Manufacturing, Unions, Full Employment and Other Cool Stuff

April 12th, 2013 at 9:06 am

Here’s an interesting piece by my pal Lane Kenworthy on lots of stuff I go on about in these parts.  Many good insights but a few parts in which I see things differently, one of which is very important to our respective views of the way out of the inequality/wage-stagnation cul-de-sac.

His theory of the case is that some of the traditional policy solutions promoted by progressives are out of sync with structural changes throughout advanced economies.  The trends pushing against manufacturing employment and unions, for example, have been ongoing for years across the globe and are unlikely to change much.  But he shouldn’t include full employment in that bin.

First, a word about manufacturing policy.  Our persistent trade imbalances have accelerated the loss of jobs in the tradable-goods sector and this is very much a policy variable (dollar policy, currency management) that we should not abandon.  Also, our competitors, from China to Germany, often have aggressive manufacturing policies that seek new markets with the government sector backstopping private investments under the theory that the private market will underinvest where returns are uncertain.  That government function has a long track record here as well, from railroads to fracking to the internet, laser, GPS, etc.  Most recently, we’ve had some success with public/private investments in advanced batteries.

I doubt Lane would disagree with any of the above.  Neither do I think those policies would reverse the trends he documents.  Germany, for example, is much more invested in promoting manufacturing than we are and they run consistent trade surpluses.  But their manufacturing share of employment is falling much like our own, though from higher levels.

Still, this isn’t just about jobs.  I’m bullish on manufacturing policy, but not so much on job growth in the sector (though slowing the rate of decline is certainly possible).  But it’s also about productivity, innovation, R&D, and unwinding the trade deficit (thus boosting growth), all of which are big deals and all of which could be left on the table if we ignore the sector based simply on the declining employment share.

Second, and this is a bigger deal, I just disagree with the idea the full employment is out of reach:

Full employment can help push wages up even in an otherwise inhospitable market and institutional context. Indeed, in the United States, an unemployment rate around 4 per cent was the key to the past generation’s one brief period of nontrivial wage growth – the late 1990s. But monetary authorities aren’t likely to cooperate, particularly given that monetary accommodation is widely thought to have contributed to the housing bubble and bust that precipitated the 2008 economic crash.

Not only do I think that’s wrong but if it’s right, it undermines one of Lane’s key solutions.

The monetary authorities will pursue full employment but the question is how will they define it?  If they set it too high (i.e., if they assume a NAIRU that’s too high), we’ll fail to create the wage pressure Lane cites above.  But remember, the Federal Reserve is not a “structural trend” like the shifting of manufacturing output from advanced to emergent economies.  They are a policy making body and are not immutable nor impervious to change.  For Keynes’ sake, it was Greenspan of all people who presided over—in fact, accommodated—the full employment period of the latter 1990s.  And post-crash, Bernanke and Yellen have been, in word and deed, acting quite differently than Lane’s post-crash supposition above.  So Lane might be right but I wouldn’t make that assumption and progressives should fight back hard on this one.

Moreover, Lane better hope he’s wrong about this.  That’s because he proposes what I think amounts to a pretty hefty wage subsidy to offset the absence of full employment, collective bargaining, and factory jobs.  But in slack labor markets, we should expect the subsidy to be absorbed largely by employers who can lower the pre-subsidy wage offer such that the transfer becomes one from taxpayers to producers, not workers.  In other words, full employment is complementary to a functioning wage subsidy program of the type Lane envisions.  (And yes, there’s the question of how realistic is that vision, but I’m happy to have thinkers like Lane get outside the box of our tightly cramped political economy of the moment.)

I’ve often stressed that progressives cannot give up on the “primary distribution”—market outcomes—and hope to fix everything with redistribution.  Not only is that an incredibly hard lift, but as market outcomes continuously deteriorate from the perspective of the middle class and the poor, we’ll have to continuously ratchet up the redistributive function.  Good luck with that.

What say you, Kenworthy?

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12 comments in reply to "Manufacturing, Unions, Full Employment and Other Cool Stuff"

  1. foosion says:

    >>Our persistent trade imbalances have accelerated the loss of jobs in the sector and this is very much a policy variable (dollar policy, currency management) that we should not abandon.>>

    Please clarify. Are you saying we should weaken the dollar in order to boost the competitiveness of our workers? If not, why not?

    >>I’ve often stressed that progressives cannot give up on the “primary distribution”—market outcomes—and hope to fix everything with redistribution.>>

    This is an incredibly important point.

