The Machines Are Coming

This is a long, but interesting repost from Nouriel Roubini’s blog. I’m posting it here because it raises a number of important issues that transcend our temporal politics and economic policies.

In particular is the section on the subject of work and labor in the machine world (Work in the Machine Age: Humans Need Not Apply?). Machines have long replaced human labor, from plows to car assembly lines to bank clerks and supermarket checkers. This presents a real problem for the labor-centered political paradigm we’ve been operating under since the beginning of the industrial age. Until recently, the wages of work is how the product of capitalism has been widely distributed to the population. When workers are no longer needed, production of the machines continues, but there is no distribution mechanism of the product except through government tax and transfer mechanisms. We already know how limited that policy is because it was tried for 75 years in the USSR and we know what happened with that experiment.

The important question in a world where capital is replacing labor as the means of production is: who gets to own the machines? Will it be multinational corporations? If so, the distribution of profits will be concentrated even more in those corporations. But corporations actually are people (despite what Citizen United objectors claim); take away the people and a corporation is nothing more than a legal charter on so many pieces of paper. The corporate agency problem revolves around who owns the corporate assets (the shareholders) and more important, who controls those assets (usually management).

If machines are replacing labor, the costs of production become embodied in the price of the machines and whoever controls that physical capital. As labor has been minimized, only the owner-shareholders and management remain to divvy up the returns to investment in those machines. So, if we’re not on the receiving end of those payouts, we’re basically out of the capitalist wealth-creating production equation. Not a good place to find oneself.

There is a recourse for labor in this picture, which is to quickly buy some equity in those machines and then defend its ownership interests in concert with other shareholders. The new paradigm is about ownership of productive assets and control of those assets through corporate governance. We had better adjust to this new reality before the cookie jar is empty. The machines won’t wait.

‘Make No Mistake: The Machines Are Coming’

by Nouriel Roubini

Last Friday night, I attended the Bloomberg BusinessWeek 85th Anniversary Dinner. The party was held at the American Museum of Natural History, where Seth Meyers, the former Saturday Night Live star, hosted the evening beneath a massive, life-sized replica of a blue whale.

The party was packed with the usual collection of highly polished New York media and business types. (The entertainment highlight of the night for me was a charming duet by Lady Gaga and Tony Bennett.)

It was a great honor to be asked by Bloomberg and BusinessWeek to give an official toast during the event, along with my fellow toastmasters Henry Kissinger, Henry Kravis, and Melody Hobson. For my toast, I was asked to select the innovation that I thought created the most disruptive change during the last 85 years.

I decided to speak about the microchip—because the microchip may well replace the human race.

Yes, I’m being intentionally provocative here: but it isn’t just because of my nickname (“Dr. Doom”) that I’ve chosen to find the dark shadow in the silver lining of technical progress.

A few weeks ago, Stephen Hawking, the greatest astrophysicist of our time, gave a provocative speech of his own: Hawking suggested that humans should start thinking about colonizing other planets, because eventually artificial intelligence and robots will replace the human race.

It may sound crazy now—but what seems crazy today may not sound so crazy 25, 50, or 100 years from now.

This wave of technological innovation began in 1947 with the invention of the transistor. A little over 10 years later, the microchip appeared; and, soon after that, computers followed. From these basic roots, the rate of innovation simply exploded.

We now live in a digital age where personal computers, supercomputers, robotics, and artificial intelligence are everyday features of our world.

All of these new labor-saving technologies are cheap to deploy—and each will likely play a role in further automating and digitizing our economy.

Without further ado, let’s take a look ahead to what many are calling the Third Industrial Revolution.

Looking back as 2014 winds to a close, I see that a lot has changed in the world economy this year. For example, there is a new perception of the role of technology. Innovators and tech CEOs both seem positively giddy with optimism. And while it is true that some wondrous opportunities may lie ahead, there are also dangers to be wary of as we look to the future.

Technologists claim that the world is on the cusp of a series of major technical breakthroughs. The excitement in this sector isn’t coming just from information technology. It’s also being generated in the fields of biotechnology, energy technology, nanotechnology, and especially from the manufacturing technologies of robotics and automation.

These new manufacturing technologies have spawned a feverish excitement for what some see as a coming revolution in industrial production.

This “Third Industrial Revolution” will provide many investment opportunities—such as green energy development and new kinds of direct investment in those nations most likely to benefit—as well as the potential for a steep rise in returns.

These are life-changing developments, and the consensus among experts is that we will all witness their impact very soon.

The Coming Manufacturing Revolution

In the years ahead, technological improvements in robotics and automation will boost productivity and efficiency, which will translate into economic gains for manufacturers.

It will also benefit highly skilled workers—principally software developers, engineers, and those who work in material science and research. (If you’re a parent or a grandparent, you should encourage the younger generations to explore any talents they possess in these fields.)

Consumers and individuals should also benefit from lower retail prices caused by lower production costs to manufacturers. In short, things will be cheaper.

The quick growth of smart software over the past few decades has been perhaps the most important force shaping the coming manufacturing revolution. The extraordinary rise of the computer software industry has led many of the world’s best minds to focus on the challenges of developing better, smarter, more efficient computer code.

As software development becomes more “glamorous,” the number of bright youngsters studying software engineering increases, creating a virtuous cycle for the software industry.

In addition to software services, a number of new technologies driving the next manufacturing revolution are just now beginning to be felt. They’re like foreshocks, early tremors of the coming earthquake.

On the vanguard of this revolution we find 3D printing. Sometimes 3D printing is called “additive manufacture,” because the process involves computer-controlled robots adding layers of materials to create new things. (Traditional manufacturing usually removes layers from raw material, for example the way a lathe cuts away metal.)

3D printing and related technologies will open the door to advances in manufacturing that have never before been possible:

  • Mechanical engineers will be able to prototype new products more rapidly. New product designs can be created and tested in days rather than months.
  • Manufacturing can be distributed globally to create the greatest efficiencies in marketing and distribution.
  • Finally, customization of products for individual consumers can occur at a price point that was never possible in the past. Not only will things be cheaper, they’ll be your way, right away.

