As the midterm elections approach, the political topic on everyone’s tongue is jobs. The discussion in the popular press, such as it is, takes several forms. Lately, the most common question one hears is how come the economy in general seems to be recovering from the recession but the unemployment rate is still so stubbornly high? The fact that corporate profits are high has also been mentioned repeatedly since it was first introduced about a month ago: the larger corporations are sitting on $1.8 trillion (a figure provided without evidence that it is accurate, by the way), but they’re not spending it and hence not hiring—why?Several kinds of explanations have been adduced for the discrepancy between supposedly incipient recovery and the unemployment rate of over 9.5%. One, which Republicans favor, is that the investment environment is very uncertain because of Obama Administration policies. Business planners don’t know the real costs of the health care bill; they know the bill will cause them to have higher costs but they don’t know how much higher. They universally deny that the bill could possibly be revenue-neutral even for the government, and they are correct: most of the things that have to happen to make it revenue-neutral depend on actions Congress has yet to take and almost certainly never will because it requires courage; but they are certain it will add to costs in the private economy. They don’t know if some sort of carbon tax, whether cap-and-trade in structure or not, will pass Congress in the next year or two. That would also add to the cost of doing business. Financial markets remain unstable, and with the new financial regulations bill, too, more uncertainty is added to the mix. Some holding companies that own banks can’t calculate what their overall portfolio looks like until they see how the banks figure out how to apply the Volcker Rule. Uncertainty breeds hesitation, and companies want to hang on to cash in uncertain times. Another explanation, not necessarily contradictory of the first, is that economists underestimated the impact of public sectors layoffs. I think this is true; indeed, I implored one my authors, Desmond Lachman, to take it more seriously when he was preparing his excellent article on the coming double dip. And he did. But a lot of economic analysts who focus on national-level statistics did not realize how broke most of the state and counties were, and how little the so-called stimulus bill made a dent in their circumstances. The layoffs have been huge, and have offset hiring in some other sectors, including manufacturing. These explanations are at best partial, however, because they are superficial. There’s a lot more going on than this, and while I used to be reluctant to voice my views on this kind of thing, my not being an economist and all, I have lost a lot of my reluctance since it has become obvious that most economists don’t know what they’re talking about. Besides, this is just a blog, and it’s August… First, it is already obvious—has been for a long time—that this is not a “V” recession but more like a “U” or “L” recession: Many jobs that existed when all this started are not coming back. The industries in which they existed have either died or retooled. We have witnessed a massive substitution of new capital for labor in productive processes in recent years, and a lot of this has had to do with IT-related inputs. We have exported a lot of jobs, yes, some of that owing to a death-of-distance phenomenon made possible by IT. We have allowed a lot of illegals to be hired, too. But most of all we have exported jobs to ourselves as teched-up consumers—think when you last had to deal with a bank teller, a gas pumper, a typist at an office, a telephone receptionist, even a grocery store checkout clerk. It does not take a rocket scientist, or even an economist, to see that productivity increases are predicated on this capital-for-labor substitution, which has accelerated sharply because of the shake-up of the past two years. One of the reasons, of course, is that the cost of labor has gone up sharply as health care costs and related benefits have gone up—another reason why it is tragic that the so-called health care bill isn’t a health care bill at all—just an insurance bill that did nothing whatsoever to understand and get a grip on cost escalation. (AI has also focused on that, and we have the best essay anywhere on the basics.) And this process of substitution is going on not only in the United States, but practically everywhere, including China and the Asian rimlands. This more than anything else explains how economic activity can become increasingly decoupled from employment figures. Also, just by the way, there is a strong likelihood that the numbers we’re using are inaccurate, but that’s another matter. The way we collect these numbers embeds certain biases in the figures, as Ryan Streeter pointed out in AI several issues ago. Most likely unemployment is even higher than we think on some counts, and not just because we don’t count people who have stopped looking. But unemployment is probably lower on others as people try to avoid taxes by moving into cash or barter economics. I am not talking about rich people, who always try to avoid or evade taxes if they can (and they often can). I am talking about people mostly in service industries who feel squeezed and to keep ends meeting have to shave expenses. They can do this by going off book, and I think we vastly underestimate how many people do this as a natural course of behavior. Lower middle class tax avoidance by this method is perfectly natural and in a sense fair, except that it burdens middle-class salary makers disproportionately. How does it balance out, between our underestimation and our overestimation? Is 9.5% right, or is it closer to 8%, or 13%? I don’t know; it would make for a terrific research project for those with the means—maybe a Nobel in economics awaits. The Democrats, it will be recalled, a few weeks ago rolled out a so-called manufacturing initiative. This was two parts hilarious, two parts pathetic and one part just stupid. The so-called initiative really wasn’t; it just mainly renamed some other programs already out there for other reasons. They apparently thought voters would be too stupid or lazy to notice, and of course that’s right. So now they can claim an initiative, which doesn’t exist. This initiative’s main element is to tax companies that export jobs. How that encourages new start-ups or actually helps revive manufacturing is a little hard to see. What these nitwits seem not to get, too, as Charles