The American Jobs Machine Is Broken

Aside from the rise of predatory Finance, the most important cause of our descent into hell has been the policy-driven, systematic destruction of American jobs during the Age of Globalization. Every respectable mainstream economist gave this policy his or her Seal of Approval. This post is a follow-up to Designed In Silicon Valley, Made In China, which was itself a follow-up to When In Doubt, Blame China.

This post's title is a riff on Tim Duy's Why is the American Jobs Machine Broken? This article is worth reading. After citing the terrible trends in manufacturing employment, Duy puts 2 and 2 together to get 4—

Note that a number of trends all begin in the 1980s. Absolute manufacturing declines, the rise of persistent trade deficits, the decline in labor's share of output, growing income inequality, and the Great Moderation. That the combination of these trends is coincidental seems unlikely...

The alert regular reader will note that I always say our Decline began in the early 1980s. Why did economists all tell a story in which shipping jobs overseas was a good thing?

If manufacturing is critically important to driving trends of national well being, an exploration of the decline of that sector is crucial. But that exploration almost always leads back to a very difficult place - international trade. And every right minded economist and policymaker knows unequivocally that free trade is good, and to even question that assumption makes one an ignorant heretic who has never heard of Smoot-Hawley. Therefore, the examination ends. Manufacturing's decline simply cannot be a problem if it is consequence of international trade because everyone knows international trade is good...

Indeed, the establishment will defend any assault on free trade with a simple, seemingly unassailable story: NAFTA was followed by the 1990s jobs boom in the US even as the current account deficit widened. Therefore, free trade does not have net negative impacts. Winners and losses, yes, but the former outweigh the latter.

I have told that story myself...

As Duy points out, the "boom" in the 1990s had far more to do with innovation in information technology (e.g. the internet and telecommunications) than it had to do with free trade. It's been many years since the Tech boom ran its course. Thus we are now in a hopeless situation jobs-wise.

For years now, we have heard the mantra that a revolution in renewable energy technology will come along any day now to fuel the next jobs creation boom. But for reasons that are all-too-obvious to those of us who have studied the energy situation, that day never seems to arrive.  

More importantly, everyone—that is, every economist—knows free trade is an unequivocal good. They all learned that Smoot-Hawley was a disaster—

The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports...

The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the "beggar-thy-neighbor" policies (policies designed to improve one's own lot at the expense of that of others) of the 1930s. Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934. More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations.

Because free trade is good, but losing good-paying jobs is bad, Tim Duy attempts to absolve Capitalism by blaming America's "strong dollar" policy—

I don't think it is a coincidence that the absolute decline in manufacturing accelerated in the wake of the US strong dollar policy, which provided the freedom for China to pursue an aggressively mercantilist economic strategy, perfecting what Japan's policymakers began in the 1980s. Thus I don't think the pernicious hollowing out of America's industrial base is simply the result of comparative advantage [in labor costs].

Having established that the comparative advantage of labor costs in developing economies does not tell the whole story of how Americans got sold down the river, Duy offers this non-standard view—

I grow increasingly convinced that the disappointing economic outcomes of the last decade are the culmination of decades of industrial neglect. That economists have dismissed industrial decline with a story of high value knowledge-based workers, a story with specific relevance to the tech boom of the 1990s but that is now defunct. And I am increasingly convinced that these trends have been largely dismissed by the economics community because acknowledging them would cast doubt on value of free trade, failing to recognize that currency manipulation was turning free trade into a zero-sum game.

In short, I have become a heretic.

Economists concocted yet another fantasy to explain away disappearing American jobs—the Tech boom of the late 1990s and similar episodes would solve our problems. But as Duy points out, Currency Manipulation + Free Trade = Zero-Sum Game. In other words, free trade was not really "free" trade. In the Real World, free trade is not always an unequivocal good. China wins, America loses, because that's what Zero-Sum Game means—there must be winners and losers if the economic pie does not grow.

The world economy became more and more out of balance, with Americans piling up debt to support consumption while China piled up export surpluses which they then used to support additional consumption in Europe, the U.S. etc. All the while, Americans lost high-value manufacturing jobs to China, India and other emerging economies. This subject is too complicated to cover in depth here, but the basic themes are clear.