On the plus side of the equation, these changes promise a great boom in productivity. Products will be created more cheaply than ever before. Early adopters of new technology will reap a windfall by perfecting the new techniques. Highly skilled jobs will be created for those educated enough to participate in the new tech-savvy manufacturing world. A few new high-tech manufacturing billionaires may be added to the ranks of the software barons of old.

However, for those workers not fortunate enough to participate in the gains of the new economy, it may feel as though the whole revolution is happening somewhere else. Entire economies risk being destabilized in countries that rely on advanced manufacturing and on service sector jobs. (If you’re reading this, chances are you live in one.)

But remember the dark shadows of those silver linings: with each new gain comes the potential loss of something else.

We know what we have to gain from this automated future. But what, specifically, do we stand to lose?

A Rather Shaky Foundation

In my view, from the economic perspective, the technological forces driving this revolution tend to have the following three downside biases. That is, advances in technology tend to be:

  • capital intensive (favors those who already have money and other resources);
  • skills biased (favors those who already have a high level of technical skill); and
  • labor saving (reduces the total number of jobs in the economy).

The risk is that workers in high-skilled, blue-collar manufacturing jobs will be displaced by machines before the dust settles at the end of the Third Industrial Revolution. We may be heading toward a future where factories consist of one highly skilled engineer running hundreds of machines—with one worker left sweeping the floor.

In fact, the person who sweeps the floor may soon lose that job to a faster, better, cheaper, industrial strength Roomba Robot!

For the last 30 years, emerging-market economies have increasingly displaced developed-market economies in the manufacturing sector as a base of production. This is a story we all know: the transition from the old industrial powers of Western Europe and North America to the new ones in Asia. But despite this shift, developed-market economies have somehow made up for those losses in their labor markets.

Over the last 20 years, the overall unemployment rate in the United States has hovered around 5% on average—except during periods of economic recession, when it has spiked upward for short periods of time.

In general, however, the loss of those manufacturing jobs has not caused catastrophic levels of unemployment.

How? Well, the short answer is the service economy.

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(Of course, this replacement of manufacturing jobs with service jobs has not been equally distributed. Some regions have suffered more than others. For example, the so-called Rust Belt in the upper Midwestern section of the United States has experienced more economic pain than most other regions. But while the local suffering has been great in those regions hardest hit, the overall trend throughout most developed-market economies is that lost manufacturing jobs have been absorbed largely by new jobs created in the service sector.)

In my view, however, there’s no guarantee that this positive scenario—of service-sector jobs making up for lost manufacturing sector jobs—will continue.

In fact, some of the trends mentioned earlier imply that the Third Industrial Revolution will unleash forces that threaten the relatively benign status quo. In addition to the job losses in the manufacturing sector, these trends also threaten the very service-sector jobs that have so far helped us avoid an employment crisis.

To put the coming changes into context, think of what e-books have already done: with a click, you can now download almost any book for about $10 on your iPad or Amazon Kindle.

This is a great service and convenience for consumers. But most of the jobs in the printing and distribution of books—and soon in the newspaper and magazine industry—are already gone. (And so are tons of jobs in the pulp paper industry—though that may come as a relief to environmentalists).

Yet this is all just the tip of the iceberg. The powerful forces unleashed by technology that will radically slash jobs in the future are already upon us. Industries affected will range from health care to retail, education, finance, transportation, real estate, and even government.

One of the affected industries may even be your own.

It’s a Small Step from Offshoring to Automation

Think of the potential risks to service-sector jobs in the context of what I call the “Automated Checkout Economy.” Several decades ago, few people thought that low-paying jobs in the retail sector would be outsourced or eliminated. Technological progress may soon change their tune.

While grocery and checkout jobs cannot be entirely eliminated, at least not quite, technology can assist in drastically reducing the number of human beings needed to fill the remaining positions. A trip into a drug store in New York City, my home for the last several years, will often reveal a single pharmacy clerk watching over four automated checkout terminals, where customers scan and pay for their own purchases. I imagine that you’ve probably seen something similar in your own town.

Other low-wage and labor intensive jobs in retail, such as stocking the shelves of supermarkets with food, will soon be replaced by machines that can do those jobs better and faster than humans could.

This has already begun to happen in traditional brick-and-mortar stores, while automation at online “e-tailers” has gone even further. Giants like Amazon have already built massive robot-staffed warehouses to distribute their orders. One day soon, your friendly neighborhood UPS or FedEx driver delivering those Amazon packages may even be replaced by a drone. And it may be sooner than you think.

In retail, the slashing of middle management jobs has already begun, as computers have become more efficient not just at crunching numbers but at providing managers with the right information at the right time.

Another trend that may result in a decrease in service-sector jobs is something we might call “The Offshoring Pathway to Automation.”

During the first phase of the transition to a truly globalized labor market, New York Timescolumnist Thomas Friedman and others popularized the narrative of high-skilled jobs being outsourced from developed markets to emerging markets. (Friedman’s book The World Is Flat is highly recommended reading on this topic.)

While this trend continues, it supports potential for a still greater transition.

Think, for example, about the process now in place for offshoring medical services. A patient in New York or London may have his MRI sent digitally to, say, Bangalore, where a highly skilled radiologist reads the scan. However, that highly skilled radiologist in Bangalore may only be paid a quarter of what a New York radiologist would earn for reading tests.

It raises the question: how long before a computer can read those images faster, better, and cheaper than that Bangalore radiologist can?

Such a transition is not far off. The offshoring process has already broken down reading an MRI into a series of simple steps resulting in digital output. That digital output can then easily be turned into an input in a fully automated process. This kind of transition, from offshoring to automation, may become a factor in reducing service-sector jobs in developed and emerging markets in the near future.

Work in the Machine Age: Humans Need Not Apply?

The Third Industrial Revolution also coincides with other systemic changes taking place in the economy. Entire industries in the service sector will have to shrink massively for reasons initially unrelated to advances in technology.

Let’s take two of the most obvious examples: the financial-services sector and real estate.

In the years leading up to the economic collapse of 2008-‘09, market bubbles fueled huge run-ups in the prices of financial assets and real estate. With a bubble in asset prices came an explosion in compensation, causing new workers to flood into those sectors. As the last remnants of those bubbles deflate, job cuts in those industries may become inevitable.

But over time, technology may allow even the jobs in real estate and finance to be first outsourced and then totally eliminated.

