Obama Administration happy talk about middle class incomes is not supported by any strategy or plan.

Larry Summers said this today in a speech at the Peterson Institute:

The rebuilt American economy must be more export-oriented and less consumption-oriented, more environmentally oriented and less fossil-energy-oriented, more bio- and software-engineering-oriented and less financial-engineering-oriented, more middle-class-oriented and less oriented to income growth that disproportionately favors a very small share of the population.

The clear implication is that it is Obama Administration policy to bring middle-class income growth rates up to, or at least nearer to, the growth rates enjoyed by the top few percent. (That they have been lagging since about 1973 is documented here and here.)  Another clear implication is that exporting more and reducing imports of consumer goods is the route to this goal. I suggest the Administration has no plan to achieve either of these goals and that mushy thinking and immense political obstacles stand in the way.

Every middle-class income is some employer's labor cost. For 3 decades the policy levers of the federal government have been consistently and vigorously employed to help drive down or at least restrain labor costs. Examples:

• Reagan's unprecedented firing of striking air traffic controllers
• Hostile treatment of labor unions by the NLRB
• Lax enforcement of rules against employing undocumented workers
• Granting of H-1B visas even when qualified domestic workers are available
• Failure to increase the minimum wage to keep up with inflation
• Manipulation of BLS consumer product index methodology to reduce cost of living adjustments
• Deregulation of transportation to increase price/cost competition
• Privatization of government jobs
• Facilitating the substitution of defined contribution retirement plans for more generous defined benefit plans
• Approval of mergers (and consequent job eliminations) that were previously regarded as anticompetitive
• Negotiating foreign trade agreements that are designed to facilitate transfer of American jobs to lower-cost nations
• Desultory and reluctant use of remaining means to protect American jobs from illegal foreign competition

If Obama's goal is to reverse the stagnation and decline of middle-class incomes, which of those does he propose to undo? How is he going to overcome the visceral institutional resistance of powerful employers to policies that tend to drive wages up? Is he prepared to use any political capital to that end?

With respect to Summers' statement that the route to increasing middle-class incomes is by exporting more, how can the US increase exports without making US industries more competitive in global markets by reducing their labor costs? Furthermore, it is fundamental mainstream economic doctrine that increasing economic integration—globalization—leads to a convergence of labor rates; for high-wage nations like the US, that means declining or stagnant middle-class wages while wages in developing nations rise. Among those who have said that globalization has in fact been driving down the general level of US wages are Alan Greenspan, Dani Rodrik, Paul Samuelson, Paul Krugman, Alan Blinder, Larry Summers, Joseph Stiglitz, the New York Times editorial board, and the National Bureau of Economic Research. Does the Obama Administration intend to increase domestic middle-class wages and simultaneously increase exports by negotiating different kinds of foreign trade agreements than the kinds we have been entering into in recent decades? If not, by what magic can employers and wage earners both be served?

There is a widespread fuzzy notion that despite disappearing manufacturing jobs the US will be able to raise the general wage level by creating a supply of more highly-educated people. This is said to be our "comparative advantage."  There are several problems with this, not the least of which is that other nations are not ceding high-skill jobs to the US but are using their governmental powers to implement strategies for dominating the high-skill industries of the future. (One example is reported here.) It seems to be true that the US has the best universities and colleges, but increasingly they are educating fiercely bright foreign students who are funded by their governments and will take their skills home with them. As developing world living standards increase and government-funded strategic opportunities to employ their new skills at home increase, the benefits of US higher education will be more and more dispersed around the world instead of underpinning new US industries.

Furthermore, the numbers show that education is doing a lot less for the economy than we thought it would. Education continues to aid the upward mobility of those who have it, but it does not create jobs or industries or magically raise general wage levels. The law of supply and demand applies to education as well as pork bellies. If we have too many college educated citizens, some of them will be waiting tables and swinging hammers, and the income differentials versus high school will continue to shrink. Having a demand-side strategy is also vital. The US, practically alone among nations, lacks an explicit jobs creation and economic dominance strategy and is paralyzed by the rhetorical foolishness that the "government should not pick winners and losers." Of course, in reality, the process of picking winners and losers in government offices, and at fundraising events, has never abated.

I would not say, as Ralph Nader and George Wallace did, that there's not a dime's worth of difference between the national Democratic and Republican parties, but when it comes to the fundamental battle about whether middle class incomes should go up or down, the differences between Obama, Bill Clinton, and other Wall Street Democrats, on the one hand, and the Republican Party, on the other, are minor. I don't expect the Democratic Party to start acting like a labor party.

Update on Tuesday, July 21, 2009 at 12:06PM by Skeptic

General Electric CEO Jeff Immelt is on a mission to improve U.S. exports and says this about labor costs:

Labor costs are also a factor. Immelt says: "In the places where you have relatively high labor costs, they've got to be more productive." The labor in any facility, he says, has to be able to compete on a "global basis."

Update on Monday, August 3, 2009 at 10:19AM by Skeptic

To those who contend globalization as implemented by the US has substantially reduced the general level of wages in the US, add Josh Bivens, who published this careful analysis in October 2007.  He says the cost of globalization to many middle class families is about the same size as their federal income tax burdens. UPDATE 10/8/09: Bivens has this later paper showing these effects are predicted by mainstream economic theory. 

Comments

[Dave Moore]

The assertion in paragraph 5 "widespread fuzzy notion. . . " that highly skilled foreign students educated in US universities ". . . will take their skills home with them". [home meaning their country of origin] can be questioned. Data presented at http://www.migrationinformation.org/Feature/display.cfm?ID=571 shows that a large number of graduate students, about 200,000 in recent years, have historically taken jobs in the U.S. The data are from a Migration Information Org.

My experience with foreign graduate students is that the few I've known will take professional-level jobs in the US if offered. The next generation after us is certainly greatly more engaged with emerging foreign students than we were. The grown children of three of my close colleagues (out of say a dozen) married foreign-born (now naturalized US citizens) professionals and their work with US firms have them working both in the US and internationally. It appears that cross-cultural marriages amongst our childrens' generation of professionals is increasing. The web site above refers to a "brain gain" for the US by dint of foreign students. My comment assumes that "middle class" in your blog includes entry level professional occupations, e.g. college teachers, scientists, economist-related jobs in business and finance, researchers in various disciplines, etc. In short, I don't see US universities educating more foreign students as a problem for wage growth in the US middle class, but as a natural evolution in the expanding global economy and a good thing for integration of the US labor with the global labor force, at least at the professional level.

Thus the implication that rising numbers of foreign students educated at US universities contributes