Book Extract The great lie of the New Economy By Doug Henwoo
Editor of the US periodical Left Business Observer, and an influential author and commentator, preaches counter revolution to the disciples of high tech
BETWEEN 1996 and early 2001 you could hardly have opened a newspaper or turned on a TV without hearing about a wondrous New Economy. It seemed that, after a long wait, the computer revolution was finally paying off, unleashing forces of innovation and wealth creation. Rising incomes, more interesting work and an end to slumps were the economic payoffs.
It's tempting to read much of the New Economy discourse as ideological. The enthusiasts' claims look like pre-emptive defences of capitalism against some of the classic indictments of it. Find capitalism too controlling? No, it's spontaneous! Too inegalitarian and exploitative? No, it overturns hierarchies! Vulgar, brutal, de-skilling and mercenary? Au contraire, it's creative and fun! Unstable? Nah, that's just its miraculous dynamism at work! Which is a way of saying that the New Economy discourse appeals to utopian impulses in these largely antiutopian times. It would be nice if organisations could be made non-hierarchical, work be made spontaneous and fun and everyone be cut in to a share of ownership. But these things are unlikely to happen under existing capitalism.
If, for example, we are in the early stages of the techno-revolution promised by the New Economy, we're certainly not distributing its dividends in the form of a lighter workload. Americans have to work awfully hard to make ends meet. While average incomes have risen considerably during the past half-century, the amount of work necessary to earn those incomes has risen with equal relentlessness. A worker paid the average manufacturing wage would have to work 62 weeks to earn the median family's income in 1947. In 1973, it would have taken 74 weeks; in 2001, 81 weeks. So, despite the fact that productivity overall is up more than threefold over the past 50 years - and productivity in manufacturing up more than fivefold - the average worker would have to toil six months longer to make the average family income.
International comparisons confirm the picture of a workhouse economy. Americans put in more hours per year than workers in Western Europe; only workers in East Asia spend more time on the job. And American workers don't produce as impressively as people think. Workers in the Netherlands, Germany, France and Italy all produce more in an hour than US workers and Americans come in barely ahead of workers in Ireland and Sweden. Nor has the recent growth in US productivity been all that impressive; of a list of 17 developed countries the US comes in dead last in productivity growth between 1973 and 1996. It's only over the latter part of the 1990s that the US ran ahead of its peers.
US productivity growth since 1997 has been hailed as a miracle. Its strength can't be denied, though it's hardly without precedent or problems. Heroic conclusions have been drawn from just a few years of evidence. And from those, ideologists have made grand claims for the superiority of the US economic model - with wide wage disparities, no welfare state, an overgrown financial system and volatile, unregulated, lightly unionised labour markets.
But while productivity growth in the late 1990s is strong, it is hardly unprecedented over the past 50 years. In fact, instead of looking like a revolution, recent productivity experience is less impressive than during the days of rotary-dial Bakelite telephones. And the recent productivity burst looks a lot like early productivity bursts of roughly the same magnitude and moving largely along with the trend in the actual/potential GDP ratio.
A longer-term view of productivity also counsels, if not scepticism, a bit of sobriety. Productivity growth in the 1990s was a bit under its 110-year average. Manufacturing productivity growth was admittedly quite strong, a rate exceeded only by that of the 1920s. But the gap between overall productivity growth and that in manufacturing leads to an interesting conclusion: productivity growth outside manufacturing is underwhelming. Considering that computers and communications technology are supposed to transform knowledge work similar to the way various generations of automation have transformed factory work, this is a surprising outcome.
Closely related to the productivity argument is a claim about innovation: that we live in a time of new product development without any historical precedent. This is a remarkable claim. The development of the telegraph, for example, reduced the time needed for communication across oceans and continents from weeks to seconds. Similarly with railroads, automobiles, radio, television, antibiotics, telephones, electricity, jet travel, plastics, indoor plumbing. And while the number of new products may be larger than ever in absolute terms, the pace of innovation may actually be slower. New Economy partisans point to vast improvement in cars as greatly reducing effective price, but in fact, the improvement in cars early in the 20th century was greater than it was at the end of the century.
While much attention has been paid to the great blessings of technology in improving the quality of products and lives, less has been paid to its downside. Customer satisfaction with airlines, banks, stores, hotels, phones and PCs has declined steadily since 1994 and the number of consumer complaints more than doubled. The complaints are mainly about areas where infotech was supposed to be working wonders: inaccurate information, slow (or no) response time and poor training of customer service reps. Perversely, infotech is in good part responsible for this state of affairs: firms identify who their good customers are and pamper them, leaving the rest of us on hold listening to New Age Muzak. More charmingly, companies sell data about customers' history to other companies, meaning that you can be slotted before you even walk in the door, since you're buying potential has already been measured. This aspect of the productivity revolution is probably welcome to managers and shareholders, but not too many other people.
Trying to quantify the contributions of computers to economic growth is probably a symptom of statistical fetishism at its most advanced. A lot less energy should be devoted to such imprecise and dubious pursuits and a lot more to asking the kinds of qualitative questions that economists rarely ask. Have computers enriched our lives? Music sounds better, movies look better, but are the songs and films of any higher quality other than in the technical sense? Computers have made some of our jobs more interesting. But for lots of people, like the US's five million telemarketers, the computer means sitting in a cubicle and having your output monitored by the boss.