Today, hundreds of thousands of back-office jobs in the financial sector are outsourced to India and other emerging markets. But tomorrow, a piece of computer code may be able to generate the same sophisticated analytics that some of Wall Street’s highly paid professionals now create.

Real estate—which is now highly labor intensive, with a plethora of agents and brokers—is experiencing a revolution. 12 years ago, in 2002, I was able to buy my first apartment in New York without a real estate agent by using the online New York Times listings. Today, even more sophisticated online tools reduce the need even further for expensive middlemen.

A revolution is also underway in education, which is also currently a very labor-intensive field.

With the growth of ever-more sophisticated online courses, will we still need hundreds of thousands of teachers in the decades to come? And what will all those former teachers do to earn a living instead?

It becomes possible to imagine a future where the top 100 economists in the world, for example, can provide high-quality and cheap online courses in their field. Those changes, however, would mean displacing the jobs of hundreds of thousands of other economics professors in the process.

Indeed, in places like emerging-market Africa, where building brick-and-mortar schools is expensive and where training high-quality teachers is difficult, online courses and cheap tablet computers could gradually begin to replace traditional education, making it even more affordable. Ironically, this would lead to some unemployment, as the demand for highly educated people to fill teaching positions declines.

Governments are shedding labor too, particularly governments burdened by high deficits and debts.

The e-government trend can also lead to labor savings in the way in which government services are provided to the public. You can find tons of public services online and avoid spending hours standing in line in an overcrowded office just to request a few government forms.

Even transportation is being revolutionized by technology. Today a friendly Uber driver or a car-sharing service like Zip Car can replace the need to buy your own car or even rent one. But in a matter of years, driverless cars—courtesy of Google and others—may render the job of a driver or chauffeur obsolete.

So, whether it’s retail or finance, education, health care, transportation, or even government, a massive technological revolution will sharply reduce jobs over time. Low-skilled jobs and medium-skilled white collar jobs will be the first to go, as they have always been.

Industrial Revolutions—Past and Future

In order to better understand the future, it’s helpful to take a look back at the past. During the First Industrial Revolution, which began around the same time as American independence from Great Britain, life began to shift away from agriculture toward increasing industrialization. Farmers moved to cities, and farms became industrialized.

Factories became widespread. A factory owner could take a farmer, perhaps a farmer who could not read or write, and give him a job. New methods—like the division of labor—and new machines allowed that farmer to become more productive. In fact, farmers were able to generate more “output” in a factory than on a farm.

But unlike modern automation, the machines needed to be run by a new generation of workers: Men and women needed to “man” those machines.

Productivity increased—and so did wages.

The Second Industrial Revolution, during the end of the 19th century and the beginning of the 20th, was an extension of the first. During those years, there was an explosion in technology and methods of communication. Thanks to the telegraph, the world became “wired” for the first time.

The new advances in technology, however, cut both ways.

Take the case of Frederick Winslow Taylor, a major figure in the Second Industrial Revolution. Taylor, known as the father of scientific management, once wrote that the brawn required for handling pig iron was proof in itself of the intellectual unfitness of ironworkers to manage their own work. This is hardly a democratic sentiment, and it was more or less the common one.

While new “scientific” methods of management increased the productivity of workers, improvements in working conditions lagged behind. (Taylor’s views didn’t help matters.)

Perhaps the takeaway lesson is that it’s easier to improve technical methods of production than workers’ opportunities.

But despite these challenges, the Second Industrial Revolution created a higher demand for labor.

As we sit on the cusp of a Third Industrial Revolution, a revolution that is both industrial and digital in nature, it’s not certain that the demand for labor will continue to grow as technology marches forward—unless the proper policies to nurture job growth are put in place.

The world began to change during the first Digital Revolution—during the rise of the Internet in the late ‘90s. Then, the digital divide between those who knew how to use computers and those who didn’t led to an income gap between more-skilled workers and less-skilled workers.

At the extreme, as I mentioned in my introduction, some serious thinkers are even worried about technology not only replacing humans in jobs—but actually replacing humans entirely.

The implications of artificial intelligence, not just for jobs, but human life, are now being pondered by some of the best minds in technology.

There used to be a science fiction term for a state where human beings were no longer able to control technology: It was called “the Singularity.”

In the future, this Singularity may no longer be just science fiction.

Will There Be a Green Revolution?

Of course, there are more optimistic sides of this story. Some of those perspectives show a much rosier picture. The green revolution in technology is a perfect example.

(Jeremy Rifkin is a believer in this view. In his 2011 book The Third Industrial Revolution, he makes a case for his bullish outlook. Rifkin is optimistic about a great many things: green renewable energy, urbanization of structural power plants, hydrogen cells, and an Internet grid for power transmission and distribution.)

These new technologies carry with them the promise of cleaner and more efficient energy.

This objective, of course, could not be more crucial. The search for green energy technology has become a global goal. The evidence of environmental damage, caused by pollution and the burning of fossil fuels, is now beyond question.To cite just one sobering example of the size of the challenge, a study by the World Health Organization (WHO) recently concluded that one in eight deaths were caused by air pollution. This is especially true in the developing world, where environmental hazards tend to be significant.

As an example, air pollution in Beijing, where senior Chinese government officials live and work, has reached dangerous levels. The pollution in Beijing is now a practical threat to the Chinese economy and to China’s plans for future development.

The Chinese government has begun to come down hard on its domestic polluters by enhancing the power of the state to regulate pollution. In light of the growing pressure to restrict environmental pollution, it seems reasonable to expect that there will be intensified research of green technologies. Hopefully, this research will address the environmental challenges at their root, rather than just fixing the damage of their effects.

Automation and Rising Inequality

While the odds for a green technology breakthrough during the Third Industrial Revolution may be good, it seems very highly likely that serious challenges will follow in the wake of further developments in labor-reducing technologies.

As more and more workers are displaced, governments will need to search urgently for new solutions to the problems of automation.

During the First Industrial Revolution, some of the worst forms of winner-take-all capitalism festered in the newly industrialized cities of Europe and the United States. The rate of social and economic inequality increased rapidly. Despite the political opposition to change, a series of economic shocks ultimately convinced enlightened people in the US and Europe of the necessity of the social-welfare state.

