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fransgeraedts (99.92)

Unwarranted pessimism

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August 10, 2010 – Comments (11)

Erosion of trust (specially in the political institutions) and unwarranted pessimism (specially with regard to the strength of the economies) haunt the western societies. That is dangerous. They could turn into selffulfilling prophecies.

Donnerv wrote a fine post under the title Goodbye America; it was a great ride.  In the post he expresses his pessimism over the future of the US. He believes that globalization (and the interaction of IT with globalization) has sealed its fate. He is especially worried about the job losses the globalization has produced and will produce. While he is of course right in thinking that many jobs have left the states  -and some will leave in the future- he is wrong about the scale of the problem, about the trend and about the overall consequences. He underestimates the strength of the western economies. I repost here my answer as part of a series.

 

Dear Donner

 

Lets try to think this through.

From the bottom up.

(1) Do you see farming disappear to china? And mining in all its forms? And harvesting the sun on the rooftops of the cities and the floor of the american deserts?

Do you see the building of houses and offices disappear? or the building of roads and bridges and railways and ports? of the public buidings and spaces that make a city? of the grid of water and waste and electricity and information?

Do you see retailing disappear to china? The local entertainment? Do you see the care for young and sick and elderly go to the far east? The connected transportindustries? The driving of the bus, the collecting of the garbage, the cleaning of the street? The hairdesigner (grin)?

Do you see education go abroad? The schoolsystem? The universities?Do you see the police go? The justice-system? Social security? Cityplanning? The army?

Collegefootball?

A very large part of an economy  -the parts that are connected to place and to people cannot be moved. Can we agree on that?

(2)Then you seem somehow to entertain the notion that the US (and i presume Western Europe?) will lose out on all the other parts of the worldeconomy that (theoretically) can be moved. I disagree.

(a)Transportcosts play already a greater role then you think. And because of the rising energycosts that role will grow.

(b)Higher labourcosts are offset by higher productivity. Part of that productivity is the effect of the society as a whole. It cannot easily be reproduced.

(c)Labourcosts of jobs that are knowledge-rich will rise much faster worldwide then you assume. They will quickly reach American levels because of the scarcity of talent and the possibility of that talent moving elsewhere  -grin, to the US for example.

(d) In the informationeconomy it is not the informatization of the industrial-economy but the production distribution and consumption of information itself that will be the most important. Do not think bookkeeping, think books, and films, and music, and histories and art and games etc. The West has a very large moat when it comes to content.

(e) Of evermore importance will be the competition between countries and societies as places to live. The West has the best ordered and the most comfortable and the most just societies. That will attract ever more people.

(f) Modernizing a society is very difficult. One of the most important exportproducts of the West will be exactly that: the knowledge how to go about and creating a working modern society.

So to sum up, place and people based economic activities cannot move.(Agri- and services industries -including the state.) A lot of the industrial economic activities could move  -but certainly not all will  -see above.  The largest part of the informationeconomy (contentproduction) will for a very long time to come be very Western indeed.The modernization of societies will become an important export product.

 

(3)  You seem to forget that most important effect of gobalization is an unprecedented amount of economic growth. To put it very simple: the productivity of the labor of twothirds of the population of the world is going to grow in leaps and bounds. That "wealth-effect" means that the demand for agri- industrial- services - and  information -products will grow -strongly -for a long time. That tide will lift all boats. So even if some parts of the industrial economy move away, the parts that remain and the parts of the infoeconomy that are here to stay will produce more then the whole of the traditional industrial economy in the US.

Or to put it again differently. Of course China will grow faster ...and rightly so  ..how could they ever reach our levels of income if they did not...but the US and Western Europe also will grow  ..slower..but fast enough...grin...

