As the midterm elections approach, the political topic on everyone’s tongue is jobs. The discussion in the popular press, such as it is, takes several forms. Lately, the most common question one hears is how come the economy in general seems to be recovering from the recession but the unemployment rate is still so stubbornly high? The fact that corporate profits are high has also been mentioned repeatedly since it was first introduced about a month ago: the larger corporations are sitting on $1.8 trillion (a figure provided without evidence that it is accurate, by the way), but they’re not spending it and hence not hiring—why?

Several kinds of explanations have been adduced for the discrepancy between supposedly incipient recovery and the unemployment rate of over 9.5%. One, which Republicans favor, is that the investment environment is very uncertain because of Obama Administration policies. Business planners don’t know the real costs of the health care bill; they know the bill will cause them to have higher costs but they don’t know how much higher. They universally deny that the bill could possibly be revenue-neutral even for the government, and they are correct: most of the things that have to happen to make it revenue-neutral depend on actions Congress has yet to take and almost certainly never will because it requires courage; but they are certain it will add to costs in the private economy. They don’t know if some sort of carbon tax, whether cap-and-trade in structure or not, will pass Congress in the next year or two. That would also add to the cost of doing business. Financial markets remain unstable, and with the new financial regulations bill, too, more uncertainty is added to the mix. Some holding companies that own banks can’t calculate what their overall portfolio looks like until they see how the banks figure out how to apply the Volcker Rule. Uncertainty breeds hesitation, and companies want to hang on to cash in uncertain times.

Another explanation, not necessarily contradictory of the first, is that economists underestimated the impact of public sectors layoffs. I think this is true; indeed, I implored one my authors, Desmond Lachman, to take it more seriously when he was preparing his excellent article on the coming double dip. And he did. But a lot of economic analysts who focus on national-level statistics did not realize how broke most of the state and counties were, and how little the so-called stimulus bill made a dent in their circumstances. The layoffs have been huge, and have offset hiring in some other sectors, including manufacturing.

These explanations are at best partial, however, because they are superficial. There’s a lot more going on than this, and while I used to be reluctant to voice my views on this kind of thing, my not being an economist and all, I have lost a lot of my reluctance since it has become obvious that most economists don’t know what they’re talking about. Besides, this is just a blog, and it’s August…

First, it is already obvious—has been for a long time—that this is not a “V” recession but more like a “U” or “L” recession: Many jobs that existed when all this started are not coming back. The industries in which they existed have either died or retooled. We have witnessed a massive substitution of new capital for labor in productive processes in recent years, and a lot of this has had to do with IT-related inputs. We have exported a lot of jobs, yes, some of that owing to a death-of-distance phenomenon made possible by IT. We have allowed a lot of illegals to be hired, too. But most of all we have exported jobs to ourselves as teched-up consumers—think when you last had to deal with a bank teller, a gas pumper, a typist at an office, a telephone receptionist, even a grocery store checkout clerk.

It does not take a rocket scientist, or even an economist, to see that productivity increases are predicated on this capital-for-labor substitution, which has accelerated sharply because of the shake-up of the past two years. One of the reasons, of course, is that the cost of labor has gone up sharply as health care costs and related benefits have gone up—another reason why it is tragic that the so-called health care bill isn’t a health care bill at all—just an insurance bill that did nothing whatsoever to understand and get a grip on cost escalation. (AI has also focused on that, and we have the best essay anywhere on the basics.) And this process of substitution is going on not only in the United States, but practically everywhere, including China and the Asian rimlands. This more than anything else explains how economic activity can become increasingly decoupled from employment figures.

Also, just by the way, there is a strong likelihood that the numbers we’re using are inaccurate, but that’s another matter. The way we collect these numbers embeds certain biases in the figures, as Ryan Streeter pointed out in AI several issues ago. Most likely unemployment is even higher than we think on some counts, and not just because we don’t count people who have stopped looking. But unemployment is probably lower on others as people try to avoid taxes by moving into cash or barter economics. I am not talking about rich people, who always try to avoid or evade taxes if they can (and they often can). I am talking about people mostly in service industries who feel squeezed and to keep ends meeting have to shave expenses. They can do this by going off book, and I think we vastly underestimate how many people do this as a natural course of behavior. Lower middle class tax avoidance by this method is perfectly natural and in a sense fair, except that it burdens middle-class salary makers disproportionately. How does it balance out, between our underestimation and our overestimation? Is 9.5% right, or is it closer to 8%, or 13%? I don’t know; it would make for a terrific research project for those with the means—maybe a Nobel in economics awaits.

