Supply Chains, Productivity, and Economic Growth: The Global Context for Understanding U.S. Employment Growth

SOURCE ITEMS

Canada’s gross domestic product contracted for a second quarter in the three months through June, a Sept. 1 report will show, according to almost all economists in a Bloomberg survey. The economy probably shrank by 1 percent, even worse than the 0.6 percent first-quarter drop.

“When Canada hurts, U.S. exporters do, too,” Bricklin Dwyer, an economist at BNP Paribas in New York, wrote in an Aug. 27 note to clients titled “Canada (not China) matters more.”

Jeanna Smialek, Uh-oh, Canada. China Pales as a Risk to U.S. Growth, BloombergBusiness, August 28, 2015. Accessed August 29, 2015.

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Moody’s Investors Service has revised downward its forecast for GDP growth in the G20 economies to 2.8% next year, from 3.1%. Moody’s says that the revision mainly reflects the impact of a more marked slowdown now forecast in China and more prolonged negative effects of low commodity prices on G20 producers than earlier expected.

Moody’s has slightly revised downwards its GDP growth forecast for China in 2016 to 6.3%, from 6.5% previously. Recently published economic indicators show that China’s slowdown in exports and investment has continued into Q3 2015. In addition, signs that employment growth is weakening point to a more marked and broadly-based deceleration in the Chinese economy than previously expected.

Moody’s revises forecast for G20 economies’ growth downwards to 2.8% in 2016, Press Release, Moody’s Investors Service, August 28, 2015. Accessed August 29, 2015.

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International production fragmentation, in which manufacturing or services activities done at home are combined with those performed abroad, has now taken centre stage. This represents a major point of departure from the so-called “Fordist” production system – exemplified by the American automobile industry – where all economic activity was organised within a single firm located on one site or in close proximity (Feenstra 1998).

Increasingly, firms across advanced and developing countries add value along these global supply chains by completing a specific task associated with the production of a finished product and then exporting it. This may be an important part or component required in the production of a good. It may even be a service that is a vital intermediate input in further production.

Albert Park, Gaurav Nayyar and Patrick Low, Supply Chain Perspectives and Issues: A Literature Review, Part I, World Trade Organization, 2013. Accessed August 29, 2015.

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I prefer to date the slowdown in productivity growth from the end of 2010 because productivity growth (in the nonfarm business sector) averaged a bountiful 2.6% per annum from mid-1995 through the end of 2010, but only a paltry 0.4% since. Other scholars prefer earlier break points. For example, productivity growth averaged 2.9% from mid-1995 through the end of 2005, but only 1.3% since.

Either way, the drop is large, and the scary thing is that we don’t understand why.

Alan S. Blinder, The Mystery of Declining Productivity Growth, The Wall Street Journal, May 14, 2015. Accessed August 29, 2015.

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In advanced economies, where plenty of sectors have both the money and the will to invest in automation, growth in productivity (measured by value added per employee or hours worked) has been low for at least 15 years. And, in the years since the 2008 global financial crisis, these countries’ overall economic growth has been meager, too – just 4% or less on average.

Hence the question on the minds of politicians and economists alike: Is the productivity slowdown a permanent condition and constraint on growth, or is it a transitional phenomenon?

Michael Spence, Automation, Productivity, and Growth, Project Syndicate, August 26, 2015. Accessed August 29, 2015.

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This paper offers an integrated analysis of outsourcing, offshoring, and foreign direct investment within a systems view of international business. This view takes the supply chain rather than the firm as the basic unit of analysis. It argues that competition in the global economy selects supply chains that maximise the joint profit of all the firms in the chain. The systems view is compared with the firm-centred view commonly used in strategy literature. The paper shows that a firm’s strategy must be embedded within an efficient supply-chain strategy, and that this strategy must be negotiated with, rather than imposed upon, other firms.

From the Abstract, Mark Casson & Nigel Wadeson, The Economic Theory of International Supply Chains: A Systems View, International Journal of the Economics of Business, Volume 20, Issue 2, 2013. Accessed August 27, 2015.

COMMENTS

Most economists explain a slowdown in a nation’s economic growth in terms of stagnant productivity growth. Yet it is seriously questionable whether such a thing as the productivity of a nation is a meaningful statistic at this late date in the development of the world economy.

