When I was in college in Boston in the Sixties, my school had a long-tenured and widely known hockey coach–and, despite a cast of excellent players, a thoroughly mediocre team. According to my friends on the team, whenever they went to this coach for advice on any technical aspect of the game–skating, puck handling, shooting–his standard reply was, “Practice!” Not very helpful, but that exhortation exhausted his knowledge base.
A lot of the recent commentary on the unemployment situation in the United States–and, by extension, anywhere else in the developed world–reminds me of that college hockey coach (thankfully, long since retired and succeeded by a line of much more skilled coaches).
The current situation is well-known. Actually, I’m not sure it is. The facts have been around for a long time. And most people probably can dredge up the information if pressed. But I’m not sure enough people in the developed world have passed from purely intellectual awareness to emotional commitment to act on the challenges they represent.
The working populations of China and India are gradually entering the labor force available to international firms, swelling its ranks by about 50%. These workers are happy to work for a year for the wages their counterparts in the developed world demand for a month’s labor. So, the latter are priced out of the market, and are being replaced by the former as quickly as possible.
The “insight” of the typical commentator on the “decline of the West” is limited to the suggestion that displaced workers be given temporary government support and retrained for new jobs. I believe that’s right. It’s also the orthodox prescription that can be found in any first-year economics text. But it’s also a “solution” as unhelpful and as devoid of content as “Practice!” Retrain for what? The commentators, many of them insulated by ivory-tower tenure that insulates them from the reality of the situation, offer (…have?) no clue.
There is some justification for stopping at framing the problem without offering any solutions. Generally speaking, high-level industrial policy of the kind Japan’s MITI was once famous for hasn’t worked there, or anywhere else. When the Cold War ended and the defense industry in the US collapsed, many scientists working in exotic metals used for weapons systems ended up designing golf clubs. Who’d have guessed?–no one.
But I think there are some conclusions that can be drawn. For instance:
1. The tendency of Washington to prevent, say, Chinese industrial companies from making investments in the United States means that these firms continue to service US customers from abroad. The associated job creation remains in China instead of migrating to the US.
2. As Fiat’s Italian auto workers are now showing, and as west coast port workers in the US demonstrated several years ago, beneficiaries of an older order can be highly resistant to change. In the developed world, it seems to me the most urgent need is to reform an education system that creates newly-minted graduates prepared to succeed in the world of 1960 (which no longer exists), but which is controlled by professionals who have been granted jobs for life. Charter schools, anyone?
3. I’m worried that the long-term unemployed are going to prove a particularly intractable problem. Take a hypothetical fifty-five year old high school graduate with no computer skills, who has bounced from job to job during the housing boom but has been laid off from an assembly line or some other physical labor job eighteen months ago. He will likely live another thirty-five or forty years. What are his chances of getting another job?
Over a million young workers enter the labor force each year. If the Fed projections are right, it will be at least a couple of years before the economy is healthy enough to absorb this flow. By that time, our hypothetical worker will be approaching sixty–and a prime target of age discrimination.
Yes, retrain this worker. But have computer skills eluded him for all this time because he didn’t need them, or because he’s been unsuccessful at past learning attempts? I don’t know.
I suspect, though, that the US is going to experience a period of European-style chronic high unemployment–with the potential creation of a new underclass–for a long time.
investment implications
On the one hand, unemployment and education are political and social issues. But they have a direct investment significance in that they influence the trend growth rate of GDP. In extreme cases–not likely in the US, I think–economic stagnation has led to a “brain drain,” where the best and the brightest leave their home countries in search of better economic prospects elsewhere.
As far as Wall Street is concerned, I think the implications are clear–shade strongly away from the 25% or so of the stock market where earnings are closely linked to the fortunes of the overall domestic economy. Until investors are clear that 75% of the market’s earnings are not, however, I suspect that stocks will continue to react en masse–though (I hope) with decreasing amplitude–to bumps along the road to economic recovery.