Canadian Cincinnatus

How Obama is short-changing the middle class and how the GOP could benefit from it, if they were smart

One mistake that free market proponents often make is that they conflate free markets with the capitalists who run the free markets. The two are not the same thing, especially with regard to business leaders at the high end. Plutocrats like Warren Buffet and GE’s Gerry Immelt are almost as political as they are business.

The dirty little secret of big business is that it doesn’t much like free enterprise. Why would they? When you are at the top, competition is bad for business. They can’t rise too much further but they sure have a long way to drop if a leaner, hungrier and smarter competitor comes along. As a result, from the perspective of their self-interest, it is much easier (and safer) for them to use their influence to pass laws that kneecap their competitors more than they kneecap them. If you are smart, you can also get showered with taxpayer money. This is why big business is often in bed with socialist politicians (cf GE and Obama). The baby they produce is called crony capitalism. 

GE doesn’t mind anti-free market legislation like cap and trade because they will get all kinds of perks such as windmill contracts, and a ban on cheap light bulbs (which forces the public to replace them with more expensive substitutes). For Goldman Sachs, things are even better. The Fed loans them money at almost 0% interest, and they turn around and loan it to Tim Geithner for a percent more. No effort, guaranteed results and - because the sums are so huge - so are the profits. And best of all, the government implicitly insures them against failure because they are ‘too big to fail’.

The problem is, as Joel Kotkin points out, that the middle class in the US is really hurting. That is because the anti-business climate Obama has fostered has hit hard the upstart competitors that provide most of the new jobs.

This should be a golden opportunity for Republicans because the interests of the middle class are almost perfectly aligned with the GOP’s free market principles. But only if GOP’s overall theme is insiders vs. outsiders, not government vs. private sector. Such a message would allow them to point out all the cushy connections between the big banks and the Obama administration. And when Obama talks about taxing “millionaires and billionaires” they should point out that this group of people includes not just Paris Hilton but almost every employer. Why is there persistent high unemployment? Answer: because the President is at war with the people who might otherwise be hiring them. When Obama talks about outsourcing jobs overseas, they should point out something Thomas Sowell said: 

President Obama's rhetoric deplores such "outsourcing," but his administration's policies make outsourcing an ever more attractive alternative to investing in the United States and creating American jobs.

In other words, every law and regulation Obama has added has helped push jobs away from America’s shores.

For a concrete example, take the aircraft plant Boeing built in South Carolina that might employ 2,000. Obama’s National Labor Relations Board is burning the midnight oil to make sure those people stay out of work.

The unemployment will continue as long as the populist anti-business bombast continues.

 

How to balance the US budget painlessly

When writing about pressing problems in current events, pundits have a tendency towards the apocalyptic. We see serious issues and assume they will end very badly or that the situation will be resolved by a paradigm-shifting Gotterdammerung that will change everything. 

Normally, what transpires is that a few things change - some for the better and some for the worse – and humanity just muddles on through to the next catastrophe.

The current US debt crisis is such a crisis. We think the US budget will blow up and change everything (just like we thought 9/11 would change everything) but I think people are overreacting. If you look at current budget situation: yes, it is serious; but no, it isn’t world changing. The reason is that the impediments to the solution are almost entirely artificial, i.e. political. In reality, balancing the US budget can be done with these changes, none of which are gut wrenching to the average American:

1. Reduce discretionary spending to 2008 levels. As 2008 was the last year of the George W Bush spending spree, 2008 was hardly a year of frugality. In reality, the budget could cut to 2004 levels with little pain felt on Main Street. But all that needs to be done is to reduce discretionary spending to 2008 levels and keep it there for a decade (i.e. discretionary spending increases kept to below GDP growth). This is not privation, political howls of dooma and gloom notwithstanding.

2. Implement pro-growth tax policies. Much of the current deficit is caused by a combination of a loss of income tax revenue corresponding with an increase in social spending due to the Great Recession. Medicare, AFDC, Section 8 vouchers, food stamps, unemployment insurance: all of these programs have grown by 50% or more in the past 3 years.

