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The "jobless recovery" and foreign competition

The buzzword in the U.S news media is "jobless recovery". Corporate profits, national income, and even the stock market, are all up, yet in the United States people can't find jobs. This commentary comes from an American point of view, but probably applies to all developed countries around the world, so you may want to read the rest of it even if you're in Europe, Australia, Japan, or some other developed area of the world.

An article on the front page of today's Wall Street Journal (see Clues to the Cure For Unemployment Begin to Emerge - note link will only work if you have a paid subscription) explores this issue, and also does some editorializing that I disagree with.

According to the article, "The U.S. economy is growing again, yet it has been unusually slow to add new jobs. The Bureau of Labor Statistics says new and expanding businesses added fewer jobs in the fourth quarter, 7.75 million, than in any quarter since 1995."

What caught my attention was this admonition contained in the article: "[Some people] seek to protect workers by blocking job-threatening advances in trade, technology or competition. But that strategy would arrest the very forces that have improved the lives of Americans over the past 50 years."

I agree that advances have greatly improved our lives, even though workers have been displaced along the way. I don't think that anyone wants to go back to a pre-industrial economy where the overwhelming majority of the people work on farms.

But I believe that foreign competition is of a different nature today than it was fifty years ago, and this competition is not good for developed nations. Advances in technology have had the effect of removing the barriers to exporting jobs. A hundred years ago, there may have been a big workforce of people overseas willing to work for practically nothing, but there was no practical way to communicate with foreign countries, and transportation across vast oceans was slow and costly.

Move forward a hundred years, and we have the internet which enables large amounts of digital information to be transferred around the globe at a negligible expense. Consequently, information jobs such as computer programming are now being effectively moved to places like India where computer programmers are willing to work for a fraction of what computers programmers get paid in the United States.

With international phone calls so inexpensive, call centers are now being moved to India also. When you call up for computer tech support, you may discover that the person who answers the phone with an Indian accent is talking to you from halfway around the world.

Miniaturization means that the cost of transporting manufactured goods, even by air freight, can be minimal. Computer chips are an example of a relatively expensive and important manufactured good that is small and lightweight and thus easily transported by airplane. It's cheaper for companies to open chip manufacturing plants in Asia and then fly the finished products back to the United States than it is for them to manufacture them here in the first place.

I also think that the whole philosophy of foreign manufactured goods has changed. It used to be that people in the United States viewed goods manufactured in developing nations as being second rate. Even Japanese goods, which now have a reputation for high quality, were once viewed as inferior to the same products that were made in the USA.

Not only has the stigma of imported goods disappeared, but corporate executives feel like they aren't doing their jobs properly unless they are moving more and more operations overseas. It seems as if operations are moved overseas even when it doesn't make any economic sense.

All the factors above create a whole new competitive dynamic. The worker in Ohio who is looking for a job isn't just competing against other American workers. He's competing against workers in China, India, and Mexico who are willing to work for a fraction of the U.S. minimum wage (which itself is a pitifully low salary for the U.S.).

I have to conclude that the buzzword "shrinking middle class" is not just a class warfare slogan coined by Democrats, but is actually a reality. Whether this is a good thing or a bad thing is open to debate. Some say that if the U.S. economy as a whole is growing, then the country as a whole benefits. But I say that whether you perceive benefit from the new competitive paradigm depends upon which side of the shrinking middle class you happen to be. If we suppose that 25% of the middle class is moving towards being wealthier, and 75% are moving towards being poorer, then probably the 25% moving up are quite happy with the new competitive paradigm, while the 75% moving down are surely quite dissatisfied.

Dick Grasso, who made millions of dollars a year as the head of the New York Stock Exchange is probably ecstatic, while the factory worker who once upon a time earned $15/hour but now earns only $8/hour is probably not a happy camper at all.

Because the United States is a democracy with majority rule, politicians from both the left and the right should take heed. If the majority of Americans feel that they are being hurt by the new competitive paradigm, they will vote for candidates who promise to do something to help them. I fear that this will most likely lead to greater socialism and less freedom, and there will be anti-capitalist "reforms" that will hurt everyone. It therefore may be prudent to put in place some protectionist policies now to protect American workers from foreign competition, rather than wait until the disparity between the well off minority and the non-well off majority becomes even greater.

posted Monday, October 13, 2003