Authoritarianism, Alone?
A Review of The Vanishing Middle Class by Peter Temin
Occasionally, I come across a theory that so thoroughly changes the way I see the world that I wonder if it can possibly be an empirically valid description of reality. The MIT economist, Peter Temin, presents one of these mind-altering theories of the U.S. economy in The Vanishing Middle Class, a book that attempts to explain the rise of a two-tiered economy. He argues that the finance, technology, and electronics (FTE) sector limits the transformative potential of their innovations by restricting access to aspiring entrants in the low-wage sector. Industry representatives of that sector, through their lobbying arms in DC, create a growth trap all too familiar to developing countries.
The developing country parallel is so compelling by Temin’s account of the U.S. economy that he posits that the predictions of the Lewis “dual economy” model involving the capitalist sector’s opposition to the subsistence sector ultimately bear out. Lewis’ original claim was simply that, “The fact that the wage level in the subsistence sector is of immense political importance since its effect is that capitalists have a direct interest in holding down the productivity of subsistence workers.” We can currently see this dynamic play out plainly on the business pages, as members of the affluent FTE sector are concerned that overheated labor markets in the low-wage sector may mean that they have to pay 4 percent more for Chipotle burrito bowls. But the insight also has deeper roots. Adam Smith famously observed that, “Employers are always and everywhere in a sort of tacit, but constant and uniform, combination not to raise the wages of labor.”
While the classical philosophers like Smith may have predicted the general outlines of America’s current predicament, another contemporary philosopher, Roberto Unger, offers a more precise diagnosis. Unger starts by noting that every economic epoch is defined by its most advanced mode of production. He calls this site “the vanguard”. There are two possibilities of this vanguard, “inclusive” and “insular” vanguardism, the first positive and the second negative. In Lewis’ day, the capitalist sector was the vanguard. But Temin appropriately recognizes that the most advanced form of production is no longer the capitalist sector, but what Unger calls the knowledge economy, which is orchestrated almost entirely by and for the benefit of the FTE sector. The incentives in the newer vanguard therefore remain the same as developing countries that struggle to overcome the middle income trap. The capitalist and FTE sector both inhibit the transformative potential that can only be unlocked by expanding the vanguard across the economy to include the subsistence/low-wage sector.
In noting the irony between the transformative potential and economic results, Temin and Unger both seem to argue that the tradeoffs in post-industrial economies are not as hard as the industrializing economies of the past. But the failure to expand access is more tragic because the potential to simultaneously solve the economic problem of secular stagnation and achieve the social aim of uplifting man’s existence is greater.
That argument should be enough for the London-based business papers as it is entirely consistent with Keynes’ project to restore order to markets by breathing rationality into the dismal science. But Americans should draw from another moral resource that relates to what Tocqueville called our “passion for equality”. For those passions to be expressed productively rather than chaotically, John Dewey wrote in Liberalism and Social Action at the height of the 1st New Deal that democracy required something more than liberalism. Classical liberalism was sufficient to dismantle aristocracy, but without also providing security, it was unlikely to produce desired democratic effects from an active citizenry. Dewey’s insight essentially added a crucial third pillar to the classical liberal principles of equality and rights—opportunity.
Though the Greatest Generation benefited enormously from this New Deal settlement, it all came crashing down as the boomers came of age in 1971, a year rivaled only by 1979 as a turning point of recent history. The mounting monetary pressures of the Bretton Woods system forced Nixon’s hand, which had the cumulative effect of transforming international political economy so as to delink wages from productivity as Temin so forcefully illustrates in the opening pages. In plainer terms, the bargain Nixon and his successors struck to pull off the national accounting trick of maintaining dollar supremacy with growing trade deficits was to eviscerate the real world prospects of workers to the point that a basic law of both economics and morality was no longer observed. Workers are no longer paid what they are worth.
Perhaps this dramatic change depicted in the above chart was not inevitable. Temin emphasizes that the Nixon shock was followed by the Supreme Court justice Nixon had recently appointed, Lewis Powell, decision to draft a memo that organized rich people’s movements opposed to the ethos of John Dewey and the New Deal. Those “coincident events” rather than the initial shock likely had a greater effect in locking in the political economy that systematically favors the FTE sector. One of the reasons why we can strongly suspect that these political movements were decisive is that in many European economies the disappearance of middle-income employment has been more dramatic, but only in the U.S. has it led to a soul-altering rise in inequality that crystallized the dual economy.
As a result of these diverging political responses to “natural” economic transformations, the American Dream is more likely to be found in Denmark, as one immigrant businessman based in Denmark told journalist, Anand Giridharadas. The early childhood education economist and advocate, James Heckman, emphasizes that continued neglect will invariably offend American sensibilities, steeped in aversion to suffocating European aristocracy, “The accident of birth is a principal source of inequality in America today. American society is dividing into skilled and unskilled… While we celebrate equality of opportunity, we live in a society in which birth is becoming fate.” The FTE sector, a group with similar priorities as the smaller donor class without conflating the two, has birthed a new aristocracy but with the discursive power of merit to obscure the ways they tilt the playing field to their advantage in the political arena, principally by making education more expensive and less accessible.
