Since the middle of the past century, our political economy has relied upon the insidious metaphor of the “economic pie,” which measures success by the amount of gross domestic product (GDP) available to every American for consumption. When serving a pie, each portion’s size depends on both the size of the dish and the share allocated to each slice. Likewise, the thinking goes, each person’s consumption depends on the size of the overall economy and the share he receives. Fighting over shares is a zero-sum game, but if we concentrate on baking an ever-larger pie, then everyone’s slice can grow. If some slices are too small, pie can be redistributed among the plates. And who doesn’t like pie?
The phrase economic pie first appeared in the presidential lexicon in 1952, when Harry Truman quoted from a Business Week article that used the term. John F. Kennedy used it when addressing the U.S. Chamber of Commerce. Presidents Lyndon Johnson, Gerald Ford, Ronald Reagan, George H. W. Bush, Bill Clinton, and Barack Obama used it, too. The media and think tanks across the political spectrum bandy it about with ease.
On its own terms, this “economic piety” has delivered. The overall economy has grown enormously: From 1975 to 2015, the nation’s GDP increased threefold. Redistribution has widened the smaller slices: During the same period, spending on programs targeting lower-income households increased fourfold. For Americans of all socioeconomic strata, material living standards, access to technology, and consumer variety all marched steadily higher.
But the things America thought she wanted have not made her happy. Her troubles are by now well known: decades of stagnant wages, a labor-force exodus, too many unstable families, and crumbling communities. Years before the financial crisis that sparked the Great Recession, a majority of Americans began telling Gallup that they are, “in general, dissatisfied with the way things are going in the United States at this time.”
Understandably embarrassed by these results, many economists and policymakers now point the finger for these troubles at phenomena like “automation.” But that is no explanation. Technological innovation and automation have always been integral to our economic progress, and in a well-functioning labor market they should produce gains for all types of workers. The economic data these days all point to declining productivity growth, suggesting that progress is “destroying jobs” more slowly than ever.
Another defense holds that conditions are much better than the data indicate or people perceive. Incomes look better or worse, depending on the measure of inflation. Poverty levels look higher or lower, depending on the accounting for government benefits—for instance, Harvard professor Steven Pinker highlights our progress lifting people above the “consumption poverty line.” And so many people have iPhones! Such observations aren’t persuasive, though, because neither readjusted data nor celebration of gadgetry does anything to improve the reality of deteriorating individual, family, and community health. Claims that overall growth is robust and wages not so bad don’t remedy ongoing social collapse, reverse workforce abandonment, or lessen government dependence—they only underscore the disconnect between conventional economic measures and the quality of life for which those measures are supposed to provide proxies. If policy analysts ask, “Who are you going to believe, me or your lyin’ eyes?” Americans will—rightly—choose the latter.
What Americans increasingly see are their children struggling and their neighbors sick or dying. Half of Americans born in 1980 were earning less at age thirty than their parents had made at that age. Most Americans still do not complete even a community college degree, yet the median income of a high school graduate lifts a family of four less than 40 percent above the poverty line; in the 1970s, such an earner would have cleared that threshold by three times as much. That’s for people who are working. At the Great Recession’s end, Charles Murray reported in Coming Apart, barely half of working-class households had a full-time worker present.
And then there are the “deaths of despair.” Mortality rates have risen since the turn of the century for middle-aged white Americans, driven by higher levels of suicide, liver disease, and drug overdoses for those with only a high school degree. Such an upsurge had no precedent in American history, and nothing similar is occurring in other developed nations. The nation’s suicide rate climbed 24 percent between 1999 and 2014, with stunning increases of 43 percent and 63 percent for men and women aged 45 to 64. Opioids are now killing Americans more rapidly than HIV/AIDS ever did. Life expectancy nationwide fell in 2015, for the first time since 1993, and then again in 2016, marking the first consecutive years of decline since the early 1960s. Preliminary data indicate yet another decline in 2017.
In making GDP growth and rising consumption the central objectives of public policy, economic piety represents a truncated and ultimately self-undermining concept of prosperity. Workers have no standing in this view of the economy; neither do their families or communities. Households that see their economic prospects plummet or their livelihoods vanish should ask for a government check and be placated when they get one. Towns that can no longer sustain themselves become places that people should just leave. Politicians will pay lip service to the importance of education and retraining, but they will not hold themselves accountable for such programs actually working. The economic pie’s expansion, regardless of what or who gets left behind, is the goal; maintaining a healthy, inclusive society is a hoped-for by-product, not an end in itself.
