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Reversing Automation
Yesterday I asked what parts of NAFTA people on Ricochet would want to see renegotiated or abrogated. After reading the responses, I’m still not sure whether people here think that free trade is good, but NAFTA disadvantages the United States — that it’s not a level playing field, in other words — or whether we’ve got real support here for mercantilism.
I’m open to the idea that Adam Smith was wrong and free trade doesn’t, in fact, benefit everyone. I’ve been arguing, though, that it’s not trade that’s killed manufacturing jobs. It’s automation.
What if both are true? Here’s an interesting study from Ball State University: The Myth and the Reality of Manufacturing in America. It focuses on the effects of productivity change, domestic demand, and foreign trade on American manufacturing employment.
Although it took a hit during the Great Recession, the trend lines on production are clear: Manufacturing is not in decline in America:
In fact, it’s at record highs.
The increased productivity is largely the consequence of the industrial use of information technology:
In 1998, the inflation-adjusted output per worker was much lower than it is today. This is due to a variety of factors, chief among them being the automation and information technology advances absorbed by these sectors over this time period. The higher output per worker has meant firms could lower their price for goods. Very clear examples of this are the price indices for different types of consumer electronics.
We have people here who argue that free trade is beneficial, but our trade agreements aren’t fair. We also have people who argue that trade itself has cost jobs, or at least, that it hasn’t been obviously beneficial. No matter your stance on that debate, I think you’ll agree that the problem of automation’s effect on employment will remain:
The authors of the study endorse the idea that trade has cost us jobs: “The most scholarly work in this area (Ocemoglu, et. al. 2014) estimates employment losses in the United States due to imports from 1999-2013 in the 2.0 million to 2.4 million range.” But they argue that this only accounts for 13.4 percent of lost jobs.
So here’s my question: If we’re jettisoning free-trade orthodoxy, why not do it in a way that will bring back many jobs, not just 13.4 percent of them, at best? Why not ban the industrial use of information technology? Or at the very least, why not legislate steps that will strengthen rather than weaken unions, given that trade unions probably know better than anyone what’s costing them their jobs? Trade unions predicted the circumstances in which we find ourselves, and they seem to have a point about what would happen if the American working class confronted long-term employment precarity.
Here’s a 1983 survey of labor unions. Only 14 percent of unions advocated technology change; and most were only willing to accept it if its impact on the workforce could be minimized. This is why economists tend to find an inverse relationship between innovation and unionization.
You may say, “Well, obviously we don’t want to suffocate innovation. That would be bad for the economy.” But we have an economy that seems only to benefit urban elites. The Rust Belt made it overwhelmingly clear that it wants its jobs back and doesn’t want to hear one more word about laissez-faire economic theories. Unless Keynes was right all along, a big burst of spending on infrastructure projects won’t in the long term bring back those jobs. (It will be great for patronage and cronyism, however.)
Perhaps innovation — Silicon Valley, in other words — needs to take the hit for a while?
Published in General
Yes, to increase jobs and costs, we should mandate that ditches be dug by hand.
With spoons.
If you will allow some projecting of my own personal journey upon the world, I think we are in a phase of increasing skepticism about the utility (ahem) of much economic analysis in general, and macroeconomic aggregates in particular. That is to say, the moral status of measures such as inflation, GDP, unemployment and productivity is very much up for grabs.
Insofar as one treats these things as emergent, arising from the freely-chosen interactions of sovereign individuals, that is one thing. If one starts to treat them as having a reality separate from the lives of actual human beings, if one starts to treat them as ‘targets’ of government action (which is to say, choices about the application of state force), then that is something else. For then one has leaped to the very worst excesses of crude utilitarianism.
If a government policy (enforced at the point of a gun, as all government policies inevitably are) raises 20 million Bangladeshis out of crushing poverty, but destroys 200 families in Ohio, does sprinkling the decision to enact that policy with the magic fairy dust of ‘democracy’ make it any less problematic?
Of course, with the US Leviathan in its current all-intrusive state, all government action or inaction has incalculable effects. But making the problem – the moral problem – ubiquitous doesn’t make it go away.
A couple of things on free trade being beneficial:
Got a better idea? I don’t think renegotiated trade deals will bring back manufacturing jobs. My instinctive answer is that we shouldn’t try to plan the economy at all, as I suspect yours is, but the Rust Belt doesn’t agree.
Yes, I agree. I think that point of view is better characterized as, “People who believe that on the whole, free trade is beneficial.”
As someone who in my former line of work was responsible for replacing workers with machines, I agree with part of your assertion, Claire.
The cost of automation was offset by the savings of labor. It was labor costs that drove the automation increase.