As Arthur Laffer once pointed out, you can’t balance the budget on the unemployed. To get the US out of the recession you must stimulate growth. You can do that by cutting income taxes for employers (i.e. the millionaires and billionaires who make more than $250K a year), slashing the corporate tax rate in half, slashing capital gains taxes in half and eliminating the estate tax.

The trick here is to not wimp out with populist anti-rich measures. When the liberals assert that the Bush tax cuts reduced federal revenue, they are half right. The Bush tax cuts to the middle class did indeed reduce revenue. In contrast, the Bush tax cuts to wealth creators was a spectacular revenue generator. Right now, the bottom 50% of Americans pays no income tax. They don’t need a tax cut (in fact, they need to start paying some income tax). It is the employers who need to be unshackled.

Do that and the unemployment rate will drop while tax revenues soar. As a bonus, mandated spending on the aforementioned welfare programs will plummet.

3. Deregulate as much as possible. There are so many counterproductive regulations on the books (Dodd-Frank, Community Reinvestment Act, etc.) that this is really fertile ground. Deregulation cuts government spending (enforcement costs) while simultaneously unshackling the economy. Another win-win.

4. Eliminate Obamacare.

5. To tame social security, take a page from the Paul Ryan plan and increase the retirement age by 1 month every year until the retirement age is 68. This change of 3 years will take 36 years to phase in but it will single-handedly make social security solvent again. How much will a 64 year old suffer if he as to wait an extra month for his first social security cheque. 

Answer: very little.

6. Introduce medical savings accounts, means tests and other market reforms to provide downwards pressure on the cost of medical services.

None of these steps, taken individually or together would cause much pain to the average American. In fact, they will relieve a lot of pain because the unemployment rate will drop. They will not fundamentally change the nature of American government or society, except to close a $1.5 trillion gap in the federal budget.

Not that implementing these things will be simple. It will be anything but simple and it will require an iron will among some of America’s leaders. It is just that the pain inflicted will be largely confined to those of America’s ruling class who rely on pork payoffs to stay in office.

Which is of course why none of these sensible reforms have been enacted yet.

How Obama is short-changing the middle class and how the GOP could benefit from it, if they were smart

One mistake that free market proponents often make is that they conflate free markets with capitalist. The two are not necessarily the same thing, especially with capitalists at the high end. Companies like General Electric and Goldman Sachs are almost as much political organizations as they are business entities.

The dirty little secret of these outfits is that they don’t much like free enterprise. Why would they? They are at the top. Free markets mean competition and competition means potential competitors. From the perspective of their self interest, once you have reached the high ranks, it is much easier (and safer) to use your influence to get laws passed that kneecap your competitors more than they kneecap you. As a bonus, you also get showered with taxpayer money. This is why big business is often in bed with socialist politicians. The baby they produce is called crony capitalism.

Which is why a big government guy like Obama is in cahoots with people like Gerry Immelt of GE. GE doesn’t mind anti-free market legislation like cap and trade because they will get all kinds of perks such as windmill contracts, and a ban on cheap light bulbs (which forces the public to buy more expensive substitutes). For Goldman Sachs, things are even better. The Fed loans them money at almost 0% interest, and they turn around and loan it to Tim Geithner for a percent more. No effort, guaranteed results and - because the sums are so huge - so are the profits. And best of all, the government implicitly insures them against failure because they are ‘too big to fail’.

The problem is, as Joel Kotkin points out, that the middle class in the US is really hurting. That is because the anti-business climate Obama has fostered has hit hard the upstart companies that provide most of the new jobs. 

This should be a golden opportunity for Republicans because the interests of the middle class are aligned with their free market principles. The GOP’s overall theme should not be government vs. private sector but insiders vs. outsiders. This message will allow them to point out all the cushy connections between the big banks and the Obama administration. And when Obama talks about taxing “millionaires and billionaires” they should point out that this group of people includes not just Paris Hilton but almost every employer. Why is there persistent high unemployment? Answer: because the President is at war with employers. When Obama talks about outsourcing jobs overseas, they should point out something Thomas Sowell said:

President Obama's rhetoric deplores such "outsourcing," but his administration's policies make outsourcing an ever more attractive alternative to investing in the United States and creating American jobs.

