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Wednesday, May 25, 2011

We Need to Build Society for “Shared Prosperity”?

In a recent New York Times column (“Degrees and Dollars,” March 6), economist Paul Krugman surprisingly had an “it just ain’t so” moment of his own, taking issue with the widely accepted but erroneous idea that more education is the key to increasing prosperity. While he was right about that, his conclusion that technological changes will so “hollow out” the middle class that massive new government programs are needed to “directly” build a society of “shared prosperity” does not follow at all.

Proponents of the megastate like Krugman simply cannot acknowledge that the coercive, redistributive policies they love have adverse consequences. As we will see, his proposed “shared prosperity” will further undermine the prosperity we still have, reduce incentives for individual effort, and create new opportunities for political rent-seeking. If you would like to see America become more like Greece, Krugman’s ideas are a perfect recipe.

Let’s look first at what Krugman gets right, though.

One of the greatest conceits of modern liberalism is that more education (formal education, especially of the sort run and funded by government) is always good because it gives people “higher skills,” thus making the United States “more competitive.” To his credit Krugman joins a growing number of critics who argue that such education doesn’t necessarily produce good results. President Obama keeps saying the nation must make more “investments” in education to increase employment and keep up with other countries. Not so, says Krugman.

But why has Krugman broken ranks? In the last few months evidence has strengthened the contrarian case by showing that a large and increasing percentage of college degree holders end up having to take jobs that don’t call for any advanced academic preparation and that many college students coast through with little or no gain in human capital. Those are among the reasons why I long ago concluded that America has oversold higher education, principally by heavily subsidizing it.

Krugman, however, points to a different reason for his turn. He contends that technology and “globalization” are eliminating the middle-class jobs college-educated people used to take, thus “hollowing out” the middle class. As a result, he argues, we can’t rely on education for social mobility.

Exhibit A is Krugman’s discovery that technology is having an impact on the legal profession. Computers, he reports, are increasingly used in legal research, scanning cases and documents for possible relevance much faster than people can. He says that this shows how technology “is actually reducing the demand for highly educated workers.”

It’s perfectly true that technology is changing the legal profession. Decades ago, lawyers had to manually hunt for relevant cases and other documents, then read them. Beginning more than 20 years ago, that laborious work was made easier with the advent of computerized research engines that would almost instantly compile lists of cases. Now computers can apparently even do some of the preliminary analysis.

Krugman’s conclusion that this is reducing the demand for educated workers does not follow, however. Just because technology has made a part of lawyers’ work faster does not mean there will be fewer lawyers—any more than the technological improvements that have made writing and editing easier and faster than in the days of typewriters and erasers has reduced the number of writers and editors.

America already has a surplus of lawyers, but that isn’t because of technology. It is because government subsidizes students who want to go to law school, and some law schools practice deception with regard to the employment and earnings prospects for their graduates.

Technological improvements certainly can lead to the elimination of some jobs in the legal profession (and others), but they simultaneously open up new jobs for educated workers elsewhere.

Krugman’s other argument is that globalization is going to wipe out some middle-class jobs because it is now possible to offshore work formerly done by American workers. He gives no examples or evidence of the magnitude of this phenomenon, but let’s assume that he is correct. Do we need to worry and insist on government action?

No, we don’t. The number of middle-class jobs is not fixed, dictating that if some are done by robots or foreigners or computers, the number remaining must be lower. You might think an economics professor and international trade specialist with a Nobel Prize to his name would know that people have been wringing their hands over the supposed harms of free trade in goods and services for centuries, but despite the apocalyptic predictions, the dynamism of the economy always produces new jobs to replace those that are lost.

In sum there is very little support for Krugman’s claim that the middle class is being hollowed out, but that doesn’t keep him from leaping to the conclusion that we need more government intervention.

He first declares that labor needs more “bargaining power.” That’s vague language, but what Krugman undoubtedly means is that the government should enact pro-union legislation. Make that more pro-union legislation, since existing law (unchanged since 1959) is already highly pro-union. Bargaining power has not been taken from unions over the last 30 years. Rather, many old, unionized companies have had to face increasing competition. They have shed workers and some have gone out of existence. Simultaneously, many new firms have come into existence, and their workers have often shown so little interest in unionization that union organizers have given up.

Furthermore, can Krugman believe that unions automatically and costlessly raise worker earnings? They can’t. As economist W. H. Hutt showed in his book The Strike-Threat System, even if unions can temporarily exploit invested capital (as was the case in the auto industry), in the long run investors will put their money elsewhere.

Finally, Krugman writes that government must “guarantee the essentials, above all health care, to every citizen.” Even if it were true that technology and global competition were hollowing out the middle class, why should government assume this role? Back in the 1960s the federal government began a “War on Poverty” that entailed giving “the essentials” to the poor. Rather than conquering poverty, the policies exacerbated it, as recipients of government benefits reduced their own efforts at improving their circumstances and interest groups learned how to game the system. Krugman’s coercively shared prosperity ideas would give America more of that.

Instead of resorting to federal handouts and union threats to increase the middle class, I suggest we abolish the many governmental barriers to entrepreneurship and entry into occupations so that more Americans can succeed on their own.

  • George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.