The Agenda

Will the United States Become the Old Country?

Will your children emigrate from the United States? Louis Uchitelle’s story on Scott Nicholson and “the elusive American dream” was widely criticized. And Scott’s grandfather did sound a bit loopy when he said the following:

“I view what is happening to Scott with dismay,” said the grandfather, who has concluded, in part from reading The Economist, that Europe has surpassed America in offering opportunity for an ambitious young man. “We hate to think that Scott will have to leave,” the grandfather said, “but he will.”

I doubt that Europe is offering ambitious young men more opportunity than the U.S., though perhaps Estonia or Poland are a decent bet. I can, however, imagine a scenario in which other countries start succeeding in their efforts to attract U.S. talent. 

This is one reason why I believe high marginal tax rates are a very bad idea. (Remember the research Arpit Gupta cited last month.) In an essay Scott Winship and I recently co-authored, we offer a potted history of productivity gains over the last decade, a recent fixation of mine:

The 1990s boom can be directly traced to IT investments, particularly in the retail sector, which had seen sluggish productivity growth for decades. The productivity surge from 2001 to 2003 was driven by investments in organizational capital, a catch-all term for productivity-enhancing business practices.

Many U.S. firms invested heavily in technology. But the most successful firms — which Brynjolfsson and Saunders call “digital organizations” — also embraced incentive systems and decentralized decision-making to allow their most talented, driven, and well-trained workers to use new technologies effectively. To put it simply, digital organizations reward workaholics and weed out weak performers. Suffice it to say, the workers who flourish in these firms are not replaceable cogs. Rather, they are valuable assets, and they demand and receive generous compensation. While digital organizations tend to be culturally egalitarian, they are a major driver of wage dispersion. Google and Facebook, for all their progressive bona fides, spend far more on top-flight engineers than on custodial staff, and they always will.

The rise of digital organizations is one reason productivity growth has continued during the Great Recession. One of the most striking facts about this downturn has been that employment has declined far more than output. As jobs evaporated throughout 2009, productivity increased by 3.8 percent, the largest increase in seven years. Comparatively few productive workers were let go, and many of those who were worked in firms that simply discovered a way to do without them, in part by offshoring a range of tasks.

As Dirk Pilat, an OECD economist, observed in 2004, these developments “are part of a process of search and experimentation, where some firms succeed and grow and others fail and disappear.” Countries that allow this process of creative destruction have an edge, Pilat suggests, in reaping the full benefits of technology investment. [Emphasis added.] 

One can bemoan this tendency towards wage dispersion or one can give it two cheers, as Gary Becker and Kevin Murphy did in a provocative essay for The American published in the spring of 2007. But it is a fact of life. And as I hope to argue in another essay, there is good reason to believe that Western Europe is about to experience a sharp increase in wage dispersion. Writing in the NYT in 2007, Tyler Cowen cited the work of University of British Columbia economist Thomas Lemieux on how demographic change impacts the distribution of income:

 

Much of the measured growth in income inequality has resulted from natural demographic trends. In general, there is more income inequality among older populations than among younger populations, if only because older people have had more time to experience rising or falling fortunes.

Furthermore, more-educated groups show greater income inequality than less-educated groups. Uneducated people are more likely to be clustered in a tight range of relatively low incomes. But the educated will include a greater range of highly motivated breadwinners and relaxed bohemians, and a greater range of winning and losing investors. A result is a greater variety of incomes. Since the United States is growing older and also more educated, income inequality will naturally rise.

Thomas Lemieux, professor of economics at the University of British Columbia, estimates that these demographic effects account for about three-quarters of the observed rise in income inequality for men and 69 to 95 percent of the observed rise in income inequality for women (“Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?” The American Economic Review, June 2006). In other words, rising income inequality is not just a result of unfairness or bad public policy. [Emphasis added.]

Then consider the fact that while levels of educational attainment in the United States are stagnant, it is increasing across Europe and East Asia:

The number of individuals that have attained tertiary education has increased, on average, by 4.5% each year since 1998, and by 7% per year or more in Ireland, Poland, Portugal, Spain, and Turkey. In 2007, one-third of the youth cohort (25-34 year-olds) had attained a tertiary level qualification and in some countries (Canada, Japan, Korea and the partner country the Russian Federation), over 50% of the youth cohort have. This implies that overall tertiary attainment levels will continue to rise in the coming years. In France, Ireland, Japan and Korea, there is a difference of 25 percentage points or more in the tertiary attainment of the oldest and youngest age cohorts (Tables A1.3a, A1.4 and A1.5). [Emphasis added.]