Will this situation change? Will Americans see good-paying jobs return in the future? I seriously doubt it. So-called free trade is still unassailable. Outsourcing continues unabated. Labor costs (on a global basis and in the U.S.) can only go down from here. Labor has no bargaining power—I mean none. Private-sector elites will make good money and the distribution of wealth will become even more skewed than it is now. For the rest of the Earth's people, including most of those in the United States, there will be only low wages or welfare or abject poverty. That's the way it's been going, and I don't see any policy or market adjustment that's going to reverse this trend.

When you hear someone like Nouriel Roubini tell you that many of the jobs lost during the Great Recession, especially the good ones, are never coming back, now you know what he means. The American jobs machine is irrevocably broken.

Comments

[Edward Boyle]

3 possible future exceptions to your statements:

1)relocalization of goods production due to high transport costs for container shipments

2) Exhaustion of Chinese labour force (the young/flexible/dormitory tpyes for massive Southern China coast factories)

3)Exhaustion of fuel sources of factories in China, Asian subcontinent forcing factory closings and shifting of manufacturing to low energy producer.

[LeRoy murray]

I couldn't agree more, having worked in magnetic media, hard drives, audio and video tape in three different companies, in engineering, during the 70's and 80's, all of whom were absorbed, or sent out of the country, and in sales since. At one a Memorex plant in Anaheim, where I worked for seven years 74-81,I went to work one day, and was told there was to be a meeting in the lunchroom, where we were all simply told the plant was closing and we could all go home.
I have watched with dismay as everything from steel on down is closed and workers laid off. Here in the little town near where I now live, there was a pharmaceutical company that employed a large part of the town. My sister and her husband were employed there. A couple years before I moved here, the company was closed with no warning, putting a large portion of the town out of work. There was a science fiction story I read years ago, don't remember the title, but the point was that in the story, the US had become a giant Disneyland for the rest of the world, primarily the Orient, and the we were all workers, fast food, restaurants, hotels, casinos, to the more seamy jobs, serving the flood of tourists...
Every day more people are laid off and the unemployment keeps growing, both drawing unemployment and drawn out but not working, yet the government tells us the recession is over blah, blah, blah. Who do they think they're kidding, I talk to people every day, a perk of sales, and NOBODY believes it's ending.
When you say the machine is broken and the good, read high paying, jobs are never coming back I'm afraid you're right. The good news is I'm old enough for social security so I'll have some time, until the government goes broke, but I already have a spot picked out for my cardboard box.

Lee Murray http://stillanotherlife.blogspot.com

[Ronald A. Evans]

See the linked Bloomberg interview with Andy Grove, former CEO of Intel.

http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

He is a fierce believer in American manufacturing and believes we should have a national policy supporting a strong manufacturing sector. He is also singularly unimpressed with the free traders--actually a strong proponent of protective tariffs. Free trade effectively lowers our cost of labor to whatever the lowest rate in the international labor market is--all over time of course, but down it goes nonetheless.

It's no surprise that labor has no bargaining power, thirty years of destructive policy and public vilification of the unions by conservative administrations (including Bill Clinton's) has totally compromised the middle class dream in this country. The only effective unions remaining are the large public service unions--teachers, police, fire, prison guards, nurses, etc., and the unions representing rich professional athletes and other public performers. Reagan and his buddies acted agressively to neutralize and destroy unions and promote "globalization" and deregulation. The result is what you see today...our economy in a shambles.

Paul Volker's interview in the NYT was also a real eye opener with his somewhat repentant view of the evolution of free market policies over the past 30 years. See

http://www.nytimes.com/2010/07/11/business/11volcker.html

I too have a seriously dismal feeling about how the next 20-30 years will play out. Certainly my 2 sons have their work cut out for them--if they could only find useful, productive and rewarding employment. We are now where the progressive movement and Teddy Roosevelt were about 100 years ago. That was an era of serious restructuring of labor laws and working conditions first slowed by the post WWI boom but then accelerated again with the collapse of the economy in the thirties.

