Jimmy Carter’s most eloquent words were in response to a question about abortion: “There are many things in life that are not fair, that wealthy people can afford and poor people can’t” (typically condensed to “life is unfair”).
Let’s revisit two young MIT graduates. Back in 2005 I found them sharing an apartment. My student was earning $90,000 per year working 80 hours per week on a new videogame. His classmate was selling $750,00 mortgages to people with bad credit, earning $150,000 per year working six hours per day (story). I figured that this couldn’t last forever. A society could not continue bestowing most of its economic rewards on those citizens who contributed the least to sustainable GDP growth. I thought that surely the pendulum would swing back and the engineer would be reaping much more in the way of rewards than the mortgage fee collector.
What’s the story in 2008? The mortgage gig came to an end and our young genius is now in law school, preparing to join his fellow lawyers in reducing GDP. What about our diligent engineer? Laid off when the project ran over budget and got canceled. He’s looking for work.
This got me thinking about globalization. When the infrastructure for globalization was new, nobody was quite sure how the benefits and costs would be distributed in American society. The container ship, the jet airliner, and the Internet introduced only subtle changes at first and then any costs were softened by a global economy that was mostly booming from the early 1980s through 2007.
As the U.S. economy collapses and people stand in unemployment lines it is easier to see who got hit the hardest by globalization.
Consider the domestic autoworker. His counterparts in Mexico are happy with a wage of $1.50 per hour. The more money that the U.S. government gives his employer, the more rapidly it builds new factories in Mexico and China. The container ship brings in inexpensive products from China, but once our autoworker gets laid off he can’t afford to buy too much. Food is a big portion of a laid-off worker’s budget, but we have decided that food will be one of the few things that we won’t let foreigners compete in supplying to American consumers, so the price of food in Michigan remains much higher than on the world market. What about housing? That’s also a big expense for a newly unemployed person. Construction labor and materials have become much more expensive because of increased demand from the countries that grew as a result of globalization.
Consider the public school teacher. If she has been in her job for a few years (2 in California) she has earned tenure and can’t be fired. If she holds onto her chair for 10 or 20 years she’ll be earning $70,000 per year in many systems. She cannot lose her job if she is less effective than a teacher in China or South Korea who earns far less. She benefits from being able to buy a 2010 Ford Fiesta built in Mexico by workers earning $1.50 per hour.
Consider the medical doctor. More than half of her income comes from programs guaranteed by the U.S. government, e.g., Medicare and Medicaid. As long as the U.S. has old people or poor people, she will always have work. Her professional association prevents the licensing of new medical schools that would increase competition among doctors for jobs. Thanks to the reduction in manufacturing costs from globalization, she can afford to purchase a brand new flat-screen TV every day for the rest of her life and give it away after watching one program.
The broad trend seems to be growth in government jobs, growth in health care (essentially a government job because more than half of all health care dollars are spent by the government), and shrinkage in private industry jobs. Another 10 or 20 years of this and 100 percent of employed Americans will work for the government or the health care industry.
Your comment about everybody becoming a government worker illustrates the most serious ticking bomb that threatens the future of American society. I don’t have any good ideas about how to pull out of this “flat spin”, in one way or another it will self correct, maybe after hitting ground at terminal velocity. Personally, as an engineer, I am questioning whether it would have made better sense financially to be a fireman in California; however, I expect the state pensions to be paid in highly inflated dollars within a decade or two.
Regarding fairness, it is quite possible that the 12 bit per hour Mexican factory worker’s conditions have improved more than the laid off American worker’s conditions have deteriorated, so to me this is an example of fairness on a global scale.
Turns out that in the UK the vast proportion of job growth has come from the public sector. The boom years were never booming for non-Government dependant employers. Oh dear.
See: http://burningourmoney.blogspot.com/2008/11/job-stats-of-damned.html
Hi Phil, how are you?
