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In the Shadows of Prosperity

Hacker may be too cynical here about the benefits of higher learning. His other writings about education make it clear that he also believes college can introduce students to different value systems, expand their vocabulary of words and ideas, and stimulate their latent curiosity. Still, he makes an important point. Employers can use college degrees as a screening device for many other factors besides developed skills, and to shield themselves from the widely recognized failures of high schools. This is especially so when the economy grows as slowly as it has until very recently; the slack demand for workers leaves an ample pool from which employers can choose the best-qualified candidates without having to offer much higher pay.8 No doubt improved technology and the downsizing that goes with it have helped keep wages down. However it is probably not technology alone but rather technology in combination with slow economic growth and the declining quality of primary and high school education that accounts for the continuing wage gap.9

Prejudice also apparently continues to play a discernible part in setting wages. The ratio of female to male earnings rose moderately in the 1980s after having stagnated in the 1960s and 1970s. But Hacker points out that women still make much less than men in every job category. For African-Americans, the income of the typical family, as Hacker writes, was actually lower in 1995 as a percentage of a white family’s median income than it was in 1975. But Hacker ignores that the incomes of African-Americans are also becoming more unequal. It turns out that earnings for upper-income African-Americans have risen fairly rapidly, but have been offset by declines for lower-income African-Americans.

The upshot of Hacker’s argument is that there is no lack of ability or talent among American workers. If I read him correctly, he particularly wants to challenge the prevailing idea among both liberals and conservatives that what is holding America back, in the long run, is a shortage of able people; such a view distracts the nation from the necessary task, which is to incorporate far more Americans into the productive economy. To extrapolate from his argument, this may involve not merely getting people into college, but improving decaying urban and suburban neighborhoods, providing enough income to stabilize family life among the poor, and reforming education where it probably counts most, which is in primary and secondary schools. “Talent may be more widespread than we believe, and we may have blinded ourselves to that possibility,” he writes.

From Hacker’s quiet prose, it is sometimes hard to know what particularly disturbs him about the situation he presents so clearly. But the elitism he sees among well-intentioned reformers seems to bother him deeply. He criticizes Harvard University’s former president Derek Bok, for example, for the kind of thinking that he believes has particularly unfortunate effects. Bok has written that every society has only “a limited supply of highly talented people.” To a Harvard president, who picks his students largely from high school valedictorians and those with the highest test scores, Hacker points out, scarcity defines talent. So does it define the standards for hiring CEOs, for example, who must often already have been a CEO or at most one rung beneath on the corporate ladder in order to qualify for the job.

Throughout history, most human talents have remained dormant,” Hacker wisely writes, “because societies have lacked the capacity or interest to uncover people’s fullest talents.” He continues: “Just as Florence of the Medicis felt no shortage of sublime artists, so classical Athens did not lack for gifted playwrights. Perhaps it is indicative of our more mundane times that we resort to talk of shortages.” In support of his view, Hacker reminds us that a considerable percentage of workers with only high school diplomas still do well, while a similarly large proportion of those with college degrees do not.10 With such arguments Hacker shows how fresh and suggestive his vision of a different kind of society can be.

3.

Americans are undoubtedly more confident today as a result of the economic progress made in the past couple of years. But little is being said about how to improve productivity and sustain more rapid economic growth—the main question that should, in my view, now be the subject of public debate about the economy. Particularly disheartening during the past year and a half, for example, has been the fact that the recent rapid growth is the result of more people working longer hours; it is not the result of a significant increase in output per worker. Many unemployed workers who were not looking for jobs before are now apparently eagerly taking them as they become available. Others are working harder and longer. Overtime hours are surging, for example. But there are only so many unemployed workers, and those on the job can’t keep extending their hours indefinitely. The recent rate of growth cannot be sustained even partially unless productivity rises faster.

Some, of course, believe that productivity gains are not being measured properly. One such argument is that the output of some modern services, such as medical care, is hard to measure, and that their productivity is being underestimated. But Dan Sichel, a Federal Reserve Board economist, figures that even if these assertions are right, and many economists have their doubts, productivity growth would be increased by .25 percent a year at most.11

Moreover, the recent productivity gains widely attributed by economists and businessmen to aggressive downsizing of work forces and restructuring of companies are typically one-time improvements that cannot be duplicated. What extra productivity growth the economy has produced may, therefore, be short-lived even if it is undermeasured. 12 As for the proliferation of computers and related products, Sichel also points out that such investments are, for all the attention they attract, still too small a part of the nation’s capital stock to matter nearly as much as today’s high-technology evangelists insist that they should.13 Perhaps most important, as is frequently noted, savings and capital investment, the generally acknowledged sources of long-term productivity growth, are still historically low as a proportion of GDP.

What should we do to sustain more rapid growth? A good start would be to recognize that the economy, perhaps because labor is more plentiful than was expected, has grown much faster than most mainstream economists believed it could without generating inflation. Still more expansionary policies on the part of the Federal Reserve to reduce interest rates should therefore be seriously considered. Real interest rates—interest rates discounted by inflation—are still historically high, and may be impeding investment and consumer spending.

More important over the long run, in my view, is to increase some kinds of private and public investment which are being badly neglected. Spending on research and development is among the most important of these. Basic research, in particular, has been cut back. Among public goods, the US is lacking in the fundamental assets that will become increasingly needed as it moves into the next century, including high-quality day care, better primary and high schools for all income groups, and more modern transportation systems. All these would contribute not merely to well-being but to the growth of productivity over the long run.