    The best off and their supporters like to pretend the market is a natural condition. In fact it is greatly influenced by the political process.

    Government tilts the scales heavily towards the best off. Look at “free trade” policy. We pursue trade policies which cause lots of competition for lower page workers (including a high dollar policy) while insulating higher paid workers (e.g., immigration and licensing laws which protect doctors, lawyers, etc.) and the wealthy (e.g., intellectual property laws transfer vast amounts to pharmaceutical companies). Look at monetary policy.

    We should focus more on these issues.

    • Jared Bernstein says:

      Pretty much, though I don’t think we should “weaken the dollar” as much as a) not worry about monetary loosening that has that effect, b) not try to strenghten the dollar(eg, through restrictive monetary policy) and c) fight back against those who manage their currency to keep the $ artificially weak.

      • Perplexed says:

        In his book “Cornered: The New Monopoly Capitalism and the Economics of Destruction” Barry Lynn’s makes some compelling arguments that our manufactures were seriously weakened vis-a-vis large financial and trading monopolies (like Wall Mart) when Congress ultimately overturned “centuries” of laws aimed at preventing price discrimination:

        “What is important here is merely to note that during the neoprogressive revival, Congress in 1975 undid the entire structure of pricing policy that had been erected in the previous centuries when it passed a law called the Consumer Good’ Pricing Act, which at last legalized price discrimination.”

        Are there any reliable stats. on world demand for labor hours? Shouldn’t we be able to capture productivity improvements by global output per worker/hour and then determine the shifts in proportion by county? (Germany was a special case due to the Euro and the advantages it gained from it in terms of exporting to other Euro members)

        Lynn does a great job of illuminating what our new forms of monopoly look like and how they operate. He suggests that, in the name of “ever lower prices” being the Holy Grail, we have allowed our manufacturing industry to be decimated by huge trading monopolies and their monopoly financier partners.

        If we are going to allow so much legalized monopoly and other forms of rent, is there really any other realistic solution than redistribution?

    • Kevin Rica says:

      I hope that everyone has read “The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy” by Michael Pettis (Princeton University Press).

      Or am I hoping for too much? There a no equations or even graphs.

  2. Perplexed says:

    Wooh, have I unknowingly wandered into the fiction section of the library? Which planet do these conditions on exist on? How is it possible to have a non-fiction discussion of what’s going on here on earth without discussing rents? I know we don’t want to actually measure them and discuss the magnitude of their role because that would threaten so many of our most treasured myths, but doesn’t ignoring them all together just move the entire to discussion to the fiction section? “Market outcomes?” Really? What kind of “market outcome” results in accelerating corporate profits in the face of high levels of capacity under-utilization and high unemployment? Is this how competition drives efficiency in a competitive capitalist economy?

    Here’s a great example of what I can only describe as the “myth of the median”: Kenworthy suggests that, “There will be plenty of demand for these services. As we get richer, most of us are happy to outsource tasks that we lack the expertise and/or time to perform ourselves. And we will likely be able to afford them as the cost of food, manufactured items, and possibly also energy falls1” While this paints a wonderful, utopian picture of increased income and shared prosperity, its driven by a misunderstanding of what the “median” means in a highly skewed distribution. There is no weighting in the median, “we” are not getting richer just because a few of “us” are doing slightly better than the larglely destitute 50% below them. The very few of “us” at the very top, who are capturing all of the gains as “we” get richer, only have needs for a limited amount of baby-sitters and housemaids. In a somewhat normal distribution, this focus on the median might be illuminating, but only serves to conceal and obscure the real underlying distribution that exists here on earth. Kenworthy should at least be using the mode to talk about what level of services most of “us” will be able to afford.

    Since we choose to conceal it by not measuring it, an estimate that rents account for 50% of the difference between the median and the mean might put us “in the ball bark” (although it may seriously understate the reality). The assumption that these are all “market outcomes” is a foundation of sand on which we build way too many policy structures and arguments.

    Looser liberalism at its finest!

    • readerOfTeaLeaves says:

      This comment reminded me of housing-related policy discussions in the early 2000s in my region.

      I’d say the majority of the policy makers on one group that met monthly did not understand the difference between:
      — Mean
      — Median
      — Mode

      This ignorance led to no end of erroneous assumptions and policy snafus.

      If you looked at housing data from the Puget Sound region between 1940 – 1980s, the housing prices for mean, median, and mode were fairly well clustered, let’s say generally between $18,000 – $85,000. The median was probably around $33,500, the mode around $27,000, and the mean around $34,000.

