Firstly I like Rajan. He is thoughtful and unlike Kruggy or Delong he is actually civil and respectful.
But he correctly identifies the problem that in order to push up the stagnant wages of the middle class, government used fiscal measures to prop up bubbles.
In fact, since the 1980s, the income gap has widened not just between CEOs and the rest of society but across the economy, too, as routine tasks have been automated or outsourced. With the aid of technology and capital, one skilled worker can displace many unskilled workers. Think of it this way: when factories used mechanical lathes, university-educated Joe and high-school-educated Moe were no different and earned similar paychecks. But when factories upgraded to computerized lathes, not only was Joe more useful; Moe was no longer needed.
Not all low-skilled jobs have disappeared. Nonroutine, low-paying service jobs that are hard to automate or outsource, such as taxi driving, hairdressing, or gardening, remain plentiful. So the U.S. work force has bifurcated into low-paying professions that require few skills and high-paying ones that call for creativity and credentials. Comfortable, routine jobs that require moderate skills and offer good benefits have disappeared, and the laid-off workers have had to either upgrade their skills or take lower-paying service jobs.
"Government programs aimed at skill building have a checkered history. Even government attempts to help students finance their educations have not always worked; some predatory private colleges have lured students with access to government financing into expensive degrees that have little value in the job market. Instead, much of the initiative has to come from people themselves."
That is not to say that Washington should be passive. Although educational reform and universal health care are long overdue, it can do more on other fronts. More information on job prospects in various career tracks, along with better counseling about educational and training programs, can help people make better decisions before they enroll in expensive but useless programs. In areas with high youth unemployment, subsidies for firms to hire first-time young workers may get youth into the labor force and help them understand what it takes to hold a job. The government could support older unemployed workers more -- paying for child care and training -- so that they can retrain even while looking for work.
The complete failure of government means that it must be given more important tasks. Granted that Rajan might say that he is not asking for central planning but at some point he has to recognize how costly government is for growth. Even if you don't subscribe to anarchy you must recognize that government in itself is a massive pain in the ass with the potential to do a lot of damage. Now how can you minimize that damage even if you dont want to subscribe to an Austrian view. That is actually an important question.
On the whole the article is good. He points out a lot of things that the stimulus hawks should be worried about but wont since they are more concerned with cheering their team.
ps. if you want an eample of hubris read the comment by Marius.
Good? Parts about the thesis are simply not correct and intentionally misleading. The differences in CEO vs. others pay, and work obsolescence misses a huge event: Leaving the “Bretton Woods Gold Exchange Standard”. Any discussion about pay differences between people in the Post WW2 period should/need to split it into at least two periods: Pre and Post Leaving Bretton Woods. All of the bad statistics turned worse as a result of leaving Bretton Woods. Look at the size of the financial business, how much of that would be useful absent the ability of the US Fed to create trillions of petro-dollars and steal purchasing power from the working classes. And look at what happened to imports? Under gold exchange there was a leveling tendency toward trade balance. With fiat dollars the trade imbalances have exploded EVEN WITH THE LOSS IN PURCHASING POWER of the US Dollar.
And look at what has happened to the price of higher education? Since the covering of tuition through loans, tuition prices have shot up as has the percentage of people with college degrees. Of course the result is that the price is higher for the degree and the value of the degree is less. But if you focus on minorities and men the whole education mess is a complete disaster. Now you have male workforce participation rates at Depression Levels. And what about those folks who have tens of thousands of dollars in loans that unlike car and home loans, these ones can not be resolved in a bankruptcy so they live on screwing the people conned into taking them.
Yes, the computer and internet have destroyed millions of manufacturing jobs, but they have destroyed millions of manufacturing jobs in China and Japan as well. The best defense for the middle class for this is to leave them alone to sort out what value these individuals have to provide to society and how much society will pay for it. Certainly creating successive financial bubbles has only exacerbated the problem.