11 Comments – Post Your Own

#1) On August 10, 2010 at 12:11 PM, SockMarket (41.96) wrote:

This is the link to Donnerv's post

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#2) On August 10, 2010 at 12:13 PM, davejh23 (< 20) wrote:

Just an observation on point 1:  Many of these jobs are funded by tax dollars.  Some of these cannot exist without domestic production to pay salaries and tax dollars that produce these jobs.  Most depend on increased real production and increasing/stable incomes/tax revenues.  If you're missing this, many of these other jobs disappear...either because there's no money for them, or there's no demand.  We know we're missing the tax revenues, and demand for many non-necessities is declining.

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#3) On August 10, 2010 at 5:14 PM, leohaas (31.56) wrote:

"Do you see education go abroad? The schoolsystem? The universities?Do you see the police go? The justice-system? Social security? Cityplanning? The army?"

Unfortunately, the army is abroad! No doubt that will cause another generation of more trouble for us here in the US.

Other than that: great post!

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#4) On August 10, 2010 at 7:11 PM, Donnernv (< 20) wrote:

Frans:

I've been dreading this, because you post at such length that replying in detail requires a lot of time.  But I have an hour, so I shall undertake the task.

My post said only two things.  Globalization has and will affect our manufacturing jobs profoundly and is now moving into knowledge-based employment.  And the amazing developments in IT have greased the skids for for these changes.

1. Farming will not disappear to China nor anywhere else.  Not many people are employed in the corporate "farms" that now produce our food.  Irrelevant to my post.  No one laid off by Ford is going to become a farmer.

2. Mining will not be negatively affected any worse here than in any other mining country.  I don't think anything in my post suggested all jobs in America would be lost forever.  I was speaking about manufacturing and professional employment...only.  Irrelevant to my post.

3. Harvesting the sun?  Irrelevant to my post.  The employment in this field will be trivial compared to the jobs lost in our core manufacturing.

4. The construction of houses and buildings has disappeared.  There is an enormous overhang of available residential and commercial property.  It'll come back someday.  But this is irrelevant to my post.  I'm talking about...oh, you know.

5. I am tired of this.  I carefully said that many jobs (especially service jobs) would not be affected.  But you choose to start listing many of the kinds of jobs that will stay.  You choose baby sitting, schools, police, entertainers.  I chose barbers, gardeners, pool cleaners, plumbers and electricians.

Your commentary either misunderstands my exclusion of place-related jobs as safe, or is just filling a blog with irrelevant stuff.

6. Transport costs obviously play a part in the out-source decision. An observation of the situation today says that freakin' kids toys can bear that burden.  As can shoes, shirts, skivvies and many other low value products.  Rising transportation energy costs will affect the equation, but the massively greater labor costs in America swamp that increase.

7. Higher productivity can easily be reproduced in the low wage areas of the world.  We sell them the machines to do so.  And so do Germany and England.  In fact, we set up factories in these locales using our best machines and robots.

8. Knowledge-rich job labor rates in the emerging economies will of course rise.  I think my statement that our labor rates will remain stagnant or fall while theirs' will rise is intact.  It's just the time it will take and the pain involved that's in question.

9. Entertainment type information has been a strong point of the American economy.  But the notion that we have a wide moat is mistaken.  India already has Bollywood.  China has had no time nor market for this kind of frivolous nonsense.  Indonesia the same.  When local markets develop for this entertainment, local producers will quickly arise to provide.  It's certainly not rocket science.

10. Places to live are irrelevant.  People live where they were born.  The 1.3 billion people in China and the 1 billion in India are not going to move to America or Germany or Switzerland.  That notion is ridiculous.

11. How do you monetize "knowledge how to go about and creating (sic) a working modern society"?  China, with the most difficult such problem in history, seems to be doing OK with the problem.  India has the same problem.  But how does this save or create American jobs?

12. Frans...I reject your thesis (within the bounds of the points presented in my post).  Jobs will continue to be lost in America.  They are not coming back.  This will harm our middle and upper-middle classes profoundly.

My hour is spent.

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#5) On August 11, 2010 at 5:17 AM, ATH001 (< 20) wrote:

Donnernv, IMHO your hour was well spent. You make very good points.