In other words, every law and regulation Obama has added, has helped to push jobs away from America. For a concrete example, take the aircraft plant Boeing built in South Carolina that would have employed 2,000. Obama’s National Labor Relations Board was working hard to stop that.

 

David Frum: the nervous Nellie of the conservative punditocracy

Moments of crisis are good at separating the reliable from the ‘wobbly’. After reading David Frum’s column in yesterday’s Post, where he excoriated conservative columnists south of the border for being “in denial over impact of debt default”, we can safely put Frum into the camp of unreliables.

His article was in reaction to columns such as the one he cited from the Washington Examiner. The quote he used as his jumping off point was:

“As the Bipartisan Policy Center has confirmed, Geithner could pay: the interest on the debt, all Social Security obligations, all Medicare and Medicaid obligations, all Defense contractor bills, all Veterans payments, and all active duty troops; and still have almost $7 billion left over for other items.

Yes, Geithner would still have to cut overall federal spending by 44%, and that would have economic consequences. But those consequences would not be as bad as defaulting on the debt. ...

Not raising the debt limit would cause a limited government shutdown, not default, as Obama has been claiming.”

The basic gist of Frum’s argument is that even if the Examiner’s accounting is true, a sudden cutback of US federal government spending by 44% would be too catastrophic for the economy to contemplate. This is how Frum makes his case:

“Suppose the government had to cut 44% from its budget on two weeks notice? How sharp a shock would that be to the world economy. 

Here’s a comparative. In the worst quarter of 2009, American consumers cut their spending by … not 44%, not even 4.4%, but 1.2%. That 1.2% drop in consumer spending helped tumble the economy into the worst collapse since the 1930s.

The U.S. consumer sector is even larger than the federal government sector. But it’s not unimaginably larger. U.S. consumers spend about $10 trillion a year. The federal government spends about $3.4 trillion.

If a cut of 1.2% from $10 trillion was an economic shock, a cut of 44% from $3.4 trillion will be a much, much, much bigger shock.”

Where to begin?

First of all, has David Frum ever heard of Say’s Law? In the words of Jean-Baptiste Say:

“The mere circumstance of creation of one product immediately opens a vent for other products.”

In other words, it is production not consumption that determines the size of a country’s GDP. Say’s Law formed the foundation of supply side economics developed by the Nobel prize winning Canadian economist, Robert Mundell that was successfully implemented by Ronald Reagan. You want an economy to grow, you must encourage savings and work (which are the key ingredients in production). If you do that, the consumption will take care of itself. The reason Say’s Law works is because our appetites are always greater than our desire to work.

To put all of this in the context of the current American budget debate, excess government spending can only have limited effect on economic growth because every dollar the government spends it has to tax, borrow or print. This is why the explosion of federal spending that has occurred under Obama (and, to be fair, also under the last year of Frum’s former employer, George W Bush, as well) has had no discernable positive effect on the economy. So here is my question to David Frum: if increasing federal spending has done so little to stimulate the US economy, why would you think cutting this spending off would hurt it?

What David Frum overlooks in his prediction of doom on Aug 2, is that a partial federal government shutdown will have positive effects (like an overnight elimination of the federal deficit) as well as negative effects (such as unpaid government workers and contractors). Though the borrowing respite will be temporary, for a while at least there will be no need for Tim Geithner to find new borrowers for T-bills or for the Fed to print more money. These are huge and immediate economic gains.

Second, the Great Recession was caused by a drop in consumer spending of 1.2%? Really? You mean it wasn’t caused by a collapse in the US financial system due to a surfeit of bad mortgages? So I guess all those business writers talking about subprime mortgages and asset backed securities were all blowing smoke. Who knew? I suppose the fact that the economy crashed on the same day as the Lehman Brothers bankruptcy was just a coincidence.

