Wednesday, June 29, 2011

Jobs, Growth & The US Economy 1939-2011

Michael Spence's recent Wall Street Journal editorial discussing types of jobs, and "Why the Old Jobs Aren't Coming Back," got me to thinking about a much longer cycle of employment and growth in the US economy.

Some pieces become watersheds for me, and, like the occasional piece by Brian Wesbury, Alan Reynolds or Robert Barro, Spence's recent piece is for me right now. It is the catalyst that has allowed me to reshape a number of ideas and observations into a more coherent fabric than I was previously able to do.

Nobel Laureate Spence distinguished "nontradable" jobs which produce goods and services which "must be consumed where they are produced," from "tradable" jobs which can produce exports. He wrote,

"Nontradable job growth can't mask the declines in the tradable sector any more. The structural problem demands a structural answer."

Well, what if there is no long term answer? At least, an answer that everyone's going to find acceptable over the long term.

Spence mentions Germany, which has heavily-unionized labor, limiting

"wage and salary growth as part of a restructuring in the period 2000-05, allowing it to compete more effectively in exports and the tradable sector than other advanced countries."

That's a fairly serious admission of a very undesirable solution, i.e., deliberately slashing standards of living in an advanced economy in order to try to compete with lower-wage nations in tradable goods and services. Frankly, it doesn't strike me as a sustainable approach in any advanced economy where citizens' aspirations and expectations have been raised by decades of cossetted, unrealistic long term economic conditions.

Why would that be necessary if an economy like Germany or the US could train its least-productive workers to be more productive, thus offsetting their higher wages and maintaining their higher standards of living?

I think the answer lies in trade, evolution of various geographic parts of the globe, and the natural refusal of humans to see bountiful periods as fleeting and a lucky combination of factors which won't be occurring again, at least not foreseeably.

Consider this view of the US economy from the mid-1930s to the present.

Having futilely borrowed and spent like crazy, FDR's federal government found itself, by late in the decade, as Roosevelt's Treasury Secretary put it, to paraphrase,

'billions in debt and the unemployment rate no lower.'

But, luckily for the US, economically, at least, a world war came its way. By the late 1930s, FDR and Congress were re-arming America. This was yet another example of an aphorism popular in my youth, i.e.,

"Elect a Democrat president and go to war."

Digging holes, then filling them in, or doing other non-economic work with federal borrowing, didn't do the trick in the 1930s or, for that matter, in 2008-11, either. But spending on defense to prepare for war with a German madman, well, that's different.

Never mind that munitions were expended, tanks, planes and ships destroyed. Men and women killed in the millions. In the short term, people went back to work and, after the Allied victory in 1945, peacetime economies could pick up where they left off.

Oops....not all of them. Europe and Japan were in ruins. South America and Asia remained relatively undeveloped economically, certainly no challenge to the one remaining economic superpower with a now-trained workforce and plenty of invested capital plant and equipment- the US.

From 1945 until roughly the mid-1970s, America was luckier than smart. Many of the jobs available in the burgeoning US economy which supplied the world were blue collar, middle-class building jobs which were within the reach of high school-educated workers, e.g., auto assembly, steel making, heat-beat-and-bend manufacture, transportation, and construction, to name a few.

Without serious global competition to provide downward pressure on goods and services prices, labor costs and benefits soared, with no difficulty in sight to funding lavish defined benefits for private and public sector workers alike.

The good times had arrived and would roll forever! After all, it was America, the mightiest economic and military power on Earth.

However, thirty years on, by the mid-1970s, the ruined Allies and losers of WWII, Germany, Italy and Japan, had rebuilt their economies and infrastructures to the point that they began to be serious global competitors. US auto and steel industries were the first to feel the impact, being among the lowest value-added sectors with the lowest-skilled labor. As such, they were most easily priced out of the market, as the unionized US work forces in those industries refused to absorb pay and benefit cuts, choosing instead to penalize new workers entering those industries as US capacity shrank amidst crippling, bankrupting losses.

Look at the recent union contract settlements in the airline, auto and public sectors. It's still the solution of choice for unionized workers in vulnerable sectors,

'I'm in the union, I have my time in, and I've got mine. Pull up the ladder and screw the younger workers coming in behind us.'

That's almost an exact quote from my New Jersey teachers' union friend concerning the current situation affecting his union, job, pension and health care benefits.

Meanwhile, by the end of the Reagan era of lessened regulation, lower taxes and renewed US economic growth, the nature of job growth was already changing. White-collar jobs requiring more education and an ability to use technology such as computers began to move the US to a more service-based economy. Truth is, after Reagan, we've never had robust economic expansions following recessions in which overall employment growth across education and skill levels participated equally.

Recently, say, since 2000, the internet and rapid global transportation of components, combined with a maturing Europe and a growing, better-educated India, China and Southeast Asia, have rendered even many of the formerly-unassailable high-paying US service sector jobs tradable and vulnerable to price competition.

While your local grocer and dry cleaner remain relatively unaffected in terms of competition, but not necessarily in terms of demand, jobs in legal services, banking, equity research, chemical research and the like have begun to move abroad as transnational firms locate those functions where productivity is highest. Indian financial analysts are sufficiently good to offer reasonable quality, yet be much less expensive and, thus, more productive analytical product than their US counterparts.

While growth in revenues and profits for America's S&P500 firms continues apace, thanks to the global coverage of many of the firms in terms of both facilities and demand, the domestic employment picture in the home economy of the index, the US, is much bleaker.

