Do Differently

by Dave Schuler on August 12, 2010

I found a pair of op-eds today, each of which parallels some of the things I’ve been saying around here for some time, that suggest that the notion that our policy choices aren’t limited to more stimulus or less stimulus, more regulation or less regulation, is one whose time has come. Matt Miller, writing in the Washington Post, while defending the bailout and fiscal stimulus policies of the Obama Administration as necessary, also condemns them as wrong-headed:

Remember (if you’re a certain age) that great Saturday Night Live ad parody in which Chevy Chase chirps to spatting spouses Gilda Radner and Dan Aykroyd that “New Shimmer is a floor wax AND a dessert topping!”?

Well, the $26 billion state relief package just passed on party-line votes is the same kind of zany paradox: a crucial step to ease today’s economic pain AND a dastardly bailout. That’s right, kids — it’s indispensable AND indefensible!

He goes on to describe the anti-stimulus effects of cut-backs in state and local government spending and calls for requiring states to restructure their budgets, using the bailouts of GM and Chrysler as his model:

The auto emergency offers the right template — because the industry was forced to restructure as a condition of its bailout. The states haven’t been. Borrowing from China to skirt devastating state layoffs is one thing. But borrowing from China to keep runaway Medicaid programs in New York and California free from fundamental overhaul, and gargantuan unfunded public pensions untouched, seems mad. In California, more money is spent each year on compensation and pensions for 70,000 prison employees than on the state’s entire higher education system!

closing with several proposals I find quite appealing:

The tragedy is that it is not beyond the mind of man to structure a state bailout that does what we need. States would be eligible for far more near-term relief than Democrats just offered in direct proportion to the amount they reduce their long-term unfunded liabilities in pensions and health care. It’s just that our current byzantine tangle of interest groups, campaign funding and media habits, mixed with both political parties’ fears and ambitions, conspire to ban even the expression of this kind of idea, let alone its enactment. It’s another depressing example of how unequal our political institutions have become to the substantive challenges we face.

Nor would it be hard to design an ambitious new stimulus that goes beyond these state bailouts that could make a big difference fast. As I’ve argued before, we could enact big payroll and corporate tax cuts now, offset (and then some) by new energy and consumption taxes passed today but taking effect only once unemployment is below, say, 6 percent. This tax swap, which could appeal to liberals and conservatives, would provide a much-needed jolt to business’s “animal spirits” while assuring bond markets we’re serious about getting our house in order in due course.

To my eye he’s almost there. Where he falls short is that there was never a successful strategy for bailing out GM and Chrysler any more than there was one for Napoleon’s invasion of Russia. The further he advanced, the greater the losses that were sustained. A successful strategy for GM and Chrysler would have been one for which the objective was a soft landing for companies that faced inevitable decline rather than one that tried to ensure their continuing survival. Consider automobile production in the United States. It’s clear from it that “Cash for Clunkers” was a strategic error if its intent was helping U. S. automakers. But it was also an error from the point-of-view of auto production in the United States regardless of who produces the cars.

Many of the engines and other components of these allegedly U. S.-produced cars were produced in Japan, Korea, and elsewhere and merely assembled here, a job that doesn’t employ the numbers in the United States that auto production once did, doesn’t require as much skill, and shouldn’t be compensated as highly as these jobs used to be. Further China, India, and other countries have enormous automobile productive capacity and are slavering to get into the U. S. market. There is very little future or automobile production in the United States, particularly in the low end of the market, and at any end of the market it will need to be done at a nearly zero cost of labor.

Richard Florida’s article in The New Republic comes even more tantalizingly close to the truth:

Our transition from a Fordist mass production economy, based on the assembly line, to a knowledge economy, in which the driving force is creativity and technological innovation, has been under way for some time; the evidence can be seen in the physical decline of the old manufacturing cities and the boom in high-tech centers like Silicon Valley, government boomtowns like Washington DC, and college towns from Boulder to Ann Arbor. Between 1980 and 2006, the U.S. economy added some 20 million new jobs in its creative, professional, and knowledge sectors. Even today, unemployment in this sector of the economy has remained relatively low, and according to Bureau of Labor Statistics projections, is likely to add another seven million jobs in the next decade. By contrast, the manufacturing sector added only one million jobs from 1980 to 2006, and, according to the BLS, will lose 1.2 million by 2020.

