often suggest that people on the right are indifferent to the suffering of jobless Americans. I don’t think that’s fair. It is true, however, that both right-wing libertarians and left-wing utilitarians like Peter Singer tend to be more mindful of how conditions among the unemployed in the U.S. compare to conditions that prevail in Haiti, Zambia, Laos, and other deeply poor countries with weak states and civil societies. Part of the reason these societies are so poor, or so the argument goes, is that they suffer under predatory elites that deploy many justifications for predation. In Brazil, unionized public sector workers are a small minority that receives very high wages relative to the private sector median, which isn’t always unreasonable given the different mix of skills and services. But the case for expansion of the public sector and public sector wage increases is often made in social justice terms, despite the obvious wrinkle that these measures are, in this context, inequality-exacerbating. And so some people like me worry about self-serving predatory elites in the U.S. context emerging and deploying attractive political rhetoric — whether “liberal” or “conservative” to advance their agendas.

My take is that upper-middle-class credentialed professionals face a tough future economic landscape. Not as tough as blue-collar workers, perhaps, but this very influential group actually does have a class interest (to put it crudely) in preventing a broad restructuring of the U.S. economy along more decentralized, competitive lines that would prove growth-enhancing but highly disruptive. Guild privileges start looking more and more absurd in a world shaped by the offshoring of tradable services. The power of the state needs to be deployed to preserve guild privileges, or some semblance of them. 

And as for working and middle class Americans, they face a similar dilemma. A mix of Baumol’s cost disease, expansion of the tradable sector, etc., is putting heavy pressure on traditional modes of work. That said, despite what is often described as wage stagnation (Scott Winship has usefully complicated this picture), there has been a robust increase in the quantity and quality of goods thanks to the advent of cheap Chinese manufactured goods, etc. So the bulk of the population also feels very wary of serious departures from the status quo — this undergirded the opposition to both Social Security reform and health reform. 

Allowing real liquidation seems to me like an essential first step to real reconstruction. Unfortunately, it might be politically impossible.

I’ve used a lot of shorthand — on a train. Hope to elaborate. 



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