The Democrats, it will be recalled, a few weeks ago rolled out a so-called manufacturing initiative. This was two parts hilarious, two parts pathetic and one part just stupid. The so-called initiative really wasn’t; it just mainly renamed some other programs already out there for other reasons. They apparently thought voters would be too stupid or lazy to notice, and of course that’s right. So now they can claim an initiative, which doesn’t exist. This initiative’s main element is to tax companies that export jobs. How that encourages new start-ups or actually helps revive manufacturing is a little hard to see. What these nitwits seem not to get, too, as Charles Davidson, AI‘s publisher was quick to notice, is that any initiative that promotes a renewal of manufacturing is, under present conditions, going to accelerate the substitution of capital for labor and thus lead to a future with even fewer good jobs. So is it a good thing, then, that the Democrats’ initiative is a sham? Not exactly, and now we come to the gist of the matter.

We have a structural problem with the economy (structural as opposed to cyclical in econ-speak), and with the labor profile that goes with it. This is the word—structural—you now hear a lot, a word I was using regularly to describe the situation at least 18 months ago. Of course this refers to a rapid shift in the labor profile as new investment becomes sharply more capital intensive and as global trends continue to send shock waves against national economies, including even very large ones like our own.

But the structural problem goes deeper than that. Here is what else is going on that contributes to the current structural situation. Americans are saving more, which is good. This leads to lower aggregate demand, which is also good if you care about the environment, bad if you care about the speed with which money moves to stimulate spending. Edmund Phelps understands that what lower aggregate demand means is a whole lot less than it’s cracked up to mean. He at least remembers Vilfredo Pareto, the Italian wise guy who substituted the concept of preferences for the older idea of utility. The Keynesian macroeconomists have it wrong: people don’t make choices just on the basis of rational value-added calculations. The micro approach that emphasizes preferences has it right, and right now Americans are in a new mood. Some, at least, are asking why they’ve been buying bunches of junk they don’t need. Some are concerned about the effects of hyper-consumerism on the environment, if not also on their own mortal souls. It’s about time. In short, I suspect that a cultural shift underlies the so-called weakness of “consumer confidence”, which is a total misnomer for what is happening. It’s not just that a lot of people are worried about overextending themselves, though that is part of it for many, it’s that increasing numbers of marginally more intelligent people are re-thinking their styles of living, their priorities, and what makes them happy and satisfied. Partly this is a generational change. A lot of people don’t lack confidence; they’re just not as foolish with their time and money as they used to be. When Time magazine, of all publications, runs a cover story on “The End of Excess”, which it did last year, you know something is cooking.

If this is true, it means we cannot go on, or at any rate seem not likely to go on, as we have constantly generating artificial demand without end. We cannot forever invent pointless new gadgets—do we really need a new razor with 6 blades instead of “just” 5?—and throw billions of slick advertising dollars at them to sustain the economy on an upward tilt forever.

And let me not leave this point too soon: science-based corporate advertising represents a kind of Weapon of Mass Deception (WMD, yes…). Do you realize that when a TV ad for some hot car shows you a sleek black vehicle with a hot blonde standing over it, saying “I love my whatever-it-is”, that dopamine actually flows into your nucleus accumbens? The association between the sex object and the car for sale established by the ad image actually changes the neurotransmission sequences in your brain. The images create those pathways, and there is not a thing you can do about it, because human beings did not evolve over hundreds of millions of years under conditions in which their visual field included mediated images (as opposed to real ones) that could be rigged to deceive them. We have no natural defenses against such deliberate uses of neurochemistry to harvest us as consumers, anymore than Pavlov’s dogs were capable of outsmarting Pavlov and screwing up his operant conditioning experiments.

