Is America in a race to the bottom, or are we going through what the Austrian born economist Joseph Schumpeter would call a process of “creative destruction”?
As readers over thirty will remember, Ronald Reagan used to tell the story of two boys: a pessimist and an optimist. A psychologist put the pessimistic boy in a roomful of toys; he sat around morosely worried that if he played with the toys they would break and he would be blamed. He put the optimist in a room with a big pile of horse manure; the boy started eagerly digging. The psychologist asked why and the boy answered that with all that manure on the floor there had to be a pony in there somewhere.
Your attitude toward that story probably predicts what you think about the protests in Madison — and a lot else besides. If you think America is in a race to the bottom as low wage labor in China and elsewhere puts more and more pressure on our middle class living standards here in the US, you probably believe that the Republican attack on public employee unions in Wisconsin is part of a general assault on working people in the United States — and you think this is something we need to fight. You likely think that the decline of the American middle class will destroy our prosperity and stability and that the public unions are one of the last forces standing in the way of an all out corporate assault on what’s left of the American way of life.
I can’t call this view stupid; my first book, Mortal Splendor, argued that the forces of globalization (though the name hadn’t been invented yet) were breaking up the social compact in western Europe and the United States, and that the resulting breakdown and class war threatened America’s stability and prosperity at home and would undermine our position overseas. That book was written almost thirty years ago; it was one of the first to point up the consequences of global industrialization for blue collar workers in the west. I pointed out in that book and in other pieces I wrote at the time that real wages for non-supervisory private sector workers had begun to stagnate in 1973; that was in 1985 and still today the hourly and weekly wages for American workers in inflation-adjusted dollars are less than they were almost 40 years ago.
Protesters gather inside the Wisconsin Capitol Building (Source: Wikimedia Commons)
White Collar Blues
For many Americans, the changes in our society — stagnant or falling real wages for non-supervisory employees, cutbacks in public services, rising costs of medical care, an affordability crisis in higher education and on and on — look like the consequences of what is often called “the race to the bottom.” Global competition is forcing us to cut costs in an effort to compete with low wage countries like China, Vietnam and Bangladesh. Restless and amoral capital shifts endlessly around the world looking for the cheapest labor, lowest taxes and the fewest regulations when it comes to questions like environmental protection and worker safety.
More, regular readers of this site will know that I’ve been predicting yet another turn of the screw. Blue collar workers have been getting the shaft since 1973; white collar workers are starting to get the same treatment now. Two of the same forces that drove down blue collar wages are starting to hit professionals: competition from overseas and the use of technology to raise productivity so that fewer workers are needed to do the same amount of work. The US manufacturing sector has actually grown since 1973, producing more even as it has shed workers. There is no reason why the same thing can’t happen to lawyers, middle managers, government bureaucrats and many more white collar workers as computers get smarter and firms start outsourcing professional work overseas.
The general decline in wages and earnings has been compounded by some specific regional problems. The relatively low-wage, low-cost manufacturing that moved to Dixie after World War Two has moved on to Mexico and the rest of the third world since the 1970s, hitting incomes and communities in states like the Carolinas and the Deep South. The Rust Belt stretching from New England across the Middle West has not only suffered from the decline in manufacturing wages and employment; as younger workers moved away, the communities left behind had high debts, high costs and high taxes — making it hard to attract the new investments that could turn things around.
Tens of millions of Americans aren’t just reading about American decline; they are living American decline. Access to middle class jobs is getting harder — and the jobs still around are less stable. Public services are slowly declining; cash strapped states and towns can’t provide the kind of education that could open more doors. Roads and bridges aren’t being maintained. Retirements are less secure. Health care is more problematic than ever as insurance prices rise — and fewer jobs offer decent plans. College tuition has exploded; we have a generation of college students carrying mortgage-sized student loans even as they scramble for elusive jobs in a snakebit economy.
And there’s more. The wealthiest in our society have gradually been pulling away from the rest of us — not just because so many of them are getting so rich, but because more of them are focused on the global economy and the health of the global system than on the prosperity of the United States of America. This is not just a US phenomenon; around the world we’ve seen the rise of the “Davoisie”, a global elite whose members have more in common economically and often culturally and morally with their fellow jet setters than with the non-jet-setting citizens of their own home countries. Their wealth, power and connections make them disproportionately powerful in this and many other countries; as a result, in the US and elsewhere policy tips more toward the Davos agenda of cosmopolitan globalism than towards national policies aimed first and foremost at promoting the interests of the citizens of the world’s countries.