Economic piety acknowledges the existence of economic losers but holds that any losses are exceeded by gains to winners, which means that with careful redistribution, everyone can emerge ahead. But what if people’s ability to produce matters more than how much they can consume? That ability cannot be redistributed. And what if smaller losses for those at the bottom of the economic ladder are much more consequential to them than the larger gains for those already on top? Under those conditions, rising GDP will not necessarily translate into rising prosperity.
Such considerations have deep implications for society’s longer-term trajectory. Even if gains exceed the costs initially, what happens if the losses undermine stable families, decimate entire communities, foster government dependence, and contribute to skyrocketing substance abuse and suicide rates? What if the next generation, raised in this environment, suffers as well—perhaps reaching adulthood with even lower productive capacity? What if, in the meantime, cheap capital from foreign savings has fueled enormous increases in government and consumer debt, while the industrial policies of foreign governments have left the American economy with fewer opportunities to create well-paying jobs for less-skilled workers? Such costs show up nowhere in GDP—at least initially. Sadly, they appear to have been much more than hypothetical, and have proved much costlier than anyone imagined.
The explanation for why economic piety steered the nation off course, and the roadmap to recovery, are encapsulated in what I call the Working Hypothesis: that a labor market in which workers can support strong families and communities is the central determinant of long-term prosperity and should be the central focus of public policy.
Alongside stable political institutions that protect basic freedoms, family and community provide the social structures necessary to a thriving society and a growing economy. Those institutions in turn rely on a foundation of productive work through which people find purpose and satisfaction in providing for themselves and helping others. The durable growth that produces long-term prosperity is the emergent property of a virtuous cycle in which people who are able to support their families and communities improve their own productivity and raise a subsequent generation able to accomplish even more. Conversely, without access to work that can support them, families struggle to remain intact or to form in the first place, and communities cannot help but dissolve; without stable families and communities, economic opportunity vanishes.
Economic growth and rising material living standards are laudable goals, but they by no means guarantee the health of a labor market that will meet society’s long-term needs. If we pursue growth in ways that erode the labor market’s health, and then redistribute income from the winners to the losers, we can produce impressive-looking economic statistics—for a while. But we will not generate the genuine and sustainable prosperity we want. Growth that consumes its own prerequisites leads inevitably to stagnation.
This shift in perspective from consumer to producer conjures a vision of two constituencies vying for the same resources, but here the dynamic is more complex. Every individual is both a producer and a consumer, the economy an engine of both production and consumption. An emphasis on the consumption lens has long been a tenet of classical liberalism: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer,” wrote Adam Smith in The Wealth of Nations. Superficially, at least, consumption seems a sensible focus.
But only through production does the ability to consume exist. Production without consumption creates options; consumption without production creates dependence and debt. Most of the activities and achievements that give life purpose and meaning are, whether in the economic sphere or not, fundamentally acts of production. Yes, material living standards contribute to prosperity, but accomplishments like fulfilling traditional obligations, building strong personal relationships, succeeding at work, supporting a family, and raising children capable of doing all these things themselves are far more important to life satisfaction. What these things have in common is their productive nature not as boosts to GDP but as ways that people invest effort on behalf of others. Our social norms recognize productive activities as essential to a functioning and prosperous society, and so we award respect, dignity, and gratitude to those who perform them.
Without work—the quintessential productive activity—self-esteem declines and a sense of helplessness increases; people become depressed. Where fewer men work, fewer marriages form. Unemployment also doubles the risk of divorce, and male joblessness appears the primary culprit. These outcomes likely result from the damage to both economic prospects and individual well-being associated with being out of work, which strain existing marriages and make men less attractive as marriage partners.
Work is both a nexus of community and a prerequisite for it. Work relationships represent a crucial source of social capital, establishing a base from which people can engage in the broader community. Communities that lack work, by contrast, suffer maladies that degrade social capital and lead to persistent poverty. Crime and addiction increase, their participants in turn becoming ever less employable; investments in housing and communal assets decline; a downward spiral is set in motion.
The role of family and community in transmitting opportunity to the next generation also depends on work. When parents lose their jobs, their children tend to do worse in school, graduate at lower rates, and have less success as adults. Part of productive activity’s worth derives from the dignity and respect that society confers on self-reliance and productive contributions. In a community where dependency is widespread, illegality a viable career path, and idleness an acceptable lifestyle, the full-time worker begins to look less admirable—and more like a chump.
