Monday, December 15, 2014

Is the middle-class American Dream dead?

"How's the US economy?" asked an old high school friend.  That is one of the questions he asks me every time we meet.  I suppose there is a professional interest too for him--his executive career is tied to the outsourced back-office operations of a US-based financial firm.

"The economy has definitely picked up" I replied.  And added the commentary that is not new in this blog: "but, the middle-class jobs are not there, which is a big problem."

A couple of days later, it was a similar question from a couple and I replayed my reply.  I continued with "my favorite examples are Facebook and WhatsApp.  They have created billions of dollars, but next to nothing in terms of jobs."

The American model that dominates our thinking is the experience for two generations from the early 1940s.  With a high school diploma, one clocked in and clocked out at work and was assured of a successful middle-class life.  Now, the US and the world are full of வேலையில்லா பட்டதாரிகள் (unemployed college graduates,) as an autorickshaw driver commented two days ago.

What happened?

Offshoring and automation happened.  The old middle class model has been obliterated.
Yes, the stock market is soaring, the unemployment rate is finally retreating after the Great Recession and the economy added 321,000 jobs last month. But all that growth has done nothing to boost pay for the typical American worker. Average wages haven’t risen over the last year, after adjusting for inflation. Real household median income is still lower than it was when the recession ended.
Make no mistake: The American middle class is in trouble.
I have been delivering this bottom-line of the middle class in trouble for a number of years now.  But, hey, who cares about what I say, right?  So, will let some other person say that instead!
Millions of American jobs disappeared during the 1990, 2001 and 2008 recessions. That’s what happens in recessions. But for decades after World War II, lost jobs came back when the economy picked up again. These times, they didn’t. And it was a particular sort of job that disappeared permanently in those downturns, economists from Duke University and the University of British Columbia have found: jobs that companies could easily outsource overseas or replace with a machine.
Economists call those jobs “middle-skill” jobs. They include a lot of factory work — the country is down about 5.5 million manufacturing jobs since 1990, according to the Labor Department — but also a lot of clerical and sales tasks that can be handled easily from a country where workers make a fraction of what they make here.
The sophistication in automation, which seems to have a Moore's Law equivalent of its own with the automation getting better and better every single day, means that there will be lesser and lesser demand for the "middle-skill" labor.  The American middle class model is doomed.  I don't see a way out of this at all.

Which is also why I increasingly find it very, very difficult to deal with students--at my university, they typically come from lower-middle-class and lower-income backgrounds, with the hope and promise that a college diploma will vault them into the prosperous lives promised to Americans.  If I give them my take along the lines of this and many other posts at this blog, I will not be even a little bit encouraging.  On the other hand, not telling them means wilful concealment of the truth as I see it.  Hopefully, some read this blog and the warning:
Even if they all earned degrees, who would hire them?


Ramesh said...

We've explored this before; so let me take a different angle.

Labour cost as a percentage of product cost is actually small and diminishing in many industries. And yet companies find it worthwhile to take the risks of offshoring to a much distant land, cart it all the way back and find it worth the hassle. It says something about the American workforce.

You have priced yourself completely off the charts and are not making it up with increased productivity. Germany suffers from a similar cost problem and yet they have lost fewer manufacturing jobs. You do not have even one of the three fundamental requirements of labour - lower cost, higher productivity and flexibility. How can you compete. You have fantastic "productivity" and flexibility in the high tech industries - that's why you are wonderfully competitive in the labour market there. But in the largely middle class jobs .... the less said the better.

On costs, you are being killed by two factors - pensions and health care. If you have a system where the health care costs are way way ahead of even Germany's or the UK's, how can you compete.

On productivity, you have a mixed bag. In some sectors, you have the greatest productivity record in the world. But in the middle class jobs, you are more at the French end of the scale than Germany's.

On flexibility, you have an inflexible labour pool despite much lower Union powers. Here, Europe is way worse off than you, but even then, you have an inflexible labour force. iPhones are assembled outside the US, not because the labour cost is high here(labour is an insignificant part of the value chain). It's because you cannot make 1 million phones a week from a standing start, have a flexible supply chain to source components at that scale and then dismantle the factory in two years when the model is gone. Only China can do this. That's why its made in China despite the huge risks of intellectual property theft.

I believe America is at fault for not finding the competitive edge in labour. Cost is decreasing as a competitive factor as labour costs continue to shrink as a proportion of product value. Germany has found its competitive advantage. America is doing precious little but moan.

Here's a wild thought. Set up a Special Economic Zone in Hawaii (much as China did long ago in Shenzhen). Run a system there with basic social security, no Medicare (mimic a basic version of the British NHS), no state pensions (only contributory pensions), and high quality port and transportation infrastructure. In 5 years, I'll bet much of tech manufacturing will shift back to the US!! In case your brethren (read birthers) need to be reassured, Hawaii IS in the US !!!

Right; now you can bring your assault rifles and shoot me down (Fourth Amendment psst psst) :)

Sriram Khé said...

I agree with your points ... except one--your wild thought experiment!

The US has done a number of things that has made the labor inflexible and expensive, in contrast to Germany. The biggest of them are the systematic ways in which we marginalized technical trades (vocational education) unlike Germany that provides its youth ample opportunities for the vocations. We also actively promote and subsidize home ownership, unlike Germany where barely half the people own homes. Homeownership makes labor way less mobile. Thus, as you note, we are like France, despite the absence of unions and healthcare and everything else that the French have. We in the US have the worst of all possible scenarios, and when the two major parties become more and more rigid and inflexible in their policy preferences, well, the middle class is screwed!!!

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