Fixing the American Dream Machine

Fixing the American Dream Machine

Fixating on the traditional aggregate measures of the economy’s health — GDP growth, the unemployment rate, or the inflation trade — ignores not only rising income and wealth inequality, but the fact the American Dream machine has been sputtering for at least two or three decades. Stanford’s Raj Chetty and his co-authors have shown that only half of Americans born in 1980 or later were out-earning their parents at the age of 30, compared to 90 percent of those born forty years before. No wonder so many Americans across the political spectrum have been so anxious or even angry, with racial resentment and political incivility on the rise.

Three broad narratives for fixing our American Dream machine, which admittedly won’t cure all problems, have been advanced by political leaders and researchers. The two that have received the most media attention are both either misleading or inadequate.

One narrative, pushed by President Trump and in more muted tones by some Democrats, blames increased and “unfair” trade for the decline of manufacturing jobs and stagnant or slow real-wage growth. Trump and many Republicans also wrongly blame illegal immigrants, who are working (if they can) at low wages doing jobs like cleaning dishes or mowing lawns that few American citizens want to do. 

The trade critique is belied by the decline in the share of workers (though not in output) in manufacturing throughout the developed world. In fairness, the “China shock” of the 2000s accelerated the decline in manufacturing jobs, but this fact cannot account for a multi-decade decline in upward mobility across much of the American workforce, of which manufacturing jobs account for only 8 percent. The Trump trade wars, allegedly mounted to help American workers, have instead shown that protectionism is zero sum at best: It benefits some workers in import-competing industries but hurts an equal if not greater number in exporting firms.

A second narrative, embraced by some Democrats and a few economists and journalists, is that many industries in the U.S. economy are becoming less competitive, driving up the profit share of income, at the expense of workers.

In a new e-book published by the Progressive Policy Institute, “A Scalpel, Not an Axe,” I show how the increase in the corporate profit share of national income indeed is consistent with a modest decline in competition outside of consumer products. Still, there is no evidence that, at the local level— where competition really takes place in many sectors — concentration has grown; if anything it has declined in various sectors Moreover, competition is most intense in consumer products, due to the rise of e-commerce, specifically Amazon, which has been wrongly targeted by some antitrust critics, as I document in the book. Amazon makes price comparisons virtually costless and instantaneous, and thereby dampens inflation, as economic research has shown. Because imports discipline pricing by domestic firms, competition would be even stronger if not for the president’s protectionism.  

Critics of corporate concentration are correct to oppose the “no-poaching” restrictions franchisors have imposed on employees of franchisees; they suppress workers’ wages and were quickly dropped after leading fast-food franchisors were sued by multiple state attorneys general. Senators Cory Booker (D-NJ) and Elizabeth Warren (D-MA) have sensibly proposed a simple ban on these restrictions. A modest rewording of the Clayton Act’s standards to make it a bit easier for the government to challenge mergers, as Senator Amy Klobuchar (D-MN) has proposed and which I extend in the book, would also strengthen competition. Existing merger standards need not be changed, but they should be more effectively enforced to shield workers from mergers that increase employers’ bargaining power.

Nonetheless, antitrust reformers should not overpromise: Fixing antitrust law and enforcing it more effectively would only partially address what’s wrong with the American Dream machine. Moreover, certain remedies proposed by the new antitrust populists could backfire. Resurrecting the jurisprudence of Justice Brandeis — who thought antitrust law should protect small business — would reward inefficiency and cost consumers. Adding a host of consumer-independent factors to the assessment of mergers, as some have proposed, would eliminate efficiency-enhancing mergers, hurting consumers, while giving courts and firms little or no practical legal guidance of what business combinations are permissible.

Meanwhile, taking advantage of economies of scale and network effects (a platform is more valuable with more users) is not an antitrust violation, and certainly does not justify breaking up any of these platforms. Moreover, as the Microsoft antitrust saga demonstrates, courts will not order breakups even of monopolies that abuse their power unless it’s shown that a simple injunction cannot prevent future misdeeds.

The most plausible narrative for explaining rising income inequality and the decline of the American Dream is the third one: continuing advances in information technology that require workers with IT skills and reward them with far higher pay than for most of the workforce. Automation and shifts in consumer tastes demand new skills, which many workers only will be able to acquire through specialized training outside their current jobs. The federal government should make loans to workers (up to a lifetime limit) seeking this training, but only at institutions that publish timely and audited placement rates for their students. Repayment of these loans should be tied to workers’ subsequent incomes (also up to a certain limit). The government should also cushion the pain of displaced workers by providing them with wage insurance that would cover for a limited time any wage losses suffered once they find a new job.  

Federal help to those actively helping themselves can be implemented without huge costs and should have bipartisan appeal. It would offer more benefits for more workers than destructive trade policies or even appropriate antitrust reforms.   

Robert Litan is a non-resident Senior Fellow at the Brookings Institution, partner at Korein Tillery, and formerly senior antitrust enforcement official at the Department of Justice. This op-ed draws on his recent e-book on antitrust and data policy recently published by the Progressive Policy Institute.

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