Why The US Pandemic Response Risks Widening The Economic Divide

Ed Comment:Oy! High-skill productivity is growing faster than GDP because the investment opportunities (e.g., IT) exceed the supply of properly trained talent. Algebraically, if something grows faster than average, then something else must grow slower than average, namely low-skilled productivity. An unconstrained supply of low-skilled labor from low-skilled immigration, trade with low-wage economies, and automation exacerbates the problem. Growth will increase wages if the supply of labor is constrained, or employment if it’s not. US employment has grown twice as fast as Europe (and still America’s middle-class incomes are 30 to 70% higher). Were the supply of low-skilled workers constrained, high-skilled productivity growth would get transmitted to low-skilled productivity growth in the following way: Increasing demand for a limited supply of low-skilled labor would raise wages, which would prune off the least valuable work (e.g., landscaping), which would increase the marginal product of labor, which would raise wages. An unconstrained supply of low-skilled labor causes its productivity to grow slowly. Strain doesn’t see the above linkage to supply. (more below on that.) he thinks of productivity growth as an independent variable. Probably, in large part, because he sees it only linked to capital investment, like Pettis. Pettis uses a two factor model, instead of 3 factors—labor and capital, without talent. And weirdly he doesn’t start with causality. So business doesn’t invest if low-skill productivity is growing slower than GDP. And productivity doesn’t grow faster without investment. Unlike me, he never explains why productivity is growing slower than GDP. It just is. It’s empirically true. But he provides nothing more than a circular reason.I’m always surprised how much difficulty economists have following all the macro links around. In part, I think most economists lack the training, knowledge, brain power, and determination to think through all the linkages carefully. The also have a certain determination not to admit to themselves that certain truths are true—in this case, that low-skilled immigration increase the supply of labor, which reduces the marginal product of labor and wages. (in Glenn’s case, that the multiplier probably does justify his proposed investments and therefore they must be justified for humanitarian reasons.) The purpose of thinking is to stop thinking. In the case of low-skilled immigration, they are too quick to justify their wishful thinking (to support low-skilled immigration because it’s virtuously humanitarian) with “supply creates it’s own demand.” Yes, it does; but what at what marginal product of labor? Aside from the supply of labor (and capital per worker), the primary thing driving up the marginal product of low-skilled labor from “waiters waiting on waiters”, is the supply of high-skilled relative to the supply of low-skilled. Only I see that.

Michael Pettis Comment:According to this important article, “an economist at the American Enterprise Institute, a conservative think-tank, says that focusing on limiting inequality should not be the immediate priority, arguing that other problems are more important to tackle, such as the ‘slow rate of productivity growth’”. But what if the two problems are related? As long as wages grow more slowly than GDP, why would businesses invest in productivity-enhancing technology?With wages so low there is little pressure to do so (unlike in the 19th and early 20th centuries, when US wages were the highest in the world and rising rapidly). In fact it is more profitable for companies individually to force down wages, and with wages continuing to grow slowly, businesses collectively don’t face the demand for their products that justifies large increases in productivity-enhancing investment. This is a self-reinforcing process, and it is probably not a coincidence at all that the slowdown in American productivity growth overlaps with the rise in American income inequality. This by the way is also what happened in Germany after the 2003-04 labor reforms.