Thursday, February 18, 2010

Chinese Labor Costs, Tea Partiers as True Believers

Source: Lett and Banister, China's Manufacturing Employment and Compensation Costs: 2002-2006, Bureau of Labor Statistics Monthly Labor Review, April 2009.
Tuesday evening, I was reading Don Peck's generally excellent cover piece, How a New Jobless Era Will Transform America in the March Atlantic. The piece lays out the social damage caused by extended unemployment. A short passage from the introduction will serve to summarize the main themes of the piece.
The broadest measure of unemployment and underemployment (which includes people who want to work but have stopped actively searching for a job, along with those who want full-time jobs but can find only part-time work) reached 17.4 percent in October, which appears to be the highest figure since the 1930s. And for large swaths of society—young adults, men, minorities—that figure was much higher (among teenagers, for instance, even the narrowest measure of unemployment stood at roughly 27 percent). One recent survey showed that 44 percent of families had experienced a job loss, a reduction in hours, or a pay cut in the past year.

There is unemployment, a brief and relatively routine transitional state that results from the rise and fall of companies in any economy, and there is unemployment—chronic, all-consuming. The former is a necessary lubricant in any engine of economic growth. The latter is a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps society’s most noxious ill.

The worst effects of pervasive joblessness—on family, politics, society—take time to incubate, and they show themselves only slowly. But ultimately, they leave deep marks that endure long after boom times have returned. Some of these marks are just now becoming visible, and even if the economy magically and fully recovers tomorrow, new ones will continue to appear. The longer our economic slump lasts, the deeper they’ll be.

If it persists much longer, this era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.
The entire thing is very well worth reading. I have intimate personal acquaintance with this issue - my Dad had an extended period of unemployment that began during the economic backwash from the 1973 oil shock, and I still bear a few psychic scars from that episode.

I was musing on this piece, and couldn't help thinking of the statistics in Chinese steel production I examined a few days ago.  In particular, Peck's piece gives the example of "Errol", a young unemployed machinist:
NO YOUNG PEOPLE were present at a seminar for the unemployed held on November 4 in Reading, Pennsylvania, a blue-collar city about 60 miles west of Philadelphia. The meeting was organized by a regional nonprofit, Joseph’s People, and held in the basement of the St. Catharine’s parish center. All 30 or so attendees, sitting around a U-shaped table, looked to be 40 or older. But one middle-aged man, one of the first to introduce himself to the group, said he and his wife were there on behalf of their son, Errol. “He’s so disgusted that he didn’t want to come,” the man said. “He doesn’t know what to do, and we don’t either.”

I talked to Errol a few days later. He is 28 and has a gentle, straightforward manner. He graduated from high school in 1999 and has lived with his parents since then. He worked in a machine shop for a couple of years after school, and has also held jobs at a battery factory, a sandpaper manufacturer, and a restaurant, where he was a cook. The restaurant closed in June 2008, and apart from a few days of work through temp agencies, he hasn’t had a job since.

He calls in to a few temp agencies each week to let them know he’s interested in working, and checks the newspaper for job listings every Sunday. Sometimes he goes into CareerLink, the local unemployment office, to see if it has any new listings. He does work around the house, or in the small machine shop he’s set up in the garage, just to fill his days, and to try to keep his skills up.

“I was thinking about moving,” he said. “I’m just really not sure where. Other places where I traveled, I didn’t really see much of a difference with what there was here.” He’s still got a few thousand dollars in the bank, which he saved when he was working as a machinist, and is mostly living off that; he’s been trading penny stocks to try to replenish those savings.

I asked him what he foresaw for his working life. “As far as my job position,” he said, “I really don’t know what I want to do yet. I’m not sure.” When he was little, he wanted to be a mechanic, and he did enjoy the machine trade. But now there was hardly any work to be had, and what there was paid about the same as Walmart. “I don’t think there’s any way that you can have a job that you can think you can retire off of,” he said. “I think everyone’s going to have to transfer to another job.” He said the only future he could really imagine for himself now was just moving from job to job, with no career to speak of. “That’s what I think,” he said. “I don’t want to.”
Machinists, of course, work with metals: possibly aluminum, brass, etc, but chiefly steel. So Errol can roughly serve for now as the human face of this situation with global steel production:

US steel production has roughly halved since 2006, and so jobs for folks like Errol working with that steel are naturally going to be very hard to find.

Peck spends most of his piece on an extended exploration of the psychological damage caused by unemployment.  However, at the end, without much detail, he tacks on the conventional answer that the left has to this situation: the government should borrow more money and use it to stimulate the economy:
Of necessity, those solutions must include measures to bolster the economy in the short term, and to clear the way for faster long-term growth; to support the jobless today, and to ensure that we are creating the kinds of jobs (and the kinds of skills within the population) that can allow for a more broadly shared prosperity in the future. A few of the solutions—like more-aggressive support for the unemployed, and employer tax credits or other subsidies to get people back to work faster—are straightforward and obvious, or at least they should be. Many are not.