Regrettably, neither of the two major political parties has genuinely concerned itself with work for decades. Politicians on all sides talk incessantly about “good jobs,” but the policies they pursue speak louder. What a coincidence that cutting taxes and shrinking government, expanding health care entitlements and fighting climate change, all were supposedly jobs programs as well!
Republicans have generally trusted that free markets will benefit all participants, prized the higher output associated with an “efficient” outcome, and expressed skepticism that political actors could identify and pursue better outcomes, even if any existed. Their labor-market policy could best be described as one of benign neglect.
Democrats, by contrast, can sound committed to a more worker-centric model of growth, but rather than trusting the market too much, they trample it. The party’s actual agenda centers on the interests advanced by its coalition of labor unions, environmentalists, and identity groups. Its policies rely on an expectation that government mandates and programs will deliver what the market does not. This agenda inserts countless regulatory wedges that aim to improve the conditions of employment but in the process raise its cost, driving apart the players that the market is attempting to connect. Better market outcomes require better market conditions; government cannot command that workers be more valuable or employment relationships be more attractive; by trying, it can bring about the reverse.
The economic landscape is pocked with the resulting craters. Starting in the 1960s and 1970s, payroll taxes and workplace rules directly and substantially raised the cost of employing lower-wage workers. Aggressive environmental regulation reduced investment in industrial activity and thus the demand for workers whose advantage lay in relatively more physical work, while the education system’s obsession with college for all left many students ill prepared to join the labor force. A system of organized labor that once helped broaden prosperity began instead to hoard it for a dwindling membership, at everyone else’s expense. Our immigration system increased the supply of low-wage workers available to employers by millions, while free trade increased the supply by billions—to the advantage of those seeking to use such labor, but not those seeking to provide it. All the while, an ever-expanding safety net provided more benefits to a rising share of the population, reducing work’s economic and social value.
The political upheaval of 2016 should have triggered a rethinking of priorities and agendas on all sides. Yet rather than embrace that opportunity, or even acknowledge the need to change course, many people pleased with the status quo reacted to the expressed ungratefulness of the masses with equal measures of indignation and obstinacy. Some concluded that typical voters must be either too stupid to recognize how good they have it or else too closed-minded to put aside their provincial fears and embrace the wonderful modern world that has been created for them, without anyone having asked them about the particulars. Others took the dissatisfaction more seriously but attributed it to inadequate implementation of existing approaches.
One prevalent narrative emphasized “globalization” as both the catalyst for disruption and the axis of political realignment. “The new divide in rich countries is not between left and right,” asserted the Economist, “but between open and closed. . . . Welcome immigrants or keep them out? Open up to foreign trade or protect domestic industries? Embrace cultural change or resist it?” Washington Post columnist Fareed Zakaria, among others, endorsed the same open-versus-closed framing, lauding former British prime minister Tony Blair’s “remarkably prescient” view to this effect.
As their framing makes clear, those purveying the open/closed dichotomy regard only one of its sides as valid. They elevate the free flow of goods and people as the nonnegotiable underpinning of both economic and social progress. Anyone with other priorities is condemned to the closed camp—closed-minded, even racist.
Yet how does the open agenda, which has already characterized the past generation of American policy, address the critical challenges facing the nation? It does not. Rather, the standard response is that this openness must be paired with a renewed commitment to helping those left behind, as if only a lack of focus and resources has prevented government programs from transforming people’s prospects. Invariably, the suggested solution is education. Zakaria calls his approach “open and armed,” because it requires “a far more ambitious set of government programs” to equip Americans with “a bristling armory of tools and training.”
The vision is supposed to be an inspiring one, in which people are lifted upward to greater opportunity. Its real implications are less exalted: If the economy no longer works for the average worker, it is he who needs to transform into something it likes better. If government programs could change human capabilities to match whatever the market might compensate highly, public policy would become rather easy. But the insufficiency of this approach as a response to the nation’s challenges recalls the joke about the economist’s solution to finding himself shipwrecked among boxes of canned goods: “First, assume a can opener.”
Without education as a deus ex machina, a commitment to openness turns out to mean little more than merging together and doubling down on existing programs of growth and redistribution, offering a veritable buffet of warmed-over policies—all served with a heaping side of self-righteousness. “I’m for globalization and a strong safety net” seems likely to become for the next generation of insulated but determinedly respectable professionals what “I’m socially liberal and fiscally conservative” was for the last.
