The Wrongologist

What’s
Wrong Today:

Robert
Gordon gave a TED
Talk last February about economic growth. Dr.
Gordon is Professor of Economics at Northwestern University, and one of the
world’s leading experts on inflation, unemployment, and productivity growth.

He thinks
that economic growth at historical rates is over. He says that we grew at an
average rate of 2% from 1891 to 2007, and slower since then. But, he concludes that we will have trouble
exceeding .8% annual GDP growth going forward. His talk lasts about 12
minutes. Go check it out.

He talks
about the fundamental disconnect between
technology and employment that has occurred since the start of the .com era.

In fact,
the Wrongologist believes that when the history of the last 10 years is
written, one of its darkest chapters will be devoted to the economic devastation
wrought by the de-industrialization of America. The American
Prospect wrote:

Last May, Wonkblog
reported that: (emphasis by the Wrongologist)

Today, US
manufacturing output is 2½ times greater than 40 years ago, while employing
one-third fewer workers. This is great if you are a manufacturer but not so
great if you are a factory worker.

For
most of the 20th Century, economic production involved a combination
of capital and labor. However in the 21st Century, programmable machines
and robots, some powered by artificial intelligence, are capable of doing many jobs
with little labor input. This makes for a different economy. Robots toil for
their owners, (let’s call them corporatists) who make the profits, but
obviously, the manufacturers need buyers for those goods. Buyers are harder to
find if many are falling out of the middle class.

A study
by the Massachusetts Institute of Technology (MIT) concluded that the loss of
so much manufacturing capacity in the US over the past decade has had a
negative impact on the country’s ability to innovate, which has long been
considered the nation’s greatest economic strength. The United States no longer
has the industrial “ecosystem” necessary to bring new ideas to the market, the
study says.

Today,
those with capital and the latest technologies have access to the global
marketplace. They are very same companies that have been cannibalizing our
economy for their own benefit by offshoring jobs and closing factories. Along
the way, they have reshaped our society.

Capitalism
has not been very good at working with our democratic institutions in the past
30 years. But they have gotten very good at working with captured politicians to rewrite
the rules of the game in the corporations’ favor. Long ago, companies worked
together with governments and people to build a middle class economy and
society. This was best demonstrated in the years after World War II up to the
1970s.

Yet, there
is no obvious alternative on the horizon that appears likely to employ the
millions of workers whose jobs have been outsourced to China, or turned over to
robots, or simply eliminated entirely in cost-cutting moves.

Dr. Gordon
speaks about the “4 headwinds” that will hold back growth in America. One of
those was Personal Debt. Let’s talk a bit about personal debt. The Wrongologist
has written about the economic dead end of student debt here
and here.

Even
though mortgage and consumer debt plunged in the wake of the financial crisis,
student loan balances nearly tripled from 2004 to 2012, to roughly $1 trillion,
according to a recent study
by the Federal Reserve Bank of New York. A total of 39 million people have
student debt, including more than 40% of 25-year-olds. According to the Fed
study, 35% of borrowers under the age of 30 are delinquent on their loans, up
from about 25% in 2008!

In the
20th century, no institution had a greater ability to raise people out of
poverty or had contributed more to the development of a robust American middle
class than higher education. And yet in this century, it is willingly
sinking its target market in a sea of debt.

The
Wrongologist was in a Home Depot over the weekend. There was a brochure at the check-out
that described “Project
Loans”. Apparently, Home Depot is willing to make loans up to $40,000 to
homeowners, a role that was handled by banking institutions before they discovered
derivatives.

Giving students
or shoppers at Home Depot easy access to credit is a stop gap substitute for a better
paycheck. It helps keep consumption up, but it is not a sustainable economic
strategy, since economies only succeed when there is equilibrium between buyers
and sellers. And it is that healthy balance between producers and consumers
which is a more important driver of economic prosperity than the imperative
to maximize profits which drives our economy today.

Politicians
speak of the “knowledge economy”, but the question is, knowledge for and about what?
Facebook is touted as a prime player in the knowledge economy, but it employs just
5800 to service 1 billion customers! Twitter has 200 million active customers
and 400 million registered users. It has 2300 employees.

What
is the value of Facebook and Twitter to the economy? These are two of our “best”, and they only
employ 8100 so-called knowledge workers. They have had a huge impact on society, but
cause barely a ripple in the economy. Their total employees are only a rounding
error in our economy.

Consider
Wal-Mart: this paragon of capitalism has 140 million customers and 1.2 million
employees. Its low-wage employees are the largest concentration of users of
food stamps in America.

Something is radically
wrong with the American economy. A once-robust system of “traditional
engineering”, the invention, design, and manufacture of products, has given
way to low wage jobs, while most higher wage jobs are in financial engineering
and software development.

Given automation, people have to figure out how to do much more to
be of value to corporations. The most successful will use technology to their
advantage while everyone else who can’t master the tech revolution may only
aspire to be low-wage employees or worse–jobless–and ultimately at the mercy
of others, (like the state).

In
closing, as we look out to the middle of the Century, most people will find
that if they have little to offer from a productivity perspective, much of their
consumption will have to cease and they will drop out of the middle class.

Those
that prolong their stay in the middle class by borrowing will reach a point
where their debt payments will be high enough to cut into their consumption of
food or their ability to pay rent. When maintaining their credit cuts into
their subsistence, there can be no more consumption.

What will Washington
say the solution is then?