Friday, August 13, 2010

A splash of cold water in the face...

It's popular rhetoric today to say that the key to maintaining and improving the American standard of living is to simply make sure Americans have broad access to education which will allow us to be highly productive workers. Being highly productive will allow nearly all Americans to continue to have high-wage jobs and enjoy the comfortable and steadily improving standard of living that we've become accustomed to.

While I wish things were so simple, I think the cold reality is that the problem is a lot more intractable than anybody wants to admit--and probably beyond the capability of our political system to address.

First, creating productive, capital-intensive jobs is one thing. Making sure workers get paid accordingly is another. It's well-documented that over the last 3 decades, worker productivity has risen dramatically but wages have been stagnant. It's easy to blame the conservative economic policies, and I'm sure that's contributed, but it's hard to see how things could have been dramatically different. In the first few decades after WWII, the US was far and away the dominant developed economy because most others were left in ruins. If somebody wanted to run a modern, industrial business, there weren't a lot of other options. Today, there's educated workers and highly productive machinery and equipment all over the world. So if US workers want a large slice of the pie while Indian workers, with comparable education, are willing to settle for 10% or less of what US workers are, it's pretty easy to open a production center there and ship (or electronically transmit) the results back to the US (or anywhere else that can pay for the output). We can pass laws and regulations that require companies to pay workers some legal definition of "fair" wages, but if the laws become to onerous companies can simply move their entire operations overseas. We can restrict imports, but considering about half of all revenues from S&P 500 companies come from overseas, it's easy to see how such a strategy could blow up in our faces (see: Hoover's tariff policies).

Second, making sure Americans have the skills for the jobs requires not simply that they have the skills, but they have them in greater degree than anywhere else. Assuming that Americans are, on average, not dramatically more intelligent and capable of acquiring skills than residents of any other nation, it's going to be impossible to keep Americans ahead of the rest of the nations in terms of skills. Knowledge is nearly impossible to contain. Witness how after a few years of American dominance in IT, the industry is now dominated by foreign workers who are able to learn the skills just as quickly as the brightest Americans, but can apply them for a fraction of the price.

Unfortunately, there exists a global imbalance between the standard of living Americans are accustomed to, and the standard of living most of the rest of the world experiences. Innovative production methods have become extremely mobile, making it nearly impossible for Americans to maintain superior productivity levels that justify the higher standard of living. I don't think there's any realistic way to maintain the global imbalance that currently exists where Americans expect to earn 10-100x what workers earn in the rest of the world (often for similar work). Either the American standard of living will drop dramatically, or the rest of the world's standard of living has to rise dramatically. Clearly, the latter alternative is preferable. The problem is achieving it would require essentially a global Marshall plan. And that's pretty much a political impossibility. Explaining to the typical American that spending trillions of dollars annually on building schools and infrastructure in foreign countries is ultimately in his best interest seems like political suicide to me. Of course, we spent, as a percent of GDP, more than that to prevent a global takeover by Nazi & Fascist forces. But politics is easier when the enemy has a face.


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