This is the future towards which our post-industrial economy is already trending—and government should be proposing policies that will help to create a new geography and a new way of life to sustain and support it. But that doesn’t mean we need a centralized public bureaucracy to speed the process of change. As it happens, innovation occurs not only within big companies, major laboratories, and research universities, but also on the margins of business and academia. John Seely Brown, the former director of Xerox’s storied Palo Alto Research Center (PARC), has observed that many, if not most, of today’s high-tech innovations are products of the open-ended, collaborative explorations of hackers. Steve Jobs didn’t invent the PC; he saw its components at work at PARC, realized their potential, and put the pieces together.

He goes on to explain how too much energy and resource are being devoted to propping up the no longer functional approaches of the past and too much encumbrance is being placed in the way of the technologies and strategies that will bring the growth of the future. He utilizes the example of high-speed rail.

In the United States the great barrier to high-speed rail is not the availability of the equipment but the condition of the roadbeds. I would have much preferred that serious infrastructure investment had been devoted to improving our late 19th century to mid-20th century roadbeds rather than refurbishing untold miles of interstate. But that’s where thinking of the future as merely more of the past leads.

We’ve got to stop thinking about what we do more of or what we do less of and start thinking about what we should do differently. Do we really need more teachers and more police officers? Or should we be teaching differently and enforcing the law differently? Rather than endless debates about higher or lower marginal tax rates why not consider what we really need to be funding and what funding mechanisms will ensure that we have what we need?

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Soccer Dad
August 25, 2010 at 9:29 pm

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Steve Verdon August 12, 2010 at 10:55 am

Ha! I suggested this quite awhile ago, that bailout money going to states should be conditional on over-hauling state budgets. I submit that the “insane/mad” outcome is the normal outcome of the democratic process. Those 70,000 prison guards are a powerful political force in California. Mess with them and they run ads on how hundreds of ultra-violent convicts will have to be released and who will come to your house and rape you, your children, your wife and your dog. Of course any such measures to reign in spending are easily defeated. Same with the other public employees. Mess with the teachers and the ads are, “your kids will grow up ignorant and stupid and you’ll have to support them forever.” And on and on it goes.

Democracy, it ensures that the voters get exactly what they’ve asked for…good and hard.

PD Shaw August 12, 2010 at 11:11 am

I had a good conversation with a brother-in-law over the weekend who manages highway construction projects for the state. He is supposed to have four major projects completed this year for the stimulus program, and is just finishing the first. Why the delays?

1. Not enough building contractors to go around. These companies are overbooked with federal, state, county and city jobs. Two of the big companies actually merged recently. The contractors are using their own people, drawing from a limited supply of known subs. Since these are lowest bid jobs, there is no incentive to risk loss by using newbies. Since there are not many companies that have the background or equipment to do the jobs, they don’t have to worry about getting kicked off for failing to meet deadlines.

2. Not enough public employees to supervise. Hiring freezes at the state mean supervision and oversight are slow. To the extent possible, work is outsourced to consultants.

3. Consultants are getting lazy. Many are former public employees that left ten years ago to make big money. They are getting paid several times what their public sector counterparts make and after some lean years want time to spend and enjoy it.

He doesn’t see how this has helped anybody except for maybe a handful of guys at the union hall brought in for some small odds & ends work. He is most disappointed that the building trades have not been helped. He call the work band-aid stuff, with really no long-term value.

Dave Schuler August 12, 2010 at 11:39 am

PD:

You touch upon something I was complaining about just yesterday. The White House economists probably graduated at the top of their majority white, upper middle class high schools, graduated at the top of the majority white upper middle class Ivy League colleges, got top marks in their graduate studies (see previous), and went directly to work at desk jobs for the government or government handmaiden industries. We should trust their judgement about the effect of fiscal stimulus?

Anybody who knows anything about how state contracts are let knows that they go to a handful of contractors and that those contractors have completely different views of what they should be doing than what must happen for effective fiscal stimulus. What would actually happen was completely obvious to anybody who hadn’t grown up in a cocoon.