The argument in Madison reflects both consensus and disagreement. The consensus is that things in the United States are going in the wrong direction. The argument is over what to do. The Tea Party and other backers of Governor Scott Walker basically argue two things: that big government is the friend of the Davoisie rather than an effective regulator protecting the rest of us by keeping the fat cats in check, and that high government costs and inefficiencies are part of the problem driving down incomes and living standards rather than part of the solution. The public unions and their supporters argue just the other way: a powerful government is our last ditch line of defense against an aggressive plutocracy and government spending on good living wages for employees is a bastion of what is left of the American middle class.
This is where the pony comes in. If you think the changes in our economy since the 1970s are just a pointless race to the bottom, you want America to stop digging. The world is going the wrong way — toward some kind of Blade Runner dystopian future of high tech and low living standards. You want to stop this future in its tracks. Governor Walker has created an artificial budget crisis by giving huge tax breaks to rich corporations; now he is using this as an excuse not just to cut the wages of middle class working people but to break them politically by destroying the union that stands between them and naked corporate power. The systematic destruction of first private sector unions (down to only 7% of the workforce) and now public unions (a majority of American union members overall with more than a third of government workers enrolled) is part of an offensive that won’t stop until the American middle class is back in the third world.
Cure for the Blues
I see those arguments and have felt their force for thirty years. I’m not, however, convinced that they ultimately make sense. I’ve been thinking about globalization and the future of American prosperity and power since writing Mortal Splendor and in those thirty years I haven’t so much changed my mind about the problems we face as come to a better understanding of the roots of American prosperity — where the ponies are and how they grow.
I wrote in my first post on Madison that I don’t think that restructuring state government is about the race to the bottom: it’s the way to avoid a race to the bottom. That answer needs a bit more elaboration. The world is in a race: a race to be the most efficient and innovative. Cheapness is one way to win this race: cheap labor can be an advantage.
But America shouldn’t compete on the basis of cheap labor: we are not nor should we try to be the Walmart of Work. So the first question becomes how do we compete in ways that don’t involve endlessly ratcheting down wages and benefits? And the second, related question is how can we generate enough demand for American workers so that market forces drive incomes up from year to year and decade to decade?
The key to success is obvious: we need to continue to raise productivity throughout the economy. If productivity goes up quickly enough, wages can rise here even if they are falling elsewhere. This is getting harder; productivity is both easier to measure and to raise in manufacturing than in services. But substituting capital and technology for human sweat has to be a large part of what we do.
To raise productivity significantly, and especially to do it in ways that give us some long term advantages, we are going to have to do more about productivity in services. In particular we are going to have to look at health, government, education and the legal industry. Health care accounts for 18% of our GDP; education for 7%, and government spending (federal, state and local) accounts for 40%. (Because a lot of government spending goes to health and education, the total from these sectors is closer to 45% of GDP than 65%.)
Unless we find ways of steadily and dramatically raising productivity in these economic sectors, American living standards will have to drop. Health care alone is going to eat us out of house and home as the population ages, but exploding tuition costs and unfunded government debt will also impose crippling burdens on both individuals and society as a whole.
What we’ve got to do here is to deploy technology and aggressive, creative reform and restructuring to health, education and government. Much bureaucratic work in government is routine; computers are going to have to replace people wherever possible. Staffs are going to have to shrink in ways that are simply unimaginable to present day government workers and their union leaders. Outsourcing government functions to private business will be a growth industry; in some cases the work will be outsourced overseas but in many others, the necessary expenses of all levels of government can and should be used to promote the growth of entrepreneurial small business rather than the maintenance of large bureaucracies.