Now, some are abandoning even the pretense of solving our problems and of maintaining an inclusive society, instead laying the groundwork for a “universal basic income,” in which high-income taxpayers provide every household with an unconditional stipend. This represents the logical end point of economic piety: unconstrained growth paired with unconstrained redistribution, maximizing consumption without reference to work. Facebook’s Mark Zuckerberg presented this idea in his commencement address to Harvard University’s Class of 2017. In her campaign memoir, What Happened, Hillary Clinton revealed that her policy team spent weeks trying to develop a basic-income proposal for her. This February, the California Democratic Party adopted the idea in its formal platform. Whether one’s motivation is the (misguided) fear that automation spells doom for those left behind in the modern economy or just a preference among the economy’s winners for maintaining the status quo, paying people regardless of whether they work appears a convenient solution.
But if the Working Hypothesis is correct, a basic income would be entirely unresponsive to the nation’s challenges; indeed, the idea represents an explosive charge planted directly at the weakest points in society’s foundation. It would make work optional and render self-reliance moot; consumption would become an entitlement officially disconnected from production. A community in which people capable of making positive contributions are not expected to do so is unlikely to be one that thrives on any dimension in which productive contributions are needed.
Often, the basic income is floated less as an ideal than as a last resort—accompanied by resignation that the future of work for the typical American is unavoidably bleak. One explanation for this pessimism is the prospect of automation rendering much of the labor force superfluous, but such concerns are conceptually backward. “Technology destroying jobs” is synonymous with the rising productivity that is a prerequisite to better jobs and higher wages for workers throughout the economy. Nor, as noted above, does evidence indicate that some acceleration of technological progress is underway—to the contrary, productivity growth has been slowing and stands at its lowest level on record.
Looking ahead, forecasts depict coming economic transformations similar in scale and pace to those of the past. Yes, the latest in artificial intelligence and robotics looks impressive. So did electricity, the assembly line, the computer, the robot, and the Internet. Headline-grabbing studies that predict doomsday make ludicrous leaps like suggesting that school bus drivers, fashion models, and real estate agents will all disappear. Conversely, careful studies of how forthcoming technologies will interact with humans indicate that opportunities to replace workers are quite rare, while the typical effect will be to augment their capabilities. As many firms are already discovering, a key limitation on the rate of technology adoption is the ability of workers to use it. Robots can be workers’ best friends, if employers find it in their interest to foster the relationship.
What really underlies pessimism about the American worker’s future is the assumption that we cannot possibly make concessions on any of our other priorities. True enough, if the preferences of the typical urban professional are always the most valid and important, if the maximization of economic efficiency and material consumption is inviolable, if businesses retain the incentive to find the cheapest possible workers anywhere in the world, then the future of the American labor market indeed looks grim. But all this merely begs the question of what should our priorities be. In the past, our society was much less affluent, and yet the typical worker could support a family. How could it be that, as we have grown wealthier as a society, we have lost the ability to make that kind of arrangement work? Or do we just not really want to?
If work is foundational to our society, then we have a duty to make the changes and trade-offs necessary to support it. Rather than taxing low-wage work to cut other tax rates and expand entitlements, we can do the reverse: We can provide a subsidy for low-wage work, funded with higher tax rates and reduced transfer payments. Instead of organized labor piling burdens atop the ones that Federal regulators already place on employment relationships, we can repurpose labor unions to help workers and employers optimize workplace conditions. We can expand the demand for more of the work that more Americans can actually do if we place the concerns of the industrial economy on an equal footing with those of, say, environmentalists. We can prepare Americans to work more productively if we shift some attention and resources from the college track to the other tracks along which most people actually travel. And if we acknowledge that while the influx of foreign persons and products can greatly benefit consumers, it can also harm workers, we can even rethink our embrace of effectively open borders. If we give workers standing, if we make their productive employment an economic imperative instead of an inconvenience, the labor market can reach a healthy equilibrium.
At the very least, we should not dismiss as impossible the renewal of work and family, sustained by a healthy labor market, before we even try. Nor can we dismiss it as too expensive, unless we know the alternative’s real cost. Departing from the market’s default outcome will always appear expensive if the “efficient” default is defined as the overriding social goal. But if some other outcome is better for society, then the efficient outcome is actually the more expensive one.
The labor market’s conditions—who can perform what kind of work and who needs what kind of work performed, what wages will be offered and accepted, and which rules govern work relationships—determine how many jobs exist, of what types, located where, and at what pay scale. Nothing in the theory of economics guarantees the particular outcome that society requires: the provision of sufficient meaningful work to sustain families and communities. If the labor market settles on an efficient outcome in which large segments of the population lack meaningful work, our response can’t be to say “thanks, understood” and then to wait for those displaced people suddenly to transform themselves into something else, or simply to give them government aid. Our response must be “that needs to change.”