Steve:

I both agree and disagree with you. Some of that is indeed, a foreseeable consequence of a democratic system. Lazy, incompetent executives only interested in being re-elected are a bug of the system rather than a feature of it, IMO.

Michael Reynolds August 12, 2010 at 11:57 am

We’ve got to stop thinking about what we do more of or what we do less of and start thinking about what we should do differently.

That’s going to be a problem.

Voters are easily stampeded and our media and politicians are just the ones to do it.

Now we see the paralysis that comes from our system of lobbyist-driven campaign contributions. We see the intellectual dead-end of ratings-first, accuracy-maybe media. We see the barrenness of Democratic and Republican pandering.

The move to a knowledge-based economy is cataclysmic for a lot of people. The percentage of people who can earn a living at this is quite a bit smaller than the percentage that can work on an assembly line.

So we are going to need to look at what to do with people who don’t happen to have been born with abilities that match the needs of this new economy. 10% unemployment (or quite a bit more) may be the way things are from now on. And we’re still going to need those people to eat, see a doctor, get an education. Which means a degree of socialism.

But this is not the end of the world. It may be the start of something better. As a species we’ve already made the transition from hunter-gatherer, to subsistence, to surplus. Now we’re moving into a world where a gap opens between the amount of surplus we can produce and the number of people needed to produce it. We’ve gotten so good at growing, building, transporting and making, that we just don’t need 100% of the population working at it. That’s a good thing. Different but good.

Dave Schuler August 12, 2010 at 1:42 pm

Michael, there was a science fiction story with pretty much precisely that premise written about 60 years ago. It was called The Marching Morons and was written by Cyril M. Kornbluth.

A novel with a related premise was written by Jack Chalker about 25 years ago.

To be honest I don’t believe what problem there is has been caused by ability. I think it is being caused by preference.

Why don’t we graduate half again as many doctors as we did 40 years ago? It isn’t because there aren’t enough people with the ability—we have about half again as many people with ability as we did 40 years ago.

Michael Reynolds August 12, 2010 at 2:06 pm

It’s been a theme in Science Fiction though generally more visible in the background or in the evasions than at center stage. The Star Trek universe never asks what you do for a living in a world where everything can be instantly fabricated and you lack the IQ to compete with androids and aliens.

I think IQ and innate talent is a big, big piece of the picture. Not everyone can be a doctor, some people can only be orderlies. If the orderly can be replaced by a machine, then the person replaced does not realistically have the opportunity to become a doctor.

We are all limited to a degree by our genetic package. I never had the slightest chance of being a jockey, no matter how much I might have applied myself. Nor was I ever going to be a mathematician, a dancer, a pilot or an opera singer. These decisions were baked in the pie.

The knowledge economy even more than manufacturing will cross national boundaries. It’s already competitive and will become more so. And it’s just a fact than half the human race is on the left side of the bell curve.

Steve Verdon August 12, 2010 at 2:29 pm

I think IQ and innate talent is a big, big piece of the picture. Not everyone can be a doctor, some people can only be orderlies. If the orderly can be replaced by a machine, then the person replaced does not realistically have the opportunity to become a doctor.

True, but still that now unemployed worker is still an unemployed resource (yes I know that might be seen as a callous way to view unemployment but bear with me….). An unemployed resource creates new opportunities. Somebody that comes along and says, “Hey, I can use in this.” It may not pay the same, it may even pay worse for the time being, but through all of history the idea of rising unemployment just hasn’t happened. Does it mean it can’t? Of course not, but I am skeptical that “this time is different.” Maybe it is, but I’d argue it is up to those who are making such and argument to provide the evidence.

The knowledge economy even more than manufacturing will cross national boundaries. It’s already competitive and will become more so. And it’s just a fact than half the human race is on the left side of the bell curve.

True, but I’m not sure that means we’ll have immiserating growth.

It might, but I’d suggest that this is an argument we’ve seen before, and over the long term it hasn’t been a problem. Technological change has probably killed more jobs than any other factor. Hell, my favorite example is the computer…the term used to refer to people whose job was to compute, usually with a simple adding machine. Rooms of people were used to construct all those annoying tables in the back of math books. Now we have had computers, the non-human kind, for quite some time and rising unemployment has not been a problem.

