First, Elizabeth Warren sees "The Middle Class on the Precipice."
How many times do people have to be mugged by reality before they grasp the idea that choices have consequences? (Let's leave aside the dubious statistical inference that three different sources of uncertainty treble the odds, and two participants in the workforce doubles the risk of a spell of unemployment. I want to finish this post before supper.) Among my early reactions to The Two Income Trap, which gives Professor Warren and her daughter material for this continuing policy show is this.
The only real increase in wages for a family has come from the second paycheck earned by a working mother. With both adults in the workforce full-time, the family’s combined income is $73,770—a whopping 75 percent higher than the median household income in the early 1970s. But the gain in income has an overlooked side effect: family risk has risen as well. Today’s families have budgeted to the limits of their new two-paycheck status. As a result, they have lost the parachute they once had in times of financial setback—a back-up earner (usually Mom) who could go into the workforce if the primary earner got laid off or fell sick. This “added-worker effect” could buttress the safety net offered by unemployment insurance or disability insurance to help families weather bad times. But today, a disruption to family fortunes can no longer be made up with extra income from an otherwise-stay-at-home partner.
Income risk has shifted in other ways as well. Incomes are less dependable today. Layoffs, outsourcing, and other workplace changes have trebled the odds of a significant interruption in a single generation. The shift from one income to two doubled the risks again, as both Mom and Dad face the possibility of unemployment. Of course, with two people in the workforce, the odds of income dropping to zero are lessened. But for families where every penny of both paychecks is already fully committed to mortgage, health insurance, and other payments, the loss of either paycheck can unleash a financial tailspin.
There are also coping strategies available to families. Don't buy the McMansion in the first place. Ditto the SUV that looks like a Kenworth bobtail. Homeschool. Ditch the organized sports and let the kids organize their own recreation. Encourage the kids to work their way through college. Cut up the credit cards. Start a victory garden.Joanne Jacobs has a similar reaction today.
We live in bigger houses, have available better treatment for more ailments, watch bigger, better TVs, listen to smaller, better iPods and drive mammoth SUVs.But it's not those choices (conveniences becoming necessities?) that concern me today. Back to Professor Warren.
Steelworkers, airline employees, and now those in the auto industry are joining millions of families who must worry about interest rates, stock market volatility, and the harsh reality that they may outlive their retirement money.Years ago, economic policy courses would likely have a unit on barometric price leadership. The short version of the model is an industry that prices like a monopoly without there actually being a monopoly, or, more distressingly, an illegal conspiracy (with great anecdotes about electrical equipment executives hiding out at Dirty Helen's in Milwaukee's red light district) to fix prices. In those days, the existence of such non-conspiratorial collusion provided reason to propose antitrust improvements, such as mandatory restructuring of competitive industries, or less rigorous standards of evidence that a conspiracy existed. And what industries provided canonical examples of antitrust-immune price leadership (sometimes referred to as "consciously parallel"; today "rational cooperation" is a subgame-perfect version of that story)? Everybody get steel, motor vehicles, and tobacco? The airlines in those days were regulated "in the public interest," but that "public interest" required that the public be protected from "ruinous and destructive" price competition, and Walter Folger Brown forbid that coach passengers be served a decent sandwich at lunch!
But it's not simply Professor Warren, who I have beaten up, repeatedly, for failure to grasp the Say Aggregation Principle, that is nostalgic for the concentrated industries of years ago. Harold Meyerson (!) quotes a scholar who appears positively nostalgic for "A Gentler Capitalism."
For the pervasive insecurity that is inextricably part of today's capitalism has become the dominant fact of modern life. "The fragmenting of big institutions has left many people's lives in a fragmented state: the places they work more resembling train stations than villages," writes sociologist Richard Sennett in "The Culture of the New Capitalism," a newly published collection of lectures he gave at Yale University in 2004. Throughout most of the 20th century, the insecurity endemic to capitalism was mitigated by business institutions organized, as Sennett's great predecessor Max Weber first noted, along military lines. The corporation gave the employee a place and a ladder, and in such a lifelong institution, Sennett notes, "it became possible to define what the stages of a career ought to be like, to correlate longtime service in a firm to specific steps of increased wealth."Those big institutions are, presumably, the giant corporations capable of practicing barometric price leadership right up to the day that some upstart displaces them. (And it is certainly the case that the automakers and Big Steel have objected, loudly, to foreign competition, and legacy air carriers have sought subsidy, and former retailing giants such as Sears and Penney have had to surrender to Wal-Mart or make common cause with Lands' End.) I think that's called creative destruction, and Russell at Cafe Hayek suggests as much. In a follow-up post, he notes that there are market tests for businesses that render their institutional memory redundant.
Sennett is no apologist for the old corporate order, but it did impart a structure to people's work lives and a place to hone their crafts. The new workplace, by contrast, is a brave new world of short-term employment and relationships, where experience is not necessarily a virtue and institutional memory is sketchy at best. It may be a fine place for young workers, but "as middle age looms and children, mortgages and school fees appear, the need for structure and predictability in work grows greater." The frequent migration of executives from one firm to another, Sennett adds, imposes further costs on employees: "This managerial revolving door has meant that the steady, self-disciplined worker has lost his audience."
Imagine that—the most productive companies treat their workers well. It's unfortunate that we live in a time where that is considered surprising.Next week, I greet the registrants in a public policy course that has a substantial competition policy component, as well as an antitrust economics course. I'm working on incorporating the tension between the security of monopoly (if in fact there is such security) and the inefficiency of monopoly into both.