Global supply chains now distribute production processes across multiple nations. Even the local bakery is, even if unwittingly, often part of supply chains that transcends national borders. The development of the global supply chain system has reached such a level of maturity that some researchers argue that the supply chain, not the individual firm, is the key competitive unit in the world economy.

The implications for measuring productivity seem obvious. If the competitive unit is a supply chain, then it is the productivity of a supply chain as a whole that is relevant to economic growth. If supply chains cross national boundaries, then measuring the productivity of only the part that is within a national boundary will obscure the positive or negative impact on total supply chain productivity of the “foreign” firms in the supply chain. The competitive position of the supply chain will not be correctly understood.

In the aggregate, measuring the productivity of a nation’s firms rather than the productivity of the supply chains in which the nation’s firms operate will lead economists and policy makers to misunderstand their nation’s prospects for economic growth. That, in turn, will lead to misguided expectations about employment and wage growth.

Today’s Strengths are Tomorrow’s Weaknesses; Today’s New Hires are Tomorrow’s New Unemployed

In an a single world economy with decentralized policy making, stability for a nation’s economy is not achievable.

SOURCE ITEMS

Cutbacks in demand from overseas customers and domestic energy producers led to the weakest growth in new orders since May 2013, prompting U.S. factories to slow the rate of hiring. At the same time, manufacturing is being underpinned by sustained spending from American consumers who are enjoying low prices at the gas pump.

Bloomberg News, Manufacturing in U.S. Expands at Slowest Pace in a Year, Bloomberg, March 2, 2015.

COMMENTS

Back in the Fall of 2014, economists hailed the strong dollar as evidence of a strong U.S. economy and only whispered warnings about the potential for lost foreign demand for U.S. goods. Similarly, they have hailed the shift in consumer spending that low oil prices allow, but only whisper warnings about the resulting job losses in the energy related industries.

Economists completely ignore the fact that a very large proportion of consumer goods that we American’s buy are produced abroad.  This matters because whatever job growth we get from the shifts from buying gasoline and heating oil to buying furniture, electronic goods, and trinkets will mostly be in lower-wage retail, not in higher-wage production. Moreover, when fuel prices begin to rise again, as they will, consumer spending will shift back into heating oil and gasoline, destroying the retail jobs that were so recently created and restoring jobs in energy industries.

Economists tell us that we have entered a period of positive economic trends; they have been doing this almost every year since the financial crisis of 2008. It’s wishful analysis because economic instability and volatility are build into the institutional structure of world economy.  So, if you just got a new job, don’t count on it lasting.

Are We In An Employment Bubble? Employment Growth in the U.S. Is Fueled By Debt Bubbles and Speculation Bubbles

SOURCE ITEMS

In most U.S. post-war business cycles, recessions were followed by above trend growth in output and employment. After the last three recessions, however, output and employment growth were sluggish. … This paper shows that each of the last three recessions coincided with a collapsing bubble in a category of private fixed investment: commercial real estate (1990-91), internet equipment (2001), and housing (2008-09).

From the Abstract, John Edwin Golob, Investment Bubbles and Jobless Slow-Growth Expansions: A Tale of Three Recoveries, Social Science Research Network, April 5, 2013.

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We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010 to 2014. … It appears that the key to boosting spending in the U.S. economy is subprime lending.

Atif Mian and Amir Sufi, Subprime Lending Drives Spending, House of Debt, June 13, 2014.

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Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows.

Lisa Abramowicz, Wall Street Clashes Over Emerging-Market Bonds as UBS Says Sell, Bloomberg, July 9, 2014.

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“It definitely feels like investors are getting overexuberant, and you can stay in overexuberant conditions for a while,” said Fred H. Senft Jr., director of fixed income and equity research for Key Private Bank in Cleveland. “But when it turns it will turn quickly and it will turn very ugly.”

Bob Ivry, Complacency Breeds $2 Trillion of Junk as Sewage Funded, Bloomberg, July 8, 2014.

COMMENTS

Households can take on more debt as their wealth increases. With more borrowed money, households can purchase more goods and services. Thus, we can get job growth from wealth growth.

But there is a hitch. The wealth growth that fuels job growth can be real or imaginary. When wealth growth is imaginary (speculative wealth bubbles), the new jobs created are unlikely to last. We saw this very dramatically in the housing bubble that preceded the financial crisis of 2008.

U.S. job growth in that era floated on a chimera. It crashed with the evaporation of the chimera.

