The data suggest, as the following article explains, that a vibrant middle class is essential to an effectively functioning economy and a strong democracy. The middle class has spawned the people who become the engines of growth, from consumers who can support the creation of innovation by taking the risk of purchasing them to the entrepreneurs who feel comfortable enough to leave more secure positions to take the risk of starting a new business.
The reality is that inefficient allocation of talent is like any other wasted resource: it eventually weakens the system its supports. The benefits will flow whenever processes are productively aligned with desired outcomes. JL
Jim Tankersley reports in the Washington Post:
Economists attribute one-fifth of America’s productivity and wage gains over the past 50 years to the improved allocation of talent.
Lisa Rapp’s mother came to Southern California a war bride. She stayed for two decades, scrubbing floors, missing her parents in Scotland, socking away dollars to someday see them again. When she’d finally saved enough it was 1969 and Lisa was just turning 12, and the two of them flew charter across the Atlantic. They stayed for the whole summer in a house with a coin-operated television. One night, while Lisa slept, her mother fed sixpence into the set and watched Neil Armstrong walk on the moon.
In the American psyche, the moon landing is the story of almost everything that went right after World War II. But in economic terms, Lisa Rapp is that story — a housecleaner’s daughter who would grow up to be an engineer; a face of an upward flow of talent that lifted workers and wages around the country.The reason the American middle class has stagnated in recent decades is the upward talent flow got clogged up.
America lost its exceptional economy because too many Americans stopped doing the most exceptional things they could. Too many middle-class workers were forced into low-skill, low-paying jobs. Too many people born poor were knocked off course on their way to gaining more valuable skills. Too many American elites flocked to Wall Street and K Street, where they got rich at the expense of the overall economy. Not enough entrepreneurs took risks and built new businesses.
These trends run in stark contrast to how Americans built decades of shared prosperity in the postwar era: by investing in themselves and clearing paths for others to get ahead, too.Mary Spirito, Lisa’s mother, told her daughter something over and over in those decades after she came to America. Go to college, she said. Learn what you need to get a job that pays well so that you won’t need to wait years to see the people you love or the places you miss.
Lisa listened. She studied science and won a scholarship to the University of Southern California. She chose civil engineering. In her intro class there were 150 students, and 144 of them were men. She felt out of place. She stuck with it.
Today Lisa runs the public works department of one of the cozy communities around Los Angeles that used to be called rocket suburbs because of the booming aerospace industry. She owns a 4,300-square-foot house in Downey, one town over. She earns enough money that her husband, Richard, was able to effectively retire and care for their sons when an aerospace downturn rocked California in the mid-1990s. She sent both boys to USC.
Lisa isn’t a harder worker than her mother, but from the standpoint of the American economy, she’s more valuable. She built a more advanced skill set and put it to use in a job that maximized it.“I didn’t think I’d end up going to college to be an engineer,” she said from her office in Lakewood, Calif., where awards and certificates and maps of city paving projects line the walls. “I didn’t know any engineers. I didn’t know what they did. But my mom always said I needed to go to college to get the skills I needed to be independent. And I think that came about because she wasn’t like that.”
For decades after World War II, the U.S. economy pushed workers to build skills and maximize their economic potential. That was the secret to arguably the greatest period of shared prosperity in the history of capitalism.
A recent landmark study by economists at the University of Chicago and Stanford University — Chang-Tai Hsieh, Erik Hurst, Charles I. Jones and Peter J. Klenow — attributes one-fifth of America’s productivity and wage gains over the past 50 years to the improved allocation of talent.
Those improvements came because Americans changed the incentives in their economy and society. After the war, Americans began tearing down social barriers — allowing African Americans to grow up to be doctors and little girls to grow up to be engineers. In 1960, the Stanford and Chicago economists calculate, more than 9 out of every 10 doctors and lawyers in America were white men. By 2008, it was 6 in 10. The same shift is true for fields such as engineering.Women succeeding where their mothers couldn't
Ideally, an economy wants every worker to do what he or she is best at rather than be stuck in a lower-value job. By letting more workers reach that potential, America lifted workers at the bottom, middle and top of the income ladder. It created a virtuous cycle where the economy grew rapidly and median wages grew with it.
In recent decades, however, new barriers have sprung up to push people into lower-value positions — not social barriers, but economic ones.
People who once worked good-paying jobs in factories or office parks have been forced into lower-paying work that requires fewer skills. To compete for one of the dwindling number of middle-class jobs, workers today need more education. But that need has become a trap for many low-income workers hoping to get ahead, because working a low-wage job is a big impediment to finishing school.
Living on the margins leaves people vulnerable to little problems — a broken-down car, a scrambled child-care situation, the pull of government benefits that vanish if you work a little bit more — that compound and kill off college dreams.
Photo Gallery: Faces of the economy
From North Carolina to California, many workers are struggling to make it in a stagnant middle class.Talent has gone awry at the top end of the income ladder, too. Too many bright graduates follow big money into finance, where research suggests they enrich themselves but don’t improve America’s job-creation machine.