At the very least, though, we should make the return to a more normal jobs environment an unflagging national priority. The stock market has rallied, the financial system has stabilized, and job losses have slowed; by the time you read this, the unemployment rate might be down a little. Yet the difference between “turning the corner” and a return to any sort of normalcy is vast.

We are in a very deep hole, and we’ve been in it for a relatively long time already. Concerns over deficits are understandable, but in these times, our bias should be toward doing too much rather than doing too little. That implies some small risk to the government’s ability to continue borrowing in the future; and it implies somewhat higher taxes in the future too. But that seems a trade worth making. We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come. We have a civic—and indeed a moral—responsibility to do everything in our power to stop it now, before it gets even worse.
The most able and authoritative proponent of this view is Paul Krugman.
I haven’t gone through the budget proposal in detail yet. But there’s no escaping the sense that this is a tremendous comedown from the hopes of a year ago.

As many have pointed out, the administration projects high unemployment for years to come:
So what’s the response to this dismal, family-destroying prospect? A brief, small additional stimulus, followed by a spending freeze. In essence, the administration is accepting mass unemployment as just one of those things we have to live with.

Now, we all know that this mainly reflects political constraints; this isn’t an Obama-bashing post. But think about how sick our political system is, if this is the best we can do. Nobody — not the Fed, not the administration, not Congress, is willing to do anything to create jobs despite dire projections.
Meanwhile, the conventional center-right view of the 60th senator that seems to govern actual policy (whoever it is on any particular day) is that enough has been done, except for maybe a small jobs bill of some kind (ie in the same direction as Krugman, but much less so out of fear of making the deficit worse).

The assumption behind these proposals is the following diagnosis: the great recession was like the great depression of the 1930s or Japan in the 1990s - massive overborrowing by individuals and overleverage of financial institutions followed by insolvency of the financial system causing depression (if the financial system is allowed to collapse) or prolonged stagnation (if not). The underlying problem is a lack of aggregate demand for goods and services, and this can be improved by the government taking up the slack on the borrowing front, and using the money to do something-or-other more-or-less useful (such as fixing up the infrastructure) and providing an alternative source of demand while everyone else works down their debt and gets in a position to begin demanding more goods and services again.

Clearly, this was pretty much an accurate analysis of what happened in the US great depression. And it clearly contains a significant element of truth now: no question we are in the aftermath of a binge of overleverage. However, it's not clear that it's the only problem we have, or even the worst.

In particular, let's think about this: what is it going to take for Errol, our gentle 28 year old machinist above, to have a long and fulfilling career in his chosen line of work? He's in Pennsylvania. As Bob Herbert relates in the New York Times recently, there is plenty of infrastructure in need of fixing in Pennsylvania.
Gov. Ed Rendell likes to tell a story that goes back to his days as mayor of Philadelphia.

As he recalled, the city had a long cold snap with about a month and a half of below-freezing temperatures. Then, abruptly, the mercury rose into the 60s, he said, “and 58 of our water mains broke, causing all sorts of havoc.”

The pipes were old. Some were ancient. “My water people told me that some had been laid in the 19th century,” said Mr. Rendell, “and they were laid shallow, without much protection. So with any radical changes in temperature, they were susceptible to breaking. We had a real emergency on our hands.”

Infrastructure, that least sexy of issues, is not just a significant interest of Ed Rendell’s; it’s more like a consuming passion. He can talk about it energetically and enthusiastically for hours and days at a time. He has tried to stop the hemorrhaging of Pennsylvania’s infrastructure, and he travels the country explaining how crucially important it is for the United States to rebuild a national infrastructure landscape that has deteriorated so badly that it is threatening the nation’s economic viability.
Alright, so the federal government could continue to run a big deficit, fix a bunch of old infrastructure in Pennsylvania (and elsewhere) and Errol might find a job in that effort for a while. But clearly, the US, with its strong political resistance to paying taxes, can only increase it's national debt up to a certain point, and so after a few years such a government program would have to cease (if indeed it were politically feasible even to start it).  So that gets Errol to, say, his mid thirties as a much more experienced and capable machinist.  Then what is he to do?

It seems to me that Errol has a much deeper problem: what is it that some US company can employ Errol to make that cannot be made much cheaper in China? And do not the data on Chinese steel production (above) and Chinese transportation and housing, make it clear that the Chinese have every intention of building industrial production capacity that completely dwarfs that of the US?

In search of data on comparative labor costs, I discovered the the US Bureau of Labor Statistics sent a couple of experienced labor statisticians to China to sort out the data situation there.  The latest summary of their work is here, and the key graph is this one:

While Chinese wages are increasing, they clearly have an incredibly long way to go before they reach anything like Western levels.  The current average for manufacturing wages in China is less than $1/hour.

A quick Google search for "Chinese Machinist" quickly turned up ads for companies who would be competing with any would-be employer of Errol. Here's Shanghai Sourcing:

And here, from the same BLS report above, is the size of Chinese manufacturing employment:

Note the scale - 100 to 120 million people (the dip in the 1990s is due to state owned businesses shedding large numbers of employees as they became more efficient, while the recent growth in employment is largely due to the success of the private sector).

