Race To The Bottom?
Published on: February 22, 2011
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  • Thomas

    “Governor Walker has created an artificial budget crisis by giving huge tax breaks to rich corporations….”

    Is this true?

    It is true if the cost of the tax breaks is equal to the amount of Wisconsin’s deficit. If not, it is not.

  • ic

    Davosies: 21st century Illuminati?

  • kyle

    You mentioned “testing” as a way for companies to find qualified employees, and I thought that was effectively illegal in the U.S. At least, this is usually called upon to explain why “degrees” are needed in what seems to be strange ways in the job market.

    Anyway, could you discuss sometime the problem of cleaning out the backlog of regulations like that? That particular one seems to come out of civil rights legislation, which is, politically, hard to touch.

    Enjoy your essays.

  • adder

    Can we export our government jobs to Bangladesh, Ecuador, and Malaysia? Maybe we can have our teaching done online by someone earning $1.00/hour and no benefits. The private sector opts for this, why not government?

  • richard40

    Good article. In essence, you are saying that todays labor intensive sectors, mainly in gov, law, academia, and health care, need the same productivity and technology improvements that revolutionized manufacturing. The resulting dislocation temporarily looks bad to the workers involved, who now have aligned themselves with Luddite dems to resist innovation. But the productivity gains in the long run result in lower prices, which in this case would result in less taxes and deficits, and better living standards for all.

  • Stacy in NJ

    Thank you so much for articulating this argument Professor.

    I participated in a post-athon at Joanne Jacob’s site trying to get the heart of some of these issues but did so rather poorly.

  • HappyAcres

    Hard for us liberal arts majors to accept, but our wordplay and fanciful theorizing are epiphenomena to technik.

  • evan

    no it is not true, the tax breaks do not go into effect until the next fiscal year…
    so the 140million deficit for this year has nothing to do with the 140million tax break for NEXT year, where the deficit is in the billions…

  • MaxMBJ

    I enjoyed this and your other pieces recently, Dr. Mead, but I must say, this is the same, simple conclusion most tea partiers came up with intuitively, sans degrees, sans years in the Ivy Leagues, sans much deep thinking: do things better, faster, cheaper. It really is the Wal-Mart-ization of the world and it’s going to happen come [heck — ed] or high water.

    As Margaret Thatcher once so succinctly put it: socialism works until you run out of other people’s money to spend. We’re flat busted. Now we innovate.

  • Victor Erimita

    Good article. But I think you overlook the role the incentives created by our current financial system plays in devaluing the productivity you see as the way forward. Many companies are outsourcing skilled tasks to cheaper labor venues abroad, even when productivity and quality suffer significant declines. Why? Because it “costs less.” Don’t the customers notice? To the extent the “customers” are executives in other companies looking to “pay less” this quarter, to impress analysits and this-quarter-driven “investors,” they overlook the declines. They don’t care about the long-term costs, because they are compensated for short-term results. Even if those results are illusory.

    Low productivity means lower unit cost isn’t really lower, because it’s not the same unit. But if the perception of lower unit cost occurs now, while the discovery of inferior unit quality happens later, the system breaks down. That is happening on a widespread basis now. It’s costing a lot of Americans their jobs with actual declines, not improvements, in real productivity resulting.

  • I agree with most of this post, but I disagree with the thought that somehow an intelligent computer like Watson could eventually replace attorneys. As an attorney myself, I understand that making sense of convoluted statutes and case law is a far more difficult proposition than most people realize. In fact, the very reason that we have courts and litigation is because the law very often lends itself to more than one interpretation, and we must turn to the courts to enlighten us as to which interpretation is correct and how that law should be applied to individual cases.

    I seriously doubt that we will ever reach the stage of artificial intelligence that will remove the need for attorneys, as that will mean that we have somehow reached a universal consensus on what is fair and right. Also, there are some aspects of the practice of law that extend far beyond mere knowledge. For example, questioning a witness in front of a jury or judge is far more of an art than a science.

    One way that the legal industry will be impacted though is through services for simple things like wills and corporations (ala LegalZoom). The technology is also making the practice of law more efficient, and less labor-intensive for support staff. For example, I personally do not employ any support staff at all, and am able to function very well thanks to some very good hardware and software. Tasks that used to be very time-consuming and difficult are now fairly automated and easy.

    The only thing that does worry me is the over-proliferation of lawyers, as there is a very real possibility of over supply in the legal market, and I think we are beginning to approach that point now.

  • Luke Lea

    Mead being silly: ” If you think America is in a race to the bottom as low wage labor in China and elsewhere puts more and more pressure on our middle class living standards here in the US, you probably believe that the Republican attack on public employee unions in Wisconsin is part of a general assault on working people in the United States — and you think this is something we need to fight. You likely think that the decline of the American middle class will destroy our prosperity and stability and that the public unions are one of the last forces standing in the way of an all out corporate assault on what’s left of the American way of life.”

    You don’t have to think public unions are the last bastion to realize that American labor needs to organize — somehow — in order to protect itself and its standard of living.

    As for the bottom, in China now that’s less than a dollar an hour. Suppose we meet them half way? You do the arithmetic and decide.

    The point is, that giant sucking noise Perot forcast is quite real. “World Trade and Payments” by Caves and Jones, Mead. Or for the shorter version, “Protectionism and Real Wages” by Samuelson and Stolpher (sp?).

    The laws of supply and demand don’t give a [darn — ed] whether you are an optimist or a pessimist. They just operate.

  • C.Olivas

    Dr. Mead,
    Much like those Keynesians bent on spending money to restart the economy in the last couple of years, your premise is both wrong and right; but for very different reasons.
    I have worked in the private sector all my life and have had to adhere to real budgets. Have managed programms which require real profits. All of this against an ever increasing –and ever changing– set of business challenges (energy, labor, raw material and other costs). We have usually met these with a more versatile and better trained workforce.
    But we are unable to compete with countries that have little or no enviromental and labor regulation. Where taxes are much lower than those in this country –and state.
    Your vision of an ever increasing bureaucratic establishment carried by the private sector doesn’t work in the real world.

