No matter who ends up on top in this year’s closely fought presidential election—billed by both Republicans and Democrats as the most important in a generation—don’t get too excited about the winner’s ability to “fix” the economy. The economy’s problems are deep and long-term.
Fundamentally, the economy has evolved while the socioeconomic model—our set of assumptions and institutional arrangements—has stayed in place. The model eventually will be replaced, but the change will be radical and painful and there is no consensus what the new model will be. Certainly, neither major presidential candidate has seemed to have an answer.
All advanced industrial nations developed the so-called welfare state around the middle of the 20th century. It is a system in which the state redistributes incomes via a progressive taxation system from its wealthier citizens to poorer, while providing free or affordable education and a safety net for the old, sick or underprivileged. In the U.S. it was established by Franklin Roosevelt as a way out of the Great Depression, but in the post-World War II decades it also helped maintain workplace peace and a considerable degree of political consensus.
In Western Europe, the welfare state was built as a way to maintain social peace after the disastrous experience of two bloody wars, revolutions and repressive dictatorships. But it also helped bring an unprecedented and broad-based prosperity to European citizens.
Such a system worked generally well as long as industrial economies were labor-intensive and the bulk of production concentrated in the highly developed countries of Western Europe and North America. The enclosed economic system provided full employment with high wages, which in turn translated into steady consumer demand and healthy profits for businesses. The government was able to pay for a generous safety net without going into debt. On the contrary, governments were able to pay down or grow out of the debt they incurred during World War II. In the case of the U.S., national debt as a share of GDP went from 120% at the start of the 1950s to 30% by 1980. Government regulations and unionization, meanwhile, ensured stability by discouraging too much competition and slowing technological progress.
The system, in its U.S. and European variants, eventually became stagnant and inefficient, and then began breaking down rather quickly. Production facilities were set up in new locations, as first East Asians and then others learned to manufacture the same goods cheaper and, in many cases, better. Established companies started to move production offshore in order to save costs in a more competitive environment. New technologies increased competition, but also made it easier to move production around the globe and replace labor-intensive processes with machines and robots. Intensified competition swept aside much government regulation and all but eliminated industrial unions, at least in more dynamic economies such as the U.S.
The economy looks very different now than it did only 20 years ago. Full employment has broken down. The jobless rate in the U.S. is now at the level of the early 1980s, but today’s unemployment, the structure of the labor market and the composition of the labor force have changed substantially. Many more women have joined the labor force today, by both choice and necessity, as few households outside the upper middle class can afford live on one income and have wives stay at home.
Underemployment is nearly twice as high as the headline unemployment rate, at over 15%, and it seems like a permanent feature of the labor market. So is having multiple jobs none of which alone can provide a living wage or offers fringe benefits. Over the past five years, there has been the phenomenon of college graduates being stuck in low-paying, low-skilled service jobs, possibly creating a permanent underclass.
At the other end of the income spectrum, it has been noted that most of the gains in incomes over the past 30 years have gone to the highest 20% of US households, with the top 5% benefiting disproportionately.