The benefits that workers take for granted in developed markets—restrictions on child labor, pensions, retirement benefits, unemployment benefits—were all created out of necessity.

Enlightened social-welfare policies were ultimately vindicated, not just morally but practically. In places where social reform was not enacted, on the other hand, more destructive forms of change took place. (The most extreme case of this destruction was, obviously, the rise of Bolshevism in Russia.)

Now the concern is that technology, together with other factors, is leading to a sharp rise in income and wealth inequality. There is a further risk that inequality will also lead to social and political instability.

The redistribution of wealth—from labor to capital and from wages to profits—may even undermine growth. This makes perfect sense when we consider that the concentration of wealth in the hands of a few tends to reduce household consumption. In the United States, household consumption makes up more than two-thirds of our total GDP.

The rise in inequality was initially the result of trade and globalization, such as jobs being offshored to emerging markets. However, the technological innovation we’re witnessing now has the potential to seriously worsen that inequality—especially when those innovations are, as we discussed earlier, capital intensive, skills biased, and labor saving.

The view is even more pessimistic when you factor in the winner-take-all effects—also known as the so-called “superstar phenomenon.”

Thanks to these winner-take-all effects, the top earners in any field now get the lion’s share of the compensation. After making a windfall profit, the “winners” are then able to use those riches to influence politicians and write their own legislation, which creates even more inequality.

In the 1930s, John Maynard Keynes had a more optimistic view of the impact of technology: he argued that eventually we could all work 15 hours a week and spend the rest of our time in leisure—like creating art and writing poetry.

But in the Brave New World of labor-saving technology, it seems, 20% of the labor force will work 120 hours a week while the other 80% will have no jobs and no income.

So the ideal world of Keynes may turn out to become a nightmare.

Despite the rapid rate of change and the many uncertainties that lie ahead, the past can help to serve as a model for the future. Governments have a decided role to play in making that future livable—as they once understood. In that spirit, we must search for political and policy solutions to the coming challenges of the Third Industrial Revolution and promote them where we can.

This is not, after all, the first time we’ve faced such problems. At the end of the 19th and the beginning of the 20th centuries, world leaders stepped up to the plate and came face to face with the horrors of industrialization. Child labor was abolished throughout the developed world, work hours were made humane, and a social safety net was put in place to protect both vulnerable workers and the larger (often fragile) economy.

The Past as Prologue

Former Treasury Secretary Larry Summers observed not long ago that we don’t yet have an Otto von Bismarck or a Teddy Roosevelt or a William Gladstone to mediate the current revolution now underway in the technology sector. The Canadian writer and politician Michael Ignatieff picked up on a similar theme in a Financial Times op-ed called “We need a new Bismarck to tame the machines.”

The references to these political giants of the 19th and 20th centuries are revealing. Otto von Bismarck, the father of the unified German state, is usually credited with the creation of the modern social-welfare state in the 1880s. (He’s also credited with militarizing Germany as he unified it—but let’s stick with his good works for now.)

At about the same time as Bismarck in Germany, British Prime Minister William Gladstone was reforming the most archaic aspects of the British electoral system. Ultimately, Gladstone’s work led to a great democratization and distribution of economic benefits in what was then the world’s leading industrial nation.

Here in the United States, Theodore Roosevelt is perhaps best remembered for breaking up the large industrial monopolies then known as trusts. And we could also add Franklin Roosevelt to the list who, in the tradition of his older cousin, sought to reform the worst excesses of capitalism during the Great Depression.

As we begin the search for enlightened solutions to the challenges that the Third Industrial Revolution presents, some of the overall themes begin to emerge. The first and most important characteristic is that the solution must channel the gains of technology to a broader base of the population than it has done so far. [The information age monetizes the value of data. So, the question is whether each of us will be paid for the data we provide to the ‘social network.’ Another way of putting this is how can you get your piece of the Google-Facebook-Alibaba pie? A free browser seems a pittance. How about a share of Google?]

To make that happen, the solution must have a major educational component. In order to create broad-based prosperity, workers need the skills to participate in the wealth that capitalism generates. That is a major challenge in a world where technology is changing the labor markets at a dizzying and increasing pace.

Workable solutions must address the world as it is, not as we wish it to be.

The way ahead cannot be a naïve “Great Leap Forward”: it must embrace the dynamics and creativity of free markets. On the other hand, while the solutions we must pursue can leverage the ideas of enlightened capitalists, those solutions must not rely solely on the generosity of capitalists to succeed.

That most fragile balance—between the freedom of markets and the prosperity of workers—must be sought and found.

Make no mistake: The machines are coming. The question for us is what kind of welcome to prepare for them.

This article originally appeared at Roubini’s Edge. Copyright 2014.

Economics 4 Dummies

dummies

Good Luck!

An Economics Lesson for Joe Biden

If the minimum wage tracked inflation, it would be $4.07 per hour.

By
MICHAEL SALTSMAN

Speaking at the White House on June 25, Vice President Joe Biden claimed that a higher federal minimum wage was practical and long overdue. “Just pay me [for] minimum wage what you paid folks in 1968,” Mr. Biden said, echoing the argument numerous labor unions, left-wing think tanks and activist groups have made.

The logic goes something like this: Had the minimum wage tracked inflation since 1968, it would today be over $10 an hour, so Congress should seek to bring it up to at least that amount. There are two problems with this logic. First, it is inconsistent with other Labor Department inflation data. And second, it presumes that entry-level employees can’t get a raise unless the government gives them one.

The federal minimum wage was first set in 1938 at 25 cents an hour. Had it tracked the cost of living since, it would today be $4.07 an hour, based on Labor Department data and the Bureau of Labor Statistics’ inflation calculator. This is the only logically consistent “historic” value of the minimum wage, and it’s 44% less than the current amount of $7.25.

Advocates of a higher minimum wage arbitrarily selected 1968 as the historical reference point. It’s no wonder: That’s when federal minimum wage hit its inflation-adjusted high point.

How about picking other arbitrary years to track the minimum wage and inflation? If you used 1948 instead of 1968, the minimum wage’s inflation-adjusted value would only be $3.81 an hour. If you chose 1988, the adjusted minimum wage would be $6.50 an hour.