Of course, that isn’t to say that the transition Michael is talking about will be all milk and honey.

Michael Reynolds August 12, 2010 at 3:04 pm

It might, but I’d suggest that this is an argument we’ve seen before, and over the long term it hasn’t been a problem.

That is absolutely true. And I absolutely hope it’s true this time as well.

steve August 12, 2010 at 8:34 pm

“Why don’t we graduate half again as many doctors as we did 40 years ago? It isn’t because there aren’t enough people with the ability—we have about half again as many people with ability as we did 40 years ago.”

Medicine used to get its share of top grads. They have been going into finance for a long time. Another big problem is lack of residency slots. N one wants to teach residents. There is no money in it. You make a lot more money doing medicine than teaching it.

Steve

Maxwell James August 13, 2010 at 9:39 am

Michael, while I agree with your concern that some part of the population may be permanently unemployable going forward, I think you’re overstating the case when you connect it to IQ and talent. Think about your own industry for a moment: How many talented writers do you know whose careers seem to be permanently stalled? It seems like you’ve pointed to more than a couple over time.

I’m not sure whether this country should be a meritocracy, but I can say that it definitely isn’t one right now. There’s little evidence that it’s really the best and brightest who go to ivy-league universities, but there’s quite a bit of evidence that the well-connected do. As Dave has often pointed out, there are also formal or informal labor cartels in a lot of higher-wage fields. Medical schools, for instance, really restrict entry – there are always far more qualified applicants who get waitlisted than there are admissions. I have an MBA, and I can assure you that plenty of people who go through MBA programs are quite dull. But almost all of them end up in well-compensated positions.

As with all resources, labor is subject to the laws of supply and demand. Someone who spends years of their life honing a skill where demand turns out to be limited, such as writing, can end up economically screwed if they’re not lucky. That doesn’t mean they lack talent or ability, merely that they’ve made economically inefficient choices regarding their own skill development. And/or they’ve been unlucky.

Dave Schuler August 13, 2010 at 10:06 am

Someone who spends years of their life honing a skill where demand turns out to be limited, such as writing, can end up economically screwed if they’re not lucky.

I don’t know what it’s like now but when I was in grad school I knew of quite a few fields in which it took more than 10 years to get a PhD. Imagine for a moment that you’re in such a field, have a newly-minted doctorate, and your field evaporates. Such things have happened.

Is it because your IQ is low? No. You didn’t acquire skills or certification? No. You just lacked a crystal ball.

As the requirement for credentials increases and the rate of change increases, I strongly suspect we’ll see more of these situations rather than fewer. My preference is for a radical re-think of the relationship between certification, skill, and employment and, as I noted in an earlier post, who bears the risk. Such re-thinks won’t come from the market. It will require government intervention and, unfortunately, the federal government is probably the worst culprit in this area.

Michael Reynolds August 13, 2010 at 12:37 pm

Oh, I’d be the first to say that there are a whole lot of writers more talented than I who don’t make what I make or get the work I get. But among the useful talents for a writer is adaptability. And a lot of writers seem to forget that they are businessmen, selling and marketing their talent.

I also attend various writer conference sorts of things, and speak at schools, where I see the wanna-be’s who don’t have the basic talent required. Who in many cases don’t have the ability to do much in the knowledge-based economy because, to put it simply, they don’t have the capacity to acquire much knowledge.

As Steve V. pointed out, this moment has been predicted more times than I can name, and always wrongly. This time will probably be no different. And maybe it’s just my guilty conscience, because I’m involved in an industry that is shedding jobs and will shed a whole lot more as we see declining numbers of bookstore clerks, librarians, editors, printers, shippers, book sales reps and so on. The publishing industry is afraid, and I’m one of the guys more or less welcoming the future and trying to profit from it.

I think the same kinds of drastic changes are sneaking up on education, and retail and some other industries as well. The construction industry has already been half-gutted. This time it feels different, but that isn’t exactly a convincing argument, I grant.

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