You are right that sometimes inefficiencies in the job market take way too long to correct themselves. But calling the lawyers “GDP reductors” may indicate that you haven’t spent much time in a country with a weak justice system. Our mind often forms the wrong associations, and we have to fight that. For instance, we never think of meter maids when we find a free parking spot—only when we get a ticket. Nevertheless, I agree that professional cartels are a form of monopoly, and should be broken—or forced to behave. I also agree that the best path for this Nation is to remain at the forefront of technology, and the current trends are somewhat worrisome. However, note that between 1999 and 2007 the number of engineering graduates (bachelor) has increased 20% (http://www.asee.org/publications/profiles/index.cfm), the higher education system is still very very strong (high schools, not so good), and many parts of the country are still an enterpreneur’s dream. That is not to say that we can relax, but chances are that we can keep the country running well for a little longer.
Prior to all the recent market upheavals, foreign car manufacturers were opening plants in the US. Building cars here made more sense than building them overseas and transporting them (or perhaps labor costs in the US started getting cheaper than labor in Germany or Japan). I’m not really sure how the difference between new lower fuel costs vs. the threat of piracy during shipping balances out…
Note that VW has a factory in Mexico, where my old GTI was built. Yet they decided to build a factory in Tennessee (http://www.vwvortex.com/artman/publish/printer_2501.shtml).
Does this correspond to a workforce reduction in Germany? Or Mexico? I have no idea.
Re: teaching – note that a mayor of one of the bigger cities in the US recent offered teachers a choice: $40k raise and no tenure, or tenure. This is of course being contested by the union, but it’s an interesting turn of events.
As a third year law student, I can only hope that as a lawyer, I won’t reduce GDP. Suggestions for how to pull that off appreciated 🙂
Your discussion about the economy, the government and technology touches on a number of interesting issues. One important point to note is that the development of the three technologies that you mention – “the container ship, the jet airliner, and the Internet” – was funded to a great degree by the U. S. government, mostly through the Defense Department. Boeing, for example, was able to use technology developed for fighters and bombers (and paid for by the taxpayers) and apply it to civilian airplanes. The Internet was originally the ARPANET. Also, the DOD funded development of containers during WW2, Korea and Vietnam (http://en.wikipedia.org/wiki/Containerization).
What’s interesting about this history is that it is at odds with the prevailing theory in America that the government is a parasite feeding off of the private sector. In fact, government-funded R & D is responsible for most of our leading-edge technology. It’s also responsible a great deal, perhaps most, of our exports. Boeing is our largest single exporter. Oracle, HP, Microsoft, etc. are major exporters. And, of course, our agricultural sector is also the source of many exports. Agriculture, as you mention, is highly subsidized and regulated by the government.
Another interesting point is the way fact the government just gave away this technology to these large corporations. For example, if Microsoft develops new technology, they will typically get a patent on it. Then, if some other software company wants to use that technology, they are required to pay Microsoft a license fee.
In the case of the Internet and many other technologies, the taxpayer funded the development and companies like Microsoft, Boeing, Google, etc. get to use that technology for free. In addition to that, these technologies are playing a role in the stagnation or decline of the standard of living of the majority of the population. So, instead if getting a return on their investments, the taxpayers of the 1940s, 50s, and 60s, funded technology which is making their children and grandchildren poorer.
People are taking “medical vacations” for health care because it’s cheaper to fly overseas and get your surgery done in Thailand rather than drive down the road to the nearest hospital. A lot of medical work like radiology is also being outsourced overseas.
Education-wise, we already see places like your very own MIT offering free courses online. How long before someone offers online education for grade school children? (I’d be surprised if someone somewhere wasn’t already doing this)
Take away lesson? The government can’t protect you from the laws of supply and demand.
The exponential growth of government sure is troubling… with new real estate tax income, all the local and state governments in my area [WA state] have grown massively – some more than 50% measured by headcount.
So now we’re looking at even more cost over time as these workers receive raises, massive retirement guarantees, and more – who’s going to pay for them over time? The rest of us?