The answer is not, though, to blame the labor market for acting like a market. A market is a tool that translates underlying conditions into the most efficient outcome. Even when conditions bring a bad outcome, the market mechanism itself remains hugely valuable. It preserves liberty and fosters choice for individuals, creates incentives via competition for innovation and investment, and helps resources flow toward the most productive uses. Neither the traditional Republican attitude of trusting the market whatever its outcome, nor the traditional Democratic attitude of wantonly trampling the market in hopes of a better outcome, actually moves the market in the desired direction. Instead, public policy should focus on those underlying conditions: Why is the market settling where it does, and under what circumstances would it settle somewhere better?
Policymakers should seek opportunities to improve labor market conditions along five dimensions: the demand for work, the supply of work, the market’s boundaries, the setting of terms and conditions, and the imposition of taxes. In each of these areas, America’s choices have been misguided. We overtax and underinvest in less-skilled workers, make them costly and risky to employers, and discourage investment in the industries where they could work most productively. At the same time, we free employers from the constraints of using the existing domestic workforce, offering them instead an option of using much cheaper foreign workers overseas or bringing the cheaper workers here. The immediate effects of these policy choices have often appeared beneficial, even to the workers who now find themselves disadvantaged. But over time those policies have reshaped the economy’s contours in ways that have left too many people out. In each case, assessing policy through the lens of Americans as producers rather than consumers yields dramatically different answers.
Demand for Work
What work does the economy need done? Consumer preferences and industry economics dictate much of the answer, but, at the margin, the rules that government puts in place can alter the balance. For instance, heavily regulating industrial activity and imposing stringent environmental regulation on physical infrastructure, while leaving the digital economy mostly free from regulation, will tend to constrict the demand for manufacturing workers while expanding it for software engineers. Targeting taxes at energy-intensive activities, while aggressively subsidizing health care and higher education, will have profound effects on which industries stall and which thrive.
Over time, these kinds of choices can begin to affect consumer preferences and industry economics. Innovation will start to shift to those areas where entrepreneurs anticipate building the most successful businesses—whether in manufactured goods or high-end services, housing renovations or artistic performances. And where greater investment accumulates, the efficiencies of scale and expertise and supply chains develop, too. A country consistently seen as the second-best location for a new factory will watch as factories get built in other places, and the researchers and suppliers and distributors follow—and soon it won’t even be the fifth best location.
In the 1970s, American policymakers responded to severe environmental degradation with a series of statutes that made its reversal an absolute priority. The Clean Air Act, for instance, sets pollution thresholds without regard for cost and requires each new generation of pollution emitting facilities to adopt better technology than the last. This worked—environmental quality has improved dramatically—but more than forty years later the ratchet continues to tighten, even though Americans already enjoy air far cleaner than Europe’s and would benefit from much faster expansion of industrial activity and infrastructure. Environmentalists and economists argue that the “externalities” associated with pollution justify ever-tighter controls, but the communities flinging tax breaks at producers willing to make local investments have a different story to tell: Clearly, they see the social value of such investment far exceeding its cost.
Straightforward reform of the Clean Air Act could help remedy this situation. Rather than demand constant improvement from new facilities, the Act should press pause and allow all new investment to proceed under the same standards applied to existing facilities. Likewise, the National Environmental Policy Act, which mandates years-long reviews of all major projects (and invites years more of litigation about each review), should be replaced with a short, predictable review process akin to those adopted in Germany, Canada, and Australia. Steps like these would strike a new balance between the environment and the economy that preserved gains to date in the former while allowing the pendulum to swing back toward the needs of the latter. If America were fortunate enough to see the reforms prompt an especially rapid expansion of polluting facilities and projects, perhaps environmental quality would drift back toward that of the Clinton Administration in the 1990s. That period is rightly remembered for its rising wages. It is rarely cited as a time of unacceptable environmental degradation.
Supply
What work are people prepared to do? The employer bears significant responsibility for training workers to meet its needs and improving their productivity over time. But for this investment to make sense, the worker must demonstrate basic capabilities at the outset. The better prepared the prospective workforce, the faster an employer can bring workers on board and the higher their wages will be.