We have already had our collapse, but the government served its corporate masters well by allocating as much public money as was needed to propping up a bloated and corrupt financial system. But stick around, the idiots who did it once did not get the full benefit of their greed and stupidity-- since they didn't learn their lesson, they'll do it again.

[Brian M]

People always talk about comparative advantage and globalization, because, of course, globalization being an absolute good rests on the theory of comparative advantage.

What always seems to get missed is that comparative advantage rests on the assumption that capital is constrained and cannot move freely across borders.

This is patently false in today's real world. In today's world, and, in fact, in the world that has largely existed in an ever increasing extent since the early 80's, capital is free to flow wherever it so chooses. When capital is free to flow, you do not operate under comparative advantage, you operate, by definition, under absolute advantage. Absolute advantage is, as you point out, a zero-sum game in which both sides may, but at least one side MUST, lose.

Globalization can only work in a world where comparative advantage is possible. That can only work in a world where the flow of capital is constrained. If people really want a form of globalization (that is, international trade) that might work, then they have to re-institute many of the barriers that they have spent decades taking down, and probably more, in order to constrain capital.

Today's neoclassical economists and the politicians beholden to big business have no interest whatsoever in doing that. They like the zero-sum game, just like the robber-barons of history always have. The powers that be like the game they have, so the rules are not going to change.

[Jack Everson]

Reversing the Outsourcing Trend
Outsourcing is a self induced dilemma. With the economic news of the last 19 months one would think that this is a new situation, but the truth of the matter is that it has been brewing for decades. As a nation, we have been traveling toward this level of outsourcing our manufacturing strength all in the name of globalization. Core industry after industry has orchestrated their own decline, facilitated by short-term managerial reward systems. The next decade could see negative growth thanks to our foolhardy fondness for “Free Market” philosophies that tell us it is OK to export our jobs. The United States is basically down to four world leading industries: Information Technology, Financial Services, Entertainment, and Energy. We are losing ground to foreign competition in each of those as well. In terms of all other industries where we once lead the world in manufacturing strength after World War II, we are now a second-class supplier at best.

Our world-leading manufacturing base developed at a feverish pace beyond the Great Depression out of need to fight and win a war. At the end of the World War II, the same manufacturing innovation was redirected toward filling our homes with self-made products to elevate our standard of living for three full decades afterward. Service industries grew out of the successful manufacturing base as an extension to value added and the prosperity seemed endless.

Then in the 1980’s we suddenly began to rationalize moving jobs overseas to enlarge consumer growth prospects everywhere but where they originated. Our Free Market mentality was assumed to be universal in its objectives of cutting labor dollars, but was not. The countries absorbing the excess manufacturing saw wisdom in protecting jobs through social programs, trade barriers and government sponsored manufacturing incentives. Absence of costly OSHA and EPA mandates that developed in the US over the past two decades cemented the foreign advantage in low price. I do not disagree with the moral compass that OSHA and the EPA bring to the table as they are the right things to do, but they are distinctions that are real to the analysis and give the advantages to the foreign producers.

So, what do we do about it? Manufacturing companies in the US need some Federal help to level the playing field. Since the government has decided to become involved in the private industrial sector, they need to shift their involvement from one of being a dis-abler into one of being an enabler to business. The demonetization of big business and increasing taxes on the rich (business owners) is unsustainable. It is comparable to killing the goose that lays the golden eggs – it takes but does not produce. Like
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foreign governments, ours should create incentives to manufacturing that lower the overall costs of doing business, but keep intact the safety and environmental gains produced by OSHA and the EPA. Although it intuitively goes against the grain, they should lower the corporate tax structure, use unspent TARP funds to convert old manufacturing sites or incentivize new ones, fund worker training, tax abate existing and new jobs, defer income and inventory taxes, and accelerate depreciation. Tax revenue would grow with the business sector and assist in federal debt reduction efforts.

Never in the history of the United States has the federal government funded industry through broad incentives across the board. Since the current administration seems to prefer the governance methods of Western Europe, perhaps they should apply them in ways that return the United States to its former economic strength.

Jack A. Everson

President
Platinum Horizon Group LLC
(740) 701-7718
jackeverson@platinumhorizon.com
www.platinumhorizon.com

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