Let's compare this to US manufacturing employment (data from the BLS establishment survey via Fred - Employees on Nonfarm Payrolls: Manufacturing from 1950 to January 2010).

Firstly, note the vertical scale - US manufacturing employment has only ever been about a fifth the size of Chinese manufacturing employment.

But, and perhaps more importantly, I want to address a reaction I suspect many readers might have - "Oh, we've been dealing with Asian competition for decades now, yeah it's not good, yeah unemployment in Michigan is bad, but the sky hasn't fallen."

Indeed, this is true.  However, I suggest that the problem with China is an order of magnitude larger than the earlier problem with Japan and Korea.  Firstly, those countries have population of about 130 million (Japan) and 50 million (Korea).  China has a population of 1.3 billion - ten times larger than Japan - and is determinedly trying to bring them all into the twentieth century.  Secondly, as the labor cost graph higher up shows, Japanese manufacturing wages, for example, are about 80% of those in the US, while Chinese manufacturing wages are about 3%.  It's going to take a very long while, or an unthinkably large correction in exchange rates, for Chinese wages to get anywhere close to those in the US.

You can see the effects of this in the data for US manufacturing employment.  It peaked in 1980 and then gradually descended to the 2000 recession.  But since then, as Chinese exports have ramped up, it's gone into a much more serious decline.  It goes off a cliff in each recession, and it doesn't recover at all in between - in fact it continues to decline, only more slowly.

If we continue with our existing policies, it's very hard to see how this is going to change in the next decade or so (absent some internal collapse in China).  As the Chinese figure out how to make cars, computers, furniture, etc, etc, to western quality standards, the entire industrial production capacity of the United States is going to get hollowed out.  Manufacturing employment in the United States would appear to be headed towards zero, give or take some noise.

Let's not put too fine a point on this: guys like Errol are fucked.

In fact, the entire working class of the United States is fucked.  Without manufacturing jobs, they are reduced to the small number of jobs installing and fixing the stuff that comes from China, and then low paying unskilled retail and service jobs.   With large numbers of chronically unemployed, the folks who are employed will have no leverage whatsoever on pay and conditions.

And with a minority of exceptions, this is not something that can be fixed with education.  To a rough approximation, the working class consists of the kids who didn't do well in school after they grew up.  Remember the kids in your high school who didn't do well.  Are they now going to turn around and become electronic engineers or CGI movie animators after some community college classes?  A small fraction, sure (and more power to them).  The vast majority, no way.

And at some level, Errol is beginning to understand his situation:
“As far as my job position,” he said, “I really don’t know what I want to do yet. I’m not sure.” When he was little, he wanted to be a mechanic, and he did enjoy the machine trade. But now there was hardly any work to be had, and what there was paid about the same as Walmart. “I don’t think there’s any way that you can have a job that you can think you can retire off of,” he said. “I think everyone’s going to have to transfer to another job.” He said the only future he could really imagine for himself now was just moving from job to job, with no career to speak of. “That’s what I think,” he said. “I don’t want to.”
Let's think about the political implications of this situation.

I was very struck by David Barstow's superb profile of the Tea Party movement in the New York Times a couple of days back. Absolutely read the whole thing, but here's how it starts:
Pam Stout has not always lived in fear of her government. She remembers her years working in federal housing programs, watching government lift struggling families with job training and education. She beams at the memory of helping a Vietnamese woman get into junior college.

But all that was before the Great Recession and the bank bailouts, before Barack Obama took the White House by promising sweeping change on multiple fronts, before her son lost his job and his house. Mrs. Stout said she awoke to see Washington as a threat, a place where crisis is manipulated — even manufactured — by both parties to grab power.

She was happily retired, and had never been active politically. But last April, she went to her first Tea Party rally, then to a meeting of the Sandpoint Tea Party Patriots. She did not know a soul, yet when they began electing board members, she stood up, swallowed hard, and nominated herself for president. “I was like, ‘Did I really just do that?’ ” she recalled.

Then she went even further.

Worried about hyperinflation, social unrest or even martial law, she and her Tea Party members joined a coalition, Friends for Liberty, that includes representatives from Glenn Beck’s 9/12 Project, the John Birch Society, and Oath Keepers, a new player in a resurgent militia movement.
Urged on by conservative commentators, waves of newly minted activists are turning to once-obscure books and Web sites and discovering a set of ideas long dismissed as the preserve of conspiracy theorists, interviews conducted across the country over several months show. In this view, Mr. Obama and many of his predecessors (including George W. Bush) have deliberately undermined the Constitution and free enterprise for the benefit of a shadowy international network of wealthy elites.

