The decline of the American worker

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I’ve always liked Fareed Zakaria.

In an Intelligence Squared debate I once saw, he came out in favor of the stupid argument that U.S. guns are fueling Mexican drug violence, but once he had been roundly thumped by the other side, he basically admitted he was wrong and dropped it. That’s the kind of guy he seems to be: reasonable and willing to admit when he’s wrong about something.

I was recently pointed to a fascinating article he wrote about the sort of general gloom and malaise that seems to be accompanying the unfortunate realities of unemployment and economic stagnation in America today. Go read it!

Anyway, Zakaria accurately describes the problems facing middle-class American workers, who predominately work in occupations such as skilled manual labor, managerial work, sales, and minor technical work. He begins with a very macroeconomic argument that holds water: that global competitiveness has opened markets full of workers who are as skilled and productive as Americans in these fields but whose wage requirements are lower. In a nutshell, here’s the core of the problem as he describes it:

Duh, of course a company is going to hire the foreign worker whose income expectation is half the American’s! There’s a lot of truth in his assessments, which are highlighted with striking personal experiences and a light dash of humor.

But sadly, Zakaria’s proposed solutions seem bizarrely unrelated to the issues themselves. While his ideas under the headings “Fiscal sanity” and “Benchmark, benchmark, benchmark” are sensible, and he’s absolutely right that the U.S. tax code is a monster that needs to be nuked from orbit and remade from scratch, there are two big stinkers in his plans.

First is his peculiar fondness for job training. The fact of the matter is that there are basically two types of companies: those that are actively looking for workers, and those that aren’t. The former are willing to train the under-qualified, while the latter may refuse to hire even the perfectly qualified.

Any company that’s looking to hire is a company that’s willing to train new hires to do their jobs. I’ve lived this: I was woefully under-qualified for my current job in terms of concrete skills, but I was hired because of the perception that I would take to on-the-job training quickly.

Obviously there has to be at least a reasonable match between skills and work; a psychologist stands no chance of hired as an aerospace engineer, for example. But there’s no evidence that American higher education is not producing the kinds of skilled workers who earn high wages. As Zakaria himself admits,

[America] has managed to invest in human capital by taking smart, motivated people from around the globe, educating them in the planet’s best higher-education system and then unleashing them in a dynamic economy.

His second idea is even weirder.

Fundamentally, America needs to move from consumption to investment. Everyone agrees that the best way to create good jobs in the U.S. is to create new industries and companies and to innovate within old ones. This means large investments in research, technology and development. As a society, this needs to become our strongest focus.

This paragraph doesn’t seem to follow his focus on workers. Zakaria has spent the whole article talking about how American labor is now at a competitive disadvantage due to above-average wages and more competitive global workers, yet here he goes off on some tangent about consumption and investment. I’m in agreement that consumption is too high, but it’s not clear how this substantially relates to his thesis about the American worker’s wages and competitiveness.

The same challenge can be made to his claim of the necessity for more investment, which he seems to be using as a synonym for “Research and Development”, whatever that actually means. But Zakaria earlier described how operational and technological efficiencies have hurt rather than helped the American worker:

First, technology has produced massive efficiencies over the past decade. Jack Welch explained the process succinctly on CNBC last September. […] Welch gave as an example a company owned by the private-equity firm with which he is affiliated. In 2007 the business had 26,000 employees and generated $12 billion in revenue. It will return to those revenue numbers by 2013 but with only 14,000 employees. “Companies have learned to do more with less,” Welch said.

Moreover, his source of revenue for this perhaps even counterproductive R&D infusion is downright ghastly: a 5% national sales tax. It seems particularly out of place to propose new taxes in an article about how the middle class is screwed. Furthermore, should this tax be allowed to exist, it will surely rise to beyond 5% in subsequent years just as all previous taxes have.

For example, in 1913 when the 16th amendment (which permits congress to tax income) was passed, the lowest tax bracket was 1%, and the top bracket was 7% on incomes over $500,000 (about $10 million in today’s dollars). Today of course the lowest bracket is 10%, and the highest one is three and a half times that.

