Broke is the new black : Part 2 (Jobs)

I wanted to say more about some of the larger economic forces one of my earlier blog entries: Broke is the new black!

A significant portion of evidence has been provided on this blog before: we've seen graphs of Household Leverage, GDP and MEW, etc.

So what's the story that connects it all up?

Well, there are two: one is the role of jobs in the US economy, and the other is the nature of debt in the typical US household. We shall talk about them separately, and I will try and provide evidence for most of these arguments. Some of the "evidence", unfortunately, will have to be without any statistics to back it up.

Economists, in my opinion, far too often ignore what can't be measured. It can pretty much be summed up in the pithy saying, "The absence of evidence is not the evidence of absence."

First up, we're going to talk briefly about "globalization".

Contrary to popular belief, the "global market" has been global for a couple of thousand years. There is truly nothing new under the sun since the Greeks and Romans wandered to India for its spices. Even in the 19th century, an Englishman could invest in companies around the world without ever leaving the comfort of his drawing room parlor. All this talk about "forces of globalization" is a bunch of twaddle!

The only interesting thing is about the mix in the distribution of labor. That is a dynamic process, and hence, very interesting.

Labor is subject to the same laws of demand and supply as everything else.

Nuclear engineers are paid more than taxi drivers because there are fewer of them. Scientists who design the next generation of nuclear reactors are paid more than the engineers maintaining and running a power plant because there are fewer of them. (Of course, the reason there are fewer of them is because the skill-set is correspondingly "harder".)

Back to America.

After World War II, America was pretty much the only industrialized country left standing. This gave it a huge push in the global market.

America also had the "intangibles" going in favor of it -- a liberal democracy, a strong legal system (with corresponding strong property rights,) and a work-ethic.

It is hardly surprising that when you have virtually no external competition, and a very strong capitalist system in place, that country is going to absurdly well.

Now, let's look at a graph of household income distribution at various percentile levels since 1967. (The graph has been adjusted for inflation, and is being presented in 2003 dollars so it's a fair comparison.)


The key word here is "household" even though it may not be completely obvious.

Back in the 60's very few women worked, and as more and more women started working, household income went from being a 1-person income to becoming a 2-person income. This is not an insignificant fact. Basically, if you look at the bottom half, it took two jobs to replace the income of one. (The top 20th percentile is a lot more complex, and I'm not going to go into that.)

Why would this happen?

Well, for one, the rest of the world started catching up. There's more and more competition, and in a open system, if you don't have specialized skills to sell, you can and should find yourself basically shit out of luck.

Here's the correct way to look at it:

Those who were born post WW II, and found themselves in the labor force in the US in the 60's basically hit the lottery jackpot in being born in the right place at the right time. The average American worker had no more skills than the average worker in Britain, Spain, China, or India, but basically managed to carve out an exceptional lifestyle (comparatively speaking) by being lucky in the birthing sweepstakes.

Let's be blunt about the economic reality: if you have no more skills than a Chinese or Indian worker, you shouldn't expect to have a lifestyle more than a Chinese or Indian worker. Also, since there's a disparity in lifestyle, you should expect the two lifestyles to basically converge.

Brutal? Definitely, but economically realistic.

Please note carefully that this does not imply that your lifestyle must necessarily fall. It is perfectly possible that it will stagnate, and all the adjustment will be in the rising lifestyle of the Chinese or Indian worker. (This is a subtle point.)

In practice, I expect the lifestyle of the American worker to fall, not because the above is not possible but it typically takes more than a generation for the adjustment. (This is just a historical guess not a hard economic law.)

We've seen two waves of this already. Since the 70's, more and more manufacturing jobs moved to cheaper locations, and continue to do so, and the labor market mix in the US turned to the services sector. Since the late 90's, more and more services jobs have moved to cheaper locations, and the labor mix is set to change one more time.

Next up, we're going to examine the role of debt in the US economy.