Chrystia Freeland

YALTA, Ukraine — One of the paradoxes of our age is that we are simultaneously living through a time of positive economic innovation and also a time of the painful erosion of the way of life of many middle-class families.

Listening to Yuri Milner, the Russian Internet investor, at a conference in Ukraine a few days ago brought home this contrast. Milner is a billionaire thanks to his Internet investments: He has done well both in his homeland, supporting some of Russia’s most successful start-ups, and, even more spectacularly by venturing abroad, taking pioneering stakes in Facebook, Zynga and Groupon.

When Milner talks about the technology revolution, he paints a dazzling picture of literally unprecedented innovation, bringing tremendous savings and benefits to consumers.

But when you talk to economists about the impact of those same forces on middle-class jobs, you come joltingly down to earth. The revolution Milner describes is part of a sea change in how the economies of Western industrialized nations work – and one that is hollowing out the middle class.

The technology revolution has become so familiar – grandmothers are on Facebook and toddlers navigate YouTube on their parents’ iPads - that it is easy to forget how revolutionary it still is. But Milner, speaking at an annual conference held by the Ukrainian billionaire Victor Pinchuk, argued that it had just begun to radically reshape our lives. (Disclosure: I moderated many of the sessions.)

Milner’s focus is on what he calls the three big “stories” in business innovation: “platform,” “free” and “e-commerce.” By “platform,” Milner is referring to the ability of the breakthrough Internet companies to build their businesses using the work and ideas of others. One example is Amazon.com. Milner said that “about 2 million independent merchants are selling on the platform every day. And that adds up to $25 billion of annual sales.” If those merchants were housed in a brick-and-mortar mall, they would occupy a “space equal to the island of Manhattan.”

The second big strand of the Internet revolution that Milner homed in on is “free.” Here, again, Milner argues that something unprecedented is going on: Thanks to the revolutionary impact of “free,” massive global brands can be created almost overnight.

Milner’s final major trend is less abstract: e-commerce. Again, this is hardly a novel phenomenon. But what Milner thinks is new is the impact of e-commerce as it moves from being the sideshow to becoming the main event.

Today, Milner estimates that 6 percent of retail sales is done online. He believes that number will be 20 percent within a decade, and he thinks it will be 50 percent within two decades. That shift, Milner argues, will have a profound and positive impact on the world economy: an 8 percent increase in efficiency. Another predicted consequence is less benign: “a pretty significant job loss in the retail sector to the tune of 40 million jobs in the next 20 years.”

Milner is a winner in all three of his generation’s big revolutions: the collapse of communism, globalization and the technology revolution. So he is inclined to believe the disappearance of retail jobs will have a happy outcome: The vanishing, low-paying retail jobs will be replaced by better-paying technology work.

But economists who have been studying the impact of globalization and the technology revolution on the labor market in Western industrialized economies are less sanguine, at least in the short term.

John van Reenan, professor of economics and director of the Center for Economic Performance at the London School of Economics and Political Science, is one of the foremost students of this transition. He thinks the biggest impact of the e-commerce revolution, and its counterparts in sectors like the law or accounting, won’t be on the number of jobs in the economy; it will be on how well they pay.

“The worry isn’t the quantity of jobs; it is the quality of jobs,” he said in a telephone interview from his base in London. “Other jobs will appear, but they may not be very attractive jobs.”

Van Reenan believes this trend has already begun, with deep social and political consequences. “It is a continuation of the hollowing out of the middle class, which we have seen,” he said. “People will find it harder to support a middle-class family.”

We’ve been in this paradoxical place before. The American economist and politician Henry George described the tumultuous change that his country was undergoing in the 19th century in an 1879 best-seller, whose title says it all: “Progress and Poverty: An Inquiry in the Cause of Industrial Depressions and of Increase of Want With Increase of Wealth The Remedy.”

What makes today’s political economy so hard to come to terms with is that the thrilling innovation and the hollowing out of the middle class – the progress and the poverty – aren’t two inimical trends. They are, instead, opposite faces of the same coin. But that’s something we don’t like to talk about, either in the hot spots where innovation is happening, or in the depressed regions where its malign side-effects are being felt most acutely.