Millions of people bid up home prices by buying them with the intention of holding them briefly and then reselling them for profit. But this could only work if, somewhere down the road, all of those speculatively purchased homes could be sold to families who wanted to buy them as homes, not investments, and who would pay the higher prices and could pay those higher prices with jobs and real incomes that would endure year after year for decades.

As everyone knew, job and income growth in the U.S. had already been compromised by outsourcing, growing competition from companies in low wage parts of the world, and other changes associated with globalization. There was no reason to believe the future of real job and income growth in the U.S. would be better, so there was no rational basis for housing speculation.

Why did it happen anyway? A good explanation is too many investors with too much money chasing too few real investment opportunities. Two decades of tax cuts for corporations and their wealthy owners (supply side economics) had pumped up the supply of investment capital far beyond the ability of the world economy to absorb it in productive ways. In addition, years of importing goods and services from China had turned China into holder of vast amount of investment dollars.

The problem for people with vast amounts of money is that they can’t spend most of it on consumer goods and services and they can’t just put it in a mattress. They have to invest it. When there is too much money for the existing investment scene, they have to invent new investment opportunities. A whole industry grew up just for the purpose of inventing investment instruments with pretty faces and questionable (sometimes nonexistent) substance. Front and center was the packaging of imaginary housing wealth.

Optimism about the economic scene is rising in the U.S. these days. Are we sure it is not rising on the surface of another speculative bubble? The relevant fundamentals have not changed since the early 2000s: The wealthy have even more wealth; taxes on corporations and the wealthy are still very low; neither U.S. nor global consumer demand are taking off.

Debt in the U.S. is growing again – but on what economic basis? That is the key question. Best bet: the job growth we are seeing now should not be trusted.

Economists at a Crossroads: The Ideology of National Policy Making Sovereignty vs. the Reality of a Global Economy

 SOURCE ITEMS

When Sweden’s Riksbank was founded in 1668, followed by the Bank of England in 1694, the motivation was that a single economy should have a single central bank. Over the next three centuries, as the benefits of instituting a monopoly over money creation became more widely recognized, a slew of central banks were established, one for each politically bounded economy.

What was not anticipated was that globalization would erode these boundaries. As a result, we have returned to a past from which we tried to escape – a single economy, in this case the world, with multiple money-creating authorities.

This is clearly maladaptive, and it explains why the massive injections of liquidity by advanced-country central banks are failing to jump-start economies and create more jobs.

Kaushik Basu (Senior Vice President and Chief Economist of the World Bank and Professor of Economics at Cornell University), Two Policy Prescriptions for the Global Crisis, Project Syndicate, April 23, 2013.

COMMENTS

Since the economic crisis of 2008, most economists have been telling political leaders and their constituents what they want to hear – that national policy making sovereignty is still viable.  (Implement the right policies and your nation will do well no matter what is happening in the rest of the world.)

The time is up for this kind of political expediency.  With more than four years of policy failure now weighing on the world’s political leaders and no promising economic corners in sight, economists can only lose the last of their credibility by continuing to tell policy makers that they are the sole masters of the destinies of their peoples.

The choice for the field of economics is clear: take a chance that some political leaders and some constituencies are ready to acknowledge that national policy making sovereignty is a thing of the past.  That’s the only approach that will save the field of economics from becoming an object of contempt.

See related source items and comments in earlier blog posts:

Accumulating Evidence Shows That the World’s Nation-Centered Economic Policy Making Paradigm is Obsolete, March 21, 2012.

The World Economy’s Demolition Derby of Competing and Overlapping Economic Policy Making Entities, January 22, 2012.

What Happens In Vegas Doesn’t Stay In Vegas: National Policies Have Global Consequences, November 30, 2011.

Fragmented and Weakened Global Governance Perpetuates the World’s Employment Crisis, September 9, 2011.

Global Shortage of Skilled Workers is a Myth; Global Failure to Create Jobs is the Reality

SOURCE ITEMS

Chart-Global Working Age Population, 2000-2010

Data Source: World Population Prospects: The 2010 Revision, Population Division, Department of Economic and Social Affairs, United Nations.

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Last May I wrote about Coursera — co-founded by the Stanford computer scientists Daphne Koller and Andrew Ng — just after it opened. … When I visited last May, about 300,000 people were taking 38 courses taught by Stanford professors and a few other elite universities. Today, they have 2.4 million students, taking 214 courses from 33 universities, including eight international ones.

