Functional deficits for dysfunctional America

In Part One, we examined financial deficits. We saw how short-term, mid-term and long-term federal deficits each have strikingly different causes and logics, and how Washington elites' obsessions are premised on confusing them - as well as ignoring state and local deficits. In Part Two, we considered the neglect of physical deficits - in infrastructure and ecosystem services - that undermine any sensible concern for our long-term economic future. We now turn our attention these three functional deficits, before concluding in Part 4 with two cognitive deficits - the critical thinking deficit and the imagination deficit - and one political deficit: the democracy deficit.

Functional deficits may be harder to quantify than physical deficits, but they are nevertheless quite real and very consequential. We can even begin to understand how they might be at least partially quantified, the better to enable us to begin managing them more thoughtfully. These all have some degree of a physical side to them, but they are primarily about how we organise how we do things - including how we organise our own social capacity and individual skills.

Choices about how we organise our lives are very much a matter of morality, about what we value and what we do not. The fact that we're obsessed with financial deficits, with so little attention to structural/functional deficits, says a great deal about how morally lost we have become.

The sustainability/resiliency deficit

Conceptually, any concern about a sustainability deficit might seem redundant after the previous discussion of our ecosystem deficit, but sustainability isn't just an ecological concept, as the housing bubble and its collapse shows us. More than 20 years earlier, the late economist Hyman Minsky explained how financial instability had a natural tendency to arise out of stable financial regimes. The more risky and unstable the financial system becomes, the less sustainable it becomes as well.

Conceptually, Minsky's work has nothing to do with ecosystem services and their depletion. It establishes an entirely distinct foundation for concern about sustainability. But it does not exhaust the concept. Rather, it points to the fact that sustainability is a generalised concept in its own right, a concept that should always factor into our thinking. Or, put another way, it's a concern that can draw on different analytical frameworks for addressing different aspects of sustainability. For an example of this more generalised approach to sustainability, we turn to a very down-to-earth source: what's known as the "Transition Movement", which began with environmental educator Rob Hopkins in the small market town of Totnes (population 7,500) in Southwest England.

Totnes was typical of countless thousands of towns worldwide that have become far less self-sufficient than they were just a generation or three ago. Hopkins moved to Totnes in 2005, because he saw it as an ideal place to began reversing that process, laying the groundwork for an intentional effort to significantly reduce energy use and restore its previous level of community self-sufficiency, which Totnes had enjoyed for eight centuries. Initially, the movement was environmentally driven by two related concerns - energy resource depletion under the rubric of "peak oil", and the carbon pollution problem of global warming. After 2008, economic collapse was later added to the list. But despite such dour concerns, it had a decidedly hopeful orientation, placing a strong emphasis on individual and community empowerment, as exemplified by the idea of "reskilling" - redeveloping the ability of people, individually and collectively - to do things for themselves that had temporarily been taken over by the global economy, in ways that increasingly seem to be unsustainable in the long run.

Reskilling is a key ingredient in developing resilience. According to a definition quoted by Hopkins, "Resilience is the capacity of a system to absorb disturbance and reorganise while undergoing change, so as to still retain essentially the same function, structure, identity and feedbacks." In short, it's sustainability in a pro-active mode that can take on outside shocks, and sustain itself by choosing what should change in order to preserve what's essential.

While American conservatives and others have managed to generate extreme hysteria over financial deficits, the most devastating deficit most Americans have to deal with is unemployment - the jobs deficit. Beyond the standard measure of unemployment - presently at 9.1 per cent - there's the broader category including underemployed and discouraged workers, which stands at 16.1 per cent. Because economists routinely adopt a business-centred view of economics, this deficit gets vastly less attention than it deserves, even though its impacts are much more directly felt by the public at large. Yet its impacts are enormous - and needlessly arbitrary, as well, since modestly restructuring labour markets could dramatically reduce this deficit.

First, let's consider its costs. A December 2009 paper by John Schmitt and Dean Baker from the Center for Economic and Policy Research, "The $1 Trillion Wage Deficit", estimated just such a loss from 2008 through 2012, as a conservative figure excluding "the cost of lost health insurance or pension contributions, lost earnings resulting from declines in the usual hours of work for those workers who manage to keep their jobs, or any cuts in wages and salaries stemming from cost-cutting pressures brought on by the recession". It also excluded the most long-term costs.

To consider those costs, we turn to a recently announced study from the Brookings Institute, "Recessions and the Costs of Job Loss", which projects a wage loss of $112,000 over 25 years for workers who lose their jobs during an economic downturn, compared to those who lose jobs when the economy is growing. With almost 9 million jobs lost during the recession, this projects to another $1tn in lost wages. While there's obviously significant overlap between these two figures, neither study captures the full amount of lost income, or the added income loss from an economy with long-term lowered consumer demand. Such staggering income losses also surely incur other losses, such as property loss through foreclosure. So $2tn is not an unreasonable estimate for overall size of the jobs deficit.