  • Chris

    I believe you overlooked a crucial difference between past and present problems: the current problems in education, pensions, and medicine stem largely from people relying too much on government. If you believe that you can get unlimited goods for a small fixed price, then demand will outstrip the government’s ability to supply. The teachers in Wisconsin may feel threatened like the luddites, but no one in 19th century England expected taxpayer provided clothing or for the government to pay textile workers three times the market wage for their skills and to guarantee a job for life. Likewise, everyone now expects unlimited MRIs and knee reconstructions, but then complain to the government when insurance rates go up. For me, dependency is the root of the problem, not productivity.

  • Greg Ransom

    What is optimistic about the impoverishment of your grandchildren through unsustainable debt and sovereign default?

    Reaganomics was NOT free market economics, and leading market theorists like Hayek opposed Reagan’s “pony in the poop” fantasy of “supply side” economics.

    Reagan adopted the “Santa Clause” theory of GOP revival laid out by Jack Kemp — give American’s goodies to bee paid for by their grandchildren — it’s been a disaster for America.

    It turns out all there was in that pile was endless poop.

    You cannot mortgage yourself to wealth, you cannot endlessly borrow yourself to wealth — the magic of negative compound interest will eat the wealth of your children alive.

    Impoverishing your grandchildren is NOT an policy of optimism.

  • Luke Lea

    Mead being silly: ” If you think America is in a race to the bottom as low wage labor in China and elsewhere puts more and more pressure on our middle class living standards here in the US, you probably believe that the Republican attack on public employee unions in Wisconsin is part of a general assault on working people in the United States — and you think this is something we need to fight. You likely think that the decline of the American middle class will destroy our prosperity and stability and that the public unions are one of the last forces standing in the way of an all out corporate assault on what’s left of the American way of life.”

    You don’t have to think public unions are the last bastion to realize that American labor needs to organize — somehow — in order to protect itself and its standard of living.

    As for the bottom, in China now that’s less than a dollar an hour. Suppose we meet them half way? You do the arithmetic and decide.

    The point is, that giant sucking noise Perot forcast is quite real. “World Trade and Payments” by Caves and Jones, Mead. Or for the shorter version, “Protectionism and Real Wages” by Samuelson and Stolpher (sp?).

    The laws of supply and demand don’t give a damn whether you are an optimist or a pessimist. They just operate.

    How far down can we go? Well, let’s see: there are 1,300,000,000 Chinese making less than a dollar an hour. They have an average IQ of 103-to-105 and a utility of income far higher than ours (thus willing to work harder).

    Put a shovel in your hand and see if you can compete.

    Even if we meet them half way that would be half of what we have now.

    The American people don’t want to be pushed half way back down into the [extremely deep and hot — ed] hole of underdevelopment from which they have climbed. They want a government of the people, by the people, and for the people. And to get that they are going to have to organize politically, not with labor unions, but by taking over one or the other of the two political parties.

    Meanwhile, I hate callous cosmopolitans who say let’s you and him share and tell us that American workers with the right training and education can compete with anybody in the world. That’s meretricious [hogwash].

    Get a shovel.

  • Luke Lea

    Oops. Sorry for the double post. And forgive my bad manners. I’m mad as [you know what –ed].

  • “Traditional liberal arts education needs to survive”

    Almost correct. The content of the traditional liberal arts is so important, so valuable, so timeless, that it will be carried on by amateurs if necessary. The existing academy has virtually destroyed liberal arts education. In all too many cases they have made it into a husk of itself, a candy coating around political correctness indoctrination. This area is perhaps the ripest for innovative presentation. You do not need academic journals full of purportedly novel ideas about Thucydides. It is OK to say things that have been said for millennia about Thucydides, because each generation of students hears it for the first time. Classes, discussion groups, lectures, interactive oral examinations via net conferences, lifetime learning in the classics for people out of their formal schooling years — all this can and should be happening. There is no reason that it has to be tied to a degree program at a university. Every citizen would benefit from reading Thucydides, and might very well benefit most at age 40, or at age 20 then again at age 40, or a virtual “room” with college age students, people in the workforce and military personnel all adding their insights? The prospects for these subjects and this content are wonderful to contemplate — but I disagree with the word “traditional” with regard to anything but the content.

  • Luke Lea

    Let me say it again. I’m tired of callous cosmopolitans who say let’s you and him share and flatter us by saying we can compete with anybody in the world.

    We can compete fine with Europe and Japan. They are our size and on our same level. We CANNOT compete with China mano al mano because they are much bigger, much poorer, and — face it — much smarter than we are (on average). Let’s get real. Tell it like it is.

  • Responding to Bryce. I must respectfully disagree with you. Of course lawyers want to make themselves indispensible. But they are a class that usually ends up making things worse, as opposed to better. And the result of judicial meddling is that we have lawyers dictating in fields where they have neither knowledge nor competency. Think the rules of engagement the US Navy labors under against the pirates of the high seas, for one.

    Thus I believe that the main problem with your hypothesis is simply that the law is convoluted primarily because attorneys and judges (who are mostly attorneys themselves) deliberately make it so. Look at the Constitution. Only a lawyer could possibly manage to misunderstand the plain language of the Second Amendment ‘the right to keep and bear arms shall not be infringed.’ And only a lawyer could possibly twist the Fifth Amendment into the tortured Kelo decision.

    The answer? Bar attorneys from serving on legislatures, as they are properly part of the Judiciary, not the Legislative Branch. And get rid of the twisted language in so many bills (placed there by lawyers of course) that provide loopholes to their favored constituencies (usually including themselves). Once that occurs, and laws are written in the kind of plain English that the Constitution was, I think that most of what attorneys do actually can be done by machines like Watson – take two arguments and compare them to the written word. Getting rid of the idea that judicial interpretations are somehow equal to the actual text of the Constitution would help too.

    Perhaps I am being somewhat harsh but as I see it, lawyers are a parasitical profession – they create no actual value and most of their actions are designed to benefit themselves, not their supposed clients. Are there good lawyers who understand that their role is limited by what the actual law says? Sure. But they are a minority.

    As for the original post, I completely agree. The entrenched interests of the so-called ‘Great Society’ will scream and complain, but capitalism is in fact creative destruction. It’s time for the public employees to face the same axes that cut the chaff from the private sector. And long past time for them to actually have to face the same retirement prospects that the rest of us do. The only exception I would grant is to the uniformed military – they are a special case. Everyone else? Welcome to capitalism, my friends. It’s survival of the fittest and based on your past history, you’re not very fit!

