The Economy—The Middle is the Trouble

The Occupy Wall Street gang is complaining about the economy.  As are the Tea Parties.  The major differences between the two are:

• Tea Partiers tend to be older, several decades older.
• The Tea Party ralliers tend to clean up after themselves better.
• The OWS crowd wants the Government to fix the problem and the Tea Parties think the Government is the problem.

The real problem may be that the economy is going through a major change and we don't know how to keep people employed during this transition.  Judging from what the Federal Government is doing, I don't think the Administration has a clue.

This Yahoo interview with an MIT Sloan School of Management Professor, Andrew McAfee, talks to the impact of technology on overall employment.  Professor McAfee and Professor Erik Brynjolfsson have written a new book, available only on the Kindle, titled Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.  Here is the last paragraph in the linked interview:

But I believe that we're heading into the next chapter of our economic history, where for a lot of people who don't have exactly the right skills or have been left behind in this race against the machine, there might not be a job waiting for you, at least in the classic sense that we're used to thinking about a job.  And we had better start thinking long and hard about how we react to that as a society and an economy.

More on that later.

Here are some comments on the views of the other writing partner:

—  Brynjolfsson asserts, "there's been this social contract, where if you are willing to work, there will be a job available to you."  In fact, America has offered work to so many people over the years because our economy has been relatively competitive and open, not because of a politically negotiated "social contract."  At times when our economy was less open (e.g., when depression-era Smoot-Hawley tariffs were in effect) or when aggregate demand was diminished, unemployment rose and wages suffered.

—  Brynjolfsson acknowledges the value of of a competitive economy when he says, "there is this kind of thicket of regulation and red tape that you have to go through if you want to start something up and employ some people."  Uncertainty whether EPA might regulate CO2 emissions through the Clean Air Act, absent cap and trade legislation, is an example of the thicket, even if this step in the view of some might serve other worthy purposes.  An income tax system in which tax expenditures (subsidies through the tax code) are now greater than tax collections likewise inhibits economic dynamism and depresses per capita income.

—  Brynjolfsson is silent on a key reason for rising income inequality in America -- increased competition from abroad in tradable skills.  Home health aides still have work in the U.S. not just because technology has not automated their work, but also because workers in places like China cannot do the work.  It can be done only on-site.  Thus, home health aides have non-tradable skills.  In general, however, lower-end workers have more tradable skills and thus are more displaced by competition from China and other competitive economies than are higher-end workers, and this tends to increase income inequality in the U.S.  These pressures were less potent several decades ago when the economies of China and other developing countries were less competitive internationally than they are today.

—  Brynjolfsson is right to highlight the importance of a better educated workforce for success in tomorrow's jobs, but certain fields will be better than others.  The IT and telecommunications revolutions has turned a lot more labor into "tradable work," e.g., radiologists in India who can read and interpret U.S. medical imagery.

A Canadian chap I am acquainted with offered this observation:

Between 1870 and 1915, the US shifted to a manufacturing economy.  After WW II, say 1945-1965, it shifted to a services economy (including retail), while 1980 - 2000 saw a shift to an information economy (we're just starting the second phase of that shift now).  Each of these shifts dislocated large numbers of people, changed settlement, kinship and marriage patterns, and restructured educational requirements and expectations.  At the same time, the cost of raising a child to be in the middle class increased while the social structural supports to enter / maintain middle class status have decreased (e.g. cost of education, healthcare, clothing, food, governmental red tape, etc.).  What social structural changes do you believe could counter this trend?

I think it is spot on.

It may add to this discussion to look at Professor Niall Ferguson's Civilization: The West and the Rest.  Professor Ferguson maintains that six "killer apps" made the difference.  His apps were (and are):

1. competition,
2. the growth of science,
3. property rights defined by law,
4. the triumph of Western medicine,
5. development of a consumer society,
6. and the West's work ethic

So, we have Professor Niall Furguson telling us that we need to retain those "middle class values" if folks are to continue working and we are to stay ahead of the competition—and it is a competition for those jobs that float around the world like it was all one big economy.

The other thing is that the number of people it takes to do many of the jobs that need doing is shrinking.  This stands athwart economic history, shouting at Henry Ford, you are wrong.  Henry Ford gave us Fordism..  Fordism can be summed up with this quote from Mr Ford:

There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.

But then Mr Ford also said this:

It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.

We do need a way to give people rewarding work and to funnel money to them, so that the masses of good being produced can be sold.  Our experience tells us that just giving things to people doesn't work.

Regards  —  Cliff