July 11, 2011

Jobs: A Long Term View

July 11, 2011

Jobs: A Long Term View

Why is the jobs market not recovering? To a large extent, the state of the jobs market is what will determine the outcome of the 2012 elections.

To start, I want to make clear that it has always been my belief that there is little that the President and Congress can do to create jobs. When we have recession we have an excuse for the party not in power to diss the party in power. Reagan did this to Carter and Clinton did this to George H. Bush. But none of these guys create jobs. Jobs are created by a coming together of capital and labor to provide a product or service which people want. The main thing that government can do to help create private jobs is nothing. I do not say that to be glib. I sincerely mean that government regulation and government policies hurt more than they help.

So what is wrong with the jobs market? The answer is: a lot.

I think that the most important thing to recognize is that part of the reason why economic recovery has been so dismal is that this past recession was not simply a cyclic recession which could be addressed by Keynesian deficit spending. The big issues in the jobs market are structural not cyclic.

The Bureau of Labor Statistics recognizes that the goods producing jobs consists of 4 supersectors: Natural Resources and Mining, Mining, Quarrying, and Oil and Gas Extraction, Construction and Manufacturing.

The Manufacturing sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products.

Manufacturing jobs have been offshored. This is a consequence, in large part, of the enormous differences in wages between China and the U.S. The average manufacturing job in China pays about 75 cents an hour. (This data is not well publicized by China but that 75 cents is a best guess.) According to this BLS report the average hourly earnings of production and nonsupervisory employees on goods producing Nonfarm jobs was $20.62 last month. I think that unless the Pacific Ocean dries up we are not going to recover a significant number of manufacturing jobs from China.

The fact that these manufacturing jobs have disappeared is a structural change not a cyclical one. The manufacturing of almost everything has moved offshore: clothing, computers, consumer electronics, appliances, machine tools etc. We are not losing manufacturing jobs because our factories are inefficient or make things no one wants. We are losing the jobs which manufacture the stuff we all want and we are also losing our dominance in high tech. That wonderful thing called the iPad may have been designed in California but it is manufactured in China. In 2008 there were 1.2 billion cell phones sold in the world. Zero of those were manufactured in the USA. The US has lost its dominance in printed circuit and semiconductor manufacturing.

The Chinese economy has flourished only because it was able to take that which already existed and use its enormous stock of low paid workers to make stuff cheaper. China has no inside track apart from that. China is to manufacturing what Wal-Mart is to retailing.

One conclusion is the the U.S. economy is in a hopeless state regarding jobs. Another possibility is that we are experiencing a case of Schumpeterian Creative Destruction. In fact this could be the Mother of All Creative Destructions.

What Am I Talking About?

In his book “Capitalism, Socialism and Democracy”, Joseph A. Schumpeter wrote, “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” Schumpeter saw capitalism as surviving by not merely innovating but by mutating and destroying the old economy in order to make room for the new economy.

I believe that the only manner in which we will see significant changes to our economy and the quality of our lives is through new and visionary technologies.

Consider some fairly new companies: Google and Facebook. What do they manufacture? Absolutely nothing physical. I am by no means minimizing the difficulty of creating and maintaining these massive entities. I am only observing that their product is not physical.

The Internet has created companies such as Zynga (the creator of Farmville) which provides on-line games for free and sells virtual products to enhance play. Many iPad games use this business model – give someone a game for free and then sell them virtual stuff for real money. The worldwide market for virtual good last year was about $9.28 billion. That is not a large number. My point is that people pay a lot of money for things which are not physical objects: cell phone service, cable TV, WSJ on-line, iTunes and that is being extended to objects in virtual worlds such as Farmville.

Intellectual property (books and music) is becoming digital. Books, vinyl records and music CDs are following the 8-track tape down the existential path to non-being.

Apple holds a big hand for this with iTunes. Netflix is moving from an entity which sends DVDs in the mail to and entity which provides streaming content via the Internet. I can watch “Alfred Hitchcock Presents”, “Have Gun Will Travel” and “Twilight Zone” delivered by Netflix on my BluRay player and recall the “good old days of TV.”

Technology is also capable of creating things which are far from virtual. This is about a company which creates perfect fitting 3D bikinis. Perhaps in the near future young women can go into stores and buy a perfect-fitting pair of jeans which are “printed” on the spot. Same for shoes. 3D printing can also used to create objects such as dental bridges and implants. RepRap is a low cost 3D printer (you can build it yourself) which is capable of self-replication. It can print another copy of itself.

3D printing could have medical applications. We may be able to create body parts on demand. See this article from the Economist, or this piece from This could eliminate the need for organ transplant donors. Athletes with bad knee, elbow, or shoulder injuries could have those parts replaced. Burn victims could get new skin quickly. Today a patient in Sweden is being discharged after his cancerous windpipe was removed and replaced by the world’s first artificial trachea, made of his own stem cells grown on a man-made plastic matrix.

The post-Singulatity economy may see economic value existing largely as intellectual property. I could design clothing and deliver it to my customers by 3D printing: no factories, no junior sportswear shops in malls – just a bunch of teen-age girls using their smart phones to get their jeans out of a row of ATM-like machines. The new line will be, “That is so, like 12 hours old. Look what just came out 4 minutes ago.”

This has already happened with nonphysical things such as music, books and newspapers.

It may be the case that we are about to see something which has an enormous impact on society and the economy. It could be the case that we are approaching a time when both goods and services are largely delivered by computers or created by 3D printers connected to computers. Wealth would take the form of the ownership of the 1′s and 0′s that described how to make something and fewer people may have to work. I am not implying that you would have a printer in your home that would make anything. You might simply order a bunch of clothing or some tools and hardware by computer, pay for it by credit card and drive to the mall to get it. There would be no inventory, no transportation costs and little cost associated with retail markup. Heck there would be no shoplifting.

I don’t not believe that this would be a smooth transition. When we had the Internet boom on the 1990′s we had a very low unemployment rate because so much speculative capital was deployed. Much of that boom was actually a bubble. The next tech boom may well produce another economic bubble of equity prices and jobs but could end in a very serious drop in employment.

Perhaps we should be thinking of an economic order in which fewer people have to work while everyone gets the basic necessities of life inexpensively. In reality this is as much a philosophical shift as an economic one. In future election cycles we might hear a candidate say, “Vote for me and I guarantee that 4 years from now 10,000,000 of you will no longer have to work.”