      Beginning in the Reagan era, the spread between the mean, median, and mode began to widen and grow farther apart by the year.

      By the early 2000s, the housing range was more like $260,000 – $8,000,000. That put the median at around $3,800,000, whereas the average was around $550,000. (I’m just giving an example off the top of my head, but for purposes of illustration, it should suffice.) For purposes of illustration, let’s say the mode was around $310,000.

      That widening spread between the mean, median, and mode should have had implications for housing policies. Although the median was a fine stat to used when the 3 numbers were clustered tightly, by the early 2000s as the 3 numbers spread apart, the median actually became less and less informative by the year.

      It actually took me far too long to analyze this inability (of policymakers) to distinguish among the mean, median, and mode as a key problem in the policy process.

      The policies should have been using the mode and the median as the fundamental bases for discussions; unfortunately, by using the median, the assumptions were skewing wayyyy too far to the high priced end of the spectrum.

      I finally talked some staff into building in a ‘quick refresher’ about the meaning of mean, median, and mode into the front end of their presentations. But I suspect that staff at all levels of government fail to diagnose this as a problem in the policy process.

      • urban legend says:

        “Germany, for example, is much more invested in promoting manufacturing than we are and they run consistent trade surpluses. But their manufacturing share of employment is falling much like our own, though from higher levels.”

        Wait a second! German manufacturing employment dropped 8% from 1990 to 2011, U.S. manufacturing jobs declined 23% (despite higher compensation costs in Germany). Is that “much like”?

        • Jared Bernstein says:

          Using FRED data and the series DEUPEFANA for Germany I get a very different result, with Germany manufacturing employment down about from 31.6% to 20%–11.6 ppts–and the US down from 16.2% to 8.9%–7.3 ppts (1990-2011). The larger decline for Germany also reflects re-unification, but if you adjust that out, they’re about the same. What data are you using?

  3. Kevin Rica says:

    The reason that we can’t raise wages is because both parties now support the right of employers to unlimited amounts of cheap labor. How cheap? “$750 a month plus room and board” (and board means living in a tent year round) for a 24/7 job. But, of course, it’s twice what you could get in Peru for similar work. Think I’m making this up? See the WSJ article “Guest Workers’ Flight Irks Sheep Ranchers: With Some Shepherds on Special Visas Abandoning Their Flocks, Industry Joins Calls for Federal Immigration Overhaul.”

    Apparently, ranchers are irked that the indentured servants that they bring here on H2A guest worker visas are skipping for better pay.

    No doubt that Chuck Schumer will be happy to help. (I heard a rumor that a Democrat used to live in that body before he moved in.) Remember, when he passes “comprehensive immigration reform” (no immigrant left behind), all the previous illegal immigrants will no longer be willing to take those wages so they will take other people’s jobs. So the farmers and ranchers will need other people to work for below market wages.

    And than the construction industry, landscapers, meatpacking industry, janitorial services industries will complain that they want equitable treatment. And Diane Feinstein, in the name of an equitable distribution of poor people to all employers will help. This will be an historic effort, even without Teddy Kennedy, who struggled so heroically to make sure that the Fair Labor Standards Act didn’t apply to Gastarbeiter.

  4. save_the_rustbelt says:

    “Still, this isn’t just about jobs.”

    Here in Ohio and Michigan, it is about the jobs.

    With each passing day unemployment and underemployment seem to be increasingly structural (in my simple mind) – increased demand will not fix the problems.

    People who were displaced by NAFTA in the 90s will go into retirement without ever really recovering the income and benefits they once had, and of course that diminishes retirement income and security.

    (When construction recovers small contractors will continue to give jobs to illegals, much cheaper and no guff about working conditions, with the bipartisan blessing of politicians.)

  5. Fred Donaldson says:

    If you add more factories in a country, there is generally lower unemployment than if you don’t.

    Imagine, Mexico’s unemployment rate is much lower than ours, and I would imagine they don’t have all those “discouraged” workers we have here, workers who have given up looking, plus workers part-time, or college grads flipping burgers.

  6. Leman says:

    Why not make the low paying jobs good paying jobs by using the labor laws to prevent employers from exploiting their people? Once upon a time, manufacturing jobs were characterized by low pay, long hours, no benefits, and dangerous working conditions. These conditions were changed by child labor laws, health and safety regulations, the 8 hour day and overtime provisions etc. Why not do the same thing with food service, retail, home health care, hotel and janitorial jobs? Turn the jobs we have into good jobs?