There are other variations on this argument about inflation adjustments, and they are just as intellectually bankrupt. Earlier this year Sen. Elizabeth Warren (D., Mass.) championed a $22 minimum wage that tracked economy-wide productivity over the past few decades. But these economy-wide gains—that include, for example, dramatic leaps in productivity in computers and wireless technology—look very different from the changes in productivity in the sectors where minimum-wage employees work. Since the early 1990s, productivity in food services has increased minimally or not at all.

The basis for both the inflation and productivity arguments is the suggestion that minimum-wage employees are helpless to earn a raise without a government mandate. Nothing could be further from the truth. Economists at Florida State and Miami University found that two-thirds of minimum-wage earners receive a raise after 1-12 months on the job. Even the Labor Department—whose acting Secretary Seth Harris has also been calling for a 1968 minimum wage—published a paper in the Monthly Labor Review (2001) showing that the “vast majority” of people who start at the minimum quickly move beyond it after leaving school.

Entry-level employees can only move up the career ladder if they have experience. To get experience, you need a job in the first place. These jobs will be more difficult to come by if Congress embraces the flawed logic of a 1968 minimum wage.

—————-

The lesson to be learned is that the world is different – the world price of labor has been driven down for the past 30 years. If we set the minimum wage at the 1968 all-time US high, more jobs will be created in India, China and Brazil, not here. Mr. Biden may have the best political intentions, but the result will be disastrous for employment of young, low skilled job hunters. We need to think outside the box and that’s probably not possible coming from Washington.

Review of Who Stole the American Dream by Hedrick Smith

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Posted at Amazon:

I wanted to give this book at least 2 stars in respect for Mr. Smith’s journalistic skills and his previous fine work with The Russians. However, this exposition is so flawed and wrong in its diagnosis of the problems and prescriptions that I can barely give it one star. It also saddens me to see 109 five-star reviews – after reading a few I’m left wondering how readers can be so easily led by just-so stories by our media elites. Or is this analysis so ideological that readers just choose to believe what they want to believe and disregard any counter-factual evidence? That is truly a lost, if not stolen, American dream.

First, Smith gives a good journalistic rundown of select history, as we would expect. His selected comparison is the post-war period referred to as the Great Compression. But he fails to see that this virtuous moment in our history was more a product of historical events than public policy. The US was the sole developed nation with an intact industrial base, while all of Europe, Russia and Asia lay in ruins. So, employable skilled labor was in short supply and American workers commanded a greater share of the returns relative to capital. The world was forced to buy our goods, even if we had to extend them the credit. This would not last and came undone in the late 60s. The 1970s was a period of stagnation when wages and corporate profits were similarly depressed by energy spikes and misguided economic policies.

Smith finds his villain in Justice Lewis Powell, who motivated a cabal of rapacious corporate raiders and turn-around artists like Chainsaw Al Dunlap and Neutron Jack Welch to take over American business. Please. The battle for corporate control was a response to ineffectual management that fed fat cat perks in the corporate boardroom while depriving other stakeholders of value. Stagnating stock prices reflected this and provided the opportunity for people like Dunlap and Welch to create value. Yes, and sometimes this depressed value was due to the mismanagement of labor inputs, so the remedy was to increase profits by reducing costs. This is how competitive business becomes efficient. If it hadn’t been Al and Jack, it would have been someone else. The business of America is wealth creation, not job creation. If we want to deal with the problems of winner-take-all globalization, we’d better understand that first.

Thus, Mr. Smith’s basic premise is not only flawed, it’s wrong. What caused the shift in power between capital and labor was the 30-year credit bubble (accommodated by a fiat dollar) that drove down interest on debt (with its tax subsidy), permitting the over-leveraging of capital ownership shares. Combined with the liberalization of developing nations in East, Southeast and South Asia, the world supply of labor exploded, driving down wage incomes across the board. Globalization powered by technology, transportation and communications, has delivered a new world that is so different from the post-war America Mr. Smith craves as to make the comparison ludicrous. We’re not going back to Kansas, Dorothy, no matter what the Wizards promise us.

Mr. Smith’s remedies are equally ill conceived, as we might expect from false premises. He’d like us to imitate Germany’s corporatist industrial policies, and in this he seems to share the same delusions as our current Democratic administration. Corporatism is a form of economic feudalism where control over economics and politics gravitates up to the national level with grand compromises made among peak labor unions, business roundtables, and government bureaucrats. Guess who wins and who loses? Elites win big while average Joe is told to be satisfied with a promised job, retirement, healthcare and three squares a day. This works currently in Germany because of several factors specific to Germany: a homogenous culture and labor force, an export-dependent economy, and a population of 80 million – none of which apply to the U.S. The long-term results of this policy are also less sanguine: the fertility rate of Germany is 1.36, well below the replacement rate of 2.1. There are more deaths than births and immigration does not make up the difference. In other words, like its European neighbors, the nation of Germany is dying a slow death. Hardly a model we would wish to follow. One must ask why, if life is so good, Europeans refuse to invest in the future by having children? Obviously, the developing nations that are liberating their societies see a much brighter future.

One more point that piqued my attention was Smith’s focus on public-private partnerships to recreate a past that he only imagines. This idea is a real buzzword for people who want to believe in the myth of a third way between socialism and capitalism. But does anybody really understand what the terms of these partnerships yield? Private interests use their connections in government to receive taxpayer subsidies to make investments in which they capture the excess returns. The risks of loss are borne by taxpayers, but these taxpayers never receive any direct return from success. This is a pure form of “heads we win, tails you lose” cronyism perpetrated by the elites in business and government. If taxpayers underwrite the risks, why don’t they have residual claimancy on any success? At heart, private-public partnerships are immoral because they violate the golden rule of moral capitalism: she who takes the risk, receives the gain or suffers the loss. (If you wonder about the morality of this rule, consult the Bible or the philosophy of law that defends the innocent from the transgressions of the powerful.)