  • Luke Lea

    Lexington Green: ““Traditional liberal arts education needs to survive”

    Almost correct. The content of the traditional liberal arts is so important, so valuable, so timeless, that it will be carried on by amateurs if necessary.”

    That’s true. I’ve got one of the best. Numerate AS WELL AS literate. Plus decades of experience in the depths of society. Now maybe I am a deluded old fool — I never rule that out — but I believe I know what I am talking about. For one thing, because I read “World Trade and Payments” by Caves and Jones.

  • Tom Holsinger

    Mr. Mead,

    Please consider that you have greatly underestimated the economic damage done by what you termed the “culture of bureaucratic legalism”. Enforcing that culture is my day job, and I see every day just how much damage it does. Here are some examples:

    All amendments to the United States Constitution are equal, but the 14th Amendment is more equal than the others, particularly given the major federal Civil Rights statute found in 42 United States Code section 1983, et seq, and its judicially created “disparate outcome” doctrine.

    That latter basically means that any state or local government action, or private employment policy, which SEEMS to have a disproportionate adverse effect on the racially & ethnic protected groups (while 42 USC refers to “national origin” too, the courts ignore “national origin” in 42 USC 1983 cases when acknowledging it might create a conflict with the far more judicially favored “racial & ethnic” groups, and this is based on a case that I personally handled) is deemed wrongful unless such a judicial opinion would induce scorn and ridicule against the issuing court.

    American Blacks as a large group tend to score less well than non-blacks, particularly compared to Asians and Whites, on most objective tests of cognitive ability or cognitive skills and/or knowledge. This has led to a de facto judicial ban on such tests other than those used by some government entities and related licensing boards (medical examiners, state bar exams, etc.).

    Private industry has, for lack of better alternatives to determine the employability of job applicants, taken to using ability to get a four year college degree (Bachelor’s) in just about anything as a means of eliminating job applicants below a certain minimum degree of intelligence and ability to show up for work. You are familiar with some of the results of that, in terms of the higher education bubble, but consider just how much economic and social damage this credentials racket has been done to businesses and social mobility, and how it was done by judicial fiat rather than through the normal legislative process where competing interests are better weighed.

    The “credentials racket” is most definitely a result of the “culture of bureaucratic legalism.”.

    What you might not be aware of, though, is how judicial mandates for “equal” funding of public schools have destroyed the public school system, and the vitality of local governments. Public schools had been traditionally funded by local property taxes, which led to wide disparities in funding of public school districts, particularly given de facto residential racial segregation in urban areas. This was found to be a violation by local governments of the 14th Amendment‘s equal protection of law clause, even before development of the “disparate impact” doctrine for racial discrimination.

    The only way the country’s public school systems could roughly equalize the financing of their many geographically based school districts was with additional state government revenue. This additionally entailed centralized state government control of what had been locally controlled public schools, based on the “He who pays the piper, calls the tune” principle.

    This overcentralization led directly to the state legislature mandates I referred to in an earlier thread as:

    “Few of these feel-good tasks, individually, involve more than a trivial expense but, in vast numbers over a 40-year period, their totality requires armies of administrators beavering away on utter crap which eats budgets and significantly detracts from the time and energy teachers can spend on instruction.”

    While the destruction of America’s public schools by robotic judicial over-enforcement of the 14th Amendment’s equal protection clause is arguably its worst effect, consider also how this has robbed America of its chief means of recruiting public-spirited citizens into careers in elective office.

    I was politically active long ago in college and law school, and my father was a California Democratic Party official. I was quite aware, through my own experience and my father’s personal experience as a Democratic Party candidate recruiter, how most candidates in those days started out running for local school boards because they had children in those schools, and so were stake-holders in them. Local schools then had real power over their budgets, and service on their boards was incredibly effective as the most basic hands-on how-to education in government operations, especially in local property tax elections.

    This has mostly been lost due to centralized state funding of public schools. Local school boards no longer have anywhere near the degree of control over their budgets that they did forty years ago, and this includes raising the revenue (local property taxes) for them. This has resulted in a dramatic decrease in the stake-holding parents have in their local government operations, and in the government operations/politics value school board service used to provide to its members.

    Sure local school board service still serves as a first step for many elective officials, but it used to be absolutely dominant. Furthermore most school board members in those days did not run for higher office, but they did learn from their experience handling school budgets and local property tax elections, and took that knowledge and senese of responsibility for public affairs back into the community.

    An incredible amount of the vitality of American democracy has been lost due to centralized funding of school budgets at the state level, and this was most definitely caused by the “culture of bureaucratic legalism.”

  • Luke Lea

    American workers need tariffs to re-establish our balance of trade. And we need to subsidize labor with taxes on capital to get our fair share of the gains of trade. Without the former American manufacturing employment will keep shrinking; without the latter American real hourly take home pay will keep falling.

    This is elementary trade theory, clearly laid out in Caves and Jones, “World Trade and Payments.”

    The laws of supply and demand can no more be safely disregarded than the law of gravity.

  • Luke Lea

    It may be creative destruction on a world scale but it’s pure destruction here in the old U.S. of A.

  • Net hick

    I feel so much better about keeping the family buggywhip factory now.

  • Luke Lea

    Modern economists are like climate scientists: hobbled by peer pressure and intellectual conformity.

    Go ask Krugman. He’s about ready to fess up.

  • Luke Lea
  • Mike Constitution

    Foreign manufacturers are building plants in places like TN, AL, and TX for a reason. Americans can compete if the barriers and burdens of government and unionism are reduced.

  • Nate

    Bryce, S. as you mention in your own post, information technology can be productivity boosting without completing replacing a profession. The legal profession, being scholarly in nature, has already benefited tremendously from the mundane word processor up to the more recent search engines. However, there are ongoing efforts in legal reasoning in artificial intelligence that will continue to improve productivity. (For instance, case-based reasoning – a common technique in certain AI applications – is heavily influenced by techniques used in case law.) Where current search engines are able to recall words (and synonyms), dates, and relevancy (by linking with other cases, etc.) More advanced legal reasoning systems will work WITH humans in constructing logical arguments and suggesting lines of questioning to delineate ignorance, etc. This is not new, nor is it science fiction. Scientific / Technical professional societies such as the American Association of Computing Machinery (ACM) and Institute or Electrical and Electronics Engineers (IEEE) as well as as the American Association for Articial Intelligence (AAAI) regularly host conferences and produce journals dedicated to AI in legal reasoning. While I expect you to be secure in your profession, the heart of what Dr. Russel is suggesting (as to the improvements of productivity in the service sector) is on the mark.

