The ‘All’ in ‘We’re All in This Together’ Is the Whole World

ITEMS FOR YOUR CONSIDERATION

… that if you just “work hard and play by the rules” you should expect … a decent life and a chance for your children to have a better one. There is just one problem: It’s out of date.

… when Clinton first employed his phrase in 1992, the Internet was just emerging, virtually no one had e-mail and the cold war was just ending. In other words, we were still living in a closed system, a world of walls, which were just starting to come down. It was a world before Nafta and the full merger of globalization and the information technology revolution, a world in which unions and blue-collar manufacturing were still relatively strong, and where America could still write a lot of the rules that people played by.

That world is gone. It is now a more open system.

 Thomas Friedman, New Rules, New York Times, : September 8, 2012.

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Anybody with an idea and a little expertise can set assembly lines in China into motion with nothing more than some keystrokes on their laptop. A few days later, a prototype will be at their door, and once it all checks out, they can push a few more buttons and be in full production, making hundreds, thousands, or more….“Three guys with laptops” used to describe a Web startup. Now it describes a hardware company, too.

Voilà, a Factory in Your Garage, Reading File, New York Times, February 6, 2010.

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Both cyclical and structural effects appear evident in the recession, suggesting that some features of the U.S. economy can benefit from stimulatory monetary and fiscal policy, while others are more permanently damaged and unlikely to respond to such policies.

 Eric Swanson, Structural and Cyclical Economic Factors, Economic Newsletter, Federal Reserve Bank of San Francisco, June 11, 2012.

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After all, borders are not impermeable. On the contrary, globalization – the immense flow across borders of people, ideas, greenhouse gases, goods, services, currencies, commodities, television and radio signals, drugs, weapons, emails, viruses (computer and biological), and a good deal else – is a defining reality of our time. Few of the challenges that it raises can be met unilaterally; more often than not, cooperation, compromise, and a degree of multilateralism are essential.

Richard N. Haass (Director of Policy Planning for the US State Department (2001-2003), To the Victors Go the Foils, Project Syndicate, Apr. 25, 2012.

COMMENTS

When there are no limits to competition, competition destroys the commons – whether that commons is arable land, fish stocks in the ocean, the earth’s breathable air, or the economy in which all the world’s working people must earn an income sufficient to support a family and contribute to the well-being of their communities.

Structural factors that rob working people of living wage jobs are not confinedto the U.S., are not confined to any nation. There are national and local variations, but, fundamentally, the structural problems are global in scope and must be addressed through globally coordinated efforts.

A global system in which one nation outdoes others for a few years, and then another nation outdoes others for a few years, while the global trend is greater hardship for the greater number, is not one the American people should want and it is not one in which a high standard of living can be sustained.

Things Come Undone: One Reason Global Economic Troubles Are Becoming Chronic

ITEMS FOR YOUR CONSIDERATION

We humans devise all sorts of methods for obstructing or “damming” the second law [of thermodynamics] for considerable periods of time. A mundane example: We paint iron to prevent it from rusting.

Frank L. Lambert (Professor Emeritus, Chemistry), Entropy Is Simple — If We Avoid The Briar Patches!, Occidental College website, February 2008.

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Our scenario shows that over the coming twenty years the world evolves from being mostly poor to mostly middle class. 2022 marks the first year more people in the world are middle class than poor. By 2030, 5 billion people – nearly two thirds of global population – could be middle class.

Homi Kharas and Geoffrey Gertz, The New Global Middle Class: A Cross-Over from West to East, Wolfensohn Center for Development, Brookings Institution, 2010.

COMMENTS

When we add a new person to the world we create a need to increase the amounts of energy and materials devoted to the production of food, clothing, shelter and other necessities that keep people alive.  We know this almost intuitively.

We are less aware of the fact that every time we add a new item of wealth (social or material) to the world we also create a need to increase the amounts of energy and materials devoted to maintaining our stock of wealth and to replacing items of wealth when they wear out or break.  We know that our cars malfunction and wear out, weeds grow in our gardens, our toys break, and alienated youth vandalize our buildings, but we tend to see these processes and events as personal or local losses, not as losses to our global stock of wealth.

Essentially, the world’s stock of wealth is an enormous and ongoing confrontation with natural forces that work to undo the things that we have done.  The more wealth the world’s people create, the larger and more costly that confrontation becomes.