Loose alliances like Friends for Liberty are popping up in many cities, forming hybrid entities of Tea Parties and groups rooted in the Patriot ethos. These coalitions are not content with simply making the Republican Party more conservative. They have a larger goal — a political reordering that would drastically shrink the federal government and sweep away not just Mr. Obama, but much of the Republican establishment, starting with Senator John McCain.
I was powerfully reminded immediately of Eric Hoffer's classic study of mass movements, The True Believer.   Written in 1951, the book is a long meditation based on the early twentieth century experience with Nazism and Communism.  When I first read it fifteen years ago or so, it immediately struck me as incredibly acute and well written, and I've reread it a couple of times since.

Here are a few extended excerpts of relevance to us now. My page numbers are from the first edition.

From the preface:
This book deals with some peculiarities common to all mass movements, be they religious movements, social revolutions or nationalist movements.  It does not maintain that all movements are identical, but that they share certain essential characteristics which give them a family likeness.

All mass movements generate in their adherents a readiness to die and a proclivity for united action; all of them, irrespective of the doctrine they preach and the program they project, breed fanaticism, enthusiasm, fervent hope, hatred and intolerance, all of them are capable of releasing a powerful flow of activity in certain departments of life, all of them demand blind faith and singlehearted allegiance.

All movements, however different in doctrine and aspiration, draw their early adherents from the same type of humanity; they all appeal to the same types of mind.

Though there are obvious differences between the fanatical Christian, the fanatical Mohammedan, the fanatical nationalist, the fanatical Communist and the fanatical Nazi, it is yet true that the fanaticism which animates them may be viewed and treated as one.  The same is true of the force which drives them on to expansion and world dominion.  There is a certain uniformity in all types of dedication, of faith, of pursuit to power, of unity and of self-sacrifice.  There are vast differences in the content of holy causes and doctrines, but a certain uniformity in the factors which make them effective.  He who, like Pascal, finds precise reasons for the effectiveness of Christian doctrine has also found the reasons for the effectiveness of Communist, Nazi, and nationalist doctrine.  However different the holy causes people die for, they perhaps die for basically the same thing.

This book concerns itself chiefly with the active, revivalist phase of mass movements.  This phase is dominated by the true believer -- the man of fanatical faith who is ready to sacrifice his life for a holy cause -- and an attempt is made to trace his genesis and outline his nature.  As an aid in this effort, use is made of a working hypothesis.  Starting out from the fact that the frustrated predominated among the early adherents of all mass movements and that they usually join of their own accord, it is assumed: 1) that frustation of itself, without any proselytizing prompting from the outside, can generate most of the peculiar characteristics of the true believer; 2) that an effective technique of conversion consists basically in the inculcation and fixation of proclivities and responses indigenous to the frustrated mind.
There is a fundamental difference between the appeal of a mass movement, and the appeal of a practical organization. The practical organization offers opportunities for self-advancement and its appeal is mainly to self-interest. On the other hand, a mass movement, particularly in its active, revivalist phase, appeals not to those intent on bolstering and advancing a cherished self, but to those who crave to be rid of an unwanted self. A mass movement attracts and holds a following not because it can satisfy the desire for self-advancement, but because it can satisfy the passion for self-renunciation.

People who see their lives as irremediably spoiled cannot find a worth-while purpose in self-advancement. The prospect of an individual career cannot stir them to a mighty effort, nor can it evoke in them faith and a single-minded dedication. They look on self-interest as on something tainted and evil; something unclean and unlucky. Anything undertaken under the auspices of the self seems to them foredoomed. Nothing that has its roots and reasons in the self can be good and noble. Their innermost craving is for a new life -- a rebirth -- or, failing this, a chance to acquire new elements of pride, confidence, hope, a sense of purpose and worth by identification with a holy cause. An active mass movement offers opportunities for both. If they join the movement as full converts they are reborn to a new life in its close-knit collective body, or if attracted as sympathizers they find elements of pride, confident and purpose by identifying themselves with the efforts, achievements and prospects of the movement.

To the frustrated a mass movement offers substitutes either for the whole self or for the elements which make life bearable and which they cannot evoke out of their individual resources.
p 16:
When people are ripe for a mass movement, they are usually ripe for any effective movement, and not solely for one with a particular doctrine or program. In pre-Hitlerian Germany it was often a tossup whether a restless youth would join the Communists or the Nazis. In the overcrowded pale of Czarist Russia the simmering Jewish population was ripe both for revolution and Zionism. In the same family, one member would join the revolutionaries and the other the Zionists. Dr Chaim Weizmann quotes a saying of his mother in those days: "Whatever happens, I shall be well off. If Shemuel [the revolutionary son] is right, we shall all be happy in Russia; and if Chaim [the Zionist] is right, then I shall go to live in Palestine."

This receptivity to all movements does not always cease even after the potential true believer has become the ardent convert of a specific movement. Where mass movements are in violent competition with each other, there are not infrequent instances of converts -- even the most zealous -- shifting their allegiance from one to the other. A Saul turning into Paul is neither a rarity nor a miracle. In our day, each proselytizing mass movement seems to regard the zealous adherents of its antagonist as its own potential converts. Hitler looked on the German Communists as potential National Socialists: "The petit bourgeois Social-Democrat and the trade-union boss will never make a National Socialist, but the Communist always will." Captain Rohm boasted that he could turn the reddest Communist into a glowing nationalist in four weeks. On the other hand, Karl Radek looked on the Nazi Brown Shirts (S.A.) as a reserve for future Communist recruits.
There is a tendency to judge a race, a nation or any distinct group by its least worthy members. Though manifestly unfair, this tendency has some justification. For the character and destiny of a group are often determined by its inferior elements.