Davidson, AI‘s publisher was quick to notice, is that any initiative that promotes a renewal of manufacturing is, under present conditions, going to accelerate the substitution of capital for labor and thus lead to a future with even fewer good jobs. So is it a good thing, then, that the Democrats’ initiative is a sham? Not exactly, and now we come to the gist of the matter. We have a structural problem with the economy (structural as opposed to cyclical in econ-speak), and with the labor profile that goes with it. This is the word—structural—you now hear a lot, a word I was using regularly to describe the situation at least 18 months ago. Of course this refers to a rapid shift in the labor profile as new investment becomes sharply more capital intensive and as global trends continue to send shock waves against national economies, including even very large ones like our own. But the structural problem goes deeper than that. Here is what else is going on that contributes to the current structural situation. Americans are saving more, which is good. This leads to lower aggregate demand, which is also good if you care about the environment, bad if you care about the speed with which money moves to stimulate spending. Edmund Phelps understands that what lower aggregate demand means is a whole lot less than it’s cracked up to mean. He at least remembers Vilfredo Pareto, the Italian wise guy who substituted the concept of preferences for the older idea of utility. The Keynesian macroeconomists have it wrong: people don’t make choices just on the basis of rational value-added calculations. The micro approach that emphasizes preferences has it right, and right now Americans are in a new mood. Some, at least, are asking why they’ve been buying bunches of junk they don’t need. Some are concerned about the effects of hyper-consumerism on the environment, if not also on their own mortal souls. It’s about time. In short, I suspect that a cultural shift underlies the so-called weakness of “consumer confidence”, which is a total misnomer for what is happening. It’s not just that a lot of people are worried about overextending themselves, though that is part of it for many, it’s that increasing numbers of marginally more intelligent people are re-thinking their styles of living, their priorities, and what makes them happy and satisfied. Partly this is a generational change. A lot of people don’t lack confidence; they’re just not as foolish with their time and money as they used to be. When Time magazine, of all publications, runs a cover story on “The End of Excess”, which it did last year, you know something is cooking. If this is true, it means we cannot go on, or at any rate seem not likely to go on, as we have constantly generating artificial demand without end. We cannot forever invent pointless new gadgets—do we really need a new razor with 6 blades instead of “just” 5?—and throw billions of slick advertising dollars at them to sustain the economy on an upward tilt forever. And let me not leave this point too soon: science-based corporate advertising represents a kind of Weapon of Mass Deception (WMD, yes…). Do you realize that when a TV ad for some hot car shows you a sleek black vehicle with a hot blonde standing over it, saying “I love my whatever-it-is”, that dopamine actually flows into your nucleus accumbens? The association between the sex object and the car for sale established by the ad image actually changes the neurotransmission sequences in your brain. The images create those pathways, and there is not a thing you can do about it, because human beings did not evolve over hundreds of millions of years under conditions in which their visual field included mediated images (as opposed to real ones) that could be rigged to deceive them. We have no natural defenses against such deliberate uses of neurochemistry to harvest us as consumers, anymore than Pavlov’s dogs were capable of outsmarting Pavlov and screwing up his operant conditioning experiments. But people are figuring it out, and it’s going to get harder for corporations to sell them lots of junk they don’t need. I think we may be coming to a point, ever so slowly to be sure, where the value-added content of new products is going to have to be persuasive in a way it has not been heretofore in order to get large numbers of people to buy them. I think, I hope anyway, that people’s idea of what is and is not a “bargain” is finally starting to change, by which I mean to heal from the fetish-like sickness in which it has rested for about the past half century. (AI recently reviewed a book on this topic—I commend it to you.) What this means is that economic growth beyond what population increase implies is going to depend increasingly on invention, innovation and that, in turn, depends on supporting entrepreneurial activity. That’s what the Administration does not seem to understand, though it has gotten the same advice from just about everyone with a brain. But there are fewer people with a business background in the Obama Administration than any in American history. These guys are on balance hostile to business. The stimulus was just for union constituencies involved in old, shovel-ready projects. This was a stupid way to spend that money, and there is still zero sign that these guys know new jobs are created: from high-tech start-ups and smaller businesses, which in turn thrive in investment-friendly conditions. The Obama Administration’s bigger-government, higher-taxes approach to everything points in exactly the wrong direction, of course. They say they understand this, and sometimes I think the President actually does understand it at some level. But where’s the action? Where are the genuine initiatives? This is what comes of ceding authority to people like Harry Reid and Nancy Pelosi. Truth be told, what we’re witnessing now has been a long time in the making. It has a history. About 50, 60 years ago a lot of observers predicted that because of automation we’d eventually end up with overproduction, deflationary danger and structural unemployment. A lot also predicted that this was how the Cold War would end—through convergence forced by technology. We’d have a situation where less than half the work force would produce all anyone wanted or needed, and we’d have to figure out what the rest of the population would do to get its share of the goodies. If they did not have salaries because their labor was superfluous, how were they to live? What would they do, and how would they earn money? You can see where this is going, or seemed then to be going: The government would have