As another example, the social security payroll tax started as 6%; now it’s 12.4%. And so on and so forth. If Zakaria believes that higher tax burdens will provide the shot in the arm that the middle class needs, he’s nuts.

Furthermore, what would this tax actually fund? Is there a government agency that is so wise and knowledgeable that it accurately knows which companies to subsidize, what industries to promote, and what products to support in the pursuit of this dream? In addition, what’s to prevent the money from being hijacked by the political process and simply used to dole out cash to powerful committee chairs’ favored corporations? In any event, this whole scheme of Zakaria’s contradicts two of his earlier statements:

Ultimately American jobs are created from the bottom up by companies, not from the top down by government fiat.


[There is an] institutionalized corruption at the heart of the American political process, in which it is now considered routine to buy a member of Congress’s support for a particular, narrow provision that will be advantageous for your business.

Moreover, he later talks about punitive Indian taxes in the 70s, how businesses were driven underground by them, and explains that they are now lower in several ways than they are in the U.S.! Zakaria can’t seem to make up his mind whether or not taxes destroy business.

A REAL solution

Let’s return to that original graph showing the core problem:

Unfortunately, none of Zakaria’s ideas really address the actual issue: American workers’ declining wage-competitiveness with skilled foreign workers.

Since we can’t control the rest of the world, we obviously need to focus on ourselves. In order for American workers to be considered, their wages need to drop:

But of course, this would be disastrous, because Americans need to spend a lot! We’re paying for rent, mortgages, cars, insurance, groceries, and all kinds of stuff. Our expenses are high:

Now at this point, some of you are probably looking at me like I’m trying to eat a grizzly bear. In order for this wage drop not to cause massive pain and suffering, the prices of things we need to buy must fall as well:

It’s important to realize that a diminished standard of living is only caused when prices rise faster than wages: Declining wages DO NOT produce a declining standard of living as long as prices fall as well.

For years, we’ve all been focused on increasing our wages, taking for granted that prices in general will rise and that we need more income to maintain our purchasing power in the face of these rising prices; we’ve all been raised with inflation as a virtual constant so that it’s the most natural thing in the world for us to expect that prices will generally rise forever. So if it’s assumed that prices will constantly rise, then it makes perfect sense that wages should correspondingly always rise to keep pace.

But what if prices could remain the same or in fact even fall? Here’s the shocking truth: from 1774 to 1912, prices remained very stable, never deviating too far from what they would have been in 1774:

Let that graph sink in: a product that cost $1 at America’s founding would cost almost the same amount a few years before the first world war, 138 years later. Now THAT’S price stability! And the trendline is even negative, meaning that over time, prices were in fact generally falling.

With such a bedrock of price stability, it was not necessary for each successive generation of workers to focus on earning dramatically more than their parents. In other words, because prices were stable, wages did not have to continually rise to keep pace with them.

Let’s put that graph in perspective, since it only goes up to 1912, which was deliberate on my part. Let me show you the full graph, which continues onwards to 2010:

Gulp. Those pre-1913 spikes look a lot smaller in comparison, don’t they? For the better part of a century, prices have been constantly rising for most consumer goods. The result is that workers’ wages must constantly be rising to even keep pace so they don’t lose their purchasing power. Wage increases are now basically mandatory to keep the cost of living of the American worker from falling, whereas from 1774 to 1912, that wasn’t the case.

Even worse, there are two products that have historically been especially important to the middle class: housing and college education. Unfortunately, for the last 40 or 50 years, these have increased in price even faster than the general rate of inflation:

Middle-class inflation.png

The terrible truth is that high U.S. wages, debt, and spending have been caused by tremendous inflation in the price of all goods and services, with truly astounding inflation occurring in the prices of housing and college. In order to keep up, we’ve been forced to constantly increase our wages, spend more for what we need and want, and take on debt when we couldn’t manage to.

As long as deflation is not allowed to counterbalance inflation and the prices of essential goods and services are constantly rising, the American worker is going to be stuck on the treadmill of trying to make his income keep up with his rising expenses and using debt to plug holes. Even if what Zakaria wanted came to pass and new industries magically sprung into existence that employed everyone and gave them high wages, the cycle would still continue, and it would only be a matter of time before inflation made a mockery of even those wage levels.


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