The students to whom the education system tailors its efforts will experience the greatest boost in their work prospects. This emphasis will also influence demand, as entrepreneurs build businesses where they expect to find well-prepared workers. If public schools offer a wide range of programs and lavish attention on those connected to the weakest segments of the labor market, they can push outcomes in a positive direction. If they adopt a “college or bust” attitude, we shouldn’t be surprised to find a workforce consisting primarily of college graduates and busts.
The American education system has skewed its focus and resources toward the college pathway to such an absurd degree that even vocational programs see themselves as a stepping stone in that direction. Yet for the vast majority of students, the journey ends in failure. Fewer than one in five travel smoothly from high school to college to career. High school test scores have not improved in decades; neither has the share of 25-year olds earning a bachelor’s degree.
America needs a co-equal vocational track that prepares students to move from high school into the labor force and that, when necessary, gives those students priority over ones headed for college. The more than $100 billion invested in subsidizing higher education each year should be gradually shifted to support instead the population that is not headed toward college success. This requires the development of high-quality vocational career tracks in high schools as well as close partnerships between school systems and employers that get students into the workplace, earning money and industry credentials, while they are still completing their formal education. For less than what society spends today on a college graduate, it could provide a student with multiple years of high school, additional high-quality technical education, subsidized employment, and a savings account with $25,000 in it—perhaps for further training later in a career.
Adopting such a system requires “tracking,” an approach that America has steadfastly rejected because it will unavoidably place some students on a non-college track who might have done well in college. But a career-focused track is not a death sentence. It can lead in many cases to a more fulfilling (and more remunerative) career than might the college track, especially for its more talented students. And individuals would have opportunities to shift tracks both during their education and much later; as the New York Times notes, “it is not uncommon to find executives in Europe who got their start in apprenticeships.” No public education system will serve every student well, but the share finding themselves mismatched will be far lower if programs at least try to meet the needs of the majority.
Society must choose between proceeding with a charade and acknowledging honestly the limitations it faces. Pretending against all evidence that every student should prepare for college sustains the fiction that government programs can compensate for various background disadvantages and thus deliver “equal opportunity,” defined as equality of life chances. Pushing every student in that direction yields the occasional Horatio Alger story, which warms the heart and stands for the proposition that the same could happen to anyone, even though its rarity in fact underscores the opposite. The approach is most useful to those least affected by it, who benefit from innate and environmental advantages, who can flourish in college, and who can now justify a broad array of economic policies that further benefit themselves by claiming that everyone else can follow their path, too. It is most harmful to those already disadvantaged, who must now navigate a system that has proven repeatedly its inability to meet their needs.
Boundaries
Who gets to perform work and who gets to purchase it? When trade and immigration policies expand the pool of employers and consumers demanding various types of work, the workers able to provide it will likely see more opportunities, and higher wages. But when policies dramatically expand the supply of workers able to meet existing demand, domestic workers will suffer. In establishing a labor market’s boundaries, balance is therefore crucial.
Unfortunately, in a wealthy country like the United States, balance will rarely be achieved for less-skilled workers if residents of poorer countries can participate without limit in the same labor market. Entrepreneurs gain access to a vastly larger and cheaper supply of labor, while imperatives vanish to build businesses that use the existing domestic labor supply or make investments in improving domestic workers’ capabilities. This effect swamps the smaller uptick in demand for less-skilled American labor that those workers might expect to see from the poorer countries’ consumers.
From a labor-market perspective, immigration policy becomes a question of skills. The economy has no fixed number of jobs that immigrants might “take” from native workers, nor do higher or lower levels of immigration necessarily lead to higher or lower wages. Immigrants are both producers and consumers, so their presence increases both the supply of labor and the demand for it. But we should expect immigrants who compete in a specific segment of the labor market to suppress wages of existing workers in that segment because each immigrant’s economic footprint is asymmetric. A worker with only a high school diploma contributes far more to the supply of such workers than to the demand for such work; a highly skilled worker, by contrast, adds at least somewhat to the demand for less-skilled work while adding to its supply not at all.
Defenders of “immigration” as a general phenomenon miss this point when they argue that recent waves have not been responsible for wage declines. They may (or may not) be right about that, but they are answering the wrong question. The issue is not whether immigration has been or will be better than no immigration; it is whether we are admitting the appropriate mix of immigrants. The counterfactual to ponder is how different things might look had we welcomed highly skilled immigrants but more tightly restricted the entry of those who compete directly with less-skilled native workers. Going forward, regardless of the policy adopted for immigration in the highly skilled segment of the labor market, lower-skilled American workers will do better if their segment of the labor market has relatively fewer of them.