And third, at the current pace of spending, the US federal government is borrowing an additional $1.5 trillion every year. That can’t continue for much longer and when it must stop, that’s when the real economic consequences will be felt. It will be a fiscal inferno that will make a controlled, limited shutdown look like an ashcan fire. Most important of all, the longer a real solution is pushed back into the future, the bigger the consequences will be.

Like it or not Mr. Frum, Americans are living in interesting times. There are no longer any easy options. Every choice is fraught with peril but some contain real solutions. A cowardly compromise might provide temporarily political relief to John Boehner and Mitch McConnell, but cowardice has a way of coming back to haunt weak politicians. A good example is what happened to George H W Bush when he broke his “read my lips, no new taxes” promise in a similar confrontation with congressional Democrats.

Now is the time for bold, principled action, not mealy-mouthed appeasement to the forces that caused the problem in the first place. 

 

The next tech boom – 3D printing – may save North American manufacturing, at the expense of China

According to Mark Mills, of Forbes:

“The factory of the future is a fully-automated building filled with robotic systems and software. Purified raw materials and power go in, and a massive stream of customized products comes out. It is an incredibly efficient machine with nary an ounce of waste.”

“The poster child of the factory-of-the-future is visible in a hot new trend in the techno-dweeb sphere, so-called 3D Printing. These machines literally ‘print’ from computer images entire finished parts or simple products, ‘assembling’ from raw metal powders using powerful lasers or electron beams. They work much the same way much your computer’s laser printer does, though in the latter case using much less powerful lasers to print text using powdered inks. One guy, a computer, and a 3D ‘printer’ … presto a desktop factory.” 

“The future of manufacturing will be largely determined by the combination of two inexorable facts: technology gets cheaper over time, while labor gets more expensive. At the macro economic level, this trend is favorable to economies that are technology-advancing (i.e., the U.S.), not cheap-labor-centric (i.e., for now, China).”

“If the future of manufacturing is information-centric — from materials innovation, to 3D printing, to disruptive business models — is that a field where China necessarily dominates? Could be, but there is no guarantee. Creativity, innovation, flexibility, flexible education, entrepreneurship are the characteristics needed to foster the new era of manufacturing. These are the hallmarks of the American enterprise.”

Though, as Mills’ article points out, manufacturing based on nascent 3D printing technology is already here, who knows at this point how far this will go, and in what precise direction. Who, in 1990, predicted the internet revolution of the late 1990’s? Not-yet-invented technology is a very hard thing to pin down.

What this article does tell us however - and the reason I bring it up - is that all the doomsayers of America and the worshippers of New China (cf Thomas Freidman) are premature in their prognostications of Chinese hegemony. 

In spite of the two horrendous years of damage caused by Obama, Reid and Pelosi, the US still remains the friendliest place in the world for small, start-up business - the kind of organization that pioneers new technology the best. Replace Obama with minimal government President who understands that it is free markets and not crony capitalism that causes real economic growth and America’s best years could yet be ahead for her.

 

P.S. Embedded in the article is an interesting factoid for all you Mark Steyn-influenced demographers out there:

“Add to this formulation the demographic fact that, by about 2025 America will be a younger country than China.”

Iceland shows the way out of a financial meltdown: the government should do nothing

Iceland was one of the countries that was hit hardest by the Great Recession but since then, it seems to have recovered well. What did it do? Let's find out…

"Iceland didn’t rescue its banks.  It couldn’t afford to do it.  So, they went bust. Iceland looked like it was going down a path of permanent financial armageddon. However, Iceland is in better financial shape than the rest of Europe today.

'Europe’s bailout path has only diverted ever-more resources to failing enterprises, postponing and deepening the problem. Iceland’s restructuring was both painful and costly for the population, but the government did not throw good money after bad, and the taxpayers were spared a nationalization of private debts. Is it any wonder that forward-looking financial markets are now betting on the Icelandic recovery?'

No Dodd-Frank. No super heroics. Just a level headed, clear eyed administration of bankruptcy law."