 Thomas Friedman, Revolution Hits the Universities, New York Times, January 26, 2013.

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According to UNESCO data, 177 million students participated in formal tertiary education around the world in 2010, an increase of 77 million students since 2000, or 77% (UNESCO Institute for Statistics, 2011).

Education at a Glance 2012, OECD indicators. OECD Publishing, September 2012.

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The Washington-based bank yesterday projected the world economy will expand 2.4 percent, down from a June forecast of 3 percent, after growing 2.3 percent in 2012. It halved its forecast for Japan, cut the U.S. projection by 0.5 percentage point and predicted a second year of contraction in the euro region. It also lowered projections for emerging markets led by Brazil, India and Mexico.

Sandrine Rastello, World Bank Cuts Growth Forecasts as Developed Nations Lose Steam, Bloomberg News, January 16, 2013.  

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In recent years, the proportion of high-skill migrants has been rising – from 19 percent in 1980 in the United States, to 26 percent in 2010, for example – as immigrants filled demand that domestic supply alone could not match.

The World at Work: Jobs, Pay, and Skills for 3.5 Billion People, McKinsey Global Institute, June 2012.

COMMENTS

The world economy has no shortage of workers and no shortage of well educated and skilled workers.  It has a devastating shortage of jobs for people of working age.

The brutal reality is that insufficient global job creation is the problem.

Flooding the world’s labor force with more and more highly educated and skilled workers will not solve that problem.  It will only expand the population of underemployed and inappropriately-employed college educated workers.

If a shortage of skilled workers really did exist, the world’s global corporations, which are awash in record profits and holding large amounts of cash, would be spending much more on worker training and aggressively lobbying governments to increase investments in higher education.  Instead, it’s only lip service for investments in education and training and, in richer countries like the U.S., lobbying for more visas for the world’s growing supply of skilled workers.

A new governmental approach to job creation is the solution.

Governments must shift from passively accepting private sector job creation failure to actively driving private sector job creation decisions.  To begin, they must stop competing with each other for the investment attention of global corporations and start working together to demand more job creation from those corporations.

More Evidence That Global Policy Making is the Only Path to Job and Income Growth

SOURCE ITEMS FOR YOUR CONSIDERATION

The size and composition of spillovers across countries is one of the many issues that have resurfaced in the wake of the Great Recession. It is now apparent that events in some countries can have profound spillovers elsewhere which are not limited to their immediate neighbors but can ricochet around the globe.

Although progress is being made, the financial sectors in large macroeconomic models are poorly developed and, at an even more basic level, there are no strong theories as to why financial markets are as closely linked as they appear to be in the data.

The structure of a typical large macroeconomic model generates low correlations of output, bond yields, and (where modeled) equity prices across countries. This does not correspond to the high correlations actually seen in the data. Imposing these financial market correlations produces estimated output spillovers that are much closer to those seen in the data, but we lack a comprehensive model explaining why these international asset price correlations are so high.

Bayoumi, Tamim ; Vitek, Francis, Macroeconomic Model Spillovers and Their Discontents, Working Paper, International Monetary Fund, January 2013.

COMMENTS

In other words, most economists are holding us back, not leading us forward.

Nations are more economically interconnected that most economists admit.  Really, we live in one world economy, not a world of national economies, and the scope of policy making must match the scope of the economy.  Otherwise, we will keep getting the terrible job and income growth consequences and the associated domestic and geopolitical turmoil we have been getting.

Liberals and Conservatives Share an Outmoded Belief that Underpins False Hopes for Job Growth

ITEMS FOR YOUR CONSIDERATION

With five cameras, a sonar sensor that detects motion 360 degrees around it, and enough intelligence to learn tasks within an hour, Baxter is designed to work safely alongside humans and do simple jobs such as picking items off a conveyor belt. It’s also cheap enough, at $22,000 a unit, so that the investment math works: If Baxter performs three years of eight-hour shifts, it’s the equivalent of labor at $4 an hour … To teach Baxter a job, a human simply grabs its arms, simulates the desired task, and presses a button to set the pattern.

Brad Stone,Smarter Robots, With No Wage Demands, Bloomberg BusinessWeek, September 18, 2012.