Intriguingly, and consistent with Temin’s Lewis model analogy, the more fruitful comparison is not to Europe but to China. In a lecture I attended in Beijing on Stanford professor’s work promoting rural education in that country, now a book titled Invisible China, I could not help but draw the comparison to the ostensibly more advanced U.S. On its face, this comparison is admittedly ridiculous. The U.S. does not have a rural peasantry immigrating to cities in search of manufacturing employment, leaving their children behind. In this sense, contemporary China remains a literal case of the Lewis model in action, while its application to the U.S. requires a level of abstraction.
And yet, when Rozelle described the nature of the political problem that confronts both countries—one explicitly authoritarian and the other nominally democratic—my mind couldn’t help but drift to the conclusion of the acclaimed political scientist Robert Putnam’s book, Our Kids, which draws from extensive interviews to provide a narrative account of the two-tiered econony characterized by Temin. Rozelle and Putnam argue in their respective countries of emphasis that if they fail to make their educational systems more inclusive, contentious activity from inert excluded masses will sow political and social instability. They are facing an uphill battle, if Temin’s analysis is to be believed. The wealthy urbanites in the FTE sector of Shenzhen and Silicon Valley will conspire to keep high quality education their exclusive privilege regardless of the dislocating effects, precisely as Smith predicted.
Ironically, the capacity to manage the dislocating effects may be greater in authoritarian China than in the U.S. If true, this reality has little to do with the superiority of authoritarian systems over democratic ones. Rather, China is true to its system while the U.S. is confused. Temin proposes a thought experiment on the gold standard sought by the “Kochtopus” to clarify that the distinction between the two forms of government collapses if the donor class in the U.S. were to achieve its policy priorities:
It would make policies without anyone but a few advisors knowing why. Secrecy would be a watchword, and information about the reasoning behind politics would be managed by the autocratic leadership. An autocratic leadership would reduce taxes greatly, but it would not extend to the low-wage sector. Essentially, all government revenue would be raised from the low-wage sector…Government services would be cut-back significantly. The regulatory state that has been constructed since the Great Depression would be starved into impotence and eliminated. There would be a free market in the anarchist sense… The Securities and Exchange Commission, the Dodd-Frank Wall St. Reform and Consumer Protection Act, and other checks on autocratic decisions in governance and finance would disappear. there would be no government to preserve level playing fields between companies…The federal government would restrict itself to a few functions: national defense (interpreted broadly), federal prisons, and the Federal Reserve system. Within that minimal framework, life would be anarchic. It might look more like a current kleptocracy such as Putin’s Russia than a preindustrial kingship.
The secrecy would be familiar to the “black box” of Chinese political decision-making at Zhongnanhai. The distortionary tax code captured by the autocratic government of the donor class would hearken back to the original tax collection systems of preindustrial kingships. But the point of Russian kleptocracy as the natural progression of anarchic liberalism, also known as “shock therapy”, is the most clairvoyant aspect of the vision Temin paints. The fatalism that besets nearly all Russians except for the most energetic young urbanites who erupted in protest in April could be America’s future. Americans are already far closer to that reality than many in the comfortable FTE sector realize. The investment bank, Credit Suisse, estimates in their annual wealth report that wealth inequality in the U.S. is second in the world, only to….you guessed it—Putin’s Russia.
In a dark twist of economist Branko Milanovic’s argument in, Capitalism Alone that the world will be inhabited by gradations of capitalist governance, I can envision a future where great power competition is of competing authoritarianisms. In some countries driven by deep anxiety of anarchy like China, policymakers will refuse to grant unlimited authority to plutocrats to dismantle regulatory institutions and instead humble the giants of the FTE sector like Jack Ma into a subservient role. A recent article for The Economist emphasizes that in the domain of anti-trust, China’s muscular state has the upper hand, reducing market concentration and generating stabilizing effects for consumer welfare. These divergent strategies of how to deal with today’s corporate elites -overreach and fecklessness- reflect the historic balance of political power in each country. In his macrohistory, The Origins of the Political Order, Francis Fukuyama distinguishes successful absolutism and failed oligarchy on terms that would no doubt be familiar to the editor of The Economist:
A more thoroughgoing Chinese-style absolutism [occurs when] the monarchy could dominate its elites by conscripting them into state service. [In contrast] In Hungary, a strong and cohesive elite succeeded in putting constitutional checks on the power of the monarch and established a principle of accountability. But these checks were so strong they hobbled the ability of the state itself to function cohesively.
Contemporary China retains its absolutism, while the U.S. plays the role of Hungary in this drama. This historical observation also aligns with linguist Noam Chomsky’s line that the danger that remains in America’s possible futures is not so much a thoroughgoing Fascist state as may exist under the watchful eye of the Chinese panpoticon, but the opposite. That is, a corporate elite controlling and siloing the state, which nonetheless has the same limiting effect on the autonomy of working people.
The progression of this essay to the historical trajectories of political development may seem to imply that the elites in the U.S. have in the long-run been lethal to the social welfare function of the state. The domination of the FTE sector is simply the most recent iteration of a longer historical drama, at least since the Gilded Age and perhaps to the genesis of the plantation economy in the 17th century, of elite capture of the state. With history on their side, those who have succeeded in walling off the transformative potential of the knowledge economy may appear to have the advantage, but only insofar as the losers in the low-wage sector navigate that transition on the impossible terms dictated by the FTE sector. To quote the Spanish philosopher, Miguel de Unamuno, there is always the possibility that these terms are rejected ushering truly inclusive vanguardism, “In the world the victorious are those who adapt to the world and the defeated are those who demand that the world adapt to them. The progress of humanity rests solely on the shoulders of the defeated.”