But people are figuring it out, and it’s going to get harder for corporations to sell them lots of junk they don’t need. I think we may be coming to a point, ever so slowly to be sure, where the value-added content of new products is going to have to be persuasive in a way it has not been heretofore in order to get large numbers of people to buy them. I think, I hope anyway, that people’s idea of what is and is not a “bargain” is finally starting to change, by which I mean to heal from the fetish-like sickness in which it has rested for about the past half century. (AI recently reviewed a book on this topic—I commend it to you.)

What this means is that economic growth beyond what population increase implies is going to depend increasingly on invention, innovation and that, in turn, depends on supporting entrepreneurial activity. That’s what the Administration does not seem to understand, though it has gotten the same advice from just about everyone with a brain. But there are fewer people with a business background in the Obama Administration than any in American history. These guys are on balance hostile to business. The stimulus was just for union constituencies involved in old, shovel-ready projects. This was a stupid way to spend that money, and there is still zero sign that these guys know new jobs are created: from high-tech start-ups and smaller businesses, which in turn thrive in investment-friendly conditions. The Obama Administration’s bigger-government, higher-taxes approach to everything points in exactly the wrong direction, of course. They say they understand this, and sometimes I think the President actually does understand it at some level. But where’s the action? Where are the genuine initiatives? This is what comes of ceding authority to people like Harry Reid and Nancy Pelosi.

Truth be told, what we’re witnessing now has been a long time in the making. It has a history. About 50, 60 years ago a lot of observers predicted that because of automation we’d eventually end up with overproduction, deflationary danger and structural unemployment. A lot also predicted that this was how the Cold War would end—through convergence forced by technology. We’d have a situation where less than half the work force would produce all anyone wanted or needed, and we’d have to figure out what the rest of the population would do to get its share of the goodies. If they did not have salaries because their labor was superfluous, how were they to live? What would they do, and how would they earn money? You can see where this is going, or seemed then to be going: The government would have to distribute the goodies. We would not necessarily have to collectivize the means of production, but we would have to collectivize the means of distribution. That’s what a welfare state is to some extent, but these observers were talking about countercyclical policies much bolder than those of the welfare state.

This problem is essentially the same one Bismarck recognized in the middle of the 19th century. It’s where his proto-socialist ideas of social inclusion came from, because he was worried about alienation and revolt. What these worriers did not see was that new technology could produce whole new industries that generated more good new jobs than the old ones the machines took away. It was dynamic and unsettling, but standards of living could rise fast.

When it dawned on people that this seemed in fact to be happening as the 19th century rolled on into the 20th, and that automation was not producing unemployment but growth and new structures of economic supply and demand, other questions arose. What about education? As jobs got more technically demanding, wouldn’t people have to know more? Herbert A. Simon took up this question in his 1964 book The Shape of Automation and concluded “not really”. He estimated that even if the share of capital in the economy as a whole increased by 3% a year, a workforce educated on the level of Japan or Western Europe, at the time lower on average than the U.S. levels, would be fine.

Simon was right for a while and those who feared the downstream impact of automation on employment were wrong, but I doubt he still is right, and I wonder sometimes whether the automation Cassandras were not so much wrong as premature. I think Simon may have underestimated the compound impact of IT-related value-added processes. I think we might be reaching limits here, and this is where our real problem comes into play—this is what “structural” really means in practice.

I think the substitution of capital for labor is accelerating rapidly, and I think IT is largely responsible for the current wave of substitution—and it has a generic and generative impact other technologies have not had. It’s not like a machine but like a machine tool. I think too we may well be moving into a situation, on a global scale, where comparative advantage is leaving high-wage jobs permanently scarce in the United States. If manufacturing at nearly all levels can move, largely thanks to IT, to find its level of highest sustainable profit, it will. Not that profit margins alone motivate employers. They, too, factor in all sorts of other considerations, like stability, community, quality of life and so on, just as consumers do. They will pay higher wages in order to keep cadres of workers who know each other and perform well in teams. On balance, however, nearly everything can move now, and it will, possibly until all the world’s relative labor costs even out. And since there are still 800 million poor people in China, that’s going to take quite a while. Either that, or the world will become sharply nationalist-protectionist as dispossessed citizens try to stop the global juggernaut, which under certain circumstances would be understandable and even morally justified (though the thought of what political opportunists could do with such energies is truly horrifying).