Every nation has some bottom quartile of adults in terms of intellect, skills and education. In fortunate times, the nation can employ those people in lower-value-added jobs like construction, basic materials extraction or simple fabrication of materials and goods.

But the days of America being competitive at producing commodities is long gone. And, with it, I believe, a brief, probably unreproducible period from 1945-1970, in which lesser-educated and -intelligent Americans could make middle-class wages and enjoy "30-and-out" careers with bountiful pensions and healthcare.

My late father's cohort, he being born in 1927, enjoyed this golden era. Those before did not, nor those who followed.

It seems to me that Americans have become used to two generations, my father's and the early baby-boomers, of economically-lucky circumstances and have cemented their financial life expectations at an unsustainable level.

Today, the only long term sustainably-competitive businesses and jobs are those which can continue to innovate, create value and move forward technologically and in terms of meeting consumer needs. Static professions and jobs are all seeing declining wages and benefits.

I've been fond of saying for several decades, upon hearing or reading pleas from unemployed Americans in sectors such as footwear production, logging, steel, mining, or auto assembly,

"Do you really want a job in those industries anymore? Do you really want to take a competitive wage to make shoes when Asians are doing the same job for a fraction of what you hope to be paid? But can't be paid anymore because the shoes you make will be too expensive for other Americans to buy?"

Thus, it was disappointing to hear the president claim just yesterday, in Iowa, that America needs more manufacturing jobs, and to 'make more things.'

First, economic resource allocation is best done by market forces, not government mandate. Second, last I read, within the past two years, the value of American manufacturing output has remained fairly steady at about 20% of GDP for decades. However, due to the forces I've mentioned in this post, lower value-added products requiring less-skilled manufacturing have not survived competition with overseas sources. Further, again, due to the technologies and capital involved in on-shore manufacturing,increased productivity in such advanced products which are more difficult to manufacture have resulted in fewer workers producing the same, or more, value-added. This is a very conventional economic model- applying more capital to the production of higher-value products which require more advanced technology and fewer workers per dollar of output.

For better and for worse, we've evolved a global trading system in which all economies are now easily linked. David Ricardo would be quite at home with the economic rules of our world. But there are challenges.

Today, I can visit a local grocer and buy soft fruit from South America, fresh fish from the coast of another country, and the like. But the same global trading economics which allow that have closed US fisheries and led American fruit growers to hire migrant laborers at low wages and no benefits to compete with overseas goods.

While I'm not happy to acknowledge this, I must admit that today's interlinked global economy can no longer inexpensively shield and support the lowest quartile, decile, or whatever economically-determined least-productive, -skilled and -employable portion of any nation's workforce.

Nobody's worried about the workforce at Google, Amazon or Facebook. But the marginal banker, auto assembler or generic factory worker is a real problem for all of us. If they can't be re-employed at anywhere near their historic standards of living, how does that affect and change the US?

Spence wrote, in closing,

"Can business, government, educators and labor come together to tackle the structural employment challenge head-on? Some will say that in the present political and fiscal climate, this is highly unlikely. They may be right. But it is a choice, a collective choice. We can invest in future growth and employment of an inclusive kind, or not. If we do, it will take significant shared sacrifice."

His identification of the challenge seems correct to me, but not his vision of a solution. I really don't think it's about better education or some grand government-business entity "investing in future growth" anymore.

Here's what the modern interlinked global economy has done. It's forced economically-mature, once-vibrant advanced economies to decide, with their antiquated mix of unions, defined benefit pensions and health care systems and raised expectations, how to deal with the costs of supporting the now-unemployable citizens who have been taught for one or two generations to expect lavish standards of living by historic comparison.

A well-educated, bright, risk-taking young person who is comfortable with a long, changing, working life will probably get a reasonabl facsimile of "the American Dream." Others will not.

I think it's time we acknowledged that, in America, a high-school graduate with an average intellect and skill set has a near-zero chance of achieving "the American dream" of a good-paying, secure job leading to a comfortable, decent home, spouse and family, health care, pension, vacations and a pleasant retirement after age 70.

Thanks to the global ubiquity of better education, I would guess that even an average US college graduate can't count on that dream anymore, either.

But it's not just because of the US government's 80-year binge of deficit spending. Rather, it's this global economic linkage, combined with profoundly bone-headed, behavioral- and expectations- altering, fraudulent promises of defined-benefit schemes. A topic about which I'll write in an imminent post.

Spence correctly fingered the necessary economic accommodation in his German example, but I doubt it went far enough. Economic evolution is making more and more formerly-nontradable goods, services and jobs tradable. So economic growth and employment are likely to exist not among the most productive nations, but the most productive people in most nations which fully-participate in the global economic system.

America won't, as a nation, I believe, be able to protect and employ it's least-productive citizens without paying unaffordable social costs. The time for that has long since passed, and, absent another devastating, global-economy-wrecking war, natural disaster or crisis, I don't see it ever returning.

This isn't a pleasant scenario. However, my background as a strategist, especially under my mentor, Gerry Weiss of GE and Chase Manhattan Bank, taught me that strategic options and realities are periodically unpleasant. But that doesn't make them untrue or unlikely.

Those who delude themselves into believing there is some undefinable, indescribable better, rosier scenario than the plausible, describable, even existing and self-evident ones facing them, are destined to learn the hard way they were wrong. At great pain and expense.

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