This means that growing the world’s middle class (a class associated with enormous amounts of personal and social wealth) comes at the cost of devoting more and more of the world’s available energy and resources to repairing and replacing existing items of wealth.  The rates at which energy and materials are produced must continuously increase in order to produce enough to both maintain the existing level of wealth and add new wealth.

The world is finite.  At some point the rates at which energy and materials must be extracted from natural systems just to repair and replace existing items of wealth bump up against the natural and institutional limits to those rates of extraction.  Economic growth (net increases in global wealth) slows and then stops.

The global economic troubles that began with the 2008 financial crisis seem to have become chronic.  Most economists argue that the world economy continues to be troubled because the world’s governments are not pursuing the correct policies.  A few, though, admit to being perplexed by the persistence of the world’s economic troubles.

Perhaps the heart of the problem is that the world is already bumping up against limits.  Perhaps economic policies no longer work as well as they once did because the policy goal (economic growth) is becoming less and less attainable.

And if economic growth is becoming less attainable, so too is the job growth associated with economic growth.

The Rapid Global Deployment of Increasingly Smarter Machines Overturns Traditional Economic Policy Assumptions About Employment Growth and Income Distribution

ITEMS FOR YOUR CONSIDERATION

Last week Amazon, the online retailer, announced it was buying a robot maker called Kiva Systems for $775 million in cash. … Kiva Systems’ orange robots are designed to move around warehouses and stock shelves.

Or, as the company says on its Web site, using “hundreds of autonomous mobile robots,” Kiva Systems “enables extremely fast cycle times with reduced labor requirements.”

Nick Bilton, Disruptions: At Amazon, the Robot World Comes a Little Closer, New York Times, March 25, 2012.

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The value of the global industrial robot-system market will double to $41 billion by 2020, according to an estimate by Christine Wang, an analyst at Daiwa Capital Markets in Hong Kong. Global unit sales last year jumped about 30 percent to a record 150,000 units, the IFR said.

Reuter, the Kuka CEO, said higher wages in China make investing in robots a simple trade off.

“It comes down to the question: at what cost can a robot do the job more efficiently?”

Richard Weiss, Kuka Robots Invade China as Wage Gains Put Machines Over Workers, Bloomberg, April 12, 2012.

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This is the potential of the “Internet of Things”: billions and billions of devices and their components connected to one another via the Internet. 50 billion devices by 2020, according to companies like Ericsson.

The basic building block of the Internet of Things is machine-to-machine communication (M2M), devices equipped to communicate without the intervention of humans.

Large scale M2M users may offer their services dozens of countries, selling the same devices globally.

Rudolf Van der Berg, The Internet of things, OECD Insights,  January 31, 2012.

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IBM says Watson’s skills — interpreting queries in natural language, consulting vast volumes of unstructured information quickly, and answering questions with a defined level of confidence — can be applied to many industries. It has already sold the technology to WellPoint Inc. (WLP), the U.S. insurer, and Citigroup Inc. (C), and expects to generate billions in new revenue by 2015 from putting Watson to work.

… Martin Kohn, IBM’s chief medical scientist, said in an interview. Using Watson “we have access to much more information than we could possibly accomplish by reading on our own, or even 100 people reading.”

Beth Jinks,  IBM’s Watson to Help Memorial Sloan-Kettering With Cancer, Bloomberg, March 22, 2012.

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There is reason to believe that code kernels for the first Turing-intelligent machine have already been written.

“Two revolutionary advances in information technology may bring the Turing test out of retirement,” wrote Robert French, a cognitive scientist at the French National Center for Scientific Research, in an Apr. 12 Science essay. “The first is the ready availability of vast amounts of raw data — from video feeds to complete sound environments, and from casual conversations to technical documents on every conceivable subject. The second is the advent of sophisticated techniques for collecting, organizing, and processing this rich collection of data.”

Brandon Keim, Artificial Intelligence Could Be on Brink of Passing Turing Test, Wired, April 12, 2012.

COMMENTS

The prevailing U.S. policy approach to creating jobs and distributing income reflects the traditional optimism of economists about long term employment and income distribution trends.  It treats employment growth and the widespread distribution of income through private sector payrolls as beneficial side effects of economic growth that require little attention from government.  The primary concern for government is providing optimal conditions for private sector investment.