Frans, the weakness I see in your argument is that the jobs that you mention will not move, are not really producers. Police, firefighters, army, these are public servants, they take from the taxpayer, instead of adding to the tax base. They do a necessary job, but do not add to the reserves of the national kitty.

 Thank you both for the thoughts.

 

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#6) On August 11, 2010 at 6:41 AM, fransgeraedts (99.92) wrote:

Dear Donner,

we agree on a lot. That is always good to see.If i underestimated that agreement in my first reaction i humbly apologize.

Let me try to put our agreement into words.

We both think that jobs that were located in the United States have moved to other places in the world. We both think that that will continue. We both think that the main reason for that movement is lower wages elsewhere. 

We both think that the brunt of those "joblosses" have been in the "manufacturing" part of the economy. You pointed out that also some jobs from the "service" and "information" parts of the economy are moving away. (China versus India is a usefull shorthand for those trends.) I agree.

We also agree that there are many economic activities that can and will not move because they are directly place or people related.

And lastly we agree that the wages of the people who are now doing the "moved" jobs will over time go up and that the wages of the "moved" knowledge-rich jobs will move up fastest.

Where do we disagree?

We disagree the most i think in our conclusions. The title of your post says it all: Goodbye America, it was a good ride. You seem to think that "globalization" will slow the growth of the American (Western) economies. You seem to think that it will empoverish the American people. I think on the contrary that "globalization"  will make the Western economies grow faster and that it will enrich our peoples.

Now of course to reach conclusions that are as contrary as those there have to be also underlying disagreements. And indeed there are. I think the disagreements fall into two categories. There are disagreements hiding in the things we agree on. And then there are the outright disagreements, some of which you mentioned above. Both are important.

Lets begin with the hidden disagreements.

Yes we agree that there are economic activities that cannot be moved. But I think Donner that you underestimate how much of a developed economy as ours that is. And i think the way you talk about that unmovable part shows that.

"Farming" for example. Yes of course not many people are employed on the farm. But there are a lot of jobs directly related to farming and the consumption of food that cannot be moved as well -because the "farming" cannot be moved. We are not going to move American milk to China to make into yoghurt for the American market. When talking about "mining" and "energy" you make the same mistake of dismissing them much to lightly.

The way in which you speak about "services" also makes me believe that you understimate how big a part of the economy that is, how varied and diverse those jobs are, from very low to very high paid, and how big the "unmovable" part of it is.(Healthcare anyone?)

Lets talk "manufacturing". Or the "industrial economy" as i like to call it. That is where the heart of your argument is, the cause of your pessimism.

First of all -and that is vitally important i believe to understand what is happening- manufacturing jobs were disappearing long before they moved away.  Think about it. They were disappearing because of automatization, robotization, computerization and the productivity gains those processes  made possible. And because the demand for industrial consumer goods (cars, houses, televisions, kitchenappliances, yes even plastic toys) was starting to slow down, those markets were beginning to get satiated. 

Why is that important?

Because it means that we are losing jobs in a sector that was already becoming less and less important in our economy.And that relates back to your underestimation of the "other" sectors in our economies.

But also because it makes it possible to see why certain "industrial" jobs will stay, others will come back sooner rather then later and still others will be created "new" inside the western economies.

Here we come to our first outright disagreement. You seem to think that the productivity of the chinese industrial worker is the same as in the US. It is definitely not the case. Study chinese manufacturing a bit better. They use many more people then we do for the same amount of production. The reason for that is obvious. Because of the low wages it is cheaper to do so. People there are cheaper then machines. There is however a second reason often overlooked. While they have lowskilled workers in abundance  -and because of that abundance they can keep wages extra low  -high skilled workers are rare. (And therefore rapidly getting expensive. But that is not the main problem. There simply are not enough of them.)

(You say that we sell highly modern factories over there. I dont doubt it. But I suspect that when those moves are succesfull -and many will not be!- it is because multinationals are moving production closer to markets (transportcosts!) not because they are used for exports. And that means that we do not lose jobs here, but gain them in producing the factories.)