This reminds me of the depression of 1920, which many say was more severe than the Great Depression, even though it lasted barely a year. The President at that time, Warren Harding (the one professional historians always place near the bottom of great President rankings), approached that crisis with the same laissez faire policy of today’s Icelanders. As a result, the depression ended just as quickly.

The lesson for Obama here is that if you don’t know your history, you are doomed to repeat it.

 

It’s regulations - not labour costs - that are killing the US manufacturing sector

Read this article in the American Spectator, written by an entrepreneur who contrasts the regulatory burden faced by an upstart manufacturer in America and in China. For instance, he says:

“Today the environment for starting and operating a manufacturing plant is not good. Gone are the days of "Great, go to it, do the best you can." Replaced by, "NIMBY" -- Not In My Back Yard. The government has imposed itself as our costly overseer, placing environmental, zoning, and wage/benefit restrictions so burdensome in time and cost that businesses are left barely competitive if not impossible to begin.”

He goes on to describe all the regulatory hurdles, burdens and risks he faced while trying to set up a manufacturing plant in a north-eastern US state. The list is long so I won’t repeat it here. In contrast, this is the regulatory procedure he faced while starting up a manufacturing plant in China:

“Now, consider my experience the last time I visited China. I was escorted by the governor of Tianjin State to one of his new cities and shown the process to open a manufacturing facility. I was led into a room with a series of desks. You start at the first desk where you present your plan. Thereafter you proceed from one to the next obtaining approvals or agree to modifications on the spot until at the last table where you are shown what lots and buildings are available that best suit your needs and the price of each. The total timeline for permits, from beginning to approval, takes about 3 hours.”

“Now, this is China so the government and the state share 30% of your business, but considering the ease of entry, increased in-country sales and helpful attitude, this is a small price to pay, especially considering America's 35% plus corporate tax rates.”

Now I know the demise of the manufacturing sector in the US has been greatly exaggerated by populists like Pat Buchanan. I have argued several times in these pages that much of the drop in manufacturing jobs in the US is due to increased productivity. In other words, the US is making more with less. i.e. this is a Good Thing. But still… the mountain of regulations and the unnecessary risks and arbitrary constraints they impose on manufacturers can’t be good for America’s (and Canada’s) vitality.

The Obamariods like to present the free market GOP with a choice: you can have pro-growth economic policies (i.e. lower taxes), or you can cut the deficit, but you can’t have both. Well, here’s a way you can have your cake and eat it too: cut regulations. Every regulation you eliminate works on both problems: it promotes growth by eliminating an obstacle to entrepreneurs while simultaneously cutting costs because there is incrementally less for the bureaucrats to do.

Of course, eliminating their false choice is why the left doesn’t want to talk about deregulation. Their biggest fear is that it will work too well.

 

The collapse of the housing bubble and the rise of affordable family formation

An interesting angle on America’s housing crisis:

“But housing's troubles may have a silver lining. If you're a homeowner, the steep fall in prices is calamitous. But if you're a future buyer, it's a godsend. What we're seeing is a massive wealth transfer from today's older homeowners to tomorrow's younger homeowners.”

“The National Association of Realtors routinely publishes a housing "affordability" index, which judges the ability of median families to buy the median-price home at prevailing interest rates. By this measure, existing homes are the most affordable since the index started in 1970.

Young buyers "will be able to enter the housing market at bargain prices," argues NAR economist Lawrence Yun. When home prices again rise, increases will parallel income gains, meaning that the relative burden of housing costs will remain roughly stable, Yun says.”

One of the most important but underrated factors of a successful, sustainable society is affordable family formation. It is so underrated that it is actively rooted against. For instance, rising home prices are always hailed as a good thing. Well, who are expensive houses a good thing for? Not young couples starting to build a family. And I say this as an existing homeowner with no mortgage.

The fact remains, a society is sustainable (to borrow the environmentalists’ favourite phrase) only if it provides a friendly environment to young couples who want to have children – i.e. create the next generation. This is why anti-sprawl regulations such as Ontario’s Greenbelt (where much of the land around Toronto has been declared off-limits to development) are so harmful.