    That said, the specific reference to “Watson” assisting in the practice of medicine is particularly frustrating. We have had the technology (in terms of algorithms) for years (and the hardware, more recently) to substantially augment the process of medical diagnosis. Here, however, I fear that the entrenched and credentialed interests of physicians will be favored over the need of the many for primary medical care. It is, I believe, entirely feasible for someone with a MSc (or perhaps even a BSc) to practice limited forms of medicine with the aid of current AI technology. But other than cost pressure, where is the incentive to do this? And if, ultimately, someone else is paying the bills, even the cost pressure incentive becomes moot.

    Which brings us to the problem of the higher education bubble. This is largely an artifact of culture, where the gov’t fueled the bubble like throwing a bucket of gasoline onto the camp fire. For many years, education was seen as the route out of the blue collar hum drum and into the comfortable white collar life. Gov’t programs for funding college were “uplift” programs to open up the white collar lifestyle to larger segments of the population. However, with easy access to college, what incentive is there (on the part of employers) to NOT require a college degree? If someone else is paying for training, why not demand that your employees have as much as possible before they come to work for you? Here, as a society, we have gotten a poor return on our “investment” in education. What surplus of political science, psychology, and physical education majors have we accumulated over the last two decades? At what cost? How have we benefited from this? (Since many of these degrees are publicly financed, we as the public financing them have every right to ask this question.)

  • thank you. You are the first to point out that they are protecting their jobs from globalization and technology, not the Republicans.
    A close look at the Luddite movement shows that the weavers back then also were trying to protect their wages against factory jobs and competition, and they got the help of many humanitarians of their time.

    As long as the union encourages Democrats to increase government regulation and paperwork to hire more union workers the country will stagnate.

    And even teachers can be fewer if the internet is used properly…

  • srp

    Lots of interesting ideas in the OP and the comments. Let me just address a big one.

    Professor Mead understandably falls for the “no wage increase since 1973” meme, which is endlessly repeated and indeed can be derived from government statistics. The problem is that those statistics are systematically biased against recent economic growth.

    1) Several studies of the inflation indexes (most famously the Boskin commission) showed convincingly that recent progress is hidden by errors in those deflators. Specifically a) they ignore most of the gains in new product categories, such as cellphones, computers, cancer drugs, television variety, etc. b) they ignore the growth of discount retailers such as Wal*Mart, assuming that consumers pay much higher prices than they actually do, and c) they ignore the substitution of equivalent cheaper goods for more expensive ones over time. If you look at the number of hours of labor at median wages it takes to buy a square foot of housing, a lumen of light, a cure for migraines, or just about anything, it has fallen significantly since 1973. No median worker would be willing to trade today’s consumption bundle for the one he could have afforded in 1973–it’s not even close.

    2) Wage figures completely miss the explosive growth of benefits over the period. Medical and other nonwage benefits have taken up an increasing share of the compensation of the typical worker.

    3) The composition of the workforce changed a lot starting in 1973. Lots of women with low education and skills, lots of previously excluded minorities, lots of immigrants from poor countries, etc. entered the work force, pulling down the median labor productivity and hence the median wage.

    So please, use your eyes and your memory and stop propagating the “no progress for the median worker since 1973” myth.

  • Kolya

    “Wisconsin needs to become a pony farm. It needs to slash taxes and reduce the non-wage costs of doing business so that employers will bring existing businesses to the state and entrepreneurs will have favorable conditions for starting and building new business. ”

    This is the exact opposite of the policies embraced by president Obama. He wants to increase taxes on entrepreneurs (or at least ones beyond a certain level of success). He wants to defend the public sector unions that fund the Democratic party. Today’s Democratic party is all about protecting the economic interests of the “spinners and the weavers” or at least the ones that work for the government. Think Argentina with nuclear weapons. The nuclear weapons probably won’t work either.

  • cavan1

    In Arizona (as elsewhere) wages have been stagant or lowered because of illegal immigration.
    I supervised a construction crew. These guys did side-work. They have been priced out of the market because of illegal immigrants.
    Don’t get in a car accident in Arizona ( over 50% don’t have insurance…and illegals definitely don’t.

    However, Arizona has a billion$ deficit ( I’m guessing). and illegal immigration costsd Arizona a billion dollars (guessing again).

  • Mbuna

    The elephant in the room that all your articles that I have seen refuse to even acknowledge: Koch brothers quietly open lobbying office in downtown Madison-
    http://host.madison.com/ct/news/local/govt-and-politics/article_7e8aa25a-3ec0-11e0-9923-001cc4c03286.html

    If you actually read this article it clearly illustrates who is really behind what is going on in Madison. You are not dealing with reality here!

  • Tom Holsinger

    Mr. Mead,

    srp is entirely correct in Post No. 31 that the inflation indexes you rely on seriously understate the deflation effect of technological advances in value added to existing items. This is very simple to determine. Compare the sound quality of the radio in the first car you ever had to the sound quality of the sound system in a car of the same relative age today, or how much you would have to pay as an undergraduate in 1970 for a dozen symphonies on vinyl recordings compared to their cost on CD’s today.

    On other points:

    There is no substitute for experience in civil litigation and primary physician care. A physician’s personal experience over time with a given patient tends to result in much faster identification of potentially serious health issues, and so make it possible to alleviate, or even avert, significant to fatal adverse consequences.

    Given the extremely large medical expenses for treatment of serious illnesses, and the economic value of American lives, investments in primary physician medical experience appear to be a bargain.

    My wife was for several years the paralegal for a local trial attorney after I had become the court’s research attorney, and I learned from her just why the effectiveness of insurance defense firms was declining rapidly. The insurance companies paying for defense of vehicle insurance claims were being penny-wise and pound-foolish. They insisted on cutting back the amounts paid to insurance defense counsel to the point where the latter could no longer afford to train new associate litigation attorneys.