The intert mass of a nation, for instance, is in its middle section. The decent, average people who do the nation's work in cities and on the land are worked upon and shaped by minorities at both ends -- the best and the worst.

The superior individual, whether in politics, literature, science, commerce, or industry, plays a large role in shaping a nation, but so do individuals at the other extreme -- the failures, misfits, outcasts, criminals, and all those who have lost their footing, or never had one, in the ranks of respectable humanity. The game of history is usually played by the best and the worst over the heads of of the majority in the middle.

The reason that the inferior elements of a nation can exert a marked influence on its course is that they are wholly without reverence toward the present. They see their lives and the present as spoiled beyond remedy and they are ready to waste and wreck both: hence their recklessness and their will to chaos and anarchy. They also crave to dissolve their spoiled, meaningless selves in some soul-stirring spectacular communal undertaking -- hence their proclivity for united action. Thus they are among the early recruits of revolutions, mass migrations and of religious, racial and chauvinist movments, and they imprint their mark upon these upheavals and movements which shape a nation's character and history.

The discarded and rejected are often the raw material of a nation's future. The stone the builders reject becomes the cornerstone of a new world. A nation without dregs and malcontents is orderly, decent, peaceful and pleasant, but perhaps without the seed of things to come. It was not the irony of history that the undesired in the countries of Europe should have crossed an ocean to build a new world on this continent. Only they could do it.
Not all who are poor are frustrated. Some of the poor stagnating in the slums of the cities are smug in their decay. They shudder at the thought of life outside their familar cesspool. Even the respectable poor, when their poverty is of long standing, remain inert. They are awed by the immutability of the order of things. It takes a cataclysm -- an invasion, a plague or some other communal disaster -- to open their eyes to the transitoriness of the "eternal order."

It is usually those whose poverty is relatively recent, the "new poor," who throb with the ferment of frustration. The memory of better things is as fire in their veins. They are the disinherited and dispossessed who respond to every rising mass movement. It was the new poor in seventeenth century England who ensured the success of the Puritan Revoltion. During the movement of enclosure thousands of landlords drove off their tenants and turned their fields into pastures. "Strong and active peasants, enamored of the soil that nurtured them, were transformed into wageworkers or sturdy beggars; ... city streets were filled with paupers". It was this mass of the dispossessed who furnished the recruits for Cromwell's new-model army.

In Germany and Italy the new poor coming from a ruined middle class formed the chief support of the Nazi and Fascist revolutions.
There is perhaps no more reliable indicator of a society's ripeness for a mass movement than the prevalance of unrelieved boredom. In almost all the descriptions of the periods preceding the rise of mass movements there is reference to vast ennui; and in their earliest stages mass movements are more likely to find sympathizers and support among the bored than among the exploited and oppressed.  To a deliberate fomenter of mass upheavals, the report that people are bored stiff should be at least as encouraging as that they are suffering from intolerable economic or political abuses.

When people are bored, it is primarily with their own selves that they are bored. The consciousness of a barren, meaningless existence is the main fountainhead of boredom. People are not conscious of their individual separateness, as is the case with those who are members of a compact tribe, church, party, etcetera. The differentiated individual is free of boredom only when he is engaged either in creative work or some absorbing occupation or when he is wholly engrossed in the struggle for existence. Pleasure-chasing and dissipation are ineffective palliatives. Where people live autonomous lives and are not badly off, yet are without abilities or opportunities for creative work or useful action, there is no telling to what desperate and fantastic shifts they might resort in order to give meaning and purpose to their lives.
Hopefully, this gives you enough of a flavor of Hoffer's thought.

It appears to me that the Tea Party movement, as disorganized and incoherent as it may currently be, places us on notice that conditions in the United States are now such as to support the beginnings of mass movements of the kind Hoffer is talking about. Such movements are not known for having good ideas for how to run society (note the failures and crimes of both Communism and Nazism when put into practice).  In particular, they don't need to have ideas that make sense to the elite of the current society (such as abolishing the Federal Reserve).  They just need to have ideas good enough to appeal to the unbearably disappointed and frustrated, the failed and the failing, and credibly promise to solve their emotional problems and give meaning to their lives.

It appears to me that with a working class that is now fundamentally and massively uncompetitive with China, a country with four times the population and wages a tiny fraction of ours, the United States is ripe for a lot more of this kind of thing.  What ails us is not just the aftermath of a financial crisis, to be solved with a stimulus.  Instead, if present trends continue, we face a national crisis of the first order which will play out over decades.  What should our entire working class do now that will give their lives meaning?  No quick fix is apparent.