This is also why the urban boosters - who think a great city must have a ‘vibrant’ downtown core to attract high-end knowledge workers such as venture capitalists, celebrity chefs and IT gurus – are so off the mark. What a functioning – as opposed to great - city needs is a large, stable, engaged middle class; in other words, men and women with families. And how do you attract them? With affordable houses that have backyards for their children to play in; safe, child-friendly neighbourhoods; good schools; and lots of mid-level jobs.

Those smart and sexy knowledge workers the urban planners are infatuated with are too footloose to be really engaged in any community they live in. It is the middle class families who plant their flag where they live and proclaim, this is my home! It is their bourgeois values that imbibe the city with the kind of civic virtues that make it a great place for ordinary people to live in.

Cities that don’t care for affordable family formation and court high-end yuppies instead, end up with a bifurcated population: the very rich (who can afford the land and the taxes) and the very poor (who don’t have to). Manhattan is the prime example with its juxtaposition of the Upper West Side and Harlem. San Francisco is a classic example of a town that has made the journey from a middle-class-friendly city (which it actually was in the 1950’s) to the overpriced yuppie paradise it is today. As a result, there is a growing dearth of children, much to the consternation of the local teachers’ union. Young families of modest and even not-so-modest means can’t afford to live there, and increasingly don’t.

In a generation, San Francisco will have an entirely different population...and character.

Does Ignatieff Just Want To Go Home? (To Harvard)

The polls say he's 20 points behind the conservatives, so short of a drastic reversal of fortune there is no chance that Liberal leader Michael Ignatieff can win enough votes to form even a minority government, yet he desperately wants an election.

Many have already speculated that if the conservatives win a similar minority, Iggy plans to revive Stephan Dion's unholy alliance with the separatists and the socialists to form a government.  He has kind of, but not really, denied this in such a way that he can easily deny that he denied it.  Yes, confusing, and this will haunt him for the rest of the election.

But I wonder if he wants an election for a much simplier reason: maybe he's fed up with being in politics.  It's much easier being a pundit about politics than actually being a politician.  In fact, I'm reminded of the HBO series Rome when Ceaser has left Mark Anthony in charge of Rome for a time.  Anthony, clearly missing combat and bored silly, complains, "Running Rome is not as amusing as I thought it would be."

But now that Iggy is leader of the Liberal Party of Canada, how does he quit and go back home to Harvard without looking like...well...a quitter?  Simple: force the election that some of his party members want, go down spectaularly in flames, and he'll get tossed by his own party after the election.  He can go back to Harvard with his head held high, write a book about it all and go on talk shows, where he'll probably talk about what "we Americans have to decide" about the issue du jour.

But if his plan is the unholy alliance, he's going to find himself in huge trouble.  It may not be illegal to form the government even though the Conservatives have the biggest share of seats, but Iggy would be breaking an unwritten rule.  I once read a book in which a king states that he can break laws while ruling his kingdom, but he can't go against what the people have always assumed is the law, the tradition. In this case voters expect the party with the most votes gets to form the government.

If Ignatieff goes against that he may form his coalition government and hold power for a while, but he'll have to shovel endless money at Quebec and NDP socialist programs in order to stay afloat.  This will be incredibly unpopular.  Eventually even Iggy will have to admit that the country is out of money and the Bloc will bring down his government just to prove they have the power.  When he has to face the voters again I believe the liberals will go down to their greatest defeat in Canadian history.  It may even rival the shellacking the old PC party received under Kim Campbell.

But untold damage would be done to the Canadian economy in the meantime, and our deficit will rival Obama's GDP ratio debt.

Perhaps its wishful thinking on my part, but I hope Iggy just wants to go home to Harvard.