PHOTO: Digital Sky Technologies CEO Yuri Milner attends the eG8 forum in Paris May 25, 2011. The eG8 forum gathers “leaders of the Internet” to consider and discuss the future of the Internet and society.  REUTERS/Gonzalo Fuentes

George Soros made headlines this week with a striking proposal that to save Europe, Germany must “lead or leave.” The leadership part was familiar: Outside Germany, at least, it is becoming conventional wisdom that Europe will survive only if the Union’s behemoth provides more decisive leadership — and writes bigger checks.

The catch is that the rest of Europe, particularly its beleaguered so-called Club Med countries, doesn’t seem to be in much of a position to coerce Berlin to do anything. That is where Soros’s second alternative — leaving — comes in. In an interview in Vienna last weekend and in a speech in Berlin on Monday, Soros added his influential voice to a cluster of iconoclasts who have asserted that Southern Europe’s fate need not be decided in Germany.

If Germany is unwilling to lead, Soros argues, the Southern Europeans should ask Germany to leave. His prediction is that these currently sickly nations would do perfectly well.

“If Germany left, the common market could hold together and actually it would be a remarkable relief,” Soros told me. “The euro would fall in value, so the debt which is denominated in euro would also fall in value and the competitiveness of the debtor countries compared to Germany and the other creditor countries would greatly improve.”

In this scenario, the Club Med countries would benefit partly from the inflation and currency devaluation that their existing monetary marriage to Germany precludes. Their renaissance would also be based on their economic fundamentals, which Soros argues are strong but are being discounted by the markets because of the existing fiscal and monetary straitjacket.

“It’s remarkable, remarkable, when you look at the Latin euro, that is to say the euro excluding Germany, it actually compares very favorably, not only with Britain, but with the United States and Japan,” Soros said.

“A Latin euro, where the members formed a fiscal union and would therefore go to introducing euro bonds, would be able to borrow at rates comparable to Japan, theUnited States and the United Kingdom. They would rank equally on the macroeconomic basis, if you compare them in terms of total indebtedness and deficit.”

Soros argues that Europe couldn’t survive the exit of one of its weaker, southern members but that it could weather the “amicable” departure of Germany.

“If Italy or Spain left, not only the euro but also the common market and the European Union would fall apart,” he told me. “Whereas if Germany left, the common market could hold together.”

Soros acknowledges that a German departure would be “a big dislocation” and a “shock,” but he thinks that the euro and the financial arrangements it supports would endure. This is, mildly put, not the consensus view.

Yet Soros knows a thing or two about currencies and bonds, which is why his economic policy prescriptions carry such weight.

He is also one of the millions of Europeans with experience of death and destruction. As a teenager, Soros hid from the Nazis in occupied Budapest; a couple of years later, still in his teens, he fled the Communists to make his way, penniless and alone, in Western Europe.

That personal history helped to inspire the second part of Soros’s message: of the promise and the peril of Europe. When it comes to peril, Soros warned that existing policy is sorting the Continent into two tiers. This Europe, he said, “is divided into debtors and creditors, with the creditors led by Germany being in charge and calling the shots and the debtors relegated to an inferior status which is threatening to become permanent.”

The historical precedent, he noted, was grim: “After the First World War, when the French imposed reparation payments on Germany, then they were sort of the tough taskmasters, they occupied the Saar, and the result was the rise of Hitler. It really would be a tragedy if Germany now fell into the same trap.”

Now for the promise: Soros remains a committed European, passionately supportive of the moral idea that animated European convergence.

“The European Union,” he said, “was meant to be an association, a voluntary association of equal states, each of which is devoted to the principles of democracy, rule of law, human rights, sacrificing part of their sovereignty for the common good.”

Millions of bitter experiences like those of the Soros family were the most powerful reason Europeans vowed never again, and embarked on their ambitious unification project. Soros notes that a successful European Union is important far beyond its borders.

“A united and prosperous Europe, devoted to the principles of open society, is very much needed by the world,” he told me. “I have a network of foundations working in various parts of the world, and I can give you personal testimony of how important it is to have a Europe that is strong enough to project its influence in the rest of the world. Take, for instance, the transformation that’s taking place in Burma, or in some of the African countries; there’s a very positive role that the European Union can play.”

As Europe teeters from one crisis to the next, Soros reminds us all that at its heart, the European Union is about more than deficits and currencies and bonds. Europe is also a political and moral idea — one very much worth preserving.

PHOTO: Billionaire investor George Soros speaks at a forum Charting A New Growth Path for the Euro Zone during the annual IMF-World Bank meetings in Washington September 24, 2011.   REUTERS/Yuri Gripas 

If there had been an empty chair at the Democratic convention this week, its ghostly occupant would have been Ronald Reagan.