What that means is that industries that are highly "automated" and have to stay that way -because the machines are better then humans in producing certain vital elements- will stay here -i think much of the german industry is a good example of the point i am trying to make.

What that also means is that the point where the wages in China and elswhere have risen to a point that "the costs" of producing there are no longer lower then in the western economies will be reached much quicker then people think: long before wages are equal.

It lastly means that a "renaissance" of "industry" in the US and other Western economies is not just possible but likely. Further advances in "automatization" coupled with new "industrial products" (that cannot be produced by human hand) coupled with a "highly skilled work force" is the recipe. 

Now let me be clear. All of that does not mean that the amount of "industrial jobs" will stop shrinking in the West. That will continue for some time yet. Nor does it mean that miraclously the "industrial economy" will become a larger part of GDP. No, that will continue to become a smaller and smaller part. (Think of the movement of industrial jobs to china as a continuation of "automatisation" by other means.) What i am trying to say here is much more modest in scope but nevertheless very important. I think Donner that you understimate the amount of industrial jobs that will stay in the US and that will be newly created there. There will be "joblosses" in the coming years in the industrial sector, sure, but going forward they will be much smaller then you seem to think. The industrial sector of the US will not disappear, it will stabilize on a lower level. (And the absolute amount of wealth it will produce will begin to grow again. And that will also mean that industrial jobs will be high paid in future. But to understand that i have to bring a new argument to the table!)

That brings us to the three outright disagreements that -more then the different estimates hidden in our agreements that i listed above- explain why my conclusion is so different from yours.

Globalisation produces worlwide economic growth. People underestimate  what is happening. The productivity of the labor of two and a half billion people worldwide will be growing by leaps and bounds! And it will continue to do so for another 100 years at least! Just by implementing the economic practices we already have developed! Donner you do not even mention that! That wave will of course lift all boats. That wave will create a demand for resources, for industrial and "other" goods the world has literally never seen before.

(Lets give an industrial example. Imagine manufacturing 1000 refrigerators with 50 people. Now instead of that imagine manufacturing the most expensive part of 15000 refrigerators with 10. )

Donner, "manufacturing"  that is the industrial economy has been shrinking as part of GDP for a long time. But GDP hasnt! It has grown. It has grown fast even from a historical perspective. Why is that? Because we are witnessing the birth of a new economy. "Services" is actually misleading here. We not yet know exactly how to call it and what its boundaries are. Communication, knowledge, information-economy, i prefer that last one. What is certain is that we have created a whole new group of goods, a whole new category of demand and that that demand is for now and the foreseeable future is unsatiable. "Content" will be King  -and yes we do have a very large moat here in the West when it comes to that.("Services" is misleading because there are services as part of the resource-economy, as part of the industrial economy, services as part of the information-economy.)

Bollywood? When did you last see a bollywoodmovie? But how many indians do you think will see a hollywood blockbuster? The West has the global cultural franchise! Even local cultures will have to pass through it to gain a worldwide audience!

An Armanisuit can be (is?!?)made in China of course, but what makes an Armani suite is purely Italian!

What "content" do you think the Chinese middleclass will want to consume?

And then lastly Donner you underestimate the moat that our societies give us. Give us in all our economic activities: ressource; industrial; information.  Have you any idea how "expensive" the Chinese government really is? In terms of the apparatus, army, police, secret service, in terms of the bureaucracy, in terms of the corruption, in terms of the wrong allocation of capital? Any idea why we are so much better in innovation? Why the new technologies of the last 30 years came again from the west  -and not from Japan? or Korea? Or Singapore? Do you want to take a bet on the political upheavals the rest of the world will undergo in the next 50 years and their human and economic costs? compared to our societies? And Donner people do move! they do not stay where they are born! Without wholescale movements of populations the US would not exist! People move more now then at any time in history! And apart from a few superrich they do move to the West Donner. The best and brightest and the risktakers move to us! They do so because the modernisation of their society moves not fast enough for them! that is the most important advantage we have  ..even though we do not use it as much and as wisely as we should.