The educational system is also going to change in ways the unions and the guilds can’t imagine — and will fight to the death. Going forward, students need to be evaluated and credentialed on the basis of what they know, not on the basis of time served. An exam based rather than an instructional hours based system will put students back in control of the educational system; the vast armada of meaningless degree programs in pseudo-academic disciplines like business communications, hospitality studies and sports management will sail off into the oblivion they so richly deserve. The pressure for pointless academic credentials and meaningless degrees is one of the great, expensive blights on our society: we can’t afford this kind of waste anymore and it needs to go. Employees will demonstrate their competence to employers by passing exams in different job-relevant subjects that test real skills; the training for these tests will be provided by entrepreneurial organizations that are likely to rapidly replace many of the inefficient and expensive post-secondary educational institutions around today, once appropriate systems to regulate their practices and monitor their performance can be developed. (Traditional liberal arts education needs to survive, and it will, but education and training are very different things that require very different approaches. To promote economic growth and social mobility, and to help individuals continually retool their skills in a changing economy, we need to separate training from education and make training as widely available, cheap and convenient as possible.)
Similarly the medical system is going to have to change dramatically. Physician assistants, aided by Watson-style computers, will handle more and more of our direct encounters with the medical system. We need to think much less rigidly and much more creatively about how to deliver improving health care more efficiently, and among other things this means that there will have to be ongoing review and change in the ways we train, certify and deploy medical personnel.
To many of the workers caught up in these changes, the transformation of these economic sectors is going to look and feel very much like a race to the bottom. The spinners and weavers in 19th century Britain felt this way as the industrial revolution turned jobs once done by highly skilled guild members into poorly paid jobs performed by unskilled industrial workers. John Henry certainly felt that he was in a race to the bottom with the steam drill.
Digging for Ponies
This is what technology does: it allows human beings to get more work with less skill. The medieval spinners and weavers had to know many complicated things to make cloth; workers in textile mills made more cloth while having many fewer skills. The workers in one of Henry Ford’s car factories were much less skilled than traditional metalworkers like blacksmith, but a combination of technical and management innovation made them much more productive.
Now that technology is moving into the knowledge based industries, the same thing is going to happen to many lawyers, bureaucrats, medical workers and (alas) college professors. Dr. John Henry, PhD; Dr. Jane Henry, MD and J. Henry, Esq are going to fall farther and farther behind the 21st century equivalent of the steam drill: Watson (the IBM computer that recently mopped the floor with its human opponents on TV’s Jeopardy). Less educated people, assisted by smart machines, are going to outperform old style professionals at more and more tasks.
The spinners and the weavers thought the advent of the industrial revolution was a race to the bottom. In some ways it was; aggressive cost-cutting has driven the development of the textile industry from that day to this.
But there was also a pony. Cheaper clothes ultimately meant — and continue to mean — better dressed people. The average working person today has a range of affordable, comfortable and stylish clothing choice that our ancestors only dreamed of. And we spend a lower proportion of our income to be dressed more richly than ever before.
The same thing needs to happen in government, education, medicine, accountancy and law. The spinners and weavers won’t like it, but the public will ultimately be much better and more cheaply served.
Change like this always looks like a race to the bottom for the people directly involved: spinners and weavers in 1810 and Wisconsin state government workers today. When disruptive change happens so fast that people are being thrown out of work faster than new sectors can absorb them, wages can decline throughout the economy. Since 1973 in the US, millions of women were entering the workforce even as increasing productivity and overseas outsourcing were reducing the number of manufacturing jobs. Wages stagnated and fell — often driving more women into the workforce to make up for their husbands’ falling income.
The cure for this process is not to stop technology in its tracks. That is what the Luddites tried to do in 19th century Britain: destroying the machines that were killing jobs and reducing wages. The cure is to exploit the opportunities that new technology and (temporarily) low wages create for innovation. That’s where the ponies come from.
Luddites destroying a loom, 1812 (Source: Wikimedia Commons)
Wisconsin needs to become a pony farm. It needs to slash taxes and reduce the non-wage costs of doing business so that employers will bring existing businesses to the state and entrepreneurs will have favorable conditions for starting and building new business. By cutting non-wage costs for private employers, Wisconsin (and the 49 other states) can create the best conditions for long term sustainable increases in the real incomes of working people.
This means that among many other initiatives, the state needs deep and continuing reforms in the way that it organizes and deploys its workforce. These changes go far beyond a few quick fixes in benefit and pension programs. I am not sure that every provision in Governor Walker’s proposed legislation is wise, and I hope some creative compromises can be found that will help ease the transition, but I am sure that his instincts are right.
There are ponies in there somewhere, and the only way to find them is to dig.