Debating the Economics of Decline

Thomas Edsall, a professor of journalism at Columbia University and author of The Age of Austerity, has an interesting discussion in the New York Times “Opinionator” section today in which he compares two prominent theses about American decline.

The first thesis is articulated and defended by prominent conservatives such as Charles Murray and David Brooks. The basic claim made by Murray among others is that the radical cultural shifts of the 1960’s led to the destruction of basic social norms that had governed public life in America in the post-war era of prosperity, including “self-restraint, responsibility, family, faith and country.”

Some of the evidence for the decline of “conventionally defined moral standards” include the following indicators:  “The percentage of children born to unwed mothers has grown from 20 percent in 1984, when Murray published his seminal work, Losing Ground, to 41 percent in 2011; the rate among black women has gone from 59 percent to 72 percent, among white women from 12 percent to 29 percent and among Hispanic women 25 percent to 53 percent.”

Alan Krueger, who is Chairman of President Obama’s Council of Economic Advisors, defends the second thesis that America’s decline can primarily be traced to rampant corporate greed unleashed by deregulation of the economy in the 1980’s. Consider this selection from his recent speech to graduates at Oberlin College:

In considering reasons for the growing wage gap between the top and everyone else, economists have tended to shy away from considerations of fairness and instead focus on market forces, mainly technological change and globalization. But given the compelling evidence that considerations of fairness matter for wage setting, I would argue that we need to devote more attention to the erosion of the norms, institutions and practices that maintain fairness in the job market. We also need to focus on the policies that can lead to more widely shared – and stronger – economic growth. It is natural to expect that market forces such as globalization would weaken norms and institutions that support fairness in wage setting. Yet I would argue that the erosion of the institutions and practices that support fairness has gone beyond market forces.

Although there are important cultural factors to consider in the first thesis, particularly the entry of women as a class into the workforce and the decline of racial segregation, what is compelling about the latter thesis is the economic evidence. In a nutshell, Krueger points to several trends that are alarming:

First, corporate profits as a percentage of GDP have risen exponentially along with executive compensation. If that’s the case, he asks, they why hasn’t a percentage of that record profiteering led to an increase in real wages. If corporations are doing so well, the thought is that workers ought to receive some share of the benefits they helped to create. But this hasn’t happened.

The second trend is that real wages have not kept up with rising output. One reason why corporate profits are so high is that workers are more productive, a trend that has accelerate in the last 20 years due to technological innovations, as well as social media and communication improvements. While rising output has improved profits, real wages have declined.

Finally, the growth of income inequality is telling. Professor Emmanuel Saez, a Berkeley economist, released a study in January showing that the first 2 years of recover after 2008, “average family income grew by a modest 1.7 percent, ‘but the gains were very uneven. Top 1 percent incomes grew by 11.2 percent while bottom 99 percent incomes shrunk by 0.4 percent.’” This means, in effect, that the rich are getting richer and the poor are getting poorer, and this signals more than anything that America’s decline is primarily rooted in economic and political factors rather than the moral and cultural factors cited by conservatives.