Finally, the gross inequality of income in America is robbing millions of equal opportunity in education and experience, and the chance for a stable family life. The unequal distribution of income is also costly to a society that is losing potentially productive workers and must pay increased public assistance and unemployment insurance. In families with incomes of $25,000 or less, Hacker notes, only one out of ten children goes to college, in part because the quality of elementary and high school education is so poor. Higher wages for the lower tier would also increase incentives for them to work and become more productive. Hacker is most eloquent about children born into poverty. “The statistics are apparent to outside observers, and to the children themselves, who very early on become aware of the barriers they face,” he writes. “And from this realization results much of the behavior that the rest of society deplores. The principal response from solvent Americans has been to lecture the poor on improving their ways.”

Why are Americans still more angry at the poor than at the rich? The cuts in last year’s federal budget balancing package, which Americans generally approved, required more sacrifice from poorer Americans than from anyone else. A Treasury Department analysis concludes that more than 19 percent of the benefits from tax cuts and spending changes in the House’s proposed budget for next year would go to the highest 1 percent of earners while only 12 percent would go to the bottom three fifths.

Hacker attributes the equanimity of Americans toward the rich to self-reliant and materialistic traditions. But the animosity toward the poor seems to me evidence of the economy’s ongoing weakness. Most Americans probably still feel too pinched to consider generous investments in public goods or a costly redistribution of income. The demand for tax cuts becomes intense when most people believe they can only just make ends meet.

For these reasons, I think the great enemy of a more just society is slow growth itself, and the resulting income stagnation. Today’s liberal reformers should keep in mind that the reforms at the turn of the century and again in the Great Depression occurred during or immediately after eras of fast economic growth. America has now experienced nearly twenty-five years of historically slow growth since the time when confidence and generosity were high.

Much has been made of the contrast to Europe, where voters still seek to retain their generous social programs despite slow economic growth and high rates of unemployment. The high cost of these social programs to European employers may well have held back job growth, while the greater flexibility in hiring and firing in the US may be one of the sources of this country’s stronger performance. It is well to remember, however, that European policymakers are hamstrung by the restrictive fiscal rules required to join the new European Monetary Union, and the US, in its seventh year of economic expansion, may be at a cyclical highpoint. And European manufacturing productivity is, nevertheless, improving about as fast as, and in some cases faster than, American manufacturing productivity.

On the other hand, experience in the Netherlands, where unemployment rates are half what they are in the rest of Europe, suggests that there is a middle way that can make sense. The Dutch have tolerated much more temporary employment than the rest of Europe, and instituted more free-market reforms. But they have also retained much of their generous system of social services, allowing them to avoid a serious widening of the distribution of income without much sacrifice in economic growth. In this sense, the Netherlands example could be suggestive for the US with its low levels of public investment and growing inequality of income. Inequality has gone so far that some mainstream economists are urging the US to consider using the tax system to subsidize increases in income for low-wage workers.14

Even if the US defies history by avoiding a recession, current rates of economic growth make it difficult to solve such basic problems as severe income inequality, which leaves some 28 percent of the population in Hacker’s lower tier of deprived Americans. And, at current rates of growth, the bill for Social Security, Medicare, and defense commitments will raise the federal deficit to potentially damaging heights in the next century.

Unfortunately, most of America’s politicians see only an opportunity to congratulate themselves for the recent prosperity, while fewer and fewer people show interest in changing society through politics or even voting.15 “How a nation allocates its resources tells us how it wishes to be judged in the ledgers of history and morality,” writes Hacker. “With the legacy we are now creating, millions of men, women, children are prevented from being fully American, while others pride themselves on how much they can amass.” Contrary to what passes for informed economics today, such a national mood will sustain neither an adequate rate of economic growth nor economic fairness.

  1. 8

    We should keep in mind that the cause of the wage gap is not that salaries for college graduates have risen rapidly. Many must settle for low-paying jobs. Rather, average high school graduate salaries have sharply decreased. The average weekly earnings for college graduates rose by only 5 percent between 1979 and 1994. The gap was largely caused by a decline of 20 percent in the average wage for high school graduates.

  2. 9

    Economists are not oblivious to this argument. For a somewhat though not entirely contradictory point of view, see John Tyler, Richard J. Murname, and Frank Levy, “Are Lots of College Graduates Taking High School Jobs?” National Bureau of Economic Research, Working Paper No. 51 27, May 1995.

  3. 10

    There is revealing contemporary economic research offering additional support for Hacker’s point of view that he doesn’t cite. These studies show that there is roughly as much inequality of income among those with college degrees and similar levels of experience as there is in society as a whole. This suggests that additional factors are at work in determining income, including abilities that may lie unused or unencouraged, especially among the disadvantaged. See Gottschalk, “Inequality, Economic Growth, and Mobility.”

  4. 11

    Daniel E. Sichel, The Computer Revolution (The Brookings Institution, 1997), p. 99.

  5. 12

    Some argue that unmeasured productivity is accounting for today’s surprisingly low level of reported inflation because it keeps business costs low. But significant unmeasured productivity gains would mean that real GDP growth is much higher than is reported. If that were true, then wages should be rising more rapidly than surveys suggest they are, or reported inflation should be much lower. The current subdued inflation requires other explanations, which may include a plentiful labor supply, international competition, tight monetary policy, and the slow growth of consumer demand.

  6. 13

    See, for example, “The Long Boom,” in the July issue of Wired.

  7. 14

    See Edmund Phelps, Rewarding Work (Harvard University Press, 1997).

  8. 15

    Only 49 percent of eligible Americans voted in the 1996 Presidential election. The turnout was worst among those with low incomes. For a further discussion of the declining interest in political participation among the less well-off, see Sidney Verba, Kay Lehman Schlozman, and Henry E. Brady, Voice and Equality: Civic Voluntarism in American Politics (Harvard University Press, 1995).

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