Burk said...

Wow- what an enormous and interesting blog! I would tie in the latter and the former parts by saying that faulty macro-economics underlies both halves- that of the tea partiers in the second, stampeded by simple greed of moneyed interests into ideologically right-wing economics, and your own in the first half, not fully understanding the nature of international trade.

I'd urge you to study William Mitchell's blog for a thorough introduction to modern Keynesian concepts. For the tea partiers, an honest treatment of macroeconomics makes clear that the government can spend anything it wants- it prints the money after all. Its limitation is inflation, not debt which is a monetary, not a fiscal "funding" instrument. And inflation is not nearly a problem given high unemployment. So another trillion dollars of fiscal stimulus would be in order right now, at least. That is, if you care about workers. If you care about capital and vested interests, then go ahead and screw the workers!

On trade, it is true that machinists are not very competitive vs China and other low-wage countries, as long as those countries build similar skills. Yet we benefit greatly from trade with China- we send them bits of paper, and they send us real goods. What is not to like? With time, as China gains prosperity and treats its people better, (by appreciating the renminbi), the value of the dollars they hold will go down, and we will be able to export more to them. The system will balance itself out over time.

Right now, China holds its currency artificially low, reducing the living standards of its own citizens (though providing lots of jobs), and accumulating lots of not-very-useful dollars. They may use those dollars to buy oil, but basically anything they do with those dollars will drive the exchange value of the dollar down, which is just what we, and especially those machinist workers, want.

Anonymous said...

From the post:

US steel production has roughly halved since 2006, and so jobs for folks like Errol working with that steel are naturally going to be very hard to find.

Just a technical correction, Stuart, but what machinists do (i.e. work relatively small pieces of metal into individual useful shapes using lathes etc) is mostly not really related to steel production. It's directly related to manufacturing. You find most machinists in manufacturing hubs.

Anonymous said...

Another way to make that point would be to say that only a very tiny fraction of steel production is ever machined.

Stuart Staniford said...

Black Lizard:

I'm aware of what machinists do. My point is that steel is their raw material, and the causes of the sharp contraction in steel production is unlikely to be without consequences for their trade. Of course much steel is rolled into I-beams, rebar, etc, etc without intervention of machinists (which is why I said Errol could roughly serve as the human face of the trend.

Stuart Staniford said...


My point is that the exchange rate issues, significant as they are, are not the largest part of the problem. US GDP is $14 trillion in 2008, Chinese GDP is $4 trillion in 2008 at current exchange rates and about $8 trillion at PPP equivalence. So say the exchange rate halves to come in line with the PPP value. US manufacturing wages are then still more than 15 times greater than Chinese manufacturing wages. Errol is still fucked.

It's quite true that we in the U.S. produce things of value to sell to the Chinese. Software, entertainment, financial services, etc, etc. My point is that these are all products of the educated classes. We (I include myself in the educated classes of course) may individually be relatively resistant to these trends. But the blue collar classes have no such immunity, and of course politically, they will not go to the wall without causing massive heartburn to the entire society.

Burk said...

Hi, Stuart-

I agree, but where is it ordained that Errol has to export manufactured goods? What he wants is a job. If the US is otherwise on an even economic keel, then running a solar installation crew or a medical marijuana shop might be a step up. And if the government takes proper control of the macroeconomic situation to promote worker interests in the broad sense, (i.e. the Fed/fiscal arms work for high employment), then there will be plenty of jobs around. Some amount of job flexibility is critical for any economic dynamics, as you have experienced yourself.

Anonymous said...

Notice though that the Chinese Machining Services ad only claims savings of 40-60% relative to the US. Machinists are tradespeople. The required skill and education level working with advanced machining equipment is many levels above a person working on an assembly line. No way machinists are only getting $1 an hour in China.

Manufacturing remaining in the US is not the labor intensive type. But it certainly is extremely automated and you need machinists to maintain those production processes.

Errol is skilled and isn't completely fucked. Worst case with his wages halved, he's competitive (but still above Wal-mart) But that's a big drop for him.

Most of the unskilled manufacturing labor disappeared long before the current slump.

chapter1 said...

This is a fascinating, and profoundly disturbing.

I was a bit puzzled by your dismissal of building infrastructure as just something which would solve the problem for a few years (due to inability of American government to finance for much longer). I think you are overlooking climate change issues.

Retrofitting American infrastructure to reduce emissions by what is needed (say, 80% overall reduction) would be a massive, multi-decade effort. Keeping all those wind turbines in good repair will generate a lot of work for metalurgists. Retrofitting our houses, installing solar panels and ground-source heat pumps will employ a lot of unemployed construction workers. And large portions of this retrofit would pay for themselves under today's economic conditions, and a lot more would with a decent carbon tax. So government spending won't be necessary- "just" a tax-and-rebate.

Obviously, a carbon tax won't be easy. But trying to implement one sure beats the dark scenarios your post hints at.

Datamunger said...

Apologies, Stuart. Sloppily, I posted under "Black Lizard" above. I read your post in google reader..under a different username.

