The US, like most countries in Europe, has been struggling to adapt to deindustrialisation, globalisation, and the other major shifts in its economy and society. This is another area where markets need the help of the government. Facilitating transition after the fact is extraordinarily costly and problematic.
We should have done more to help those who were losing their jobs to globalisation and advances in technology, but Republican ideology said no, let them fend for themselves. Government must anticipate the broad strokes of future structural shifts. Adapting our economy to climate change and to the changing demography are just two of many challenges of “transition” facing our economy and society in coming years. New technologies — including robotisation and artificial intelligence — represent further challenges.
Recent and earlier episodes of such changes have generated one important lesson: the market on its own is not up to the task. There is a simple reason already explained: those most affected, for instance, those who are losing their jobs, are least able to fend for themselves. The changes often imply that their skills are less valuable.
They may have to move to where the jobs are being created—and house prices in the growing parts of the country are often far higher. Even if, after training, their job prospects might be good, they don’t have the resources for retraining, and financial markets will typically only advance them the money at usurious interest rates. They lend at normal interest rates only to those who have good jobs, a good credit history, and good equity in their home—in other words, to those who don’t need the money.
Thus, there is an essential role for government to facilitate the transition, through what have been called active labour market policies. Such policies help retrain individuals for the new jobs and help them find new employment. Another tool for government is referred to as industrial policies, which help restructure the economy into the directions of the future and assist the creation and expansion of firms, especially small and medium-sized enterprises in these new sectors.
Some countries, like those in Scandinavia, have demonstrated that well-designed active labour market and industrial policies can create jobs as fast as jobs get destroyed and can move people from the old jobs to the new. There have been failures, but that is because sufficient attention has not been paid to what makes for successful policies.
As government pursues labour market and industrial policies, it needs to be sensitive to questions of location. Too often economists ignore the social and other capital that is built into a particular place. When jobs leave a place and move elsewhere, economists sometimes suggest that people should move too. But for many . . . with ties to families and friends, this is not so easy; and especially so since with the high costs of child care, many people depend on their parents so they can go to work. Research in recent years has highlighted the importance of social bonds, of community, in individuals’ well-being.
More generally, decisions about where to locate are not efficient. Too many people may want to crowd into the big urban centres, causing congestion and putting strains on local infrastructure. Among the reasons that factories moved to rural areas . . . was that wages were low, public education ensured that workers had enough skills nonetheless to be highly productive, and our infrastructure was sufficiently good that it was easy to get raw materials into the factories and the finished goods out.
But some of the same forces that had led to low wages are now contributing to the problem of de-industrialisation. Wages were low in part because of lack of mobility—with perfect mobility, wages (skill-adjusted) would be the same everywhere. But this lack of mobility is key to understanding why de-industrialisation is so painful.
In short, we need policies focusing on particular places (cities or regions going through stress), in what are called place-based policies, to help restore and revitalise communities. Some countries have managed such policies extraordinarily well: Manchester, England, the textile capital of the world in the nineteenth century, has reinvented itself—with help from the UK government—as an educational and cultural centre. It still may not be as relatively prosperous as it was in its heyday, but it is instructive to compare Manchester with Detroit, which the United States simply let go bankrupt.
Government played a central role in the transition from agriculture to a manufacturing economy; it now needs to play a similar role in the transition to the new economy of the twenty-first century.
One of the most important detractors from individual well-being is a sense of insecurity. Insecurity can also affect growth and productivity: individuals, worrying about whether they will be thrown out of their house or lose their job and only source of income, can’t focus on the tasks at work in the way they should. Those who feel more secure can undertake riskier activities, often with higher playoffs. In our complex society, we are constantly confronting risks. New technologies may take away jobs, even if they also provide new ones. Climate change itself presents untold new risks, as we have recently experienced with hurricanes and fires.
Again, large risks like these and ones associated with unemployment, health, and retirement, are risks that markets do not handle well. In some cases, like unemployment and health insurance for the aged, markets simply do not provide insurance; in other cases, like retirement, they provide annuities only at high costs, and even then, without important provisions — such as adjustments for inflation. That is why almost all advanced countries provide social insurance to cover at least many of these risks.
Governments have become fairly proficient in providing this insurance — transaction costs for the US Social Security system are a fraction of those associated with comparable private insurance. We need to recognise, however, that there are large gaps in our system of social insurance, with many important risks still not being covered either by markets or by government.
Changes and reforms are necessary to achieve a more dynamic economy, growing faster, an economy that serves people, and not the other way around. Many of the policies are hardly novel—variants of these policies have worked successfully in other countries. It’s not the economics that are difficult. It’s the politics.
Even if we get the politics right and succeed in achieving the reforms described here, attaining a middle-class life may still be difficult: even families with reasonable jobs may not be able to have an adequate retirement or afford to send their children to college. Just as, traditionally, farmers helped each other raise a new barn, and just as families pull together in times of need, our society works best when everyone works together. The positive agenda of restoring growth for all is part of the broader ambition of making a middle-class life accessible to all.
From “People, Power, and Profits: Progressive Capitalism for an Age of Discontent” by Joseph Stiglitz. Copyright © 2019 by Joseph Stiglitz. Published by Allen Lane. All rights reserved.