The general optimism of economists about employment and income distribution includes a specific optimism about the impact of technology driven productivity growth.  Economists generally acknowledge that the implementation of new production technologies reduces the demand for labor in the industries in which those technologies are introduced.  But, they go on to argue that the workers who are displaced (or their children) find work in new industries (also created by the new technologies).  The net result is greater wealth for society and no permanent upward trend in unemployment.

Assumptions Underlying This Optimism Are Obsolete

In the past, this logic worked fairly well in the U.S.  Today, however, three key assumptions underlying this logic are violated in the real world.

The first assumption is that technological innovations will not be implemented faster than displaced workers can retrain for and find alternative work in emerging industries.  This assumption is no longer operative because unprecedented efficiencies in research and development fields, unprecedented fluidity of capital flows, and unprecedented levels of global competition are generating employment displacement and new skill requirements faster than human institutions can respond.

The second is that global market institutions will always evolve fast enough to keep the global capacity to consume growing as fast as the global capacity to produce grows.  The expanding role of debt financed consumption in the growth of global markets in recent decades and the prolonged duration of the financial and economic crisis that began in 2008 because of the tightening of credit show that this assumption is at least questionable.

The third assumption is that machines can displace only a small portion of human work activity.  This is no longer true.  Recent years have brought businesses massive increases in computing power, lower cost high capacity information storage, and computer programs that use highly sophisticated computational algorithms.  These hardware and software advances are now being deployed to mimic an expanding range of human work activities.

Job Creation and Income Distribution Must Become Direct Goals of  U.S. Economic Policy

If the assumptions on which economists rest their optimism about employment growth and income distribution are now obsolete, then public policies that succeed in stimulating private sector investment growth are unlikely to produce the employment growth and income distribution outcomes needed by the majority of people.  Creating good jobs and implementing policies that widely distribute incomes must become direct goals of government policy making, rather than secondary goals.

To continue with the current focus only on providing optimal conditions for private sector investment will only bring us more of what we now have: declining middle class incomes, more families living in poverty, and too much wealth owned and controlled by too few people.

Overheated Global Competition Drives Job Growth Down

Estimated Job Shortage 2012-13
Estimated Job Shortage 2012-13

Table presented in World of Work Report 2011, International Labor Organization, October 31, 2011, Pg. 9.

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“Non-financial firms have increasingly invested in financial assets at the expense of physical assets. … This is particularly the case with firms in advanced economies, but in recent years, developing and emerging economies have started to exhibit similar trends. …   Empirical evidence shows that rising profitability in the financial sector has played an important role in drawing in investment from the non-financial sector towards the financial sector.”

World of Work Report 2011, ILO, October 31, 2011, pg. 41.

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“The great thing about the new I.T. revolution, says Jeff Weiner, the C.E.O. of LinkedIn, is that ‘it makes it easier and cheaper than ever for anyone anywhere to be an entrepreneur’ and to have access to all the best infrastructure of innovation.”

Thomas Friedman, One Country, Two Revolutions, New York Times, October 22, 2011.

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“… technology investments are playing an increasingly larger role in mid-market companies’ bottom line. Business process automation and technology improvements are the two top contributing factors to the jump in mid-market productivity; new hiring ranked fifth overall. …

“’Technology is on the mind of most mid-market executives,’ said McGee [Tom McGee, national managing partner, Deloitte Growth Enterprise Services, Deloitte LLP].  ‘ … 74 percent of respondents believe globalization is forcing U.S. companies to become more productive to stay competitive … and set themselves apart from the pack ‘”

Deloitte: Mid-Market Executives Increase Long-Term Investments Despite Economic Uncertainty, Deloitte Press Release, Oct. 10, 2011.

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“Despite representing only … 19 percent of employment [in 2007], multinational companies contributed 41 percent to overall productivity growth from 1990 to 2007.”

James Manyika et al, Growth and renewal in the United States: Retooling America’s economic engine, McKinsey Global Institute, February 2011.

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“His solution is to offer a new and altogether different kind of TV set, although in typical CEO fashion, he refuses to elaborate on what that might involve. He simply offers the assurance that a great deal of R&D investment is going into designing a new TV that could reverse Sony’s fortunes.”

Vlad Savov, Sony CEO Howard Stringer: Every TV set we make loses money, Washington Post (originally published in The Verge), Friday, November 11.