Datamunger said...

In general, I see mass movements as the flip side of hyper-individualism. What's weird is the libertarian bent of the Tea Partiers.

Stuart Staniford said...

Chapter1: I'm 100% in favor of the kind of retrofit of US energy production you call for. Eg see Powering Civilization to 2050.

That said, I still think that we are going to have a big problem if all the wind turbines, solar panels, and heat pumps get made in China, and all we do here is install them. And I don't see what the argument is for why they won't all get made in China. About the only argument I can come up with is if the factory is fully automated (which certainly some solar panel factories approach), in which case they are insensitive to labor costs. But of course, in that case, they aren't going to do much good for manufacturing employment.

Burk said...

I don't get all the hyperventilation over manufacturing employment. Are we all exercised about not having enough farming employment? No- we take the gains from increased productivity (or beneficial trade) and pay the same people to give haircuts, or do economics, or play in rock bands. Labor is fungible.

Stuart Staniford said...

Datamunger - Median to median, the comparison is $30 to $1/ hour. Looking at this discussion thread it looks like machinist's make about that level of wage in the US. The degree to which the median manufacturing laborer in the US is much higher skilled is unclear - I can't find any data on it at present, or for machinists in particular.

My guess is the 40-60% lower costs in the ad reflects similar capital costs plus dramatically lower labor costs.

Stuart Staniford said...

Burk - labor is *mildly* fungible. Agricultural workers could eventually go to the factory (though as Hoffer notes, that did lead to social upheavals such as the civil war in England along the way).

But now, if you're a machinist and you'd like to get a job in Silicon Valley as a programmer, you have a snowball's chance in hell. So the lack of blue collar jobs is critical.

Have a look at the data on employment population ratio for men eg (here), and you can see that we are not taking up the slack.

Geoff said...

John Michael Greer has a great post up addressing some of these same issues:

Gary said...

Great post Stuart. A couple of thoughts...
China is in the middle of a major growth spurt. Growth begets growth when conditions are ripe - which they are for China. The U.S. is a stodgy middle aged country. Our borders are full, our infrastructure aged, and further growth limited by our previous over-expansiveness. Our goal should be to age gracefully and with wisdom rather than pretend we are still in our countries youth.
I'm still on the fence about the tea partiers. I certainly see us vulnerable to demagoguery when times are bad - but I think we are still quite a ways from fascism. Isn't Libertarianism self limiting? Once those opposed to government become the government - do they just disband and go home?

Stuart Staniford said...

Gary - I would completely agree about "quite a ways". To use the German analogy, it's the equivalent of the early 1920s. Things could go many ways from here.

What is bothering me is that it's not obvious what the off-ramp from this trend is for the U.S. Protectionism of our domestic industry of course, but that just transfers the problem to inability to compete for natural resources from abroad with more competitive Chinese industry. War is out of the question with a nuclear state. We would not appear to have any effective leverage in the situation. We can jawbone the Chinese, but they've already proven themselves amply capable of ignoring that.

Of course, I retain an open mind and will be doing intensive research ongoing.

Stuart Staniford said...

I should also say - I'm not claiming that the current Tea Party movement itself has any strong future. It may if it evolves a clear and charismatic leader, or it may not. Nor am I saying the Tea Party movement is an imminent threat to society. What I'm saying is that I buy Hoffer's dictum that all mass movements are a lot alike, and the existence of one is proof that the conditions are in place to grow others too. If the situation of the US lower classes continues to worsen, then such movements will continue to arise and strengthen, and ultimately will become dangerous.

Stuart Staniford said...

Also, I don't rule out at all the possibility that China could suffer some internal collapse or disorderly transition. There would not seem to be really any durable worked examples for the kind of society the leadership there is building, and so they are innovating it as they go, and that's pretty risky. OTOH, they've been doing it with considerable success for quite some time now, so I certainly wouldn't claim it's clear they'll fail, either.

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Datamunger said...

If the situation of the US lower classes continues to worsen, then such movements will continue to arise and strengthen, and ultimately will become dangerous.

Ironically, here we were looking askance at the working class while one of own (i.e. a technologist) attempted mass murder yesterday.

They don't have the same sense of entitlement as the middle class has : most from an early age have been subject to suggestion from all directions that they must lower their sights in life and accept being shit upon.

The middle class is different. Many believe the world is rightfully theirs, if they put in the time and effort. They blame lack of success on a "war against the middle class." Many have a long way to fall and not much cushion.

Anonymous said...


It seems to me that there are only two plausible things that might affect the manufacturing imbalance that exists.

The first would be that oil depletion might eventually raise prices or volatility to the point that it begins to erase the existing cost advantages. It seems unlikely that this could happen solely due to peak oil, but, perhaps combined with a realistic exchange rate it might have a substantial impact.

