The Perfect Storm Labor Day 2012

In the movie The Perfect Storm the captain and crew of a fishing vessel make an imprudent decision to the return to their home port with a large catch rather than to run from a gathering storm and lose a lot of money. Two powerful weather fronts combine with a hurricane to produce one of the most dangerous Atlantic Ocean storms of the past century. When a gigantic rouge wave hits the boat, the good crew and captain are lost. As with George Clooney and his crew, the average American worker has been hit with the confluence of three enormous economic storms. All of them seem to be beyond the control of either the government or the ability of our financial system to absorb.

First over the past 20-30 years globalization has gutted manufacturing in this country. Free trade pretty well guaranteed the destruction of large scale industrial employers from high paying unionized jobs in primary steel mills to the low pay operations such as those found in the garment trade. The American worker is caught in a battle of wage arbitrage with employees who will work at near slave labor wages in the developing world.

Regulations, particularly environmental regulations, have shut down entire industries in this country, including the two factories where I worked many years ago. It is just easier to move your operations to a country where there is little in the way of environmental regulations or where a simple bribe will send inspectors off to bother someone else. Likewise the rising costs of benefits and taxes (local, state, and Federal) are contributing to push jobs offshore. Now foreign countries like China, have our physical plants (capital), their labor, and increasingly they are learning how to replicate our technology. We are in trouble.

I have written at length concerning the effects of automation and artificial intelligence in the American workplace most recently in:

The Robots are Coming

Automation is not going away. In fact it is combining with globalization. IBM is replacing computer programmers laid off in this country with programmers in India, the new back office of the world’s industrial combine. New York City famously contracted with an Indian company to process their parking tickets. And, Oh yes, now radiologists in India are reading your X-Rays on the Internet.

Finally, some economists describe the current economy of the developed world in terms of a “Kondratiev Winter.” Nikolai Kondratiev was a Russian economist who studied long term economic cycles. A Kondratiev Winter occurs after major sectors of an economy reach saturation. That has happened in a variety of industries from steel to electronics. Even though prices are dropping, demand is not increasing fast enough to cover the sunk costs in capital. The onset of a Kondratiev Winter “Is characterized by a lack of good investment opportunities that leads to low interest rates. In the past, investments offering exceptional returns or low interest rates, or a combination, led to lowered credit standards which, in turn, created a speculative boom and high debt levels, followed by a crash and financial crisis.” (Wikipedia) Sound familiar?

Perhaps the most important feature of a Kondratiev Winter is an overhang of bad debt that strangles out productive economic activity. The governments of the developed world, as well as the average middle class American are facing an enormous overhang of bad debt. Nearly 1/3 of American homeowners are underwater. That means they still owe more on their house than that house is worth. The baby boom is desperately attempting to pay down its debt prior to retirement. This demographic tidal wave is also downsizing, getting rid of stuff, not buying more stuff. In past recessions the insatiable appetites of the American consumer rode to the rescue. Not this time.

This chart compares the growth of the population with the growth in employment and more importantly the growth in “covered employment” meaning jobs that provide benefits. What it is telling us is that most of the jobs generated during the last four years are low paying jobs without benefits or self employment or contract work that does not provide benefits.

The working class American is in trouble. The growing and unsustainable split between the richest Americans (top 0.2%) and the rest of the country has been discussed so much that no one is bothering to listen anymore. I am not worried about the 1%. The 1% includes some of our most desirable and productive citizens including medical doctors and successful small businessmen. I am a little worried about the 20%. This includes the white collar (managerial class) and the gold collar (technologists). These are the people who do the heavy lifting for the 0.2%. They have good paying relatively secure jobs. I work with a number of outstanding young men who hold bachelors and masters degrees in engineering disciplines. No matter what turns the economy might take, I think defense scientists with degrees and security clearances will be OK.

I am deeply worried about the future of the average man. Forty years ago a man of average intelligence with a high school diploma who was willing to work 40 to 50 hours a week could reasonably expect the income necessary to support a wife, a couple of kids, a house, and a car. This is no longer true. Even two incomes are sometimes not enough. I offered this prayer for those who seek employment back in 2009. It is needed more than ever.

A Prayer For Those Who Seek Employment