But there are many jobs that are not easily automated. I worked in computer manufacturing for much of the time. We don’t have the technology to automate that. The products change too rapidly for anyone to want to design a computer for automation. Assembling a computer employee a lot of people in Austin when I designed factories for them in the 90’s. They offered so many jobs that one of our biggest challenges was finding people. They’re all but gone now. Low skill low impact manual labor in the thousands, wiped out by manufacturing off shore.
The difference in labor costs was so great that they could assemble in Malaysia, fly the products over night to Tennessee, do some cursory work in Nashville so we could claim it was assembled in the USA and still save substantial money.
That amount of labor cost differential cannot be overcome by will or by law. Businesses will find a way to use that cheaper labor or else their competitors will. Complaining won’t change the equation. Our labor costs have to go lower or theirs have to go higher.
There’s an underlying assumption that wages in the developed world and the developing world won’t converge along with individual skill sets and the value adding capacity of unskilled labour. But in fact there are strong economic pressures that encourage precisely that tendency. The only things that stand in its way are trade barriers and hugely greater labour efficiency in the developed world (aka more and more automation) – and the latter is constantly under challenge.
I don’t argue that our trade agreements are unfair. I don’t know enough about them to know those kind of nuances. But nonetheless I’ve soured on absolute free trade. Sure Smith identifies the benefits of free trade, and in an ideal world, I conclude there are benefits. I’m also not sure that Smith doesn’t qualify those benefits. I seem to recall toward the end of Wealth of Nations that he did have qualifications to his principle. But I’m not sure.
Be that as it may, absolutely when there are huge internal taxes on imported goods, free trade is a benefit to the respective communities. However, as the tax rate is reduced, there are less and less benefits to a community, and at some point the detriment to the society because of turnover and shifting infrastructure outweighs the benefits. People start losing their jobs and causing social imbalances for less and less economic advantage. Sure, in theory even this reduced advantage should produce benefits over time, but if those benefits require a couple of generations to be realized, then what do you say to the current generation that will not realize those benefits in their lifetime?
Part Two:
I’m not smart enough to know when we’ve reached this situation, but my gut tells me we’ve reached it. The answer is not to dramatically shift to high import taxation – which by the way, the USA for the first 150 years hugely benefitted – but to some level of protection to protect blue collar, working level people. Most of that advantage goes to the high end salary earners. It takes years for that to filter down to working level people.
The argument about productivity reducing jobs has been around for centuries and has been repeatedly repudiated. I think that’s still the case.
The free trade deal is a form of planning the economy in itself. You could argue that putting taxes in imports is acutally less planning than not. Either way, both require planning.
This is exactly what I argue when I support tariffs. A mere tax on imports implies no sort of central planning by the taxing authority- and in fact during the era of tariffs the US federal government was almost non-existent compared to today.
This is correct, it is a policy choice which has trade offs.
The cost reduction due to automation plus the existence of places where two dollars an hour is a princely wage, mean that most of those jobs are gone for good. There are some sectors where specialty assembly still goes on, but at much smaller levels than existed before.
I’m a free trade supporter because the economics are clear on it. Free trade is net positive, but like Thomas Sowell teaches us, public policy is about trade offs. There are going to be some people who get hurt by it which leads to other policy choices on how to deal with that.
I see that Canada is open to doing some renegotiation on NAFTA and that tells me that they have areas of their economy that they would like to protect also and are likely interested in doing some logrolling with the United States. That’s not great news unless you’re in the industry that the Canadians or Americans want to artificially protect. More concentrated benefits with diffuse costs which politicians love. It’s a great way to buy votes with other people’s money.
Claire, the main debate on that thread was not between protectionists and people who believe in free trade but disagree with unfree trade masquerading as free trade to our detriment.
The debate was between the latter and people who are self-described unilateral free traders. They will do nothing to stop trade barriers erected to harm the US.
Claire, that is the tiniest fraction of the effect of foreign trade barriers. In fact, it may have little to due with the foreign trade barriers that survive the free trade deals. It does not account for lost foreign markets or jobs that would have been created in a free trade situation but were not due to foreign trade barriers. We have lost very few jobs due to Chinese auto imports but more in auto part imports. We have lost hundreds of thousands due to lack of access to the Chinese market.
Free trade works. It spreads wealth, but concentrates pain, uproots lives, and hits like lightning. People, families, communities, … can’t get out of the way fast enough. We know about this now.
Thatcher dealt with nationalized industries given a lifeline by government takeover. When she did, she left a path of dead and dying towns, suffering, addiction, the dole, and bitterness. It was not her fault. It was simply the determinant of our lives – economics. The same applied to Allentown, Framingham, Utica, and Dayton. Coal, steel, autos, TV’s, cash registers, and turbines. Gone. Guangzhou, Raleigh, Montgomery, Austin, and Nuevo Laredo won. Walmart, Sam’s Club, Hyundai, Boeing, Samsung, and iPhone buyers won also.