It could be, in other words, that we could face a very large, more or less permanent massive unemployment situation—unless we innovate like mad. And to do that we’ll have to educate like mad. And here is the crux of the matter: Pretty soon, most of our young people will be from minority groups that have a history of not learning very well. Let us not be coy: The reason for this is not mainly unequal educational opportunities, though there is plenty of that too. The reason is cultural, and there is a strict limit to what public policy can do about this. No Child Left Behind can fix this only to a very limited extent. Kids who are not spoken to and read to at home start school in inferior positions compared to other kids. A lot of this has to do with family stability, with having a mother and father in the house paying attention to and loving the children. The data on kids in minority groups growing up without fathers is appalling, and it is getting worse, not better. Schools alone can’t fix this problem, and it is fast becoming not a humanitarian problem affecting the so-called underclass, as it has been since the Moynihan Report, but a core economic and social problem on a national scale.

This is why I am on most days pessimistic not so much about the American economy—which remains capable of innovation and hence extensive growth—but about American society: We are going to have ever huger numbers of essentially unemployable minority citizens, a schizoid society as a result that is even worse than it already is. They won’t be able to learn enough to take the higher value-added jobs an innovation-based global economy will generate. They will be competing not just with other Americans, remember, but with a global labor force in many if not most areas. The prospects fills me with dread.

Is there nothing we can do about this? No, in fact, there is plenty we can do, but it will take boldness, imagination and some political courage. I can think of two major programs which might do the trick, at least to start.

The first, which I have talked about for years, is that we need a Baby Bond/National Service program. AI has featured a version of this idea, so I won’t belabor the point here.

The second is a New Homestead Act—a kind of combination of the original Homestead Act, the CCC and the GI Bill. We need to get otherwise unemployable people out of the sinkhole cities in which they live and get them back on the land, increasing dramatically the labor-input of agriculture. We need to turn America into one huge environmentally self-sustaining garden, understanding what that word really means. Perhaps I will elaborate my idea of a New Homestead Act in a future post.

These two programs taken together might not be a silver bullet, but they could save the country from the disaster of permanent structural high unemployment and social upheaval ahead. Is our political system capable of generating serious change? Can a flock of pigeons perform Beethoven’s Fifth?

We have in The American Interest an ongoing project called “Nation-Building in America” and infrastructure renewal is a subject I have been trying to get covered now for some time, so far to no avail. The reason for my difficulties is my standard of adequacy: I don’t want an essay just telling my readers how bad things are and extolling all the nifty gadgets we have to make them better.  I want an essay that acknowledges Galston’s Law, the ur-observation of the entire project: You can’t get new policies and new outcomes from the same old bureaucratic/organizational setup.  If you want to do something genuinely new, you have to consider organizational design factors, whether the organizations in question are governmental, private or, in this case, some public-private partnership structures.

I define a worthy 21st century infrastructure for America as an integrated structure that encompasses energy, transportation, communication, airports, water/sanitation and all the rest, bound together by an IT-driven central nervous system. We all know about the “smart grid”, but that’s just about electrical utilities. I am talking about something an order of magnitude above that. I am taking about maximizing the synergies among developing technologies, and I am talking about skipping a technology generation to acquire a truly advanced infrastructure that can serve as real productivity value-added for the economy. It’s not exactly like the opportunity Japan and Germany had after WWII, where the Allies had destroyed their legacy systems, but we’re in such bad shape that it’s almost analogous.

