On debt-fueled consumption, rising inequality, education, and service sector pay

Raghuram Rajan, the former IMF economist who was one of the first to finger banks' pay structure as a key cause of the financial crisis,(in Jan. '08)  has an  interesting essay out: How Inequality Fueled theCrisis (h/t Chait).  In developed countries, only the educated can thrive in a global economy. Delivering effective, broad-based education reform is hard and slow; encouraging debt-fueled consumption is a readily available palliative. So politicians of both parties have turned to the latter:

In the US, though, there have been strong political forces arrayed against direct redistribution in recent years. Directed housing credit was a policy with broader support, because each side thought that it would benefit.

The left favored flows to their natural constituency, while the right welcomed new property owners who could, perhaps, be convinced to switch party allegiance. More low-income housing credit has been one of the few issues on which President Bill Clinton's administration, with its affordable-housing mandate, and that of President George W. Bush, with itspush for an "ownership" society, agreed.

Moreover, the cheap-money crutch has always been a standby for political leaders:

This is not, of course, the first time in history that credit expansion has been used to assuage the concerns of a group that is being left behind, nor will it be the last. In fact, one does not even need to look outside theUS for examples. The deregulation and rapid expansion of banking in the US in the early years of the twentieth century was in many ways a response to the Populist movement, backed by small and medium-sized farmers who found themselves falling behind the growing numbers of industrial workers, and demanded easier credit. Excessive rural credit was one of the important causes of bank failures during the Great Depression.

Conclusion:

America needs to tackle inequality at its root, by giving more Americans the ability to compete in the global marketplace. This is much harder than doling out credit, but more effective in the long run.

While no one doubts that U.S. education needs to get better and fairer, Rajan is a bit perfunctory about how our educational system has been failing us. A couple of caveats: first, the percentage of Americans with a four year college degree has risen bumpily but continually over the last forty years -- the period in which less educated Americans have lost ground. As of 2009, according to the Census, 29.5% of American adults over 25 had a college degree; 38.5% had at least a two-year degree; 54.5% have had "some college."  These groups have shared in the gains in GDP  over the past 30-40 years (with disproportionate gains going to the upper end of the education spectrum); it's those with a high school degree or less that have been slammed. While the percentage of those with no postsecondary education needs to shrink, and the quality of education for those with less than a four-year degree needs improvement, and quality vocational training should be rescued from the ash heap, it is also not inevitable that we consign the less educated to an economic underclass status as manufacturing jobs dry up.

Second: Richard Florida adds the crucial perspective that education isn't everything; growing national wealth can be better shred with the less educated. There is no iron economic law decreeing that manufacturing jobs have to pay better than what are now considered low-level service jobs:

the blue-collar jobs we pine for were not always good jobs: we made them good jobs. When my father came back from the second world war, his poorly paid factory job had been transformed. He was able to buy a house, put his two sons through college and participate fully in the American dream. Some of this was due to the power of unions. Most of it was because of the enormous improvements in productivity wrought by improved technologies and management techniques.

The same thing can and must happen in the service sector. It is starting already. Companies such as Wegmans, Whole Foods, the Container Store, Best Buy and Zappos already account for a fifth of the top 100 best places to work in America. A typical hourly worker at the Container Store earns about $30,000 a year, not nearly as much as a GM factory worker but about 50 per cent more than the average for hourly-wage retail workers. Retail outlet Trader Joe’s mandates that full-time workers earn at least their community’s median household income, while its “store captains” can make six-figure salaries. These companies recognise that better conditions lead to better customer experiences – and an improved bottom line.

Florida wants government policy to actively encourage that "recognition," fostering improvements in service sector productivity as it once did in agriculture, and thus enabling higher service wages.

Florida's recommendation raises the question: what percentage of a country's population needs to be highly educated and professionally employed to continue to drive competitive productivity growth and GDP growth? What is the relative importance of educating a relatively small sliver extremely well -- i.e., maintaining top-tier universities -- and improving broad-based access to quality education? Are the two interdependent?  Is there a natural limit to the percentage of a population intelligent enough to benefit from at least a four-year academic college-level education (perhaps, but I suspect it's very high, and rising).

There is a chicken-egg aspect to all the elements of shrinking inequality and increasing productivity and therefore wealth.  Better-paid service people will raise more educable children and thus boost educational attainment; better educated service workers will raise service productivity; still wealthier professionals will be willing to pay more for better services (e.g., by shopping at Wegmans or Whole Foods, where service is part of the attraction). But Florida adds a crucial perspective: distributing wealth down toward the less educated remains at least in part a political choice, and doing so needn't crimp economic growth.  Also: maintaining a large segment of the population in manufacturing jobs is no more essential to national wealth than maintaing a large segment in agriculture.