    This resulted, over time, in litigation associates making partner without knowing how to win a case before trial, and being seriously deficient in trial skills. This means that a lot more unmerited tort and even commercial lawsuits started surviving to the trial. A competent defense counsel could have won judgment with pre-trial motions, but there simply aren’t that many of those guys anymore.

    This means that insurance companies have to pay out more money overall for pre-trial settlements or attorney fees at trial, even when they win, than they save in being so parsimonious with attorney fees before trial.

    There certainly is a vast potential amount of savings in government employment but, as a general rule, government inefficiency increases (up to a point) the higher in the management food chain you go.

    Even allowing for increased, inflation-adjusted, per capita spending on public K-12 education over the past 40 years, the amount of per capita funding which actually goes to classroom instruction has declined due to the vast proportionate increases in non-instructional staff, aka administrators.

    A reduction in the ratio of non-instructional staff to instructional staff to what that was in 1970 would allow cost savings to a degree which permits both great increases in teacher/student ratios plus great actual decreases in per capita school spending.

    The drawback, though, is that a lot, perhaps most, of the increase in non-instructional staff to instructional staff ratios has been driven by legislative mandates that schools attend to various useless tasks which please the special interests whose votes and campaign contributions got the legislature to pass the mandates in the first place.

    A great place to start here would be a new law that public schools need only comply with the legal mandates applying to charter schools, and that all laws creating greater mandates are repealed by operation of law. I know, I know, in my dreams and all that. This administrator overload is inherent in the culture of bureaucratic legalism.

  • Jimmy J.

    Professor Mead neglects one thing that I believe has forced this country away from the wealth creation of manufacturing, extraction, and agriculture. That thing is ever escalating and restrictive environmental regulations, which are the result of the Endangered Species Act.

    It has become more costly and difficult for people to build new manufacturing plants. There has been a virtual moratorium on building nuclear power plants. Those plants, if built, would provide clean, abundant, cheap energy and good jobs for the builders and operators. We have shut down our forest industries to save an owl that is still disappearing because it is being eliminated by another species of owl. We are in the proces of regulating our coal mines out of business. Our oil exploration companies have been locked out of drilling in oil rich areas which include Alaska, off our coasts, and even in the continental U.S. Recently we have turned one of our most productive agricultural areas, the west San Joaquin Valley, into a dust bowl to save a small fish in the Sacramento Delta. In Washington State the regulators want to prevent farmers fromm planting within 500 feet of any dry wash, creek, stream, or river. If successful this could eliminate as much as 36% of the farmers’ tillable acreage.

    All the above mentioned industries provide good paying jobs and create new wealth. However, the environmental movement will not be satisfied until we have returned to pre-industrial conditions. They do not like it, but we can manufacture, mine, drill, log, run nuclear plants, and farm in ecologically sound ways. It is sheer folly to shut down or hobble those paths to prosperity. Adam Smith said the wealth of a nation lies in the productivity of its lands and the willingness of its citizens to produce from those lands. I think he’s right and I think we need to go back to being a wealth creating nation by using common sense environmental regulations, not what we have today.

    Most of these environmental obstacles arise in the form of law suits brought by environmental organizations. The lawyers have been responsible for hobbling our wealth creating industries as well as driving up the cost of medical care by constantly suing phamaceutical companies, hospitals, and dcotors. Reforming our tort system could pay huge dividends as well.

    End of rant!

  • john lynch

    Come to the Supply Side! It is your destiny!

  • steve smith

    All I know is that my blue collar dad raised a family of four on one meagre income. Now, having a one income family is a luxury. All statistics aside, things are economically worse in that regard. Sure we have finer clothes, more gadgets and a false sense of academic achievement, but we have strangers and televisions raising our children. This is not my American Dream.

    I’m all for raising productivity, but only if I can capture a greater share of it. Sure a rising tide lifts all boats, but it lifts some higher than others. I will be no sharecropper for the “Davosie.”

    Oh, and lets see a computer or low skilled worker give a closing argument in a murder case. I’ve done it. I’ll continue to do it only so long as I can bring home enough money to raise my family on one income. Otherwise, I can raise my own food, heat my own house and ride a bike wherever I need to go. Atlas is about to shrug.

  • WigWag

    One searches in vain throughout this entire post for any acknowledgement by Mead that the machinations of executives in the financial industry are relevant to the economic calamity facing tens of millions of Americans. And while he calls for more efficient and technologically sophisticated health care, legal and accounting sectors he remains silent about the social utility of a financial system that socializes risk while it privatizes profits. Does Mead think that that the rules that govern the financial system are somehow inviolate while the rules that govern health insurance for firemen or tenure for college faculty or class size in public schools all need to be reexamined?

    To make matters worse, not only does Mead completely ignore the culpability of the financial sector in causing some of the economic distress the United States is facing, he wants to compound the problem by lowering marginal tax rates on the very financial executives who contributed to pushing the American economy down a hole.

    In my opinion, Mead needs to either rethink his thesis or, at the very least, expand his notions about where the problems with the American economy lie.

    • Walter Russell Mead

      Financial chicanery on a mass scale has been a constant in American life. The 19th century was no better — yet living standards rose and the economy grew. Financial misbehavior exacerbates booms and busts in the real economy, but capitalist economies remain cyclical. That our present downturn follows two of the longest expansions in our history does not surprise me. We should fight financial fraud and develop effective regulations as capital markets change, but poor financial decisions rather than consciously fraudulent ones are the larger problem — and there is no long term cure for that.

  • Joe Thorpe

    Things must get worse in the developed world before they get better, despite increases in productivity. Historically the developed world has been able to thoroughly exploit the third world in many areas, trading many hours of their labor for mere minutes of our own. Slowly, that gap is closing, and while those in the third world are becoming, relatively, much richer, we seem to be a bit less prosperous. So it goes.

  • Tom Holsinger

    Mr. Mead,

    Fraud I know, having started out with SEC Enforcement a very long time ago. My first case involved a scam which was comically similar to that depicted in Mel Brooks’ _The Producers_. It involved leases in depleted oil wells sold as tax losses, aka tax shelters. The fraud was that there was no equity in those wells at all, and the prospectus said on its first page, “Some of these leases may be encumbered.”

