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.