This gets to the issue of true prescriptions to correct the failures of crony (not free market) capitalism that pervades our world. A world that advances freedom, and that includes the freedom to trade, must promote and defend the basic rights of ownership that undergird not only capitalism, but human nature itself. A worker is little more than an input cost, but ownership represents the residual claimancy on productive effort after all input costs have been paid. The success of capitalist society is measured by the creation of excess wealth associated with productive activities, in other words, profits. The problem is that 20th century industrial policy has associated the distribution of economic success through employment alone. In other words, most citizens only participate in the system as a labor cost. Thinking outside this “job creation” box calls for a wider distribution of the risks and returns to the ownership of the resources used in economic production, not least of which is financial capital. How does Mr. Smith really think all those CEOs got so rich? They all had stock options! Was there theft? Yes, from other stakeholders, principally shareholders. Unions should become the agents representing diversified ownership in American business for workers, and by association for all Americans. That’s a job that would get them on the right side of history.

The way Mr. Smith (and others of his persuasion) would lead us would be the ruin of the greatest experiment in freedom the world has ever known. That’s sounds more like a nightmare than a dream. Please folks, wake up. Do it for the children.

Where the Elites Get Their Meat

Below are a couple of WSJ articles that indicate the way things look from the top down in our crapitalist society these days. First up are the financial elites. Public securities markets are the principle means by which individuals can participate in the success of large capitalist enterprises as something more than a labor cost. You may not be able to create a company like Apple, but you can buy its shares and receive a share of its success. The effect of devising policy that discourages public filings in favor of private placements means the door closes on the little guy and only the insiders get the sweet deals, which they then spin off to fleece the public after the easy profits have been squeezed dry. This is how capitalism concentrates wealth and don’t think our politicians are not pigs at the trough when it comes to insider deals.

The second article is offered in the “fair and balanced” spirit to show how our labor leaders play their political game by devouring their own members. Yessiree, the labor elites feed off their workers’ hard-earned incomes, while the financial elites feed off those workers’ savings. The wolves are eventually going to run out of sheep…

How different this Animal Farm would be if the shepherds decided to represent the interests of all to participate in the bounty of free enterprise.

Who Needs Wall Street?

Public debt and equity issues fell to $1.07 trillion between 2009 and 2010, while private issues rose to $1.16 trillion.

By DANIEL GORFINE AND BEN MILLER

A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission’s most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.

Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.

The crowd funding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact.

Here is the background. U.S. securities laws have a private-market exemption, called Regulation D, that allows companies to sell securities to accredited investors with high net worth (essentially more than $1 million excluding a home). The exception means the companies don’t have to go through the SEC’s costly and time-consuming registration and reporting requirements for public offerings. The securities can also be resold to financial institutions that hold a required minimum value of securities investments.

But the securities laws have also banned general solicitations for these private-market offerings—and Title II of the JOBS Act lifts this ban. This means that a company, investment fund or seller now can publicize its offerings via the Internet or traditional advertising media, as long as the ultimate investors are accredited or qualified institutional buyers.

One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away.

Until the JOBS Act, Regulation D effectively allowed companies and funds to raise capital only from investors with whom they already have a pre-existing relationship. So money typically flowed into a deal through broker-dealers or arbitrary social networks. This process shuts out a wide swath of prospective investors and, thanks to the lack of a robust trading market, results in lower prices for the securities.

By rolling back the ban on general solicitation, fund offerings and resales of unregistered securities can now flow through vast Internet-based broker-dealers and other finance networks, potentially giving a steroid shot to private capital markets.

According to the Angel Capital Association, there are 8.6 million accredited investors nationwide, of which only 3.1% currently invest in business startups through private markets. The large pool of untapped investors and capital may result simply from a shortage of information regarding investment opportunities or concerns over private market liquidity.

Thanks to the JOBS Act, private capital markets will enjoy increased transparency and therefore greater efficiency. They will also likely experience substantial new capital inflows due to the widespread advertising of offerings. If high-quality companies and funds have access to broad and deep pools of capital in private markets, then the question becomes why many of them would bother with the regulatory compliance and shareholder-management costs of public markets.

We anticipate a paradigm shift in how companies raise money, as they increasingly shun the highly regulated, costly and volatile public markets in favor of now deeper and more efficient private markets. This could be a boon for capital formation.

But it could also mean fewer investment opportunities for the general public. The most promising companies may delay or never file IPOs and instead seek capital on private exchanges not accessible to those who don’t qualify as accredited investors—which is 97% of the U.S. population. Meanwhile, novice accredited investors may be bombarded with solicitations for private placement opportunities, without some of the regulatory oversight provided in public markets.

For lawmakers and regulators, however, perhaps the lessons from the success of private markets can help with a reform of public securities regulations, many of which were written nearly a century ago and, at least in part, are the reason for the continuing privatization movement.

——————–

Michigan Union Tell-All

A memo shows how unions hope to keep coercing worker dues.

When Michigan became the 24th right-to-work state late last year, everyone knew unions would try to overturn or otherwise neuter the law. Less expected was that they would do so at the expense of their own members.

That’s the message from a December 27-28 memo to local union presidents and board members from Michigan Education Association President Steven Cook, which recommends tactics that unions can use to dilute the impact of the right-to-work law. One bright idea is to renegotiate contracts now to lock teachers into paying union dues after the right-to-work law goes into effect in March. Another is to sue their own members who try to leave.

“Members who indicate they wish to resign membership in March, or whenever, will be told they can only do so in August,” Mr. Cook writes in the three-page memo obtained by the West Michigan Policy Forum. “We will use any legal means at our disposal to collect the dues owed under signed membership forms from any members who withhold dues prior to terminating their membership in August for the following fiscal year.” Got that, comrade?

Also watch for contract negotiations in which union reps sign up members for smaller pay raises and benefits in exchange for a long-term contract. “We’ve looked carefully at this and believe the impact of RTW [right to work] can be blunted through bargaining strategies,” Mr. Cook writes.

The union filed its inevitable lawsuit against the law last week. But in his memo, Mr. Cook admits this is a long shot, as is a challenge based on technicalities like the law’s carve-out for police and fire fighters. “Because of wording contained in the Act,” Mr. Cook writes, “challenging the carve out might not strike down the Act but could merely put police and fire into the same RTW pit the rest of us are in.”

Unions may have learned from last year’s meltdown in Wisconsin over Governor Scott Walker’s reforms. While Big Labor waged an unrelenting campaign to overturn the law in court and to recall Mr. Walker and Wisconsin legislators, there has been little serious discussion of a similar effort against Governor Rick Snyder in Michigan. “If the goal is to undo RTW, this is the least appealing of the options,” Mr. Cook writes of potential recalls.