Yet the government seems clueless. The stimulus program was about shovel-ready infrastructure—old technology that it’s often foolish and wasteful to fix.  Of course, that was mainly a jobs programs for favored constituencies, and little more. The Obama Administration’s new investment in railroads is nice, but it’s a one-off. It is not integrated into anything, as best I can tell. The President is just jealous that French and Japanese and Chinese trains can go faster than ours. That’s what he actually said, in the State of Union address no less. I waited that night to hear a vision for infrastructure that was economically sensible and sound in terms of engineering principles. Nothing doing. If this guy is really so smart, why is he consistently so disappointing?

Now, I am not a centralization freak; on the contrary, I am more impressed by the efficiencies of subsidiarity. But there are some public-goods functions that can benefit from technical and engineering synergies if built up to scale, and I think national infrastructure in an age of rapid IT advances is one of them.

Even more than that is at stake. We want an infrastructure that’s efficient in thermodynamic terms, of course, but also one that is desirable in broader social terms. We know that the choices we make about technology affect social patterns, attitudes and behaviors (think internal combustion engines, highways, suburbs and drive-ins… or think the Pill, for that matter—not all the shaping is spatial in nature). We don’t get integrative efficiencies and social benefits from dumb luck. They require some planning, some forethought. They also require a capacity to trade short-term for longer-term benefits. Why, for example, do we still keep so many of our power and telecommunications lines up in the air, where they’re vulnerable to every passing windstorm, instead of burying them? Partly because we’ve become incapable, much of the time, of front-loading a long-term investment.  It’s not because we’re incapable of calculating the investment; it’s because we’re institutionally deficient when it comes to the politics of the matter.  Business models do not align with the long-term public good, and government seems incapable of  doing anything about it.

Seems to me, too, that if we now need some aspects of this system to be national in scope for the sake of efficiency and rational management (say, the telecommunications piece), then we cannot keep doing on the state level some of the things we’ve always done before. Just as it makes no sense to pay for digging up the street four times if you only have to do it once, how much sense does it make to have 50 separate licensing schemes when the technology is of national (and international) scale? (Though perhaps there are some functions that would be better de-federalized and given to the states.)

And it seems to me that the principle of modularity needs to be built into a new infrastructure, so that just as newer avionics packages can be put into old airframes (to a point), technological advances can be instituted in infrastructure systems without having to start over every time some key component ages. We now face a mountain of costs because we have let systems age so badly. If they had employed modular designs, we would be able to upgrade without that mountain being so high, and that should be our aim in the future: to use modular design, insofar as possible, to space out our investments, so that planned maintenance cycles double as forms of upgrading, again, insofar as possible.

Moreover, as already suggested, I want this essay to consider what the role of government ought to be to promote (not to own and manage) a new infrastructure.  Now, I know people who argue that government should have zero role in infrastructure, that it all should be privatized. I regard this as an insane remark, but actually, so do most of the people who assert it—because the moment after they got their libertarian rocks off, so to speak, they acknowledge all the “exceptions” in which some government role has been and remains necessary. If you add up all the exceptions, there’s not much ideology left. Any reasonable and historically literate person knows enough of the history of the canals and roads and railroads and telegraph and so on in our country to realize that we need government for a variety of purposes: licensing to ensure health and safety and rational use of scarce public goods, providing an understory market for new technologies, basic science and R&D investments, and so on. There is a logic to some kinds of public monopolies, after all, just as there is to certain zoning practices.

The design problem in this regard is that we need a permanent place where the partners and participants involved in building a new infrastructure can convene to decide what to do and how to do it. I have a hard time seeing how people who build electricity grids, people who build road systems, people who build trains and light rail, people who do energy infrastructure, people who do fiber optics, people who plan airports, people who think about financing such things, people who consider safety and environmental issues (one of several necessary governmental functions) and so on, will all somehow get together on their own accord within a private-market framework to plan an integrated system. Without such a place to convene and plan, we will continue to get incremental developments at best, and possibly developments not up to efficient scale. We will get a system that is less than the sum of its parts rather than more. As things stand now, there is no such place in the Federal government, nor is there any interagency arrangement substituting for such a place.

