Higher Skill Levels May Mean Slower Recovery

Paul Krugman waxes gloomy: “So far, there’s nothing pointing to a fundamental turnaround this year, or next, or for that matter as far as the eye can see.” Ryan Avent’s not so sure:

Whoa! There is nothing pointing to a recovery at any time in the future? As I said, the world spent four years doing everything wrong, and yet the Depression finally came to an end. Even if we’re not taking all the steps Krugman would have us take, we are at least avoiding the big errors that doomed the economy before. Krugman is basically saying that this downturn will last as long as the Depression or longer, despite the drastically different — and economically orthodox — policy path taken by the world’s large economies. This seems crazy to me.

Those are good points. On the other hand, there’s at least one factor indicating that recovery is harder on present circumstances than it was during the Great Depression—our much higher level of human capital. Consider this chart from the 1940 Census (apologies for the legibility issues, this is literally a chart from the 1940s, not a new chart based on 1940 Census data):


A majority of Americans hadn’t so much as set foot inside a high school. These days, about 80 percent of Americans have a high school diploma and about a quarter have a bachelor’s degree. As the 2007 CPS report on educational attainment says “this reflects more than a three-fold increase in high school attainment and more than a five-fold increase in college attainment since the Census Bureau first collected educational attainment data in 1940.”

This reflects a large-scale increase in the skill-level of the population which has done a great deal to drive prosperity. But it also points to a problem with recovering from economic downturns in modern circumstances. Unskilled workers do work that, by definition, requires few skills. You need to be willing to show up and work hard, but beyond that it’s easy to teach you how to do the job. That means that an unskilled worker can, broadly speaking, be a generalist. If there’s a downturn in demand for maids in a given labor market but an uptick in demand for CVS cashiers, then unskilled workers can shift from one sector to another without much of a problem. Skills, by contrast, tend to be somewhat specialized. When a fifteen-year veteran newspaper writer gets laid off, his fifteen years worth of experience leave him with skills that have some value outside of the newspaper sector—general writing and verbal ability are always useful. But fifteen years worth of newspaper experience is most valuable in a world where there continues to be robust demand for newspaper writers and that’s not the world we live in.

The skill-base of the American workforce is the cornerstone of our prosperity. But a large economic dislocation typically forces some sectoral shifts. And when you have large sectoral shifts, the value of your workforce’s skills diminishes. I believe something similar is true for capital goods. The cars manufactured in the 1920s and 1930s were crude compared to today’s cars. And the tanks of the 1940s were crude compared to today’s tanks. So it was easier to convert the car factories of the 30s to tank production than it would be to effect an equivalent transformation these days. Or, more to the point, it was easier to do that than it will be to convert capital goods related to the production of houses into capital goods related to the production of import-substituting manufactured goods.

Another issue is that it’s at least possible that America’s key export industries—aviation and entertainment—are both in long-term structural decline.