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Anyone who endured Macroeconomics 101 was taught that recessions and depressions occur because of insufficient demand or from overproduction and a general glut of things that no one can buy. This explains the still popular Washington economic cure, which involves artificially generating more economic demand via federal outlays.

The opposite perspective emerges from Say’s Law (named after Jean-Baptiste Say): the proposition that supply creates its own demand when economies are unshackled.

Wayne Crews, Stimulating Demand Misses the Point, Forbes Magazine, September 26, 2011.

COMMENTS

Now that we are so far away from the trauma of 2008, experts generally agree that policies haven’t worked as expected – but they continue to hope that GDP growth will produce massive job growth.  That hope is based on a shared belief that increases in GDP require equivalent increases in job growth.

The two sides offer competing formulas for stimulating GDP growth, but both rest on this belief.  Liberals call for increasing consumer demand (demand side economics), which in turn should generate more investment and more jobs.  Conservatives call for increasing investor funds (supply side economics), which in turn should increase hiring and then generate more consumer demand.  Both formulas end up in the same place: high GDP growth and a low unemployment rate.

The key connection for both formulas is the belief that the production of commodities that will be sold in markets is primarily dependent on human activity.  More production requires more human activity.

Well into the 20th century this belief had considerable validity.  It no longer does.  Machine activities have replaced large portions of human activity in the production of commodities for sale in markets, and more machines are being brought on line every day around the world.  Increasingly, machines are not only replacing physical production activities (like assembly line tasks), they are replacing information gathering and decision-making tasks.

In this context, the old formulas for job growth don’t work.  A large amount of investment in buildings and machines produces only a tiny amount of job growth.

In the 21st century, jobs must be created intentionally, not as a byproduct of investment growth or demand growth.  Competing companies can’t do that kind of intentional job creation without putting themselves out of business.

Only governments can intentionally create jobs.

Hard Working? Creative? Strong Language and Computer Skills? Earn Up to $4 Per Hour in the New Global Labor Force

ITEMS FOR YOUR CONSIDERATION

The job didn’t pay much: four bucks an hour if you really hustled. But for Catherine Fraser, a recent community college graduate from Mountain View looking to pick up a little extra spending cash, the work was a hoot.

… said analyst Martin Schneider with 451 Research. “Like manufacturing has done forever, crowd-labor lets us break down a job into tiny components, where one bit of fact-checking or writing a few sentences is now the equivalent of gluing that chip onto a computer board.”

… The larger question — and one with huge global implications as crowd-sourcing redefines and in some cases kills traditional jobs and long-established labor-management models — is whether the crowd-labor pool could essentially become one big worldwide digital sweatshop. While industry studies show average hourly earnings across all categories range from about $7 in India to $16 in Western Europe, the fast-growing segment of micro-taskers earn half that on average, and some make only $1.50 an hour.

Patrick May, ‘Crowd labor’ helps spur social networking revolution, San Jose Mercury News, Updated: 05/01/2012.

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Series Index May

Series Index Apr

Rate of Change

Employment Index

50.8

54.2

Slower

Business Activity/Production

55.6

54.6

Faster

New Orders

55.5

53.5

Faster
Source: May 2012 Non-Manufacturing ISM Report On Business, Institute for Supply Management, June 5, 2012

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For Great Wall, a private sector Chinese car maker that employs 50,000 workers, the Swiss robots and other machinery that line its bright factory floor produce more than cost savings. The company hopes they will help it build cars good enough to compete with the global auto makers.

According to Nomura, 28 percent of factory machines in China use numerical controls – one measure of automation. That may be far lower than Japan’s 83 percent, but China is growing far faster than Japan did at a comparable stage of development, says Ge Wenjie, a machinery analyst with Nomura.

In other words, China may soon be known less for cheap Christmas toys and more for high-end medical equipment, luxury cars and jet engines.

By Don Durfee, Analysis: Robots lift China’s factories to new heights, Reuters, June 3, 2012.

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Unit labor costs fell in 23 of 47 service-providing industries, the most since 2003 …

Output per hour increased in 32 of the 47 [service-providing industries] industries studied.  In most of these industries, productivity rose as output growth was accompanied by declines or more modest increases in hours.  Several  industries posted double-digit productivity gains as a result: local as well as long-distance general freight trucking; refrigerated warehousing and storage; radio and television broadcasting; wireless telecommunications carriers; and travel agencies.

