From: The New York Times
April 9, 2012
The Two Economies
By DAVID BROOKS
The creative dynamism of American business is astounding and a little terrifying. Over the past five years, amid turmoil and uncertainty, American businesses have shed employees, becoming more efficient and more productive. According to The Wall Street Journal on Monday, the revenue per employee at S.&P. 500 companies increased from $378,000 in 2007 to $420,000 in 2011.
These efficiency gains are boosting the American economy overall and American exports in particular. Two years ago, President Obama promised to double exports over the next five years. The U.S. might actually meet that target. As Tyler Cowen reports in a fantastic article in The American Interest called “What Export-Oriented America Means,” American exports are surging.
Cowen argues that America’s export strength will only build in the years ahead. He points to three trends that will boost the nation’s economic performance. First, smart machines. China and other low-wage countries have a huge advantage when factory floors are crowded with workers. But we are moving to an age of quiet factories, with more robots and better software. That reduces the importance of wage rates. It boosts American companies that make software and smart machines.
Then there is the shale oil and gas revolution. In the past year, fracking, a technology pioneered in the United States, has given us access to vast amounts of U.S. energy that can be sold abroad. Europe and Asian nations have much less capacity. As long as fracking can be done responsibly, U.S. exports should surge.
Finally, there is the growth of the global middle class. When China, India and such places were first climbing the income ladder, they imported a lot of raw materials from places like Canada, Australia and Chile to fuel the early stages of their economic growth. But, in the coming decades, as their consumers get richer, they will be importing more pharmaceuticals, semiconductors, planes and entertainment, important American products.
If Cowen’s case is right, the U.S. is not a nation in decline. We may be in the early days of an export boom that will eventually power an economic revival, including a manufacturing revival. But, as Cowen emphasizes, this does not mean nirvana is at hand.
His work leaves the impression that there are two interrelated American economies. On the one hand, there is the globalized tradable sector — companies that have to compete with everybody everywhere. These companies, with the sword of foreign competition hanging over them, have become relentlessly dynamic and very (sometimes brutally) efficient.
On the other hand, there is a large sector of the economy that does not face this global competition — health care, education and government. Leaders in this economy try to improve productivity and use new technologies, but they are not compelled by do-or-die pressure, and their pace of change is slower.
A rift is opening up. The first, globalized sector is producing a lot of the productivity gains, but it is not producing a lot of the jobs. The second more protected sector is producing more jobs, but not as many productivity gains. The hypercompetitive globalized economy generates enormous profits, while the second, less tradable economy is where more Americans actually live.
In politics, we are beginning to see conflicts between those who live in Economy I and those who live in Economy II. Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I.
Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle. They want to tamp down some of the streamlining in the global economy sector and protect health care, education and government from its remorseless logic.
Republicans believe the globalized sector is racing far out in front of government, adapting in ways inevitable and proper. If given enough freedom, Economy I entrepreneurs will create the future jobs we need. Government should prepare people to enter that sector but get out of its way as much as possible.
Democrats are more optimistic that government can enhance the productivity of the global sectors of the economy while redirecting their benefits. They want to use Economy I to subsidize Economy II.
I don’t know which coalition will gain the upper hand. But I do think today’s arguments are rooted in growing structural rifts. There’s an urgent need to understand the interplay between the two different sectors. I’d also add that it’s not always easy to be in one of those pockets — including the media and higher education — that are making the bumpy transition from Economy II to Economy I.