Corporate executives have learned that lobbying the federal government can boost their own incomes, while diverting resources from more productive investment. Something has afflicted the little-guy entrepreneurship that historically has served as a ladder to the middle class.
Economists Steven J. Davis and John Haltiwanger concluded this fall that American labor markets became “much less fluid” in recent decades, with far fewer workers hopping to better jobs. Until that fluidity comes back, they wrote, “sustained high employment is unlikely to return.”
Add it all up and you see what’s gone wrong.
Millions of Americans aren’t contributing as much as they could to help the economy grow. When it does grow, those workers are not able to fully share in the spoils.
The median prime-age American male — 25 to 54 years old — earns less today than he did in 1966, adjusted for inflation. After decades of social and economic progress, the median prime-age woman earns less now than she did in 2000. The typical two-parent American family works nearly two more days per week, full time, than it did in 1979 — but earns less per hour, in real dollars. The Federal Reserve calculates that the typical household has less wealth than it did in 1989. Economists Emmanuel Saez and Gabriel Zucman reported recently that 90 percent of U.S. households are worth less today than they were in 1987.
And yet America’s total personal income nearly doubled over the past 25 years, and inflation-adjusted incomes nearly tripled for the top 5 percent of U.S. earners.Research suggests those trends carry a high cost to society: Harvard University economist Nathaniel Hendren calculates that increased income inequality has led the government to overstate individual purchasing power by 15 to 20 percent in the United States since 1980, which amounts to a $400 billion-per-year blow to the economy.
Several studies have found evidence that a strong middle class is the cornerstone of a vibrant economy. The nonprofit Kauffman Foundation reports 7 in 10 entrepreneurs grow up in the middle class — an economic sweet spot that leaves would-be disruptors feeling comfortable enough to experiment, but not so comfortable that they never take chances. The International Monetary Fund finds that countries with more equal income distributions tend to have longer periods of stable growth.
Perhaps most importantly for Americans, a team of researchers from Harvard and the University of California at Berkeley has found that, around the country, the regions with the largest middle classes are also the ones where it’s easiest to climb the economic ladder.Employment opportunities in downtown Downey, pictured here, have shifted toward a service economy in recent years, and some residents are concerned that high-paying jobs are harder to find.A healthy middle class, put another way, is a precious resource in the American economy. For the past 25 years, America has been neglecting that resource instead of nurturing it. Reinvesting in that resource would pay off for the economy.
There is a good metaphor for that kind of investment in a resource – and how it can yield big returns – in Downey, the town where Lisa Rapp lives. It’s a Coca-Cola bottling plant, the largest in North America.Saving the economy like Coke saves water
Renewing the middle class starts with America’s institutions reimagining U.S. workers as a renewable resource. Coca-Cola's bottling process may be able to show us how.Coke has bottling plants all around the world. Their most important resource is water — if you don’t have water, you can’t make Coke. Not long ago, Coke plants hogged that resource, and not just for their drinks. The company used water to wash its bottles and cans, to lubricate its conveyor belts. Walking through a plant often meant wading through puddles.
A crisis changed that relationship. Coke was operating in a region in India where farmers’ wells began to dry up. Locals blamed the company; a court eventually cleared the company of wrongdoing, but Coke lost its operating license. Executives took a sobering message from the experience: They needed to start nurturing their water resources more.
The company teamed up with an environmental group, the World Wildlife Fund, and set aggressive goals to reduce water use at its plants worldwide and to protect watersheds it used. Plants like the one in Downey switched to compressed air for cleaning and dry lube for conveyor belts. Managers were judged on conservation targets. They spent hundreds of thousands of dollars per plant to make the changes.
It’s paying off. Coke’s North American plants alone have improved water efficiency by 11 percent, with a goal of 25 percent more by 2020. The company has reduced its water usage globally by 20 percent.
Most importantly, as this metaphor goes: Those expensive steps are already paying for themselves in water savings. The Downey plant is one of the most efficient on the continent now.
Using water more efficiently means using less of it, to preserve the overall resource. With middle-class workers, being efficient means investing in developing workers’ talents and using them in the way that has the most value — preserving a strong middle class for the greater health of the nation.
Downey did that once, when it was home to the factory that built the Apollo rockets and NASA’s space shuttles, and to thousands of manufacturing jobs that paid a solid family wage. They remember those postwar decades fondly here, as a time when the economy boomed and everyone benefited.Few Americans today believe the country works that way anymore. Polls show majorities say the economy is stacked against people like them; finding a way to boost pay for the middle class has become a dominant focus of politicians across the spectrum, and will likely be a driving issue in the next presidential election.
If America’s leaders want those jobs and raises to come back — if they want the economy to get back to working like it used to — they need to fix the country’s broken talent flow. They need to encourage the most skilled workers to create value for the whole economy, not just themselves. They need to unleash the low-skilled workers who are stuck in low-paying jobs and struggling to get the education they need to get ahead. They need to reverse the decline in entrepreneurship that is suppressing job creation.
That task is daunting and complicated, and it will require a lot of creative thinking.
It’s kind of like landing on the moon.
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