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“First, in a global economy, we need to be thinking more about the sources of apparent productivity growth. It matters greatly for wages and employment whether rising value-added per worker is being driven by domestic production improvements, supply chain efficiencies, or by productivity gains abroad. …

Second, government policies designed to increase incentives for business investment, such as accelerated expensing, may have the effect of increasing supply chain efficiency rather than domestic productivity. …

Third, we are effectively flying blind in terms of the effect of the global economy on US workers.”

Michael Mandel and Susan Houseman, Not all productivity gains are the same. Here’s why, What Matters, McKinsey & Company,  June 1, 2011.

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The transformations in communications, transportation, transnational trade and investment flows, geopolitics, and access to advanced technologies that we summarize with the term globalization have greatly multiplied the number of businesses in every sector of the world economy competing for customers.

Moreover, companies are competing for a stagnant number of consumers and consumer dollars.   Although the buying power of working families is growing in the countries experiencing rapid economic growth (called the emerging economies), it is declining or barely growing in many of the advanced economies and in many other parts of the world.  This is greatly intensifying the competition among the worlds much larger number of competing business enterprises.

This environment of overheated competition puts enormous downward pressure on global job growth.  It drives the owners and managers of almost every business enterprise to pursue strategies that are good for the business but destructive to the world’s labor force much more aggressively than would be the case in an environment of moderated competitive pressures.  These strategies include:

  • Investments in financial assets as a way to park money that can’t be profitably invested in production of goods and services
  • Large investments in technologies that reduce work hours without reducing the capacity to meet existing customer demand
  • Large investments in product innovations designed to displace similar products rather than to create new products that meet new needs
  • Large investments in ad campaigns designed to lure current consumers to change consumption activities (e.g., switch from watching TV to playing video games)

The impact of these strategies on employment is fairly straight forward:

  • Profitable investment opportunities are in short supply, so money parked in financial assets is more likely to help generate financial bubbles than to generate new jobs
  • Productivity gains eliminate jobs when demand for products and services is not growing
  • Investments that only lure consumers to replace one product for another, to replace one consumer activity with another, and/or to buy the same product from a different company only move consumers around in the market place; the net effect on the labor force is job churning not job growth.

Overheated global competition will continue to do harm to global job growth until a global policy response creates a mechanism for market sharing and puts boundaries on the use of competitive strategies.  Without that response,  global rates of unemployment, underemployment, poverty, and political upheaval will continue to increase.  And the U.S. will not avoid sharing in these miseries.

Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis

“A second conclusion is that the multilateral system lacks coherence; that is, comparable and consistent disciplines in closely connected areas of international economic interaction. This is particularly notable between trade and finance. The existing system of global economic governance lacks effective multilateral disciplines over exchange rate, macroeconomic and financial policies, or for redress and dispute settlement regarding the negative impulses generated by such policies. In this respect, governance in money and finance lags behind that for international trade. This is a main source of strains in the trading system.”

 Yilmaz Akyüz, Global Rules and Markets: Constraints over Policy Autonomy in Developing Countries, Working Paper No. 87, Policy Integration and Statistics Department, International Labour Office, June 2008

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“Economic integration and interdependence in the world today have reached an unprecedented level. As a result, the globalized economy cannot function for the benefit of all without international solidarity and cooperation. This was highlighted by the global financial and economic crisis that followed the collapse of big financial institutions, and it has underlined the need for developing approaches to new forms of global collaboration.”

Trade and Development Report, 2011: Post-crisis policy challenges in the world economy, United Nations Conference on Trade and Development

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“Global investors increasingly view risk in binary terms: When things are looking calmer on the global economic front, stock markets rise across the world; when things look scarier, they fall. Instead of differentiating among the economies in the United States, Europe and Japan, market measures are moving closely in tandem.

Moreover, because major U.S. companies have operations around the globe, executives are more likely to try to offset weakness in their overseas operations by pulling back on hiring and capital investment domestically, even if the U.S. economy is proceeding apace.”

Neil Irwin, U.S. fortunes increasingly determined in Brussels, Frankfurt, Political Economy Blog,  Washington Post 09/06/2011

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“Concurrent with the shift in power among nation-states, the relative power of various nonstate actors—including businesses, tribes, religious organizations, and criminal networks—is increasing. The players are changing, but so too are the scope and breadth of transnational issues important for continued global prosperity.

The diversity in type of actor raises the likelihood of fragmentation occurring over the next two decades, particularly given the wide array of transnational challenges facing the international community.”

By 2025, the international community will be composed of many actors in addition to nation-states and will lack an overarching approach to global governance.