You are right about automation – same thing. Narrow, deep, pain. Followed by incremental benefit across the spectrum. In the late 1980’s we replaced three shifts of workers with a robot. The 3 workers cost us $150k a year all in. They were replaced by 5% of one technician who cost $65k and a $100 Japanese robot. Do the math. Payback was 9 months, +,-.
Later, we found ourselves competing against Chinese, Mexican and Brazilian robots and their technicians. Customers decide. Sound familiar.
As the engineer, plant manager, president and owner, what are you going to do? Change or die?
You can nationalize this problem by protection (taxing), training for service industry jobs, or the dole. But in the end, you can’t stop it and prosper. Hmmm?
That is bleeding to death slowly. Change or die?
My sense is that automation is going to continue to erode headcount, and it doesn’t make a difference if trade is a factor. I work for a manufacturer of industrial equipment and the quality and capability of machining tools, technology, and inventory management equipment is quite amazing.
One line of attack is to try to create more manufacturing opportunities – more factories and more businesses manufacturing more products here. That requires some long-term reforms affecting the cost of doing business in the US (resources, regulation, taxes, etc.). But then you need some place for all those products to go, so you want to tread carefully about blowing up trade relations.
Some capacity is going to continue to be developed abroad. We simply cannot produce and ship a product from the US that will be price competitive in the Asia market. Where we look at the total cost of ownership; they buy on cost alone.
I’ve been listening to this promise to bring back manufacturing jobs since the 1980s. It’s been the Democrat line until they got tired of peddling it. Even during the economic boom during the 1990s, the Democrats couldn’t figure out how to turn around that trend. I do think there is a possibility to improve manufacturing overall in the US by making it easier to do business.
I don’t know whether trade is as significant a factor as it is played up to be. I’ve always been skeptical of this. As a kid growing up in the Rust Belt and driving by Wisconsin Steel in South Chicago every week, I watched that ancient plant get shut down and thousands laid off, while the politicians and unions promised that such a thing would never be allowed to happen. It was all blamed on the Japanese dumping steel. The problem was a 50-year old plant, no investment, no innovation, and energy and resource costs going through the roof.
Our perception of the heyday of American manufacturing is the 1950s and 1960s. The problem is that (except for us) most of the industrialized world was still rebuilding from the Second World War. The rest of the world was mired in grinding poverty. We were competing against ourselves. The rest of the world is not going to content itself to poverty so that we feel good about ourselves. More and more countries are developing and entering the global market place and there will be the inevitable challenge of competitive advantage. I’m wary of promises of “fair trade” because we’re going to want access to their markets just as much as they’re going to want access to ours.
All that being said, there is a real problem of middle America being hollowed out with fewer opportunities for blue collar families. We need to do a better job developing vocational education and non-college opportunities. But I remain skeptical of the idea of filling the gap with nothing but manufacturing jobs.
This has been demonstrated to be a sick and evil farce of false hope.
We can’t have political freedom without a free economy. We can’t have a free economy without free trade. Like subsidies to domestic producers subsidies to import competing industries will be corrupt distorting, and harm the economy. Moreover, protectionism reduces the costs of really bad interventionist laws that have nothing to do with imports. It is what makes the third world third world. That’s just the way the world works and where we should begin. But this doesn’t mean we cannot recognize that we have so oppressed our economy through regulations and controls that adjustment is slower and more costly so that changes imposed by trade or new technology, are far slower than they ought to be. We must also recognize that the role we created for the dollar and the devastation caused by WWII gave us monopolies in almost all manufacturing while making it essential that we run deficits. Our boardrooms and our unions thought their success was do to their skills and didn’t prepare for the end of their global monopolies, indeed many still speak of the post war economy as if it was our good policy, robust wage growth, and superior managers that caused that middle class economic growth. And some economists thought it was Keynesianism. It wasn’t and we have to deal with these challenges but deal with them in ways that do not corrupt us or take us down the path of protectionism or central economic controls of any kind.
But what happens when you have changed?
Assume you and I own the two best widget makers in the world. We are lean and efficient and have outcompeted everyone else. We are quite profitable.
The Chinese government sees that and bars our goods. Their rationale is that they control 50% of the world market for widgets. If they can keep that for a Chinese company, their economy of scale can let them outcompete you and I in the world market and drive us out of business. If that doesn’t succeed, they come to me and offer me a deal: I give all my IP to a joint venture controlled by a Chinese company. If I say no (or perhaps even if I say yes), you get the same offer.
Otherwise, or additionally, they use the threat or act of keeping me out of the Chinese market to depress my stock price and buy me out and take all the IP…
So are you saying that the USA was unfree for the first 150 years?