The pattern in new right-to-work states is that union membership plunges when it is voluntary. That’s what happened in Wisconsin and Indiana, and it will probably happen in Michigan too.

Yet the most revealing news in the Cook memo is how little the union discusses assisting workers so more will voluntarily join unions. Instead the focus is how to continue coercing workers to keep paying dues. No wonder that the percentage of government workers who belong to unions fell last year. The Cook memo is damning proof that the main goal of union leaders is to enhance the power of union leaders, not of workers.

No More Twinkie Defense!

This is one way to self-destruct…

Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.

Hostess Brands Inc., the maker of iconic treats such as Twinkies and traditional pantry staple Wonder Bread, said Friday it is shuttering its plants and firing about 18,000 workers as it seeks to liquidate the 82-year-old business.

The company, which filed for Chapter 11 in January, said it has requested bankruptcy-court authorization to close the business and sell its assets.

A victim of changing consumer tastes, high commodity costs and, most importantly, strained labor relations, Hostess ultimately was brought to its knees by a national strike orchestrated by its second-largest union.

Unequal Pay? The Real Crime.

The shocking irony is that in order to defend the ill-conceived contract rights of first-class citizens, we’ve created a whole class of second-class citizens. Would anyone call this a just policy?

Much has been made this election season about the gender gap in incomes. The political movement for legislation to correct this gap, called Equal Pay for Equal Work, assumes that any statistical difference is due primarily to wage discrimination in the work place. In other words, the gender-gap discussion always centers on holding employers accountable and demands new laws to correct the injustice.

There are all sorts and forms of studies to address this puzzle and it seems one can find a study to confirm any desired result. Mostly, statistical comparisons fail to control for other variables that could explain the difference. (Economist Diana Furchtgott-Roth runs through the problems in her book “Women’s Figures.”)

Legitimate comparisons look at men and women with the same job tenure in the same position at the same firm. If there’s a big difference under those circumstances, there may be discrimination, giving women grounds to sue. Federal law forbids discrimination, and permits such suits.

But when economists compare men and women in the same job with the same experience, the analysts find that they earn about the same. Studies by former Congressional Budget Office director June O’Neill, University of Chicago economics professor Marianne Bertrand, and the research firm Consad all found that women are paid practically the same as men.

This is not to deny that discrimination based on gender or race may exist in the workplace, but it does open up the discussion over how prevalent it is and what to do about it. Frankly, the obsession with the pay-gap statistic that has led the National Organization for Women to support legislation to restructure the economy seems inappropriate, if not counterproductive.

First, the historical data suggest that the trend over the past thirty years has closed the gap, with the main cause cited as the increased demand for skilled labor in the work place during the Great Credit Bubble of 1982-2007. Between 1979 and 2009, the earnings gap between women and men narrowed for most age groups. The women’s-to-men’s earnings ratio among 25- to 34-year-olds, for example, rose from 68 percent in 1979 to 89 percent in 2009, and the ratio for 45- to 54-year-olds increased from 57 percent to 74 percent.

Furthermore, the gap has been closed most effectively at the higher skill levels as measured by education. On an inflation-adjusted basis, earnings for women with college degrees have increased by 33 percent since 1979 while those of male college graduates have only risen by 22 percent. The point is that this is a market phenomenon in which the main driver has been employers’ desire to hire qualified workers who just so happen to be women. They must pay the going price paid by their competitors. It should come as no surprise that the gap has leveled off at 80% after 2007 and the flat economy since.

But, more egregiously, Equal Pay for Equal Work has ignored and distracted us from more serious economic injustices associated with inequality. These injustices are unemployment disparities and the political sanctification of two-tiered labor contracts. Let’s start with how unemployment affects the income gap.

Unemployment of Women vs. Minorities

Last month the official BLS unemployment rate registered at 7.8% of the labor force. Depending on how one chooses to measure employment, the real rate could be anywhere from 12% to 16%. For men, the rate was at 7.8% and for women it was also 7.8%, meaning there is virtually no official gender gap in unemployment. (Of course, this is not true when one expands the definition to include the underemployed.) But let’s look at the unemployment rates broken out by race and age: teenagers, 23.7%; blacks, 15.9%; and Hispanic, 11.5%. These figures show that these groups suffer disproportionately from what we might call No Pay for No Work. Their only hope is growing opportunity that flows from a thriving private sector economy. No discrimination legislation is going to secure that for them.

This brings us to the second problem of economic injustice associated with pay: two-tier labor contracts that pay higher wages and benefits to senior union members for equal work.

Two-Tier Labor Contracts

Businesses and workers competing in a global economy face constant pressure to reduce costs to keep prices competitive. We’ve seen this unfold across the industrial economy, and with new communications technology it has invaded the service sector with IT outsourcing.

The necessary response for businesses and workers to survive this onslaught of world competition is to reduce labor costs by improving productivity. But this necessitates a reduction of jobs combined with an industry-wide reduction of wages. Of course, legal union contracts prevent any such reductions. The result has been to split the workforce into two tiers: union members with seniority who are able to reap the unsustainable pay and benefit rates and the new hires who receive less pay and benefits for the same work.

These two-tier contracts were enacted first in the airline industry, then the auto and retail workers unions, and finally are leeching into the teachers unions and public service unions. For example, at Chrysler, newly hired workers earn just $14 to $16 an hour in wages and about $25 when all their benefits and other costs are added in. That’s roughly half what it costs to employ a veteran member of Chrysler’s 26,000-strong UAW work force.

This is the politically-condoned compromise between unions and employers. But how can anyone make the claim it is not discriminatory? Apologists will claim that the differentials are for seniority and experience, but this papers over the two-track system and how it will affect workers over their working lifetime. In simplest terms it is Unequal Pay for Equal Work.

The degree of this injustice varies radically between the private and public sector. The private sector will rationalize pay according to market signals and end up improving productivity through capital substitution. The result will be less number employed in existing businesses. But a thriving economy will lead to jobs increases through new business formation. Labor unions can adapt through profit-sharing arrangements that make labor costs more flexible.