Similarly, policymakers must take a more nuanced view of international trade, which for all its benefits has imposed heavy costs on the American workers who compete most directly with foreigners. The standard position on trade, held by many economists and adopted by many policymakers, is that trade is always good and that more is always better. This conclusion stems from the error of evaluating trade primarily by its effects on immediate consumption. In the short run, a consumer would obviously prefer having the opportunity to purchase something from abroad over not having that opportunity. A trade deficit created by the United States importing more from other countries than it exports, on this view, would be unimportant or even beneficial. If other countries are willing to send us more than they demand we send in return, it is they who are the patsies. If, rather than purchase U.S.-made goods, other countries choose to purchase U.S. Treasury bonds or companies or houses, that’s a demonstration of confidence in the American economy and the desire of foreigners to invest here.
This consumerist focus is myopic, as adopting a production lens makes clear. In aggregate, at the national level, imbalanced trade places the economy on a lower trajectory. In the short run, it reduces productive capacity. It also allocates both human and physical capital away from industries that hold most potential for the future, and it builds industrial ecosystems and supply chains outside the United States, which will make future efforts to regain a competitive foothold more difficult. What begins as a distortion or imbalance becomes genuine advantage as supply chains and know-how embed in the countries that have seized them. The United States, meantime, has become a prominent exporter of garbage (not just bad pop music but actual refuse). If the Working Hypothesis is correct, trade deficits do matter.
This is not to advocate protectionism or to suggest that anyone voicing skepticism about current conditions must be on the right track. A middle ground exists between the refusal to countenance affirmative trade policy and the desire to throw weight around indiscriminately. A policy that fully occupies this middle ground would focus on four objectives: first, building strong American advantages in sectors whose goods and services are traded globally; second, deterring unfair foreign practices that undermine free markets—even when confrontation carries a risk of retaliation; third, addressing financial imbalances that contribute to trade imbalances by discouraging foreign acquisition of U.S. assets; and fourth, providing support to the less-skilled American workers who disproportionately bear trade’s costs. From the consumer’s perspective, none of these steps is necessary. From the producer’s, all are imperative.
Transactions
How do workers and employers establish and manage their relationships? The set of negotiable terms and conditions and the rules of negotiation have a significant influence on the nature of transactions in any market. This is triply true in the labor market, where overlapping regimes of contract law, employment law, and labor law govern the efforts of workers and employers to reach mutually beneficial agreements. Any contract they wish to sign must grapple with the myriad rules that government imposes about hours, wages, conditions, benefits, and much more. On top of those rules, the presence of a union may introduce an additional layer of collective bargaining, itself controlled by government rules.
In principle, allowing workers to bargain collectively should give them an opportunity to secure better terms than they might each achieve individually. Furthermore, by placing workers and employers on equal footing, concerns of unequal power and unfair agreements fall by the wayside, reducing the need for government dictates. Why does the Department of Labor need to set the standard for overtime pay when the parties can be reasonably expected to work out this issue for themselves? But done poorly, a system of organized labor can have the opposite effect, creating industry-wide cartels that negotiate agreements in the long-term interest of no one.
The National Labor Relations Act, enacted during the Great Depression, continues to dictate the structure of American organized labor, to disastrous effect. It establishes hyper-adversarial relationships between workers and employers—something neither side wants—and facilitates a bargaining process closer to a hostage negotiation, in which only the union issues demands or can hope to achieve gains, while the employer’s goal is merely to minimize the pain. Worse, the NLRA actively prohibits any other forms of worker-management cooperation from taking root outside the confines of a traditional union, ensuring that no such alternatives can ever blossom.
The NLRA should be amended to remove its prohibition on alternative forms of organizing. And then the Federal government should take the radical step of redefining its employment laws as a default rather than a floor. A retailer and its employees, for instance, might agree that overtime pay will be less than time-and-a-half but all schedules will be set at least two weeks in advance and a system established to allow employees to trade hours among themselves as needed. Workers might gladly waive thousands of pages of excessive safety regulations in return for meaningful representation on a plant operating committee and right-of-refusal on all equipment purchases.
Instead of fighting it tooth and nail, employers would welcome the presence of organized labor that could engage constructively in ways like these. Workers would have greater agency to define the terms and conditions of their workplaces and to place emphasis on what they value most. Both sides would share an interest in finding opportunities to boost productivity.
