Deindustrialization and Inequality

There go your jobs!

Photo by Joe Raedle/Getty Images

Paul Krugman writes that “today’s service economy is in many ways like the Edwardian-era economy in which a small number of wealthy people employed a large number of servants — except that we tend to outsource the service, relying on restaurants and cleaning services instead of cooks and maids.”

It’s interesting to note in this regard that domestic income inequality is shrinking in China as industrialization continues. There’s an old hypothesis in economic history called the “Kuznets Curve” which postulated that agrarian economies started out very poor but not-so-unequal. Then as they started industrializing, inequality would explode. Because rural productivity is extremely low, early industrialists can earn enormous profits paying highly productive factory workers wages that are only barely above the subsistence-level earnings of the farmers. But the very profitability of this sweatshop industrialism ensures that people will build more and more factories. That creates excess demand for industrial labor, and you get to the part of the curve where China is today—rising wages and falling inequality.

One way of thinking about the contemporary United States is that Kuznets was wrong to think of this as an inverted-U with a single peak. Instead it’s a wave, where inequality rises again once the share of the population working in factories falls.

But of course this isn’t something that just happened. A lot of research has come out in recent years indicating that contrary to the blithe assurances of economists expanded trade with China has in fact reduced the earnings of American workers substantially. At the same time, these developments have made America richer overall. Which is to say that the resources exist, in principle, to make investments in Social Security, education, universal health care, wage subsidies, etc. that leave everyone better off. We just haven’t actually done those things. And that, at the end of the day, is my bottom line. The broad shape of the economy is always shifting. What matters for big distributional outcomes isn’t really those shifts, it’s what the political process does with them. Our process has done a little of what we should be doing (Obamacare, for example) but also a fair amount of the reverse—as seen in the relentless drive for Social Security cuts.