Dale Worley (achinhibitor) wrote,
Dale Worley

Maybe the next 40 years will be different

TL;DR: In the last 40 years, economic change has been dominated by the entry of billions of (formerly) poor people into the global economy, to the detriment of workers already in the global economy (e.g., Americans). This process is unlikely to continue, and there may be a sharp shift to a political economy that is much better for workers (and worse for capital).

Much has been made recently of the "white man's paradise" of the 1950s and early 1960s. The political economy of that era was enviable, with extremely low unemployment and highly-secure jobs with generous benefits. Everybody knows that Trump ran on this vision, but we should not forget that a lot of the slogans of the Left reference this era as well -- as if that state of affairs is the natural order and any deviation from it is due to the nefarious politics of The One Percent.

In reality, that was a time when the most rigid law in political economy -- supply and demand -- was most on the side of the American worker: The factories in Europe and Japan had been demolished, there was tremendous demand for capital goods (construction and machinery) to rebuild Europe and East Asia, and the cohorts entering the American labor market were very small due to the Depression baby bust.

(My father noted some time around 1970, as conventional wisdom, that going to college was a poor deal economically. Whereas you'd eventually make more money with a degree, you'd never make enough to make up for the four years you'd lost in college. It was a better deal to go to work in a steel mill directly from high school.)

The natural consequence was that workers -- that is, people in a good position to sell their work -- that is, Americans (and only Americans) -- got paid a lot.

My adult life roughly spans from 1975 to 2015. That era was different, with generally eroding wages, weakening benefits, and a general sense that workers are getting a raw deal. The economic indicators agree with this: The fraction of national income going to labor is declining. Businesses aren't investing as much, suggesting that they don't need to invest in improving the productivity of their workers, presumably because simply buying more hours from workers isn't very expensive. An expected consequence is that the rate of productivity improvement is low, and we see that.

But this span of 40 years has a very different political economy than the paradise years: Its most distinctive feature has been the entry (or re-entry) of workers into the international "globalized" economy. It started when Japan and Germany rebuilt enough to start exporting, or at least, not importing all their capital goods from North America. (As National Lampoon's "revenge issue" noted in "Revenge Around the World": "How do you make them mad? Defeat them in a major war. How do they take revenge? Wait 30 years, then destroy your currency.")

The next phase was in the 1980s, when the Japanese steel, auto, and shipbuilding industries became export powerhouses. At that time, Japanese workers (even unionized workers) were paid significantly less than (highly unionized) American workers, and combining that with relentless quality improvement and a dose of government support, they demolished those industries in the United States, much to the detriment of many high-paid American workers.

In the 1980s and 1990s, there were a significant number of other countries that joined the global economy, including South Korea (which followed the Japanese economic model), but also a lot of Latin American countries abandoning semi-autarkic economic models, and the countries of the former Soviet Union. Together, these countries added something like a billion workers to the global economy, but almost no capital. Needless to say, this increased the returns on capital and decreased the returns on labor on a world-wide basis.

Though probably up to this point, the median American worker was gaining ground, or at least, staying even. The workers who were being paid really poor wages were in other countries, though usually they were being paid better than they had been previously.

Then in 2001, China joined the World Trade Organization. The mainstream economists predicted that it would be like previous globalizations, causing a considerable amount of "disruption" (i.e., people losing their well-paid jobs), but that the average worker would gain more from reduced cost of living than they'd lose from reduced demand for their labor.

Things turned out differently. China was much larger than any previous entrant into the global economy, and no previous country had a government with the intention of connecting its entire labor force to the global economy as quickly as possible, and the willingness and power to brook no opposition to doing so.

The result is what we've seen, which is pretty much what the Left had been predicting for decades previously, and which Trump has pledged to reverse.

But there's not a lot of reason to expect that this pattern will continue. From the late 1700s to now, the number of people in the global, industrialized economy has been rising approximately exponentially, with a growth rate of 5% to 10% per year. But there is no next act after China's entry. The only country of similar size is India. But India is a democracy and so it can't simply impose the enormous changes needed to connect its populace to the global economy. People have traditional land rights, so highways, ports, and factories can't be sited by administrative fiat; various occupational groups can present effective political opposition to modernizations that would threaten their economic security. (Though in some industries that have very few infrastructure requirements, like IT, India can globalize without popular interference.)

There are perhaps two or three billion people in countries other than India that aren't in the global economy, but they don't have the strong governments needed to overhaul their economies quickly. (Consider the largest of these countries: Indonesia, Brazil, Pakistan, Nigeria, Bangladesh, and Russia.)

In addition, the United States' major low-skill labor supply for the last 70 years has been Mexico. But Mexico is finally turning into an advanced country and its birth rate has dropped dramatically, so there is now net emigration from the US to Mexico.

The consequence is that we may be swinging from a global economy with a rapidly growing supply of labor and a relatively fixed stock of capital to a global economy with a relatively fixed labor supply and a rapidly growing capital stock. (The latter due to the "savings glut" by governments trying to control the exchange rate of their currency and individuals saving for retirement.) The current indicators seem to point this way -- the unemployment rates in the United States are declining to record lows, wages for ordinary jobs (and even low-skilled jobs) are rising at rates not seen for decades, and borrowing money seems to be preternaturally cheap.

In five years or so, we'll start to be able to see if these recent changes are a new pattern.

One thing I do not expect is for anything to return to how it was in the past. Any economy tends toward equilibrium, but when it comes to people, their lives and occupations, and where they live, most change comes on a generational time scale, via the process when the young end their education and choose their (lifetime) occupations and locations. Middle-aged people who have been displaced from good careers mostly won't find other good careers; they will cease to be statistics when they retire or die. ("to be successful, retraining programs must be highly targeted at the workers most likely to benefit. In general, that means younger workers with some postsecondary education who are motivated to follow through, and who are able and willing to relocate to places with more job opportunities.") Settlements that are declining will either vanish or have their populations replaced with workers with new occupations that are now lucrative in those locations. Though there will be some benefits to such people and places as wages for "low skill" work improve due to the general labor shortage.


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