The Human Capital Economy

By Chris Farrell

Every once in a while, the established order is overthrown. The rhythm of everyday life and beliefs about economic opportunity are transformed by a combination of organizational innovations and new ways of thinking. Severe economic downturns accelerate these transitions.

The United States has been gradually moving away from an economy of producing tangible products like cars and machine tools, and toward an economy that generates wealth by creating intangibles, such as search engines and education. You can see this quite clearly in Muncie, Indiana.

"When I got laid off, I understood I wasn't going back," says Jerry Keener. He worked for 25 years at the Borg Warner Automotive Transmission assembly plant in Muncie. It was a good union job with a pension and health insurance. But the factory is closed now, the jobs gone to Mexico. Keener is collecting unemployment insurance; it's not even enough to cover his prescription medicine. Keener says there's nothing in Muncie for him anymore. He's thinking about leaving town, maybe going down south to look for work.

"What is happening now is that, in a lot of ways, Muncie encapsulates the economic transition the whole country is going through," says James J. Connolly, director of the Center for Middletown Studies at Ball State University in Muncie. "We're moving away from manufacturing and towards the service economy, toward knowledge-based jobs."

Even during this recession, employment in these areas has managed to expand - 579,000 new jobs in education and health services since December, 2007. "In many regions, especially the hard hit manufacturing belt, people working in health and education are crucial to keeping local economies afloat," says Michael Mandel, chief economist at Business Week.

And you need a good education to get those jobs, or at least the savvy to make the service economy work in your favor.

That's what Muncie resident Tom Green did. For 40 years, he flew commercial and corporate jets around the world. But in September 2008, he lost his job when the commercial real estate company he worked for grounded its jets. Green was 58. He could have panicked. Instead he thought: "Time to do something else."

He dipped into savings and bought the Blue Bottle, a coffee shop and restaurant in downtown Muncie. It's nestled on a block among Victorian era buildings, some lovingly restored, others empty and waiting for rehabilitation. The Blue Bottle thrives on the growing economy of knowledge workers, including professionals, government employees, health care workers, and students from nearby Ball State University. Students work on laptops while enjoying a cappuccino; budding entrepreneurs talk over their business plans with clients. To visit the Blue Bottle is to see the backbone of the newer, healthier Muncie. And far from wanting to leave the place where he grew up, Green is more attached now than he was all those years he was flying around the world. "Being a small business owner connects me with the community," he says. "I am committed to Muncie."

Economic change has shaped Muncie before. The collapse of the railroad financing mania in the 19th century led to a depression from 1873 to 1879, the longest in the nation's history. The trauma hastened the rise of steel, coal, machine tool and other iconic businesses of industrial America, creating "smokestack towns" like Muncie. These industries took advantage of a new national market knit together by the railroads. The discovery in the early 1880s of an underground natural gas field in the northern Indiana region surrounding Muncie attracted manufacturers, most notably the Ball Brothers glass jar company. Industry was soon well-established - a General Motors transmission plant, a number of other auto parts manufacturers, and more glass makers.

The combination of the Great Depression and World War II solidified Muncie's place as a major Midwestern manufacturing hub. Muncie also had a small university and a medical complex, along with some professionals and small business owners. But the town's character was dominated by its factories and their workers. From the end of World War II until the early 1970s, young men in Muncie and similar "smokestack towns" across the country graduated from high school, joined a union and made a good living at a factory. They pocketed their earnings and bought cars and homes, barbequed on the patio, and dreamed of retirement. "They were working class on the job but middle class at home," says Michael Hout, professor of sociology at the University of California, Berkeley.

But a painful decline in American manufacturing took hold by the late 1970s. Membership in private unions fell precipitously. Corporate rivals from Europe, Japan, and East Asia began competing with American industry for jobs and markets at home and abroad. American manufacturers were continually overhauling their operations, laying off workers, and forcing the remaining employees to switch jobs. The prospects for high school graduates grew grim. In the 1960s, work at an auto plant could bring salary and benefits of some $60,000 a year (in current dollars) according to Robert Reich, former Secretary of Labor. Now, the same worker might make $17,500 with slim benefits at Wal-Mart.

The manufacturing jobs that once offered workers a middle-class life are fast disappearing. But the middle class isn't. The jobs and careers that move people into the middle class are just different now than they were a generation or two ago. Jobs in government, education, healthcare, and other knowledge creating industries tend to provide middle-class incomes, and they usually offer retirement, health insurance and other benefits. Professors at public universities like Ball State earn about $57,000 a year. The median salary for grade school teachers in Muncie is $45,000. Laboratory technicians, nurses and other skilled workers in the health sector make a decent living, too. Although an aristocracy of labor in union plants still does well, more people now work in non-union factories and smaller manufacturing sites around the country, and they earn significantly less than, say, unionized autoworkers. "Most of the jobs in education and healthcare are actually more middle class than the jobs on the assembly line," says Berkley's Hout. "The community is trading up."

These intangibles, critical for today's knowledge-based economy, are not well measured by the gross domestic product figures produced by the Bureau of Economic Analysis. However, intangibles do produce jobs. And the days when a combination of a high school degree and a strong work ethic were enough to get a young person on a path to the middle class are long gone. It's not that you'll never get a job without a degree, but people who only go to high school actually make less now than they did 30 years ago, adjusted for inflation. Their wages are dropping, while wages for people with college degrees have been going up - and the gap is getting wider.

This is a change from the way things were for a long time in the United States. When most jobs did not require a college degree, there were more than enough college graduates. From 1915 to 1940, the relative demand for college graduates grew at an average rate of more than 2 percent, but the supply of college-educated workers rose at an average annual rate of more than 3 percent. With plenty of college graduates to spare, the wage differences between the two groups remained pretty stable, according to economists Claudia Goldin and Lawrence Katz of Harvard University. And this remained true as the G.I bill and a state sponsored college building boom opened up unprecedented opportunities for a college education in the first three decades of the postwar era. There were more than enough college-educated workers to meet the needs of American employers. But starting in 1980, the increase in college-educated workers slowed while employer demand grew. The "wage gap" between workers with different levels of education began to grow, fast.

So now the new face of poverty often comes with a student loan. Most young people have gotten the message that a college education is how to get ahead. Many of the working poor in Muncie have been to community college, junior college, or public four-year university. Yet a lot of them never actually finish their degree. What they get is a student loan repayment book. The same story holds nationwide. Students from low-income families who are the first in their family to go to college - if they quit during their first year of public university, they end up owing, on average, $6,557. Those who leave in their fourth year owe an average of $16,548. These students must pay back their loans without the extra earning power associated with attaining their degree. "The key question is how you get these middle-class jobs," says Leslie McCall, professor of sociology at Northwestern University.

It will be tough for a former 50-something autoworker like Jerry Keener to find a well-paying job at Ball State or the medical complex. If he does decide to leave Muncie, he'll have plenty of company. The city's population has shrunk by about 4 percent since 2000. But for Tom Green, owner of the Blue Bottle coffee shop, the transformation of Muncie into a healthcare and education hub is good news. There should be plenty of people stopping by to boot up their laptops and buy a cup of coffee.

Back to Hard Times in Middletown.