The other alternative would be to intentionally and systematically undo globalization to the greatest extent possible. I do not mean to imply that there should not be global trade. Rather, I would suggest that you basically reinstate the blocks that allow for the globalization of capital. Re-institute barriers to the free movement of capital and specifically protect the domestic labor force (and resource base), even at the cost of higher prices and some inflation. Now this probably cannot be done in the current political, economic or financial climate. However, eventually, the situation may change. The question is, will it be too late? Is it already?


Steve From Virginia said...

What an excellent article! Eric Hoffer is tremendous and so bookends Wendell Berry and E. O. Wilson. They are all children of their time ... whatever time that happens to be. The 19th century, perhaps or the Eocene.

Certainly there is no more modernism in this future which is unraveling under our feet. Why do fools continue to look toward industrialism and its ever- shiny, 'New!!!' iterations? Repeat an experiment enough times expecting a different result ...

Four- hundred years of industrialization and what do we have to show for it besides bulging landfills and world- wide ugliness and despair, billions of hungry people who cannot have enough to eat because the factories cannot profit if all are given jobs.

US slavery was an historical error and so was - and is - the industrial revolution. The price tag is a ruined and hollow Earth. We can hollow it out some more but the experiment will always yield the same result albeit with more ... feeling each time!

We live the final death spiral of industrialization. There is no escape, only a furious mass suicide of humans ... out of disappointment. Maybe not. I suspect that Floyd or whatever his name is would be a fine master mason or vegetable farmer or wrecked house puller or seaman on a sailing ship or a shipwright or builder of streetcars or of houses close to the road which has no cars. He could become a blacksmith tomorrow and start making good knives and have a very good living until he could branch out into making other valuable things that people really need ... rather than what some ad agency lies them into believing they want.

He looks to the whistle and the time clock and the hated boss and the smoke and poisons and is lost in the past. He just doesn't go far enough ...

brett said...

Gary:"Isn't Libertarianism self limiting? Once those opposed to government become the government - do they just disband and go home?"


Paul D said...

I spend most of my time in China. For the past thirty years, the Chinese leadership has worked to upgrade the country's infrastructure through export earnings. Fortunately for them, this coincided with the west's push for globalization, giving Chinese exports largely free access to their markets, especially after China joined the WTO in 2001.

A major reason for this push is to create what is as close to full employment in China as possible, since the country needs to create 25M new jobs each year just to keep its head above water.

The downside of this is that many of the jobs created do not offer much value added, but since the Chinese government owns and finances many state owned enterprises, it is able to do this. Unlike in the west, for many businesses, labor is the lowest cost input.

Why does the Chinese government do this? China has a long and often bloody history. One of the causes of internal unrest in China is large numbers of economically disrupted men of working age (men without jobs), so, for any Chinese ruler, it's better to keep that at work even though there may be little value-added. In the west, these people would most likely be living on some kind of unemployment compensation. In China that doesn't exist.

Through this policy, China will most likely be the last man standing in the world economy, since other economies can either choose to impose tariffs on Chinese exports, or allow Chinese imports to eat away at their workforce.

What most westerners fail to understand is that cheap Chinese exports are the logical result of the country's employment policies.

No matter what happens, the outcome is not pretty.

Paul D said...

Just read a very interesting excerpt from a speech given by Charles Munger, Berkshire Hathaway partner, in 2003 at UC Santa Barbara:

"You are more prosperous than you would have been if you hadn’t traded with China in terms of average well-being in the United States, right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It’s obviously China. They’re absorbing all the modern technology of the world through this great facilitator in free trade, and, like the Asian Tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you’ve got a weak nation of backward peasants, a billion and a quarter of them, and in the end they’re going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that’s a wonderful outcome for the former leading nation. He didn’t try to determine second order and higher order effects.

If you try and talk like this to an economics professor, and I’ve done this three times, they shrink in horror and offense because they don’t like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third order consequences.
The best answer I ever got on that subject – in three tries – was from George Schultz. He said, “Charlie, the way I figure it is if we stop trading with China, the other advanced nations will do it anyway, and we wouldn’t stop the ascent of China compared to us, and we’d lose the Ricardo-diagnosed advantages of trade.” Which is obviously correct. And I said, “Well George, you’ve just invented a new form of the tragedy of the commons. You’re locked in this system and you can’t fix it. You’re going to go to a tragic hell in a handbasket, if going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership.” And he said, “Charlie, I do not want to think about this.” I think he’s wise. He’s even older than I am, and maybe I should learn from him."

I think this sums it all up pretty well.

Stuart Staniford said...

Paul - many thanks for your fascinating comments!

Burk said...

Hi, Paul-

What I am hearing here is a fundamentally colonialist and repugnant attitude. We need to keep "them" down so that we can enjoy continued economic and military hegemony. Sorry, that is simply immoral.

China's rise makes them richer, and makes us richer as well, due to gains in productivity all around. Do we have to share the world with others? Yes indeed we do, and if we do so within a peaceful ideology of world trade (as we do with, say, Europe and the Americas) and a rule-based international system, then we will have achieved a great deal more than we would by keeping the peasants down on the farm.

Anonymous said...

Germany has high labor costs yet exports TO China. Costs are one thing, value another..