Chrystia Freeland - Plutocrats

Going through your first gilded age while the West goes through its second one makes things both harder and easier. One reason it is easier is that we’ve seen this story before, and we know that, for all the wrenching convulsions along the way, it has a happy ending: the industrial revolution hugely improved the lives of everyone in the West, even though it opened the vast gap in standard of living between East and West that we still see today.

We didn’t know that for sure during the first gilded age—remember that it was the dark, satanic mills of the industrial revolution that eventually inspired the leftist revolt against capitalism and the bloody construction, by those revolutionaries who succeeded, of an economic and political alternative. But today, the evidence that capitalism works is clear, and not only in the wreckage of the communist experiment.

The collapse of communism is more than a footnote to today’s double gilded age. Economic historians are still debating the connection between the rise of Western democracy and the first gilded age. But there can be no question that today’s twin gilded ages are as much the product of a political revolution—the collapse of communism and the triumph of the liberal idea around the world—as they are of new technology.

The combined power of globalization and the technology revolution has also turbocharged the economic transformation of the emerging markets, which is why Mr. O’Neill’s BRICs thesis has been so powerfully borne out.

“We are seeing much more rapid growth in developing countries, especially China and India, because the policies and technologies in the West have allowed a lot of medium-skilled jobs to be done there,” said Daron Acemoglu, professor of economics at the Massachusetts Institute of Technology and a native of one of O’Neill’s “Next 11,” Turkey. “They are able to punch above their weight because technology allows us to better arbitrage differences in the world economy.”

This means, Professor Acemoglu argues, that the first gilded age of the developing world is proceeding much faster than it did in the West in the nineteenth century.

“In the 1950s, labor was cheap in India, but no one could use that labor effectively in the rest of the world,” Professor Acemoglu said. “So they could only grow going through the same stages the West had done. Now the situation is different. China can grow much faster because Chinese workers are much better integrated into the world economy.”

Yet the successes of this economic revolution can also make living through your own first gilded age in the twenty-first century harder to endure. Once television, the Internet, and perhaps a guest-worker relative reveal to you in vivid real time the economic gap between you and your Western peers, growth of even 4 or 5 percent might feel too slow. That will be especially true when you see your own robber barons living a life of twenty-first-century plutocratic splendor, many of whose perks (a private jet, for instance, or heart bypass surgery) would have dazzled even a Rockefeller or a Carnegie.

Meanwhile, as emerging economies go through their first gilded age, the West is experiencing its second one. Part of what is happening is a new version of the industrial revolution. Just as the machine age transformed an economy of farm laborers and artisans into one of combine harvesters and assembly lines, so the technology revolution is replacing blue-collar factory workers with robots and white-collar clerks with computers.

At the same time, the West is also benefiting from the first gilded age of the emerging economies. If you own a company in Dallas or Düsseldorf, the urbanizing peasants of the emerging markets probably work for you. That is good news for the plutocrats in the West, who can reap the benefits of simultaneously being nineteenth-century robber barons and twenty-first-century technology tycoons. But it makes the transition even harsher for the Western middle class, which is being buffeted by two gilded ages at the same time.

A survey of nearly ten thousand Harvard Business School alumni released in January 2012 illustrated this gap. The respondents were very worried about U.S. competitiveness in the world economy—71 percent expect it to decline over the next three years. But this broad concern looks very different when you separate the fate of American companies from the fate of American workers: nearly two-thirds of the Harvard Business School grads thought workers’ wages and benefits would be in jeopardy, but less than half worried that firms themselves would be in trouble.

“When a company is stressed and has issues, it has a much greater set of options than a U.S. worker does,” said Michael Porter, the professor who led the study. “Companies perceive that they can do fine and they can do fine by being one of the 84 percent that moved offshore, and they can also do fine by cutting wages.”

“Although the overall pie is getting bigger, there are plenty of people who will get a smaller slice,” said John Van Reenen, head of the Center for Economic Performance at the London School of Economics. “It is easy to say, ‘Get more education,’ but if you are forty or fifty, it is hard to do. In the last fifteen years, it is the middle classes who have suffered.”

“The China Syndrome,” a 2011 paper on the impact of trade with China by a powerful troika of economists—David Autor, David Dorn, and Gordon Hanson—underscored what is going on. The empirical study is particularly significant because it marks a shift in consensus thinking in the academy. In the debate about the causes of growing income inequality, American economists have tended to opt for technology as the driving force. But, drawing on detailed data from local labor markets in the United States, the authors of “The China Syndrome” argue that globalization, and in particular trade with the mighty Middle Kingdom, are today also having a huge impact on American blue-collar workers: “Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment.”

The deleterious effects go beyond those workers who lose their jobs. In communities hit by the China Syndrome, wages fall—particularly, it turns out, outside the manufacturing sector—and some people stop looking for work. The result is “a steep drop in the average earnings of households.” Uncle Sam gets hit, too, especially in the form of increased disability payments.

Messrs. Autor, Dorn, and Hanson are no protectionists. But, in a challenge to the “one nation under God” view of the world, they offer a sharp reminder that the costs and benefits of trade are unevenly shared. As they put it, their finding does not “contradict the logic” of arguments favoring free trade; it just “highlights trade’s distributional consequences.”

That distributional impact is, in the term of art used by economists, to polarize the labor market: there are better and more highly paid jobs at the top, not much change for the low-skill, low-income jobs at the bottom, but a hollowing out of the jobs in the middle, which used to provide the paychecks for the American middle class. Maarten Goos and Alan Manning, writing about the same phenomenon in the UK, call it the division into “lousy and lovely” jobs.

A recent investigation of the direct employment impact of the iPod is a case study in these lousy and lovely jobs—and shows where some of what used to be the jobs in the middle have gone. The research is the work of Greg Linden, Jason Dedrick, and Kenneth Kraemer, a troika of scholars who in a pair of recent papers have examined how the iPod has created jobs and profits around the world. One of their findings is that in 2006 the iPod employed nearly twice as many people outside the United States as it did in the country where it was invented—13,920 in the United States and 27,250 abroad.