However, in the public sector there is no flexible component and no impetus to correct this injustice except through an entire generation dying off. This means the generation that follows the “first tier” will suffer lower income levels and benefits for their entire lifetimes in order to pay the outsized benefits for their predecessors. In addition, first tier labor contracts are iron-clad when it comes to firing and layoffs, while second tier hires can often be fired at will. The explicit incentive structure insures that second tiers do all the work, while first tiers collect all the reward. The shocking irony is that in order to defend the ill-conceived contract rights of first-class citizens, we’ve created a whole class of second-class citizens. Would anyone call this a just policy?

It would be nice to think we could just raise all public union workers to unsustainable compensation levels, but that would merely harness the economy with higher taxes and less investment and production. It would lead to the Incredible Shrinking Economy.

The lesson here is that when it comes to economic policy and government legislation concerning preferences for one group over another, we had better pay attention to the longer term consequences to our society. If one wants to know where the future of two-tier public labor contracts lies, I would guess public unions will be regulated like public utilities where labor contracts must adhere to a public finance/tax revenue logic. The days of politicians trading unfunded benefits to public unions for votes is over. Too late for many.

A Look at the Global One Percent

We need to parse out this data and argument offered by Meltzer to understand what is really going on. Meltzer is right to criticize the idea that tax policies are causing inequality and that domestic tax and redistributionist policies can best mitigate it. But he is wrong to say that a rising tide will lift all boats equally, and that is the problem.

The dynamics of a globalized market economy show capital returns outpacing labor returns because capital is mobile and labor is relatively fixed. Human capital marked by skills, fame, and easy access to financial capital have aggravated the winner-take-all economy where incomes and accumulated wealth follow a power law, as evidenced by the superstar economy and growing inequality since 1980, and shown in the graph below.

Of these factors, financial capital is most amenable to democratization. Capital concentrates, and the rising inequality we see in global markets is caused by the concentration of success as measured by financial capital. The USA and UK show marked upturns in inequality due to the rapid growth of the finance industries in these two countries. We can also note this phenomenon by comparing the two cases of Sweden, including and excluding capital gains.

Financial markets behave differently than product markets, as dually noted and analyzed by Hyman Minsky. Our policies will have to address this uniqueness of capital in a global capitalist society in order for the system to be politically and economically stable and sustainable. In analyzing a capitalist economy, one must focus on the risk and returns of CAPITAL and how it gets distributed through free market exchange. Our tax policies should compensate for this simple fact, though our political leaders across the globe are mostly ignoring it.

From the WSJ:

The remarkable similarity in income distribution across countries over the past century means domestic policy has less effect than many believe on who gets what.

By ALLAN H. MELTZER

While the Occupy Wall Street movement may be waning, the perception of growing income inequality in America is not. For those on the left, the widening gap between the top 1% of earners and the remaining 99% is proof that American capitalism is unjust and should be traded in for an economic model more closely resembling the social democracies of Europe.

But an examination of changes in income distribution over nearly 100 years, not just in the United States but elsewhere in the developed world, does not bear this out. In a 2006 study titled “The Evolution of Top Incomes in an Egalitarian Society,” Swedish economists Jesper Roine and Daniel Waldenström compared the income share of the top 1% of earners in seven countries from the early 1900s to 2004. Those countries—the U.S., Sweden, France, Australia, Britain, Canada and the Netherlands—all practice some type of democratic capitalism but also a fair amount of redistribution.

meltzer

As the nearby chart from the Roine and Waldenström study shows, the share of income for the top 1% in these seven countries generally follows the same trend line. That means domestic policy can’t be the principal reason for the current spread between high earners and others. Since the 1980s, that spread has increased in nearly all seven countries. The U.S. and Sweden, countries with very different systems of redistribution, along with the U.K. and Canada show the largest increase in the share of income for the top 1%.

The main reasons for these increases are not hard to find. Adding a few hundred million Chinese and Indians to the world’s productive labor force after 1980 slowed the rise in income for workers all over the developed world. That’s the most important factor at work. The top 1% gain relatively because they are less affected by the hordes of newly productive workers.

But the top 1% have another advantage. Many of them have unique skills that are difficult to replicate. Our top earners include entrepreneurs, rock stars, professional athletes, surgeons and lawyers. Also included are the managers of large international corporations and, yes, bankers and financiers. (Interestingly, the Occupy movement seldom criticizes athletes or rock stars.)

The most dramatic change shown in the chart is the decline in the top 1% of Swedish earners’ share of total income to between 5%-10% in the 1960s from well over 25% in 1903. The Swedish authors explain that drop as mainly due to the decline in real interest rates that lowered incomes of rentiers who depended on interest and dividends. Capitalist development, not income redistribution, brought that change.

Income-redistribution programs that became widespread in the 1960s and 1970s had a much smaller influence than market forces. Between 1960 and 1980, the share going to the top 1% declined, but the decline is modest. The share of the top percentile had been reduced everywhere by 1960. Massive redistributive policies in Sweden did more than elsewhere to lower the top earners’ share of total income. Still, the difference in 1980 between Sweden and the U.S. is only about four percentage points. As the chart shows, the top earners in both countries began to increase their share of income in 1980.

The big error made by those on the left is to believe that redistribution permits the 99% or 90% to gain at the expense of top earners. In much current political discussion, this is taken as an unchallenged truth. It should not be. The lasting opportunity for the poor is better jobs produced by investments, many of which are financed by those who earn high incomes. It makes little sense to applaud the contribution to all of us made by the late Steve Jobs while favoring policies that reduce incentives for innovators and investors.

Our system is democratic capitalism. In every national election, the public expresses its preference for taxation and redistribution. It is a democratic choice, not a plot controlled by one’s most despised interest group. The much-maligned Congress is unable to pass a budget because it is elected by people who have conflicting ideas about taxes and redistribution. President Obama wants higher tax rates to pay for more redistribution now. The Republicans, recalling Ronald Reagan and Margaret Thatcher and much of the history of democratic capitalist countries, want lower tax rates and less regulation to bring higher growth and to help pay for some of the future health care and pensions promised to an aging population.

Regardless of one’s economic philosophy, the public deserves an accurate presentation of the reasons for the change in income distribution. The change is occurring in all the developed countries. The chart shows that policies that redistribute wealth and income have at most a modest effect on income shares. As President John F. Kennedy often said, the better way is “a rising tide that lifts all boats.”

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