All of this of course should not make us complacent. Far from it. What i try to show is that we have lots of chances. That our future can be very bright indeed. But that will only happen if we grab those chances, if we keep developing and learning.

fransgeraedts

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#7) On August 11, 2010 at 7:57 AM, fransgeraedts (99.92) wrote:

Dear ATH,

thanks for your reaction!

i believe you misunderstand my argument. When i speak of the jobs that cannot move then i do not speak only or in the first place or even mostly of public servants. I speak of farmers, and drillers for gas and truckdrivers and wallmartemployees and hairdressers and medical specialists and journalists and garbagecollectors and bartenders ........ etc etc.

The word "productive" is i believe the source of many of our misunderstandings. It is used in at least three different ways. Work in the private sector is "productive", work in the state sector is not. Work on goods/services that compete on the worldmarket and can be exported is "productive", work on goods/services that dont compete and cannot be exported is not. Work that produces goods is "productive" work,  work that produces services is not. I believe all three of those usages are wrong. (Interestingly enough if you combine them you get a certain macho 1950/60/70 type of work as outcome: building airplanes for Boeing for example) But that is maybe something for another post!

 

fransgeraedts 

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#8) On August 11, 2010 at 8:50 AM, russiangambit (29.30) wrote:

I am not optmisitic on the future of the US because ( among other things) US workers are still very protected from the outside competition. It is very hard  to come work in the US legally. And illeglas are very restricted in what they can compete with the american workers.

What would make me optimistic if US started gradually relaxing the immigration policy to allow more competition within the US. That would strengthen the american labot market. Instead US is going the opposite route, making it harder and harder for immigrants to leglally work in the US.

Remember, that when whites came to America, majority of Indians didn't die because of the whites superior weapons, they died of deseases that whites brought that  indians didn't have immunity to them. I am afraid this is what is going to happen, US population will keep hiding behind a wall of immigration laws to protect themselves from globalization and at some point the wall will no longer hold and will come down and US workers will be completely decimated because they didn't have a chance to develop the immunity to the global workplace.

I mingle with a lot of foreigners here and in Russia, and the hard lives many of these people live make them so tough. I wish more americans could meet these people and understand what they are up against and prepare themselves instead of hiding.

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#9) On August 11, 2010 at 12:25 PM, fransgeraedts (99.92) wrote:

Dear gambit,

thanks! 

i agree wholeheartedly with you that immigration policy should be more open. But i have to say compared to what we do here in Europe in that regard the US is doing a much better job. And of course the absolute worst case is Japan. I am convinced that the absence of any meaningfull immigration is the biggest reason for their lost decades.

If i may give the Netherlands as an example. I would like to see the Dutch population grow from sixteen to twenty million. Immigrants from eastern europe and from india and iran and from our traditional immigration countries should be prefered. (Indonesia, Surinam, Israel, Ghana, Marokko, Turkey.) We should offer many places for students, we should attract professionals in the spheres where we want to lead worldwide innovation, we should stimulate investment in and trade with the countries of origin. When we reach 20 million immigration should become the way we hold the population at that level compensating for a low birthrate. 

By the way, i do not think that a well managed immigration program will depress wages. But that is something for another post maybe.

 

fransgeraedts

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#10) On August 13, 2010 at 11:33 AM, dwot (47.53) wrote:

Well said Donnerv.

While I agree that many jobs stay, what was our high paying jobs have left and that is huge.  We are moving retail job sector standard of living.

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#11) On August 16, 2010 at 7:23 AM, fransgeraedts (99.92) wrote:

Dear Dwot,

i agree and disagree. Which is the point here. It is all about seeing both the weaknesses and the strength of the US-economy.

Without reopening the debate:

what if retailwages would rise?

are we not also moving towards a google-employee standard of living?

And how about the idea of creating new even higher paid manufacturing jobs?

Look at this article. It is relevant for the debate here.

http://tiny.cc/h651d

fransgeraedts

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