That is, in most of the OECD, younger cohorts will be considerably more educated than older cohorts. To the extent advanced economies try to restrain the tendency towards wage dispersion through labor market regulation, they will run into what you might call the Pilat problem: (1) investment in organizational capital is the big driver of productivity growth in advanced economies; (2) rigid labor markets undermine the trial-and-error process that leads to organizational innovation;  and, finally, (3) talent is mobile. If I can’t pay for performance in Country X, I will go to Country Y. 

Americans are unaccustomed to thinking of the U.S. as a country people leave, and we are and will likely remain for a very long time a huge net recipient of migrants. But talented U.S. workers will, like talented Danish and French workers, start leaving their native country in larger numbers in search of more congenial work environments if we aren’t careful. Consider Parag Khanna’s essay on the rise of city-states in the new issue of Foreign Policy:

 

For these emerging global hubs, modernization does not equal Westernization. Asia’s rising powers sell the West toys and oil and purchase world-class architecture and engineering in return. Western values like freedom of speech and religion are not part of the bargain.

This is very much the case in the monarchies of the Persian Gulf, where urban ambition is manifest in iconic new districts ordered up in the desert sands. Abu Dhabi is creating the solar-powered, car-free Masdar City – meant to be the world’s first carbon-neutral, no-waste city — and colonizing its Saadiyat Island with architectural marvels to house new Guggenheim and Louvre collections in stunning new buildings by Frank Gehry and Jean Nouvel. The emirate has embraced a two-decade master plan to invest not only in new cities, but in smart ones that will take into account land use, sanitation, efficient transport, and community building, in hopes of making itself into a place where Westerners will flock for a better quality of life (certainly not because of the climate or its starring role in Sex and the City 2). Already the result in the Persian Gulf is something truly new, as a once-barren cultural zone features increasingly global melting pots like the Qatari capital of Doha, where residents hail from more than 150 countries and far outnumber the locals. If these new five-star hubs play it right, they could convince Westerners to give up their citizenship for permanent homes in a friendlier, tax-free environment. [Emphasis added.]

I imagine that most readers will find this laughable. And I certainly can’t imagine wanting to live in Dubai or Doha rather than New York or Chicago or Dallas. But I’m a parochial and unadventurous person by nature, and an instinctive American nationalist. The kind of people who make digital organizations thrive tend to be less tethered.

Bashing the rich has a powerful political and emotional appeal for many people. For people on the left, tax exiles are profoundly unattractive figures — economic Benedict Arnolds, to evoke a phrase popular in 2004. I think about this more pragmatically. Plutonomy is baked into advanced economies. Without truly confiscatory taxes — I’m talking about marginal tax rates in the neighborhood of 70 percent or higher — large fortunes will keep growing larger, and the ultrarich will settle in the most congenial environments. The U.S. is a country rich in amenities that Dubai, Doha, and Singapore can’t really match. So many of the ultrarich will pay a premium to live here, just as wealthy individuals pay a premium to live in California or Paris. But how big a premium will they pay? And how long will our edge in amenities last? 

It’s useful to assume that the answer is not that big and not that long. Because if we’re wrong, a trickle of adventure-seeking emigrants could become a cascade of our best and brightest.  

One way to keep our edge in amenities is to take a leftier road and spend more money on high-quality public services. The only wrinkle is that we’d have to fund them out of regressive consumption taxes, to avoid driving away talent. My preference is to take a rightier road, and remake our public sector so that it can offer high-quality services at low cost through the use of competition, for-profit social enterprise, personalization, privatization, and other strategies that don’t rely on big increases in public spending. Note that no one on the mainstream left is proposing the kind of marginal tax increases that would really blunt the rise in income and wealth inequality. They’re not doing it because affluent Democrats are an important constituency and, I suspect, they’ve accepted the fact that confiscatory taxes will dampen growth, though they agree as to where we should fall on the curve. 

This is my take on the central debate of the next few decades: Sweden vs. Singapore. 

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