In a few industries, productivity rose despite falling output.  In industries such as postal service; couriers and messengers; video tape and disc rental; photofinishing; and newspaper, book, and directory publishers, rising labor productivity reflected declines in both labor hours and output, with hours falling more rapidly than output.

Productivity and Costs by Industry: Selected Service-Providing and Mining Industries, 2010, Economic News Release, U.S. Bureau of Labor Statistics, May 31, 2012.

COMMENTS

During the 20th century each new generation of U.S. workers faced declining employment opportunities in agriculture, mining, and manufacturing.  But those lost employment opportunities were offset by growing employment opportunities in government and private service sector industries.

This is no longer the case.  Job growth in government and service sector industries has slowed considerably.  Moreover, some government agencies and service sector industries are embracing new production technologies and becoming job shedders themselves.

The hallmark of the first half of the 21st century may well be a decades long global employment crisis.  National governments are still trying to apply economic remedies carried over from the 20th century in a world that is vastly different.  National economic sovereignty is gone.  Rich and poor nations alike are now joined at the economic hip in a single world economy.

Sticking with the “each nation goes it alone” strategy for addressing the global employment crisis isn’t working.  Rather than getting increasing prosperity, U.S. working families and local business owners are getting a larger share of the world’s very high level of poverty.

The practical alternative for the U.S. is to join with the world’s other nations to build institutions that coordinate national economic policies and set minimum global standards for corporate behavior, working conditions, wages and benefits.

Globalization cannot be undone, so there is no other choice.

Time is Running Out for the “All News is Good News” Spin on U.S. Employment Prospects

ITEMS FOR YOUR CONSIDERATION

Payrolls climbed by 69,000 last month, less than the most- pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate called for a 150,000 May advance. The jobless rate rose to 8.2 percent from 8.1 percent, while hours worked declined.

Timothy R. Homan, Employment in U.S. Increased 69,000 in May, Bloomberg, June 1, 2012.

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The proportion of Americans in their prime working years who have jobs is smaller than it has been at any time in the 23 years before the recession, according to federal statistics, reflecting the profound and lasting effects that the downturn has had on the nation’s economic prospects. … The percentage of workers between the ages of 25 and 54 who have jobs now stands at 75.7 percent, just a percentage point over what it was at the downturn’s worst, according to federal statistics.

Before the recession the proportion hovered at 80 percent.

Peter Whoriskey, Job recovery is scant for Americans in prime working years, Washington Post, May 29, 2012.

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A gauge of manufacturing in the 17-nation euro zone fell to a three-year low of 45.1 in May, indicating a 10th month of contraction, while unemployment reached 11 percent, the highest on record. China’s Purchasing Managers’ Index dropped to 50.4 from 53.3, the weakest production growth since December.

Simon Kennedy, Global Growth Heads for Lull as Europe Output Shrinks,  Bloomberg, June 1, 2012

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Markit chief economist Chris Williamson attributed the [manufacturing] slowdown to “a near-stagnation of export orders, reflecting deteriorating demand in many overseas markets, notably the euro zone but also emerging markets such as China.”

Steven C. Johnson with editing by Chizu Nomiyama, Weak export demand slows May manufacturing growth: Markit, Reuters, June 1, 2012.

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“We are living in very unusual times,” said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

Jeff Sommer, Flights to Safety Can’t Hide the Dangers, New York Times, May 12, 2012.

COMMENTS

Since the official end of the Great Recession, economists, with very few exceptions, have reiterated optimism about U.S. job growth following economic news releases, whether the news was good or bad.  This optimism was and is untenable.

Even after decades of economic globalization, U.S. economists continue to make the mistake of treating nation to nation variations on larger global employment themes as though they are largely autonomous national employment themes.  This mistake leads economists to carry forward into the current era a trust in nation-based economic analysis tools and nation-based economic policy formulations that were developed for an economic era that is all but gone.

Until U.S. economists revise their analytical approach and policy formulations to fit the global economic era in which we all now live, Americans will continue to be fed hopes about U.S. employment trends that are largely destined to be disappointed.

In Bill Clinton’s 1992 presidential campaign the phrase, “It’s the economy, stupid”, was used as a reminder to campaign workers to stay on message.  It became fairly well known outside the campaign and is still occasionally quoted.

Long ago, U.S. economists should have revised that phrase to “It’s the world economy, stupid.”

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.