Dominik: How not to reduce GDP as a lawyer? It might be too late! You were one of MIT’s brightest students and instead of working as an inventor or business manager you’re now going to be shuffling paper. If you work for a company as in-house counsel that might help minimize the deadweight loss to the economy. If you work mostly with young companies and help them get funding, you might not be too destructive (though again you would have to look at what you’d have done with your life had you not gone to law school). This is not a criticism of your career choice, by the way. In the context of the original posting you are doing pretty well, choosing a career that figures largely in government employment and also one where being locally present and licensed is often required. A law graduate in Bangalore cannot work for the U.S. government. A law graduate in Bangalore cannot show up in a U.S. courthouse to represent a client.
Luke: Your idea that all valuable technology was funded by the government is an interesting one, but I don’t think it has held up to scrutiny by economists. NASA has had some spinoffs but the cost to the taxpayer for those spinoffs has been staggering. The military has done somewhat better, e.g., the Air Force was a big proponent of integrated circuits, but overall the military tends to be conservative in its use of technology. The Navy is famous for using UNIVAC computers that failed in the commercial marketplace decades earlier. Oracle, an example that you cite, was entirely privately funded and the underlying ideas were developed by IBM. You also cite HP, which has had a long-standing policy of not doing any contract work for the federal government because they believe that it will make their company so inefficient that they would never again be able to compete commercially (see Lockheed-Martin for an example). HP will sell its products to the government, but development is all done independently. Do keep in mind that if the government weren’t spending 36 percent of GDP in the U.S., citizens and private companies would have nearly 50 percent more money to spend and they might spend some of that on R&D or innovative products. Government spending is not free…
Philip, I am intrigued by your statement that HP “has had a long-standing policy of not doing any contract work for the federal government …” I googled it but what I found were stories like HP won another billion-dollar federal government contract, etc. So do you mind sharing your source? Thank you.
James: I was an HP employee and that’s one thing that they told me during orientation back in 1982. I don’t think that anything has changed. HP is happy to sell the Federales whatever it is selling to the commercial world and even happier to sell $1 billion worth. But HP does not develop customized products or weapons on a cost-plus basis for the Defense Department. To the extent that HP does IT solutions for the government it is work that has the same character as building IT solutions for a Fortune 500 company.
HP developed the TAC line of ruggedized Unix workstations for the Navy in the 90s. Whether all work was fixed fee or any was cost plus I am unsure. And you do realize that HP now owns EDS – a very serious group of cost plus award fee blue suited Beltway bandits right ? I doubt HP has an aversion to any mode of legal reliable income these days. It would be surprising if HP has the same corporate character it may have had back in the day. We live in a different world now where people job hop and jobs are outsourced when cost effective. Do companies like HP actually retain staff and management long enough to cultivate a corporate culture ? I surmise the culture is how can this division make this level of profitably and meet these growth figures this quarter. I guess I am skeptical of any altruistic reason that HP may eschew a cost plus contract . Perhaps fixed fee DoD work better fits their method of assessing cost and obtaining expected profit levels.
Philg: I wasn’t claiming that all advanced technology development was funded by the government, just most of it. There’s no question that the three technologies that you mentioned were all heavily helped by taxpayer-funded R&D.
I was about to concede your point about IBM, Oracle and relational databases. Then I did some googling and found this document – http://kb.cospa-project.org/retrieve/1998/20040116445.pdf. If you read it, you’ll see that government research grants played a significant role in the develpoment of the technology. One of the IBM researchers was quoted as saying “A very modest federal research investment, complemented by an also-modest industrial research investment, led directly to U.S. dominance of this market.”
Regarding your last point – I suppose it is reasonable to say that if the government collected no taxes, individuals and businesses would have more money to invest in R & D. However, it big business appears to prefer the situation as it stands.
“I doubt HP has an aversion to any mode of legal reliable income these days”
Addendum: it appears there is still a case outstanding against HP by the DoJ, I may need to retract that statement pending case outcome.
“The U.S. Department of Justice has joined three whistleblower lawsuits alleging that HP, Sun, and Accenture paid and received kickbacks from IT partners in exchange for preferential treatment on government contracts, the DOJ said”