Taxes
How do the employer’s total cost and the worker’s take-home pay differ from the agreed-upon wage? The term tax is meant here in the broadest sense. Obviously, the direct taxes imposed on both employers and workers represent a large wedge inserted between the bargain that the parties might like to strike and the costs and benefits that they ultimately experience. But many other factors play a similar role, adding to the cost of becoming a worker or hiring one.
Conversely, government can offer subsidies that offset tax burdens or even raise the transaction’s value to one or both parties beyond what the market offers. If society wants more from the labor market, it must consider paying for it. This can take forms ranging from tax credits for the employer or worker to direct subsidies that boost wages to better infrastructure that lowers transportation costs. Such policies are more expensive than other reforms, though.
The ideal reform would be a direct wage subsidy that puts additional money into low-wage paychecks for every hour worked. The subsidy would be calculated relative to a target wage of, say, $15 per hour and make up half the difference—so someone earning a market wage of $9 per hour would receive an additional $3 per hour. Such a subsidy would have two major effects: first, a substantial raise for low-wage workers, making each hour worked more valuable and yielding more take-home pay; second, encouragement for less-skilled workers to take that initial step into the workforce and for employers to offer such jobs.
Such a subsidy would be expensive—perhaps $200 billion per year. But Americans already spend more than $1 trillion per year on the means-tested programs of the social safety net. Most of those programs either ignore work or actively discourage it, and many provide benefits to people who are working anyway. Converting the needed share of safety net spending into a wage subsidy would improve its effectiveness by encouraging and rewarding work.
Neither economic growth nor economic redistribution will rescue America from its current predicament. If the Working Hypothesis is correct, then we will need to create the social and economic conditions for a robust labor market in which all able Americans can be contributors, achieve self-sufficiency, and support strong families and communities.
A genuine commitment to that kind of inclusive society requires a willingness to shape institutions to that end, even when doing so is for the benefit of others or when it creates tension with other values. Such concessions are of a different character from the taxes and spending that are often confused for compassion in American politics. “Don’t tell me what you value,” former Vice President Joe Biden liked to say. “Show me your budget and I’ll tell you what you value.” But taxes are easy, and deficit spending is even easier, compared with reordering social priorities—reconsidering whether to tolerate more pollutants in the air we breathe, determining whose children our schools are oriented toward, deciding what constraints our national borders should impose, and, ultimately, defining what we expect of and owe to one another.
The people needing to accept a departure from some of their preferences if labor market health is to be society’s priority are, generally speaking, the highly skilled, college-educated “winners” of the modern economy, who command the nation’s economic, political, and social heights. Perhaps it should be no surprise, then, that such an agenda has received little attention from anywhere on the conventional political spectrum. The problem is not one of bad faith. To the contrary, people who argue that growth leads inevitably to widely shared prosperity expect that strategy to work; people who argue that sufficient public spending can substitute for what people cannot provide for themselves believe passionately that this is the case. People know how they want society ordered and wish desperately for that same thing to be good for everyone else, and for everyone else to want that same ordering.
So they have sought approaches in which “everybody wins.” This is precisely the premise of economic piety and especially of the “open” agenda—characterized by the priority given to globalization and GDP growth above all other policy goals; the hope that intensive training and education can transform those left behind into those getting ahead; and the backstop of economic redistribution, or even a basic income, if all else fails. That so many Americans feel left behind by this agenda, even as it allows their consumption to rise, is a source of honest confusion.
The irony is that openers are themselves making just the kinds of choices that they struggle to recognize when made by others. They are happy to accept higher taxes and advocate for expansive government programs if it buys peace and quiet. But they will not contemplate any deviation from the borderless, green, multicultural, college-educated, individualistic, consumption-oriented society they prefer. They regard their willingness to part with money (and thus consumption) to preserve their way of life as benevolent. Yet when the targets of their largess display a comparable hierarchy of priorities, the openers assume the explanation to be ignorance, or worse.
A useful question for programs of reform in today’s America is whether the reformer has proposed any concessions whatsoever on behalf of the average American worker. If the only thing on offer is tax dollars, the program is not a serious one. If the path forward is for the workers to change themselves to fit better into the reformer’s preferred society, the program is not a serious one. We now have decades upon decades of overwhelming evidence that neither outright redistribution nor investments in education provide the help promised—to the contrary, massive influxes of resources toward both have coincided precisely with the economic and social declines that have brought the nation to its present predicament.
Happily, many, perhaps most, prospering Americans really do care about the fate of their fellow citizens and the quality of their society and are prepared to make sacrifices on behalf of others. For them, the time has come to grapple with the real trade-offs that money can no longer obscure.