Mike Downtown

How to compete globally without slashing wages and benefits

Walter Russell Mead has an excellent article on globalization and how to succeed at it without “a race to the bottom.” First he describes the problem:

“For many Americans, the changes in our society — stagnant or falling real wages for non-supervisory employees, cutbacks in public services, rising costs of medical care, an affordability crisis in higher education and on and on — look like the consequences of what is often called “the race to the bottom.”  Global competition is forcing us to cut costs in an effort to compete with low wage countries like China, Vietnam and Bangladesh.  Restless and amoral capital shifts endlessly around the world looking for the cheapest labor, lowest taxes and the fewest regulations when it comes to questions like environmental protection and worker safety.

More, regular readers of this site will know that I’ve been predicting yet another turn of the screw.  Blue collar workers have been getting the shaft since 1973; white collar workers are starting to get the same treatment now.  Two of the same forces that drove down blue collar wages are starting to hit professionals: competition from overseas and the use of technology to raise productivity so that fewer workers are needed to do the same amount of work. The US manufacturing sector has actually grown since 1973, producing more even as it has shed workers.  There is no reason why the same thing can’t happen to lawyers, middle managers, government bureaucrats and many more white collar workers as computers get smarter and firms start outsourcing professional work overseas.”

A familiar argument? But his antidote to the problem is not the usual one you would expect:

“I see those arguments and have felt their force for thirty years.  I’m not, however, convinced that they ultimately make sense.  I’ve been thinking about globalization and the future of American prosperity and power since writing Mortal Splendor and in those thirty years I haven’t so much changed my mind about the problems we face as come to a better understanding of the roots of American prosperity...

I wrote in my first post on Madison that I don’t think that restructuring state government is about the race to the bottom: it’s the way to avoid a race to the bottom.  That answer needs a bit more elaboration.  The world is in a race: a race to be the most efficient and innovative.  Cheapness is one way to win this race: cheap labor can be an advantage.

But America shouldn’t compete on the basis of cheap labor: we are not nor should we try to be the Walmart of Work.  So the first question becomes how do we compete in ways that don’t involve endlessly ratcheting down wages and benefits?  And the second, related question is how can we generate enough demand for American workers so that market forces drive incomes up from year to year and decade to decade?

The key to success is obvious: we need to continue to raise productivity throughout the economy.  If productivity goes up quickly enough, wages can rise here even if they are falling elsewhere.  This is getting harder; productivity is both easier to measure and to raise in manufacturing than in services.  But substituting capital and technology for human sweat has to be a large part of what we do.

To raise productivity significantly, and especially to do it in ways that give us some long term advantages, we are going to have to do more about productivity in services.”

Mead elaborates on the usual solution to this problem and why it doesn’t work: 

“Change like this always looks like a race to the bottom for the people directly involved: spinners and weavers in 1810 and Wisconsin state government workers today.  When disruptive change happens so fast that people are being thrown out of work faster than new sectors can absorb them, wages can decline throughout the economy.  Since 1973 in the US, millions of women were entering the workforce even as increasing productivity and overseas outsourcing were reducing the number of manufacturing jobs. Wages stagnated and fell — often driving more women into the workforce to make up for their husbands’ falling income.

The cure for this process is not to stop technology in its tracks.  That is what the Luddites tried to do in 19th century Britain: destroying the machines that were killing jobs and reducing wages.  The cure is to exploit the opportunities that new technology and (temporarily) low wages create for innovation.”

To me this argument is a breath of fresh air because the argument put forward by the left – and also from paleo-conservatives like Pat Buchanan – that globalization is bad because it puts Americans out of work always bothered me. It bothers me for two reasons: first, because I am instinctively pro-freedom; and second, because I am honest enough to see a kernel of truth in what they say - blue-collar jobs are being lost.  Its fine to tell people, go get a PhD in biophysics from MIT and invent something in biomechanics. But what if you can’t? What if you are not smart enough to do that? One strength of the old, manufacturing North America was that it guaranteed a decent job to almost every hard working, person. There was something in it for all honest citizens. A nation of credentialed Harvard haves and blue collar have-nots ‘clinging bitterly to their guns and religion’ does not make for a stable society, regardless how economically efficient it is. 

In this article, Mead points out the silver lining that pessimistic commentators often miss when they focus only on the negative effects of Schumpterian creative destruction. But read the whole article. It is long but worth it.