Barack Obama admiringly referred to Reagan’s transformational presidency during the 2008 election campaign. That enraged the Clintonites, but then-Senator Obama’s take on the historical shifts in American politics was absolutely right. If you doubt that, just think back one week to the Republican convention, which was above all a coming-out party for Reagan’s 21st-century heirs.

Reagan’s legacy is so powerful because he identified the state as the central issue in American politics. That is still true today. Both in Tampa, Florida, where the Republican promise was to shrink the state, and in Charlotte, North Carolina, where the Democrats’ promise is to transform the state into a more effective servant of the middle class, the big question is what government should do, and how big it should be.

In 2008, Mr. Obama identified the force of Reagan’s leadership because he aspired to have the same impact. But the problem for him — and for American liberals in this century more broadly — is that the task they have set for themselves is both harder to do and, crucially, harder to explain.

That argument is made eloquently in a newly published essay on the Obama presidency by Theda Skocpol, a Harvard professor and one of the country’s foremost political theorists. If you read only one book about Mr. Obama this electoral season, read “Obama and America’s Political Future,” the slim volume that includes Dr. Skocpol’s essay and three smart responses. Together, they rise above the tick-tocks and polemics that characterize too much of the United States’ political writing.

Dr. Skocpol’s starting point is the comparisons between Franklin D. Roosevelt’s New Deal and Mr. Obama’s ambitious plans — often described as a New New Deal — that were often made at the beginning of his administration. But that parallel, which was drawn by insiders as readily as by outsiders, misses one crucial historical difference: F.D.R. built the state from scratch, while Mr. Obama is trying to overhaul a massive state machine that has existed for decades.

“The things that happened in the 1930s were unprecedented in peacetime,” Dr. Skocpol told me. “That was hard, but citizens could get a sense that something new was happening. What is different for Obama is that there is a very elaborated federal apparatus that already exists.”

It is the difference between a start-up and turning around a big, troubled company, or, to use a more domestic metaphor, between building a brand-new house and renovating an old one.

“We know from economic and technology history — it is easier to fill a space for the first time,” Dr. Skocpol said. “This is the same principle.”

Dr. Skocpol, who describes the Obama effort as “redirecting” the state, believes that task is difficult for many reasons. One is that change usually antagonizes vested interests; another is that, as the Obama administration has certainly shown, it often increases complexity.

When it comes to Election Day, renovation has a further, powerful disadvantage, compared with starting from scratch. When you build on a greenfield site, it is easy to show what you are doing and to explain how it is new. When you are working on a brownfield site, it is a lot harder to demonstrate what you’ve actually accomplished.

In the United States, the job of redirecting the state is further complicated by a phenomenon the author of another essay in this volume describes as the “submerged state.” Suzanne Mettler, a political science professor at Cornell University in New York State, coined the term to describe “a whole number of public policies in the United States that are hard for people to perceive as such because of their design.”

The submerged state lurks most massively in tax policy, which provides huge benefits, but ones that are largely invisible to their recipients. The result is the familiar American paradox of beneficiaries of government largess who passionately call for a shrinking of the state.

“A lot of people derive a lot of benefits from public policy, but they don’t recognize that the government is assisting them, so they are less likely to support government,” Dr. Mettler told me. She cited a survey she did in which only 43 percent of respondents admitted to ever getting help from the government. When asked about specific programs, though, 96 percent turned out to have benefited from state largess.

When it comes to the campaign trail, the easiest platform is a start-up — Americans love the shiny new thing. Next best is demolishing something that’s old and rotten — the appeal of Representative Paul D. Ryan’s radical rhetoric is no accident.

Hardest of all is to promote a painstaking, time-consuming renovation — which is exactly what U.S. government needs and what Mr. Obama, at his best, has promised to accomplish. To succeed, he needs to understand how different his new deal is from F.D.R.’s and why his transformation is a harder sell than Reagan’s was. He needs the courage to remove the cloak of invisibility from America’s submerged state. And when it is revealed to Americans in all of its complex and inefficient glory, he needs to come up with a clear plan not to make it bigger, but to make it better.

PHOTO: Former U.S. Speaker of the House Newt Gingrich and his wife Callista narrate a tribute to former President Ronald Reagan during the final session of the Republican National Convention in Tampa, Florida, August 30, 2012.  REUTERS/Adrees Latif