    Only the 1973-74 Arab oil embargo following the Yom Kippur War caused the value of, and income from, those supposedly depleted oil wells to soar, with wonderfully awful tax consequences for all those investors who needed those wells to lose money rather than make lots of it.

    In my opinion, the 2005-08 financial bubble was due far more to conscious financial fraud than was the 1926-29 bubble and, IMO conscious financial fraud was THE dominant cause of the recent bubble.

    This is something I’ve seen in files going over my desk about every week, sometimes several a day, in my public practice of law, and this has been true for about two years now. I agree with the estimates that at least half of the home mortgages issued in California 2006-2007 involved overt fraud, and that this home mortgage fraud also caused the values of commercial real estate to spike up even though there was rarely (if ever) conscious fraud in the commercial sales.

    Poor financial decisions are a larger problem than consciously fraudulent ones only in the long run, and in the long run we are all dead. Intentional fraud was dominant in the most recent financial bubble.

  • WigWag

    “Financial chicanery on a mass scale has been a constant in American life. The 19th century was no better…” (WRM @ Feb. 22, 2011 at 10:39 pm)

    That’s true, but it is also true that class struggle has been a constant in American life. In fact, its been a constant in the life of the English speaking world for well more than a century. It is generally acknowledged that one of the reasons that the last “new” version of capitalism, the “Blue State model” was invented was to nip a dangerous vesion of class struggle in the bud before the entire system was put at risk by those disgusted by the consequences of the Great Depression.

    It’s fine to say that financial machinations are as old as the wind, but then shouldn’t you also point out that the type of conflict playing out in Wisconsin and elsewhere is also as old as the wind? Do you really think this is the first time that employers have tried to set worker against worker? In the past, employers pitted workers of different ethnic groups against each other; today the strategy is to pit downtrodden private sector workers against public sector workers. Haven’t we seen this play before?

    Is it really true that the model in effect for the past 75 years is now outmoded or are we merely witnessing another attack on a model that a certain segment of society never approved of in the first place?

  • Luke Lea

    1950’s standard of living was established in this country as a consequence of immigration reform (in the 1920’s) and the work of Francis Perkins (wage and hour laws above all). Then, as now, it was all about the supply of labor relative to capital. And it took changes in public policy to secure the benefits of labor-saving technology to the common people.

  • William Thompson

    “Governor Walker has created an artificial budget crisis by giving huge tax breaks to rich corporations….”

    Is this true?

    [Gosh –ed] No! Those tax breaks were necressary to keep those business in the state or lose it to other states or even more likely they would move out of the US.

    Any state that is taxing or is costing more to operate in than other states or even other countries will eventually lose business to the more business friendly location.

  • David Ellis

    I find respondent’s use of the cutesy term “pony” distracting from an otherwise insightful post.

  • Tom Holsinger

    Mr. Mead,

    You might have a misconception about the term “intentional fraud” here. The parties’ intent, when they began their dangerous financial practices, need not have been fraudulent. Something this big simply does not happen because of an initial grand conspiracy.

    Instead somebody went over the line a first time, realized they could get away with it, did it some more and other people gradually started emulating the bad behavior, with new ways of committing fraud being devised as things progressed.

    And the regulatory elites flat failed for all sorts of reasons.

    IMO the origins of the intentionally fraudulent part of the financial bubble lie in creation of the Mortgage Electronic Registration System, aka “MERS”, which started out as a shady way tax dodge concerning real estate transfer taxes on home sales and mortgage transfers.

    Whether or not MERS was even legal ab initio, the way it actually conducted operations did not at all comply with its allegedly intended practices, and rapidly turned into overt fraud, tax fraud at the beginning and then fraud on investors.

    My first boss at SEC Enforcement taught me that the best con men merely give their marks an opportunity to con themselves. That certainly happened with the fraudulent side of the financial bubble, and that fraud became dominant in home mortgage issuances about 2005.

    • Walter Russell Mead

      In my view a combination of technological change, economic change and the human failure that leads people to project past trends too comfortably into the future periodically creates situations in which neither market participants nor regulators are able to assess and price risk — or to understand much less guard against various forms of systemic risk. Sooner or later when markets venture into this terrain, there is a crash. It is not so much that the standard of ethics falls in such periods. People, including con men, do not understand what they are doing and take risks that they would not normally take. The combination of rapid change in markets themselves (sophisticated products, high volume, new trading strategies and other computer assisted bells and whistles), global economic change that shifts the way international markets work, and the success of central bankers and economic strategists at preventing market panics and crashes made market participants more than usually clueless and careless — and the crash came. Fraud is a part of this story and can play a role in the triggering events that lead to panic and meltdown, but cluelessness (including among fraudsters who did not realize how exposed they were becoming) was, I think, the bigger factor.

  • Tom Holsinger

    Mr. Mead,

    People and institutions are not the same. There was no over-arching conspiracy. The vast majority of the people who intentionally perpetrated the fraud were not directly exposed to any of its consequences. The vast majority of the perpetrators were the scores or hundreds of thousands of people who handled the fraudulent loan applications, assisted the applicants in filling out knowingly fraudulent statements in those applications, processed the applications and issued the loans from which they received commissions.

    The whole idea, by everyone who knew they were committing illegal acts, was to nab a portion of the loan income as it went by. It doesn’t matter whether they were at the bottom of the cash machine processing mortgages, or at the top arranging for and selling the securities providing the loan funds. They were all getting a piece of the money as it went by.

    And, unless they invested in home loans themselves or the so-called mortgage-backed securities themselves (very doubtful), they kept their ill-gotten proceeds, and have entirely gotten away with it.

    So have the great majority of the politicians with whom they shared their proceeds.

  • WigWag

    One last thought from me about this very interesting post.

    Twice now, Professor Mead has commented that the etiology of financial crashes is far more related to imperfect information, greed or plain stupidity as opposed to actual fraud. My response is so what?

    Why is he so resistant to call for the same radical reform of the financial sector that he calls for in the health insurance sector, the education sector and public employee pensions and collective bargaining rights?

    As Mead himself says, there’s nothing venal about school teachers, doctors, nurses or firemen; it’s just that the rules governing the way they operate are outdated and need reform. Similarly he says that it’s not venality that caused the recent financial implosion, it was poor decisions made by financial gurus.