Global Trends 2025: A Transformed World, National Intelligence Council, PDF version, November 2008

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“Today, some 50,000 multinational enterprises and their 450,000 affiliates employ over 200 million people throughout the world. Their impact is felt in virtually every facet of industry, trade, services and business activities.”

Multinational Enterprises web page, International Labor Organization

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Over the last several decades, the world’s distribution of economic power has shifted along several dimensions.

  • The distribution of power among nations has become more decentralized (the number of nation-states in the world has doubled since 1950, a number of weaker nations – notably the BRIC countries – Brazil, Russia, India, and China – have substantially increased their positions of power in the world economy, and with the cold war over, the most powerful nations have less ability to dictate foreign and domestic policies to weaker nations).
  • The number of economically competing geopolitical units in the world economy has increased dramatically (increasing numbers of bilateral and multilateral free trade agreements have exposed more and more of the world’s local businesses to global competitors; advances in transportation and communications technologies have brought more and more of the world’s state, provincial, and urban governments into virtual face-to-face competition for investments and jobs)
  • The distribution of economic power between the world of national and multinational governing institutions and the world of global business enterprises has shifted in favor of the business enterprises (.the expansion of the number of competing geopolitical actors in the world economy has increase the number and diversity of investment opportunities available to corporations and investors, increasing their power to play off one geopolitical entity against another and thus limit the willingness of governments at all levels to manipulate flows of capital and goods to favor their own citizens).

These shifts in power have wrought a destructive change in the global environment for job creation.

Business enterprises operate under very different mandates than do governments.  The core mandate for every business is to gain market share, not share market gains; to maximize profits for owners and shareholders, not to maximize general welfare.  In the pursuit of that core mandate business enterprises cannot increase employment, pay higher wages, create safer working conditions, pay taxes, or invest in parts of the world where the greatest need for jobs exist, if doing so will alter the balance of competitive advantages in favor of competitors.    Incurring avoidable costs seldom enhances competitiveness; cutting costs often does.

In a world in which governing institutions lack the power to organize and moderate competition so that it serves the general interest and in which the growth of markets is stagnant, fiercely combative and norm-breaking waves of competition among the world’s 50,000 global corporations and among the world’s millions of globally exposed local businesses and governments are inevitable.  Unrestrained job slashing frenzies in pursuit of lower costs are inevitable.  Waves of hiring that manage to materialize cannot be sustained.  High levels of unemployment and underemployment become the permanent state of affairs.

No Real U.S. Job Growth Until the World’s Middle and Lower Income Families See Real Income Growth

The distance between the richest and poorest countries has widened to a gulf. The richest country today (Liechtenstein) is three times richer than the richest country in 1970. The poorest country today (Zimbabwe) is about 25 percent poorer than the poorest country in 1970 (also Zimbabwe). It is sobering to see, amid enormous material prosperity in developed countries, that the real average income of people in 13 countries in the bottom quarter of today’s world income distribution is lower than in 1970.”

Human Development Report 2010 – 20th Anniversary Edition, The Real Wealth of Nations: Pathways to Human Development, p. 42.

Even with the economy in a funk and many Americans pulling back on spending, the rich are again buying designer clothing, luxury cars and about anything that catches their fancy. … Many high-end businesses are even able to mark up, rather than discount, items to attract customers who equate quality with price.

Stephanie Clifford, Even Marked Up, Luxury Goods Fly Off Shelves, New York Times, August 3, 2011.

Trends U.S. Blue Collar Earnings in Manufacturing

Chart source: Richard Wallick, Auto Industry Labor Costs in Perspective,  Bureau of Labor Statistics, Originally Posted: April 22, 2011.

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Increased global spending on yachts, private planes, high end sports cars, multi-million dollar homes, $200 per person meals, and other luxury items does produce a number of new jobs in the world economy – but not many.

Income growth for the world’s middle and lower income working people does the heavy lifting for global job creation.  Increases in spending by middle and lower income families send huge numbers of the world’s global corporations, neighborhood businesses, and governments looking for new employees.

No real income growth for the world’s middle and lower income families translates into insufficient growth in demand for the increasing volumes of goods and services that can be produced by the world economy, and from there almost directly into no progress in the U.S. on reducing unemployment and underemployment.

The U.S. is deeply enmeshed in a demand starved world economy and U.S. economic policy does not directly address that aspect of our situation.