While the most effective counter-measures against unemployment - direct government jobs programmes and prolonged stimulative government spending - were never seriously considered, another potent option still remains. In another recent paper, "Work Sharing: The Quick Route Back to Full Employment", Dean Baker argued that "dividing up the existing work among more workers" appeared to be the only politically feasible way to increase employment more rapidly. Baker cited the example of Germany, whose aggressive work-sharing policy actually helped it to reduce its unemployment 0.4 per cent since the start of the downturn, in sharp contrast to a 4.4 per cent increase in the US.

The paper went on to outline "a proposal for a system of work sharing which would give employers an incentive to maintain workers on their payroll at reduced hours as an alternative to laying them off. The system would be attached to the existing system of unemployment compensation, with short time compensation as an alternative to unemployment compensation." Among other things, Baker noted the savings in costs to train new workers once the economy starts to recover, as well as the likelihood that "work sharing might help to keep workers employable".

What's more, an intelligently-designed system, such as one involving 4-day work-weeks, could produce other benefits as well. "That's a really big deal," Baker told me. "People spend hours a day commuting. If you could cut down your commuting by 20 per cent who wouldn't want to do that?"

This is particular clear-cut example of a larger issue - that of greater individual control over the trade-off of time versus income, which could produce environmental benefits as well as more life-satisfaction.

"If you could encourage people to take benefits of productivity in the form of leisure, rather than higher income - and income does tend to correlate with resource use - then that's a great thing," Baker said, adding, "You're not forcing anyone." And, indeed, Europeans have overwhelmingly embraced this trade-off, with shorter work-weeks, longer vacations, and paid family leave time. This is where the issue of a time deficit enters the picture - a deficit that many harried parents in particular know all too well. Giving people greater freedom to choose is supposedly the heart of "free market" logic. And yet, the way we structure existing labour markets robs people of the most fundamental choice of how to spend their time. This need not be.

The United States has a very high level of inequality - almost the highest in the developed world, and higher than many developing countries as well. But that's not what Americans want, and it's not what's best for us, either. Our lack of equality constitutes a very serious deficit, that's grown significantly worse over the last 35 years, when the income share of the top 1 per cent has more than doubled, from about 9 per cent in 1976 to about 24 per cent today. Although Americans are more tolerant of income and wealth inequality than people in other countries, a recent study "Building a Better America - One Wealth Quintile at a Time" found a surprisingly strong consensus that Americans would prefer to live in Sweden instead.

Well, not Sweden, actually, since Sweden's wealth distribution is not that different from the US. Rather, by 92 per cent to 8 per cent, Americans would prefer to live in a country whose wealth distribution was the same as Sweden's income distribution, meaning that the top 20 per cent would have 34 per cent of the wealth, rather than 84 per cent of it. The study also found that the average estimate of existing inequality occupies a middle range - with the top 20 per cent thought to hold 59 per cent of the wealth. Thus people dramatically underestimated the level of wealth inequality, and wished to dramatically reduce it even further. Differences between groups - by income, gender, and political affiliation - were relatively small compared to the agreement between them.

But it's not just that there's a widely-shared desire for a significantly more egalitarian society. There's objective evidence that it would be better for us as well. Inequality carries with it all manner of costs to the health and well-being of individuals, groups and entire societies. A great deal of such evidence is compiled in the 2009 book, The Spirit Level: Why Greater Equality Makes Societies Stronger, which compiles a wide-ranging collection of data showing how more unequal societies produce significantly worse outcomes across many different faces of life.

Typically, the book shows this in terms of graphs comparing data from different countries, or different states in the US, revealing strong correlations between income inequality and negative outcomes, as well as the reverse with positive outcomes. Examples include life expectancy, infant mortality, drug use, mental illness, adult and childhood obesity, high school drop-out rates, maths and literacy scores, teenage birth-rates, homicide rates, conflicts between children, and imprisonment rates, among others. The graphs correlating inequality with an aggregate measure of social well-being are particularly striking for how closely they approximate a straight-line correlation - quite unlike similar graphs comparing income levels to social well-being, which show only a vague relationship between the two.

While critics might object that "correlation is not causation", when there's so much smoke the probability of fire becomes overwhelming, particularly when there are credible arguments about how and why there is causation involved. In particular, one broad-brush argument describes how it is that we tend not to even realise the costs we are paying:

As greater inequality increases status competition and social evaluative threat, egos have to be propped up by self-promoting and self-enhancing strategies. Modesty easily becomes a casualty of inequality: we become outwardly tougher and harder in the face of greater exposure to social evaluation anxieties, but inwardly - as the literature suggests - probably more vulnerable, less able to take criticism, less good at personal relationships and less able to recognise our own faults.

In short, we lose the capacity to recognise what we've lost, a form of anosognosia. And without such knowledge, it's impossible for us to choose wisely, to act in our own self-interest, much less think sensibly about the welfare of others.

Is this an argument for eliminating all inequality? No, of course not. It's an argument for moderation, not elimination - and more immediately, for better understanding of how and why inequality is deleterious, a deficit we simply cannot afford to bear at current levels.