    If that’s the case, why not change the rules that the financial sector operates under to radically remake that sector with the same vigor that we reform education and health care? If old fashioned rules that govern the way we educate our young people and provide health care to our seniors need changing, why is the financial sector any less in need of reform?

    Instead of reforming the financial sector, Mead actually wants to reward poor performance. He thinks we should focus our attention elsewhere because, after all, “financial chicanery on a mass scale has been a constant in American life.” It seems to me that this makes reforming the financial sector more critical not less critical. It also seems to me that rewarding financial executives with lower marginal tax rates (at least at the State level), which is what Mead recommends, sends precisely the wrong message and creates poor incentives. Even if their behavior was mostly not fraudulent but was just dumb, should we really reward financial executives for making bad decisions by lowering their tax rate at a time when the vast majority of Americans are doing worse, not better? Apparently, unless I’m missing something, that’s what Professor Mead wants to do.

    Using the fact that financial chicanery on a mass scale has been a constant factor throughout U.S. economic history as an excuse to exempt the financial sector from the type of radical reform Mead advocates for health care, pensions and education just seems strange.

    Cancer on a mass scale has been a constant factor in American lives too. That doesn’t mean we stop trying to discover ways to cure it. Working to prevent financial chicanery and to ameliorate the consequences of bad financial policy should be just as important as reforming health care and education.

    If it’s not then Professor Mead’s recommendations are more about ideology than thoughtful public policy.

  • Luke Lea

    Quoting WigWag: “As Mead himself says, there’s nothing venal about school teachers, doctors, nurses or firemen; it’s just that the rules governing the way they operate are outdated and need reform.”

    I would say the same is true of corporations. There is nothing venal about their shipping jobs overseas or hiring illegal workers here at home. The way the rules are written (or in the case of immigration law, enforced), they have no choice if they wish to remain competitive.

    Thus it is the rules that need reform, not corporate “morality” which is an oxymoron in any case. (Jail time for CEO’s, on the other hand, would work better than stiff civil penalties — but that’s just one more rule that needs to be changed.)

    So, indeed, let’s change the rules on imports, immigration, the standard working day. Rules rule.

  • Professor Mead,

    You remarked that “This is what technology does: it allows human beings to get more work with less skill.”

    Do you know the cognitive anthropologist Ed Hutchins? In his great book Cognition In The Wild, recounting the evolution of Western navigation artefacts, Hutchins says:

    “…the existence of such a wide variety of specialized tools and techniques is evidence of a good deal of cultural elaboration directed toward avoiding algebraic reasoning and arithmetic… The specific implementations of the task determine the kinds of cognitive processes that the performer will have to organize in order to do the task. The implementations are, in turn, part of a cultural process that tends to collect [external artifacts] that permit tasks to be performed by means of simple cognitive processes.”

    Hutchins’ historical account here is more evolutionary than revolutionary, and so not exactly Schumpeterian. But at any rate, you might find Hutchins very interesting if you haven’t already stumbled across him.

  • Person in Grey

    So you want to end unions as a viable political force in this country, fire everyone who can be made redundant by technology, and end the social safety net. If that isn’t a recipe for a race to the bottom, I don’t know what is.

    What’s supposed to happen to the millions of unemployed that must be created in the name of productivity? Are they simply out of luck? What happens to the lucky few that retain their jobs? In a unionless market with massive unemployment employers have zero incentive to pay them a respectable wage.

    But no worry, I’m sure innovation will sort it all out. And if it doesn’t, oh well. I guess the middle class was nice while it lasted.

  • Alisher Burikhanov

    I agree that training & education is the step to take to avoid being ran over by the semi-truck know as globalization. But how does a town with little to offer capitalize on improving education? Higher taxes will scare businesses and investors away. Low taxes wont pay for education, because health professionals are better at lobbying, what does this small town USA do?

  • Tom Holsinger

    Alisher,

    The instructional value imparted by the educational system has decline dramatically in the past 20-30 years, while its cost per pupil, adjusted for age cohort, has soared. This has had major adverse effects on labor force skills and productivity, and therefore on economic growth.

    This educational system degradation of labor productivity has been disguised by the countervailing effects of technological innovation.

    Mr. Mead is quite correct that America’s economic future is greatly dependent on reform of its public sector. The great decline in public sector productivity, particularly in K-12 education, has drastically reduced economic growth.

    There are many reasons for this decline in public sector productivity, starting with the term, “Public Employee Union”.

  • Mrs. Davis

    A badger looks back

  • The big money is organized. The big money is always organized. So what about labor?

    In the words of John L. Lewis: “With organization you have the aid of your fellow man. Without organization, you are a lone individual, without influence and without recognition of any kind. An exploitation of you and your family when it pleases some industrialist who desires to make money from your misery”

    This is as true now as it ever was. I come from an old family and am as aware of the flaws in the concept of industrial, craft, and public employee unions as anyone. But there remnants are the only thing left.

    Clearly labor, by which I mean the 80 percent of the population who make their livings, not with their brains, but with their feet and their hands (and their fingers).

    They must organize now. I advocate flash mobs of those who have lost their jobs, seen their wages decline, or fear for the future of their children. Pick a Congressman, the house of the President of an Ivy League president, the homes of the CEO’s of the big Wall St. firms, the White House, or what other vulnerable point you can imagine. There is no reason to wait for a national organization. That can come later. Do it like the Tea Partiers did it, but ten times bigger. Don’t be a nation of sheep.

  • Luke Lea

    Speaking of education, I have a proposal for Walt. This summer go get a job at WalMart. Not as a greeter or in the check-out line, but on the floor stocking shelves and helping customers. Make a point of being friendly with everyone you meet. Get to know them. Ask them about their families, their hopes and their dreams.

    No doubt you have other plans. Speeches, conferences, travelling engagements, things you’ve done a hundred times before. But if you really want to learn something of value to yourself and your readers you ought to go out and get to know your fellow Christain citizens. They are overwhelmingly Christian you realize. Honest, kind, hard-woarking people. Talk to them, laugh with them, cry with them, see them.

    • Walter Russell Mead

      That is pretty much how I lived for some of the years after college. You are right — it is a good and important thing to do and I advise college students to take jobs like that rather than hunting for swanky internships. Some of them even listen!

