On Rajan’s Explanation for the U.S. Recession
Raghuram Rajan, the former chief economist of the IMF and a Chicago professor, has a completely different take on the U.S. recession. There are different reasons for the global recession – not all of them tied to the fact that the U.S. economy is just freaking huge – but his explanation is fantastic.
I’ll summarize Mr. Rajan’s article:
- Wages have been growing much faster for workers in the 90th percentile of the wage distribution than those in the 50th percentile. Technology has changed rapidly since then, and growth reached fever pitch in the ’90s. Those who had the necessary skills – or the education necessary to learn those skills – could advance. If all you had to offer the American economy was the strength of your back, your job got outsourced. Just look at the chart here. If you’ve got a professional degree, you only have a 2.3% chance of being unemployed. If you only have a high school degree, that’s 9.7%.
- Rajan: “The everyday consequence for the middle class is a stagnant paycheck and growing job insecurity. Politicians feel their constituents’ pain, but it is hard to improve the quality of education, for improvement requires real and effective policy change in an area where too many vested interests favor the status quo. Moreover, any change will require years to take effect, and therefore will not address the electorate’s current anxiety.”
- Thus, politicians opted instead to make credit easy to come by. Rather than the middle class utilizing the new credit facilities to go back to school, they bought houses. And keep in mind that the ease of credit was aided by Fannie and Freddie, but it can’t be blamed totally on them – Glass-Steagall had to be repealed as well.
- Rajan: “The problem, as often is the case with government policies, was not intent. It rarely is. But when lots of easy money pushed by a deep-pocketed government comes into contact with the profit motive of a sophisticated, competitive, and amoral financial sector, matters get taken far beyond the government’s intent.”
Before all is said and done, we will witness the U.S. in decline in a global economy that knows how to educate its populace. Unless, of course, the government takes the steps to improve the long-term educational capabilities of our fine nation. And for all that Mr. Obama has done wrong, he at least has not wholesale supported the teachers’ union as I expected. Union-busting will help, but America had better be emotionally ready to stop “blaming the teacher” for everything that has gone wrong. The baby boomer generation supported lower expectations of their children at school and grade inflation – something that will need to go away as well.
Oh, and if you’re in the workforce now, you’d better start educating yourself on something you don’t know how to do. Chances are, your job will depend on it one day.