to distribute the goodies. We would not necessarily have to collectivize the means of production, but we would have to collectivize the means of distribution. That’s what a welfare state is to some extent, but these observers were talking about countercyclical policies much bolder than those of the welfare state. This problem is essentially the same one Bismarck recognized in the middle of the 19th century. It’s where his proto-socialist ideas of social inclusion came from, because he was worried about alienation and revolt. What these worriers did not see was that new technology could produce whole new industries that generated more good new jobs than the old ones the machines took away. It was dynamic and unsettling, but standards of living could rise fast. When it dawned on people that this seemed in fact to be happening as the 19th century rolled on into the 20th, and that automation was not producing unemployment but growth and new structures of economic supply and demand, other questions arose. What about education? As jobs got more technically demanding, wouldn’t people have to know more? Herbert A. Simon took up this question in his 1964 book The Shape of Automation and concluded “not really”. He estimated that even if the share of capital in the economy as a whole increased by 3% a year, a workforce educated on the level of Japan or Western Europe, at the time lower on average than the U.S. levels, would be fine. Simon was right for a while and those who feared the downstream impact of automation on employment were wrong, but I doubt he still is right, and I wonder sometimes whether the automation Cassandras were not so much wrong as premature. I think Simon may have underestimated the compound impact of IT-related value-added processes. I think we might be reaching limits here, and this is where our real problem comes into play—this is what “structural” really means in practice. I think the substitution of capital for labor is accelerating rapidly, and I think IT is largely responsible for the current wave of substitution—and it has a generic and generative impact other technologies have not had. It’s not like a machine but like a machine tool. I think too we may well be moving into a situation, on a global scale, where comparative advantage is leaving high-wage jobs permanently scarce in the United States. If manufacturing at nearly all levels can move, largely thanks to IT, to find its level of highest sustainable profit, it will. Not that profit margins alone motivate employers. They, too, factor in all sorts of other considerations, like stability, community, quality of life and so on, just as consumers do. They will pay higher wages in order to keep cadres of workers who know each other and perform well in teams. On balance, however, nearly everything can move now, and it will, possibly until all the world’s relative labor costs even out. And since there are still 800 million poor people in China, that’s going to take quite a while. Either that, or the world will become sharply nationalist-protectionist as dispossessed citizens try to stop the global juggernaut, which under certain circumstances would be understandable and even morally justified (though the thought of what political opportunists could do with such energies is truly horrifying). It could be, in other words, that we could face a very large, more or less permanent massive unemployment situation—unless we innovate like mad. And to do that we’ll have to educate like mad. And here is the crux of the matter: Pretty soon, most of our young people will be from minority groups that have a history of not learning very well. Let us not be coy: The reason for this is not mainly unequal educational opportunities, though there is plenty of that too. The reason is cultural, and there is a strict limit to what public policy can do about this. No Child Left Behind can fix this only to a very limited extent. Kids who are not spoken to and read to at home start school in inferior positions compared to other kids. A lot of this has to do with family stability, with having a mother and father in the house paying attention to and loving the children. The data on kids in minority groups growing up without fathers is appalling, and it is getting worse, not better. Schools alone can’t fix this problem, and it is fast becoming not a humanitarian problem affecting the so-called underclass, as it has been since the Moynihan Report, but a core economic and social problem on a national scale. This is why I am on most days pessimistic not so much about the American economy—which remains capable of innovation and hence extensive growth—but about American society: We are going to have ever huger numbers of essentially unemployable minority citizens, a schizoid society as a result that is even worse than it already is. They won’t be able to learn enough to take the higher value-added jobs an innovation-based global economy will generate. They will be competing not just with other Americans, remember, but with a global labor force in many if not most areas. The prospects fills me with dread. Is there nothing we can do about this? No, in fact, there is plenty we can do, but it will take boldness, imagination and some political courage. I can think of two major programs which might do the trick, at least to start. The first, which I have talked about for years, is that we need a Baby Bond/National Service program. AI has featured a version of this idea, so I won’t belabor the point here. The second is a New Homestead Act—a kind of combination of the original Homestead Act, the CCC and the GI Bill. We need to get otherwise unemployable people out of the sinkhole cities in which they live and get them back on the land, increasing dramatically the labor-input of agriculture. We need to turn America into one huge environmentally self-sustaining garden, understanding what that word really means. Perhaps I will elaborate my idea of a New Homestead Act in a future post. These two programs taken together might not be a silver bullet, but they could save the country from the disaster of permanent structural high unemployment and social upheaval ahead. Is our political system capable of generating serious change? Can a flock of pigeons perform Beethoven’s Fifth?
This is your free article this month. A quality publication is not cheap to produce.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Subscribe today and support The American Interest—only $2.99/month! Already a subscriber? Log in to make this banner go away.
Published on: August 16, 2010Saving American Society from Structural Disaster