  • Luke Lea

    Walt says, “That is pretty much how I lived for some of the years after college.”

    But how many years ago was it? A full generation? It’s a different world out there now. And you are a different person. I bet you would profit from the experience. Thanks for even considering it.

  • Dracovert

    As usual, Dr. Mead is ahead of the curve on complex social and economic problems. Automate Health and Human Resources bureaucratic processes to minimize the hideously expensive government bureaucracies, and provide superior social and medical services at minimum cost to consumers. Automate productive and service functions to minimize industrial and service bureaucracies (which are at any rate less expensive and wasteful than government bureaucracies) and provide superior services and products at minimum cost to consumers. Rationalize education and training, which have become radically irrational, and gear the education process to actual utile and quality-of-life needs. OK, so then what?

    We may asymptotically approach a position in which all material needs are satisfied for all people at minimal cost. Of necessity, we then must devote greater effort to esoteric and extraterrestrial efforts to avoid social and mental stagnation, which I do not consider a serious hazard; the quest for knowledge seems insatiable among some people. A greater hazard is millions of uninvolved consumers whose material needs are satisfied with minimal effort on their part. That could become a problem, though demographic trends (smaller families in “rich” countries) seem to reduce this problem.

    And then there are the steaming piles of horse manure with which the Democrats have saddled us. In the here and now, my argument is that every cent of the $14 trillion national debt is the direct responsibility of Democratic Party laws and policies. Every government expenditure is the result of laws or policies passed by congress and signed by the president, disregarding Obama’s theft of Government Motors and such. Democrats’ worst rap on President Reagan is that he increased the national debt, but he did not. The increase in the national debt during the Reagan years and after was from LBJ’s Great Society program laws, specifically the War on Poverty which was wasteful, corrupt, and futile, and left us with a $6 trillion national debt after expenditure of $6.6 trillion on WoP. Democrats devote major energy to obfuscate facts such as this.

    If the War on Poverty was LBJ’s baby, the much more catastrophic Housing Bubble belongs to Carter and Clinton. You will search in vain for any Republican Party input that contributed to the Housing Bubble. On the contrary, the Senate Banking Committee specifically rejected
    Republican efforts to reform Fan and Fred on a party line vote. The Housing Bubble has so far added $5 trillion to the federal debt, and counting.

    The Clinton Dot.com Bubble is a problem of a different nature. The Bubba Bubble developed and cracked wholly within the Clinton Administration, and the NASDAQ lost $2.5 trillion before Clinton left office. Recessions play out over months and years, but NASDAQ grew to unsustainable levels in year 2000 (P/E ratio 65 in January 2000, when 27 is considered as being hazardously high). Democrats blame President Bush for the Bubba Recession, but the Dot.com crash was almost exactly one year before Clinton left office and the recession die was cast. The Bubba Bubble added $3 trillion to the national debt, which now totals $14 trillion.

    So, the Democrats’ waste of $14 trillion is a burden that may impede recovery. WWII was a necessary effort that left us at a relatively similar ratio of debt to GNP in 1945 as compared to now, but the Democrats social and financial programs recently were not only unnecessary but destructive. Regardless, increasing productivity and efficiency may help us to grow out of the Democrats’ financial disaster, just as we grew out of the debts that resulted from WWII.

    And then there are the unknown unknowns. China and the Middle East are in ferment, and any one of very many factors could trigger conflict. The USA could dominate this conflict in a matter of days if it so chose, but what will Obama choose? Or is Obama even relevant at this point?

  • Stephen Greer

    This article seems to me to be only half complete. Mr./Dr. Mead is absolutely correct in saying that the service industries of the U.S. are due to catch up in the productivity acceleration that’s been occurring in the U.S. economy since the mid-1990s. If IT can be intelligently applied to the service sectors Mr. Mead highlights (health, education, etc.), then possibly millions of employees will be downsized out of a job and not likely to be soaked up by entrepreneurial outsourcing. This is one half of Joseph Schumpeter’s Theory of Creative Destruction.

    The other missing half the author leaves out, and what is critical in creative destruction, is what takes the place on a macroeconomic scale of the lost economic production of the old service industries. Economic theory says that those released employees should be reallocated labor to the newer, higher value-added sectors of the economy.

    In recent times, this includes such new industries as biotechnology; internet industries; materials technology; communications services; etc. As well as the hundreds and thousands of startup companies that are formed each year that possibly are seeds of brand new industries yet to be named.

    I would have been very interested to hear Mr. Mead’s ideas of these newly-created industries in the coming decades. It’s the new startup entities that will (hopefully) be created to absorb all those millions of employees that will be downsized in the coming IT revolution in the current service industries. This “creative” second half of Schumpeter’s creative destruction theory is at least as important as the unfortunate but necessary “destructive” half.

  • Brilliant!
    What we need to do is hire Chinese workers for the Congress, State legislatures, and local fire, police and teachers.
    The U.S. economy would be in the black in 24 hours, with the quality of everything going up.
    For this, I would take lessons in Chinese.
    Unions are a thing of the past, and have outlived their usefulness.
    You think I jest, but, this could work!

  • zilong

    The US has the highest productivity in the world, per hour, and labor costs 33% lower than in Germany, which has a current account surplus of 5.5%, exports comprising 56% of its GDP and a humming economy.

    Let’s not make this about productivity, it’s terror of taxation.

  • WPRIAQ

    I was referred the original article. Definitely and intelligent well thought out and well written piece. There is allot in there to disagree with but allot to agree with as well.

    For most the arguments have been personalized and made into attacks skirting the real issues; rather than an intelligent exchange recognizing change is needed.

    Both sides have work to do and all the proposals have merit and areas for improvement.

    The longer this change is put off the more difficult the compromises will be and the more tragic the results of such change on everyone caught up in the system.

    Perhaps the greatest single dissapointment is that in such times we need our brightest and best at teh helm hammerign out details and debating all positions championing the most comprehensive solutions providign teh best for teh most people possible.

    Sadly, we more often see folks in those positions that are nearly illiterate in ability to communicate on any level, irrational and unable to participate in a civil exchange of ideas and more importantly completely without a thread of common sense. It makes one ask “how did they get there anyway”.

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