Biden's Two-Track Economy Tackles Twin U.S. Threats

(Bloomberg Opinion) -- President Joe Biden’s economic plans promise to split the U.S. economy between industries that increase productivity and industries that provide mass employment. This is a reasonable response to the pressures the U.S. is facing from changes in technology and the global economy. But it also risks creating social divisions between the people who work in the two types of industries.

In a recent blog post, I tried to lay out a general vision for where Biden’s economic plans are taking us. One concept I kept coming back to was the idea of a “two-track economy.” I got this idea from Japan, where world-class export industries — think of Toyota Motor Corp. and Panasonic Corp. and Nintendo Co. — ended up subsidizing other inward-looking industries that were fairly unproductive and hidebound but managed to employ a huge number of people. Japan sort of stumbled into this arrangement, but my idea is that Biden is attempting to create something along these lines -- providing research funding and other support for innovative knowledge industries like software, bioscience, and advanced manufacturing, but also supporting a domestically focused “care economy.”

That sort of bifurcation makes sense in a world where the industries that raise productivity the most are not the ones that offer the promise of mass employment. During the Industrial Revolution, manufacturing was the cutting edge in terms of innovation and productivity growth, but it also absorbed a huge amount of the workforce. It was able to do this because demand for manufactured goods was increasing so fast.

Today, however, the U.S. faces a very different landscape. The most innovative industries — software, biotech, etc. — don’t employ that many people. Instead, an increasing share of the American workforce is occupied doing local services such as health care, education, retail and food service. These sectors were hit especially hard by the pandemic (it’s hard to do in-person service work when you might infect someone), but the overall trend has been toward more of the workforce doing these things:

The reason for this isn’t entirely clear. Some argue that it’s due to automation — new technologies are making it easier to substitute machines for humans instead of just complementing human labor. A more likely culprit is globalization — as Asia has become the global center of labor-intensive manufacturing, the U.S. has been unable to compete on costs in any industry that depends on mass low-paid assembly work. No longer able to be the workshop of the world, the U.S. has been forced to become the world’s research park — competing in high-tech industries that leverage America’s advantages in research and development and venture-backed entrepreneurship.

The upshot, however, is that the high-powered knowledge industries that Biden wants to support with big federal research dollars are not going to provide mass employment. We’re not all going to be computer programmers, like people dreamed we might in the 90s. Nor are we all going to become lab scientists or the people running high-tech semiconductor labs. It’s increasingly clear that most of us are going to be employed taking care of each other — making each other food, looking after children, providing entertainment, taking care of each other in our old age, and so on. It’s broader than that, of course; installing fire alarms or helping people with financial advice ultimately falls under this same heading. By boosting demand for care jobs, Biden is hoping to lean into this change.

And in the current global economic environment, it’s probably the smartest path. But it risks creating a social divide between the people who work in the knowledge industries and the people who work in the local service industries.

That divide is already visible in the divergent wages that people in these sectors are paid. According to the job search website Indeed, the average software engineer in California makes over $135,000 in base salary alone, while the average child care worker in the same state can expect to make between $19,000 and $52,000.

That economic gap inevitably leads to a social divide, as knowledge workers price local service workers out of desirable areas and enjoy luxuries denied to the working class. And that social divide leads to political divides over things like higher education and hiring policy at technology companies, which are seen as the gateways to the golden, privileged world of the knowledge worker class. When you divide the economy into two tracks, everyone naturally wants to hop on the track that pays more — and they can’t all fit.

But measures to remedy that divide are also fraught with peril. Japan used its peculiar financial and corporate management systems to repress the wages of the people who worked for top companies like Toyota. This created a more egalitarian society, but when Japanese companies started needing to look abroad for talent, they found that their salaries were utterly uncompetitive.

The U.S. is more likely to use the tax system and government benefits to ameliorate those class inequalities. But the more our companies are forced to compete for global talent in a race against increasingly competitive Chinese rivals, the more they’ll need the ability to offer lavish lifestyles to workers who could choose to go to Shenzhen instead.

The U.S. will just have to find a happy medium between the goals of international competitiveness and social equality. But finding that middle path is a challenge every country has to deal with. The two-track economy isn’t a perfect solution, but it’s probably the best option available to the U.S.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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