Computers have allowed financiers to develop complex new financial instruments and trade them at lightning speed, which is good news for the principals, but is it good for most of society? The net has allowed people around the world to make contact with each other in completely unprecedented ways, but computers have also allowed governments to spy on us and marketers to profile us in unprecedented ways. A gain for human possibilities and a loss. New Economy rhetoric invokes gee-whiz stats of questionable accuracy to foreclose any serious discussion of the broader political and cultural issues. Economists shouldn't get away with that.
One of the supposed benefits of the New Economy is a new egalitarianism. Driven by dynamic markets, not stodgy old welfare states, it has reportedly given us the toppling of old hierarchies and the democratisation of wealth. In fact, the distribution of income in the US in the early 2000s is about the most unequal it's ever been. In 1980, the richest fifth of Americans had incomes about ten times those of the poorest fifth. In 2001, the richest fifth had incomes over 14 times that of the poorest fifth. In the 1980s real incomes at the middle and lower levels were falling; in the late 1990s, they were heading up, not as rapidly as those in the upper brackets, but probably enough to soothe. In any case, only wimps obsess about inequality when there's a 50-year war against terror to fight.
There are several reasons for this. At the top end, there's been a tremendous increase in elite compensation. The strength of the stock market between 1982 and 2000 greatly expanded the income of the very rich. And labour incomes themselves have become more unequal. From the mid-1970s to the mid-1990s, real hourly pay for the bottom third of the pay distribution fell, pay at the middle was pretty flat and pay at the top rose nicely.
"Boom" is the word typically used to describe the US economy from about 1995 through 2000. The word is well-earned if you owned stocks or ran a Fortune 500 company. But the median US household was only just a hair better off in 1998 than it was in 1989. In fact, the great economic achievement of the mid-1990s was recovering the income losses of the early 1990s. Income growth at the middle was fairly robust late in the decade, but the recession undid a good bit of that work, bringing median incomes in 2001 to a level just 6 per cent above that of 1989. Poorer households - those in the bottom 20 per cent of the income distribution - still didn't recover to 1989's level until 1997, and as of 2001 they were less than 5 per cent higher than 12 years earlier. New Economy talk was mainly about riches - riches for all. The reality is that it's meant riches for some.
A standard right-wing reaction to the tales of poverty and inequality in the US is to appeal to the allegedly stunning upward-mobility characteristic of American life. Actually this isn't the case at all. Recent studies by the Organisation for Economic Co-operation and Development (OECD) of Canada, Germany, the UK and the US found that Britain's poverty performance during the early 1990s was the worst of the four, with 38 per cent of the population experiencing at least one spell of poverty (defined as an income less than half the national median) over a six-year period, compared with 28 per cent for Canada, 26 per cent for the US and 20 per cent for Germany.
But both the US and British poor were more likely to stay poor for a long period of time: almost half of all people who were poor for one year stayed poor for five or more years, compared with 30 per cent in Canada and 36 per cent in Germany. And, despite claims of great upward mobility in the US, 46 per cent of the poor rose out of poverty in a given year, compared with 45 per cent in the UK, 53 per cent in Germany and 56 per cent in Canada. And of those who did exit poverty, 19 per cent of Americans were likely to make a round trip back under the poverty line, compared with 16 per cent in Germany, 10 per cent in the UK and 7 per cent in Canada. US low-wage workers have the weakest upward trajectory. Of all low-wage US workers in 1986, 39 per cent were unemployed five years later, 34 per cent were still low-wage and 27 per cent were working at an above low-wage job. In most other countries, twice as many were able to rise out of low wages.
Why does the US have such a polarised income structure? The answers are simple: the largest low-wage labour force in the First World and the weakest welfare state. The wage issue is straightforward: it's an empirical fact that the gaps between the well paid and poorly paid are wider in the US than just about anywhere else. The welfare state issue is more controversial.
Since the great backlash began 20 to 25 years ago, right-wingers have been arguing that redistributionist measures have done nothing to reduce poverty or have made things worse, by encouraging laziness and dependency. That argument was the theory behind the end-of-welfare legislation of the Clinton Administration.
It isn't true. Policies that take from the rich and give to the poor flatten the income distribution and reduce poverty. Listed in descending order of interference with market incomes there are three groups of countries: the social democratic (Scandinavia); the corporatist (most continental European countries); and the liberal (the predominantly English-speaking countries). Since the liberal countries interfere least with market incomes, they have the highest poverty rates and most inegalitarian income distributions; social democratic countries occupy the other extreme; and corporatist states fall in between. Roughly speaking, the liberal countries saw the largest rise in poverty between 1980 and 1990, the social democratic ones saw the least and the corporatist ones came down the middle.
There's no great mystery to making the poor less miserable and the middle more secure. You start with unions, add vigorous antidiscrimination programmes and finish with a civilised welfare state. Not very fashionable in 2003, for sure, but if 19th-century notions of social policy and economic organisation can be rebranded as "new", then anything's possible with the right organisation.