Thursday, March 7, 2013

“Jobless Recovery”

Sydney M. Williams

Thought of the Day
“Jobless Recovery”
March 8, 2013

Two and a half years after the recession that ended in November 2001, the Economist bemoaned long term unemployment in the U.S., at 1.9 million people, as the “highest in ten years.” Today, four years after the end of the last recession, long term unemployment stands at 4.8 million people, or 40% of total unemployed. Richard Freeman, professor of economics at Harvard, wrote four years ago: “From the 1980s through the mid 2000s, employment has increasingly lagged GDP in economic recoveries.” Professor Freeman noted that the United States was not unique in this regard, that much of the West and Japan were experiencing jobless recoveries. It should also be noted that corporate profits have reached record levels, and this week the Dow Jones sold at new highs. Productivity gains aided the former, while the latter has a lot to do with the Fed’s policy of free money.

What’s going on with employment and what can be done about it? Professor Freeman puts much of the blame on financial institutions with their focus on proprietary trading, rather than serving the needs of individual and corporate borrowers. There is much in what he says; though I suspect it is not the whole story. Perverse incentives at banks too big to fail were, in part, responsible. A system that rewarded risk-takers for gains realized and unrealized, but that socialized losses did not function in society’s interest. Boards of directors who ignored balance sheets but celebrated income statements naturally urged the provision of capital to those departments that generated the largest profits. Their concern was not the economy; it was their banks profits. Corporate and personal loans were boring compared to the returns one could get trading derivative securities. Despite Dodd-Frank, in the months and years following the 2008 credit crisis, big banks have become even bigger. They, thus, have become more dangerous to the fragile ecology that is our financial system.

Jobless recoveries have deeper causes than banks emphasizing trading over lending. The bigger problem, I believe, has been the inability for many workers to keep up with a dynamic and changing workplace. The full ramifications of the revolution in communications, smart-phones and the internet have yet to be felt. Since the start of the Industrial Revolution, the labor force has had to adjust to changes in technology that allowed productivity to flourish, but created uncertainty for labor. The number of workers required to produce a single auto has declined significantly over the past fifty years. Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) allowed concepts to be converted to finished products with a much diminished workforce. This change has been reflected across all industries, from steel to breweries. Factory floors that once required hundreds of people can now be run by a single operator sitting at a computer console. Change continues. Today, the concept of “smart” manufacturing is transforming traditional factories from cost centers into profit centers.

For the past three decades, the problem has been accentuated by globalization, as cheap labor in Eastern Europe, the Far East and Africa usurped American jobs. All was not bad news, however; as consumers benefitted from lower prices. But nothing stays the same. Capitalism is always in flux. Plentiful and cheap domestic natural gas at home, along with rising wages in the developing world, provide the potential for a resurgence of American manufacturing, if politicians allow it.

While we are seeing the effects on labor markets today, changes wrought by technology are part of a trend that extends back decades. A few years after World War II, computers began benefitting manufacturing. Productivity improvements rewarded shareholders and corporate management, but often came at the expense of labor. For a while unions protected threatened workers, but then lost their clout as America evolved from an industrial-based economy to a service-based one. Because of a rising service sector, employment remained robust, but wages declined. Flipping hamburgers at MacDonald’s did not pay the same as working the assembly line at Ford. In part, that shift explains why nominal wages for middle income earners have been essentially flat for the last three decades.

Recently it has been the service sector that is being affected by technology. A revolution in communications and the development of the internet have greatly altered the way in which the service sector operates. With increasing numbers of people banking on-line, banks can close branches. Amazon does not require the salesforce that a Borders does. Legal, medical and tax advice are available on the internet. Planes can be flown remotely. Computer-driven algorithmic programs are replacing traders. On-line gaming will impact casinos. Electronic record keeping is negating the need for file clerks. While skeptics worry about poor or bad information, it is difficult to conceive of an industry that has not been touched by this creative destruction – a process that, no matter how individually painful, is natural to progress. When problems arise they will be addressed. We are not going backward.

None of this is new. Change of this nature has been a part of life since the start of the Industrial Revolution. Thousands of home-based producers, from bakers to milliners were made obsolete as factories opened in cities almost two hundred years ago. Railroads bankrupted canal and stage coach operators late in the first half of the 19th Century. Fifty years later, autos, trucks and airplanes began to have the same effect on railroads. In fact there are those who suggest that societal changes brought about by electricity and autos at the turn of the last century were far greater than the change we are now undergoing. In 1910, farm workers represented 40% of America’s labor force. Fifteen years later, only a third of working Americans were on farms. Today, it is under two percent. The move from hayfield to factory floor to MacDonald’s took about 175 years. The past is no guide to the future, but it does provide perspective.

Going forward, I suspect entrepreneurship will gain in importance, with the caveat that government does not impede its blossoming. Despite Yahoo’s Marissa Meyer’s recent statement, it could well be that we will move back toward a system of small, home-based businesses. Certainly, the internet and communications would allow it. Interestingly, as an aside, I was told last Friday that the fastest growing sector of the job market is the growth in farm workers! But it is from a very low level.

Capitalism, which has raised living standards for millions of people for two hundred years, is by nature disruptive. That has not changed, and it should not. But there is a tendency among well-intentioned politicians and union leaders to try to preserve the past. One of the costs of progress is the inevitability of uncertainty brought about by change. Free societies, operating within the rule of law while guaranteeing property rights, offer the best antidote to unemployment. However, today’s politicians in Washington (and other capitals) are in the business of selling comfort, taking from those that have and giving to those without – functions that once were the responsibility of states and/or the private sector. Today, to argue to the contrary makes one appear Scrooge-like.

Politicians, with an eye on the next election, are almost always reactionary. It is the rare individual in Washington who anticipates. In recent years, our politicians have offered security, creating dependency, while shunning personal responsibility. They have deemphasized private investment and encouraged consumption. When the press writes of stimulus, they think of Washington. When they speak about austerity, it is in terms of the government. Nevertheless, while government has grown bigger, the driving force in our economy is still the private sector. Big government, in my opinion, largely bears responsibility for declining rates of growth in GDP. If stimulus is needed who better to provide it than the private sector? If austerity is deemed necessary one can be assured families and businesses will tighten their belts. Government is rarely a good investor, for the simple reason they are not motivated by profit. In a Thursday Wall Street Journal op-ed, Michael Boskin quoted Larry Summers from a 2009 memo regarding an impending $527 million loan guaranty to Solyndra: “The government is a crappy venture capitalist.” They are. Government should set the rules and play umpire. The players should be the private markets.

There will always be crooked and inept business people, who make either bad decisions or ones mired in personal self-interest, rather than in the interests of their shareholders or customers. Competition is the over-riding and effective regulator in free markets; whereas government is a monopoly.

The bottom line is that the economy needs jobs, and the question is: who is best prepared to offer them, government or the private sector? In my opinion, the answer is obvious, but there are Keynesians who think otherwise. Government interference, though intentions may be honorable, tends to inhibit, not help, the natural adjustment that always (and must) takes place. Under the banner of “fairness,” government increases regulations and raises taxes. Unfortunately we live in a world where dependency has grown, making people less capable of adapting. Ironically, the characteristics necessary to survive and thrive in the world we are entering would be more familiar to our pioneering ancestors than to today’s governing and governed classes – aspiration, self reliance, hard work, adaptability, opportunism, thrift and the willingness to take a chance.

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