Here are four things you often hear asserted about the economy. Guess which ones are wrong:
l The major reason job growth has been so slow is that there wasn’t enough fiscal stimulus.
l Off-shoring creates more jobs at home than it kills.
l Industrial policy always fails.
l Globalization is not a major contributor to rising income inequality.
In fact, all four statements are wrong. And now Michael Spence has the proof.
Spence is former dean of the Stanford Graduate School of Business, former dean of Harvard’s faculty of arts and sciences and a world-class economist with a John Bates Clark medal and Nobel prize. And last week, Spence was in Washington to make a presentation at a high-powered conference organized by the International Monetary Fund. The moment I heard it, I knew he was on to something important.
Spence and Sandile Hlatshwayo, a new colleague of his at New York University’s Stern School of Business, took the U.S. economy and, from a statistical standpoint, divided it in two.
In one part were jobs in those companies that operate in a global market, subject to competition from foreign firms and suppliers. Most manufacturing wound up in the tradable bucket, but so did agricultural products, minerals, energy and a healthy chunk of business and financial services, from investment banking to management consulting. Not all these companies export, but they are all subject to import competition.
In the non-tradable bucket went activities such as government, health care, retail, construction, hotels, transportation, wholesaling — things that pretty much have to be done here and sold here.
When they looked at what happened between 1990 and 2008 — a period of rapid globalization — two things stood out.
One was that all the job growth came pretty much in the non-tradable activities, in particular government and health care, while across wide swaths of the tradable manufacturing sector, jobs declined significantly.
The other thing they noticed was that in terms of economic value-added — the “output” that is measured by GDP and generally correlates with income — the tradable sector experienced a slight edge.
Put the two together — the very unequal employment growth and nearly-equal output growth — and what you get is an economic tale of two cities, one that is growing in terms of jobs but not income, another that is growing income but not jobs. In short, a recipe for increasing inequality and social and political polarization.
The story behind the numbers goes like this:
Companies in the tradable sector, under the pressure of global competition, are busily outsourcing low- and mid-skilled work to other countries to become more competitive and more productive. The higher-skilled Americans who remain in those firms share in the benefits of that shift through wages and salaries that started higher and have been growing faster.
In the untradable sector, the story is one of rapidly rising employment but not so rapid a rise in output, which has translated into stagnant wages and benefits, both because of the slower growth in productivity and the increased competition in the labor market from all those workers laid off by the tradable sector. Moreover, now that the credit bubble has burst and households and government have had to cut back on their debt-financed consumption, much of the job creation that has gone on in the non-tradable sector is unlikely to continue.
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