Now, I am mindful that even if a concept for such a place were developed (say, merging the Department of Transportation, the non-military side of DOE, the FCC and maybe the NTSB) there is a good chance that the U.S. political system, as presently constituted, could not do this right. (Look how the Feds messed up the original light-Washington-footprint DHS proposal to create the dysfunctional monstrosity we have now.) The opportunities for distortion, corruption and God-knows-what are almost too large to imagine. But is that a reason not even to think about it?

Moreover, seems to me that the promise of a really major leap forward could attract significant private sector support. Oddly enough, in this economic climate, it may be easier to think and build big than to persuade people to go further into debt to fix already obsolete bridges, rails, roads, water/sanitation systems and so on.

I think I have finally found an author who understands what I want and can do it. We’ll see. In the meantime, I went with some optimism to the newly opened offices of Building America’s Future (BAF) here in Washington. This is, supposedly, an infrastructure renewal project co-sponsored by Governors Schwarzeneggar, Rendell and Mayor Bloomberg. I told the head of this office that I wanted to help them get out their message. Come to find out, they have no message. They appear not to have any version of their program or vision even 2,000, let alone 4,000 or 5,000 words long, that they can give me for TAI. So far, it seems, they have only a PR stunt, a minor upper-middle-class jobs project and some expensive rental space. If they have done any actual thinking, I can find no evidence of it. Unkind? Too cynical? Maybe; let’s test the statement: Arnold, Eddie and Michael, prove me wrong if you can.  Make my day.

The last time Spain faced the Netherlands in a really big match they were wearing cuirasses and carrying swords.  Nobody will be killed at Sunday’s World Cup match, but the Dutch will sing the same anthem—Het Wilhelmus—that they sang in 1573 at the siege of Haarlem and in 1577 when the Prince of Orange’s forces defeated the Spanish army and marched triumphantly into Brussels.   It is the world’s oldest national anthem. (Since you asked, yes, Japan’s national anthem, the Kimigayo, is technically older, but it was not set to its present music until 1880, when Japan felt the need to have a national anthem. The longest is the Greek, weighing in at 158 stanzas.  Well, you know how Greek poetry is…)

The William of the title, Het Wilhelmus, refers to William the Silent, the prince who led the armies of the Dutch Revolt against the King of Spain. So it is a more than a little puzzling to find William singing,

To the king of Spain I’ve granted
A lifelong loyalty.

The Dutch Revolt was the first modern war of national liberation. So why is one of the fathers of the Republic professing loyalty to the King of Spain?

The Wilhelmus, like the American Declaration of Independence, was written in the middle of a shooting war to justify armed rebellion. The participants in both wars needed to persuade themselves that they were not rebels, but loyal men forced to rebel by unendurable tyranny.  And they also needed to persuade the world.   It adds something to the match if you think of the Dutch fans with their faces painted orange as propounding Calvinist resistance theory. Set to music.

The great triumph of the Dutch is not that a small people succeeded in defeating the mightiest European Empire of the era, though that was a remarkable feat. What sets the Dutch Republic apart is that it introduced the modern era of nation states governed as liberal democracies.

I don’t know what the Hapsburg armies sang during the decades they spent trying to put down the Dutch Revolt, but I do know that they won’t be singing their national anthem on Sunday.

Actually, the question of the Spanish anthem is an interesting one. Spain does have at least half a national anthem. The music is a handsome eighteenth century march. What the Spanish can’t agree on are the lyrics.  Writing lyrics to a national anthem pretty much requires you to identify the nation you are writing about.   There is a committee working on it, and the members have my sincere sympathies as they attempt to write lyrics that will satisfy everyone without offending Basque, Catalan or Galician national sensibilities.

But on Sunday I will be rooting for the Dutch, because it was the Dutch who blazed a path out of the wars of religion that led to religious tolerance and liberal democracy. And because you have got to love the weirdly medieval lyrics that will be belted out by Dutch fans:

William of Nassau, scion
Of a Dutch and ancient blood,
I dedicate undying
Faith to this land of mine.
A prince am I undaunted,
Of Orange, ever free,
To the king of Spain I’ve granted
A lifelong loyalty.

Diana Muir Appelbaum is working on a book on nationalism.  She is the author of Reflections in Bullough’s Pond: Economy and Ecosystem in New England.