The Dismal Science
Down-sizing Downsizing
The Clinton administration is at war with itself on the hottest economic issue of the day.

By Paul Krugman
(1058 words, plus links)

       The Clinton administration isn't particularly mendacious on economic matters--in fact, economic analysis and reporting under Clinton have been unusually scrupulous. But the president has changed his mind about economic policy so often that now his officials sound insincere even when they speak the plain truth.
       And so I feel a bit sorry for Joseph Stiglitz, the eminent economist who chairs Clinton's Council of Economic Advisers. In April, Stiglitz released a report on the state of the American worker, more or less confirming what most independent economists had already concluded: Workers are not doing as badly as recent headlines might suggest. In particular, the impact of corporate downsizing has been greatly exaggerated.

Stiglitz's report was, to all appearances, a sincere attempt to produce a realistic picture of the American labor market. Yet it was treated by nearly all commentators as a purely political document--an election-year effort to accentuate the positive.
       But the commentators had reason for their skepticism. After all, other members of the administration--especially Labor Secretary Robert Reich--have been insistently pushing a very different view. In the world according to Reich, even well-paid American workers have now joined the "anxious classes." They are liable any day to find themselves downsized out of the middle class. And even if they keep their jobs, the fear of being fired has forced them to accept stagnant or declining wages while productivity and profits soar.

Like much of what Reich says, this story is clear, compelling, brilliantly packaged, and mostly wrong. Stiglitz, by contrast, is telling the complicated truth rather than an emotionally satisfying fiction.
       To understand why Reich is wrong (about this and most other things), think about the strange case of the missing children. During the early 1980s, sensationalist journalism, combining true-crime stories with garbled statistics, convinced much of the public that America is a nation where vast numbers of children are snatched from their happy families by mysterious strangers every year. TV shows about "stranger abductions" are a media staple to this day. In reality, however, such crimes are rare: about 300 per year in a nation of 260 million.
       It's not that abductions never happen. They do, and they are terrible things. Nor is the point that the kids are all right: For hundreds of thousands of American children, life is sheer hell. Almost always, however, the people who victimize children are not strangers. For every child kidnapped by a stranger, at least a thousand are sexually abused by family members. But stranger abductions made good copy, and therefore became a public concern out of all proportion to their real importance.

Corporate downsizing is neither as terrible nor as rare as stranger abduction, but the two phenomena share some characteristics. Like stranger abductions, downsizing is a camera-ready tragedy, perfect for media exploitation, that is only a minor part of the real problem.
       Stiglitz's report is full of dense statistical analysis making this point, but here's a quick do-it-yourself version. A February Newsweek cover story entitled "Corporate Killers" listed just about every large layoff by a major corporation over the last five years. The number of jobs eliminated by each company appeared in large type next to a photo of the CEO responsible. The article implied that it was describing a national catastrophe. But if you add up all the numbers, the total comes to 370,000. That is less than one worker in 300--a tiny blip in the number of workers who lose or change jobs every year, even in the healthiest economy. And the great majority of downsized workers do find new jobs. Although most end up making less in their new jobs than they did before, only a fraction experience the much-publicized plunge from comfortable middle class to working poor. No wonder Stiglitz found that the destruction of good jobs by greedy corporations is just not an important part of what is happening to the American worker.
       The point is that Reich's style of economics--which relies on anecdotes rather than statistics, slogans rather than serious analysis--cannot do justice to the diversity and sheer size of this vast nation. In America anything that can happen, does: Strangers kidnap children; mathematicians become terrorists; executives find themselves flipping hamburgers. The important question is not whether these stories are true; it is whether they are typical. How do they fit into the big picture?

Well, the big picture looks like this: Both the number of "good jobs" and the pay that goes with those jobs are steadily rising. The workers who have the skill, talent, and luck to get these jobs generally do very well. Only a relative handful of "good job" holders (which is to say only a few hundred thousand a year) experience serious reverses. America's middle class may be anxious, but objectively, it is doing fine.
       The people who are really doing badly are those who do not have good jobs and never did. Those with lousy jobs have seen their already-low wages slowly but steadily sink. In other words, the main victims of (to use another of Reich's phrases) the "new economy" are not the few thousand managers who have become hamburger flippers but the tens of millions of hamburger flippers, janitors, and so on whose real wages have been declining 1or 2 percent per year for the last two decades.
       Does this distinction matter? It does if you are trying to set any sort of policy priorities. Should we, as some in the administration want, focus our attention on preserving the jobs of well-paid employees at big corporations? Should we pressure those companies to stop announcing layoffs? Should we use the tax system to penalize companies that fire workers and reward those that do not? Or, instead, should we fight tooth and nail to preserve and extend programs like the Earned Income Tax Credit that help the working poor? It is disingenuous to say we should do both: Money is scarce and so is political capital. If we focus on small problems that make headlines, we will ignore bigger problems that don't.
       So let's give Joe Stiglitz some credit. No doubt his political masters allowed him to downsize the issue of downsizing at least partly because they believed that good news re-elects presidents. Sometimes, however, an economic analysis that is politically convenient also happens to be the honest truth.


You can link to and read the Stiglitz report which is now on the Web.

Paul Krugman is a professor of economics at Stanford whose books include The Age of Diminished Expectations and Peddling Prosperity. His column, "The Dismal Scientist," will appear monthly in SLATE.

Illustrations by Robert Neubecker