The new normal for U.S. jobs
Earlier today, federal reserve chairman Ben Bernanke announced that quantitative easing would continue until the national unemployment rate fell below 6.5%. With the unemployment rate currently sitting at 7.7%, that could mean reduced borrowing rates for months. It also begs the question; are we looking at the new normal for U.S. jobs?
Idealistically, many politicians and economists would like to see the unemployment rate return to the levels of the 1950s – boom years when the rate clung to rates below 5% for most of a decade. But those may not be realistic numbers in a modern U.S. economy. At that time, the US was a world leader in manufacturing and processing of raw materials. That’s no longer the case. The U.S. is in the midst of a nasty shift away from production and into an economy of information and to some extent, technology.
Globalization has naturally moved low-paying, low-skill, manufacturing and processing jobs to markets where wages are much more conducive to increasing profit margin. For much of our lives, and that of our parents and grandparents, we were fed the idea that globalization would be the great equalizer. And it is. But it’s generational change that’s being created. Children in China are incredibly richer than their parents or grandparents. Children in South Korea are almost immeasurably wealthier than their parents or grandparents. All you have to do is take the train from Dongducheon to Seoul in South Korea to witness the growth and change of generations in what were once emerging Asian markets.
The world is creating new consumer markets. But there are still developing markets being ripped up into the next tier of development. And it’s a painful transition at times.
John Kenneth Galbraith described this transition amazingly well in his 1958 book The Affluent Society:
Poverty was the all-pervasive fact of that world. Obviously it is not of ours. One would not expect that the preoccupations of a poverty ridden world would be relevant in one where the ordinary individual has access to amenities – foods, entertainment, personal transportation, and plumbing – in which not even the rich rejoiced a century ago. So great has been the change that many of the desires of the individual are no longer even evident to him. They become so only as they are synthesized, elaborated and nurtured by advertising and salesmanship, and these, in turn, have become among our most important and talented professions. Few people at the beginning of the 19th century needed an adman to tell them what they wanted.
What Galbraith is describing isn’t just the state of the U.S. at the height of Madison Avenue. He’s describing a transitional continuum. The U.S. and Canada and other western nations have emerged from this continuum into a state that did not exist when Galbraith wrote those words, though he does allude to where we are now.
The U.S., and other countries, are waiting on the adman to tell them what they want. What is it they’ll consume next? What is it they’ll create next? What is it they’ll produce next? Where does the economy go from here?
The dot-com bust made us acutely aware of the dangers of possessing no tangible assets to back-up the immeasurable wealth of ideas. The most recent financial crisis of 2007 and 2008 informed us of the fragility of an economy based almost entirely on consumption and speculation on that consumption.
And there-in lies the problem. The federal reserve maintaining low interest rates is an attempt to promote more consumption. A return to the economic structure that produced the meltdown of 2007. It’s also a system that has led to a widening inequality of wealth. The U.S., with its consumption based economy, has the widest gap in income inequality. Meanwhile, Canada has the fastest growing income inequality gap.
In the absence of the next stage of production for both Canada and the U.S., that gap only stands to increase. The result, is the concerning impact on the middle class. It may also be creating a wage bubble smack-dab in the middle of a struggling economy.
Keeping interest rates low is designed to promote borrowing and spending. But the result of increased levels of borrowing can be the concentration of wealth in those who have the means to lend. Eventually, as wages on the lower end decrease, and profits on the upper end increase, a hole is created in the economy. The poor don’t have the stability to borrow, while the wealthy don’t have the requisite numbers required to spend en masse.
The middle class, often comprised of skilled labourers, supervisors, upper-tier blue collar workers, and low and middle level white collar workers, is slowly diminished. Without a new base of tangible production, those jobs related to product worth multiplication continue to disappear. As a result, the service jobs the middle class tends to maintain also disappear. Home ownership decreases. This is the death of the American dream that some economists fear.
It could also mean that unemployment rates north of 7% are the new normal for the U.S. This could be the new natural rate. That’s the challenge when an economy emerges from a collapse. The old normals aren’t normal anymore. The 4.2% unemployment rate at the start of 2001 is a distant memory.
But how does an economy, especially one on the scale of the U.S., move beyond its consumption reliance into something more stable?
There are several possibilities, but some of the most well-known involve regression.
Inefficiency of production would bring jobs back. It would bring supervisors back. But forced inefficiency in an already technologically advanced society can only last so long, and it can lead to an even greater concentration of wealth.
A massive expansion of the military industrial complex in the face of an undeniable enemy on the scale of a world war could shock the economy into production and temporarily revive the middle class. But does the world want to rely on a state of perpetual destruction and war in order to maintain economic stability?
Really, there’s only one option that the science of scalable economies supports – innovation. The U.S. needs to innovate its way out of the hole, slowly adding middle class jobs. Slowly relieving trade deficits. And slowly growing. Slow, in this case, may be best. By keeping interest rates low and hoping for a massive and magical rebound, the U.S. economy may actually be exacerbating the problem it’s trying to solve.
The good news is there is room for innovation. Health Care will continue to grow as the U.S. prepares to deal with the aging baby-boomer generation. The so-called “green jobs” revolution is in its infancy. But in addition to that, somebody, whether it’s the government or the private sector, needs to invest in a massive amount of research and development.
If the U.S. is going to emerge from production stagnation and the shrinking of the consumer class, it will need to find something to produce that no other economy has the technological ability or the workforce required to produce.
The U.S. needs to create American exceptionalism instead of trying to sell the world on its existence. The U.S. is no longer the world’s adman. China is.