It seems rather obvious to me that the free trade policies of the present regime have done enormous damage to the US economy and eviscerated its base of support. Just ask president elect Trump.
Whole industries have left the United States, with the departures continuing. This has given us a weird situation where the people of communist Vietnam believe capitalism is wonderful, while Americans vote for Bernie Sanders. This is because for them capitalism means factories move in, giving them opportunities they didn’t have, and their lives get better. In America, they leave, reducing opportunity, and giving people the chance to go deep in debt in college to get a job that may soon not exist.
But it’s worse, because not only are Americans expected to compete with our labor on an equal field with the people of Vietnam, we are also subsidizing them. A while ago, for off topic reasons, I was googling the i7-4770k processor made by Intel in that country- and I found a story about a US aid program to teach Vietnamese studies how to design microprocessors.
This is insane.
The election of someone who noticed this and made an issue out of it should surprise no one.
How do you square that belief with the data?
Cato Rand:
A couple of things on free trade being beneficial:
Smith wrote 240 years ago. He wrote in the context of John Locke, who preceded him. The world moved slowly. Competition moved slowly. Industries died over a generation or more. Products were rudimentary and could be replaced by rudimentary alternatives. He did say “everyone” benefited from free trade. That is pretty clear. And they still do.
Go to Walmart, buy a new car, buy an airplane ticket, or purchase an air conditioner. The price is suppressed by competition. Added up over the entire society (everyone), less spent on peanut butter or toilet paper means more for video games, internet connections, schools and medical care. Life improves.
Locke, interestingly enough, coined the “life, liberty and pursuit of property” natural right (God given). He also wrote that people are entitled to what they can reasonably consume – any excess should be shared…. he was a Bernista.
No matter the situation, kings, tyrants, hordes, tinker, warlord, brigand, farmer, industrialist, lobbyist, elite … we struggle with distribution. Who gets what and why.
Economics is determinative. Or so I keep writing. And it is. Stand in its way, and you pay. You can join a cult, adopt collectivization, erect walls, or declare your independence, none of this will much alter the fact the laws of economics, who can produce more of the critical things for less, determines your destiny.
I don’t know. But I do think the answer is either, “too bad for them,” or “a mixed economy.”
Yes, and no. Well, @guruforhire is a finely sharpened knife and he puts things in vivid context. Some retraining works, but the jobs as hospital orderlies or xray technicians don’t pay $25 an hour plus $15 of benefits. Some retraining leads to a few better paying jobs. But the GURU, is right. It ain’t a panacea.
The problem is this – how much do we want to tax in the form of tarriffs, training, retraining, welfare, unemployment, food stamps, etc. to get people motivated to move on and do something else? Move from say, McKeesport to Houston? We can build a big beautiful wall around each town – but Europe tried this and failed. Europe does sacrifice economic growth by slowing competition down – from within and from trade. But in the end, the mighty EU failed too. Grasshoppers meet their winters.
Today, competition moves fast (ask MC Hammer). It is like we are living back on the plains one plague or raid away from death. And we are – to some extent. Those maurauders are those Walmart and Toyota shoppers. They roam about demanding more for less. Genghis Visacard. And Genghis Visacard hordes buy on Amazon Prime.
Yes. But the democrats won’t do that, and Bush didn’t either. Trump may.
How about for the domestic market? And access to that should be a great tool to force open access to foreign markets for our products.
Especially when the US dollar is the global reserve currency. That must end.
I worked at a steel mill that was a lot older than 50 years. There were billions made in investment in new tech, along with a continually shrinking workforce. But the endless foreign subsidies were certainly a problem for US industry, which the US government did nothing about. It’s hard to compete when your competitors get their plants for free.
I recall, still, the day a letter arrived signed by both our US rep and Bill Clinton, telling the union and the company that nothing would be done about dumping.
Globalism is the policy of both parties.
Hence, Trump.
Yes, I think they are.
I also think this is insane.
Sectors with growing controls are less free and more corrupt and through time get worse. And countries with more central controls are more corrupt and backward. We must get beyond having to fight this battle of central controls with progressives and protectionists with every new generation or we’ll never get to correcting the structural problems. We must learn through time, observe why the third world is third world, why socialist countries become tyrannies what happens when we erect protective barriers, why Singapore went from a poor backward economy and without a single tariff is now the wealthiest country on earth. Before we can address the matters I raised we must clear our heads of all the nonsense, sound bites, anger, and actually make an effort to understand these matters. That you distrust economist’s mantra about free trade is understandable, but not enough. Our tariff history does not support protectionism and while across the board uniform tariffs are not protectionist and would be even less so under the remnants of Breton Woods, that isn’t what people are talking about and unless we define the structural problems clearly, isn’t what we will do.
Unfortunately, I agree with @iwalton. I often do.
More importantly, so does history.