For many decades, Labor Day was a holiday on which Americans celebrated (and maybe even felt a bit smug about) our nation’s economic prowess. This year, not so much. In our current economy, many people are suffering grievously. Moreover, an increasing number believe that the problems are permanent. Surveys show a significant proportion of the population believes that their own living standards will continue to decline, and that their children’s generation will live less-well than their own. In other words, the feeling is growing that what we face in not a normal cyclical downturn, but a sea change for the worse.
The proximate cause of the current situation was the housing bubble and bust, and more generally the excessive and irresponsible use/deployment of credit in both the public and private sectors. However, there is every reason to believe that there are structural problems with the economy that go well beyond the sort of things that are usually portrayed on graphs in economic discussion.
Politicians, economists, analysts, and bloggers have asserted numerous and sometimes conflicting factors as primary causes for our economic problems. This post will summarize some of the explanations most commonly proposed plus a few more. I don’t necessarily agree with all of these, and today I’m focusing on simply stating the proposed causal factors, leaving detailed analysis/assessment for a future post.
The possible causes of the economic decline:
1)The low-hanging fruit has already been eaten. Economist Tyler Cowen, for example, argues that America’s historical prosperity has been driven largely by: (i)the availability of free land, (ii)a sequence of key technological breakthroughs, and (iii)the high return on investment offered by providing schooling to motivated but uneducated immigrants. He further argues that the free land is gone, that today’s technological improvements are not comparable to those introduced in the period 1880-1940 (electricity, automobiles, airplanes, radio, mass production, pharmaceuticals, etc), and that the high % of the population already attending college makes additional improvements from this source difficult. (Tyler’s recent book includes a graph attempting to measure the “rate of global innovation” since medieval times; it shows innovation peaking over the period 1850-1905, and having now returned to the level where it was in the early 1700s.)
2)Technological unemployment. The argument here is that the advances in technology that have already occurred, and those that are likely in the near future, reduce the need for labor so radically that full employment will never again be possible. This assertion is basically the opposite of the low-hanging-fruit argument, at least the technological aspect thereof.
3)Globalization/offshoring. The reduction in tariff barriers, coupled with the fall in physical barriers driven by telecommunications, air freight, and container shipping, puts American labor in competition with cheap labor around the world, and drives wages to the lowest common denominator. Some advocates of this viewpoint argue that David Ricardo’s elegant and well-accepted theory of comparative advantage does not adequately account for the dynamics of the modern era–that, for example, offshoring of a manufacturing operation may inexorably drive the later offshoring of production engineering and later of design engineering and product management.
4)Uncontrolled immigration. This is similar to the globalization/offshoring argument, with the exception that the competitive labor is physically resident in the U.S.
5)The hypertrophy of the legal and financial industries. Advocates of this viewpoint would argue that while law and finance are key to the operation of the economy, the numbers of people involved in these industries, and the corresponding resources allocated to them, have become greatly excessive. See my post about sticky governors. In addition to the direct financial costs, the excessive growth of these industries has siphoned off considerable human talent which could be more productively employed elsewhere.
6)Excessive regulation. Excessive and unwise government regulation slows down the rate of business creation and expansion of existing businesses; moreover, it tends to politicize business and hence to result in the deployment of the nation’s capital to enterprises and projects which have good political sponsorship rather than those which are economically sound. It also further drives that expansion of the legal and lobbying industries, as companies strive to protect themselves from the political process, to exploit it at the expense of their competitors, or both.
7)Rising energy costs and declining availability. The creation of a large and affluent middle class had a great deal to do with the substitution of mechanical for human energy. The increasing costs of oil, and potentially of electricity, directly threaten this broad-based affluence. (Obviously this point is closely related to point 6, “excessive regulation.”)
8)Runaway credentialism. Excessive emphasis on degrees and on “elite” universities wastes human resources by putting barriers in the way of talented but uncredentialed individuals, and also wastes resources by steering vast amount of human time and effort into education which is really pro-forma rather than truly valuable from either an economic or an intellectual-development perspective. Vast amounts of financial resources have been poured into universities; much of it has been expended on buildings, overgrown athletic programs, and administrative salaries. Whereas the expansion of university education might have once helped social mobility and full use of society’s talents, excessive credentialism tends to set class barriers in stone.
9)The failure of the public schools. Large numbers of kids never learn to read and understand documents of any complexity, to write coherently, or to perform simple calculations. (Several manufacturers have commented about the difficulty of finding employees who can read a ruler or who even understand fractions well enough to be able to learn how to read a ruler; I was talking the other day with a guy who teaches landscaping at a community college and who made the same comment. The economic consequences of this should be obvious.) For families that lack the resources to escape them, bad public schools lead to multigenerational economic crippling…for those that do have such resources, the cost of escape-reflected in either private-school tuitions or in additional housing costs required to move to neighborhoods where the public schools are at least somewhat less-bad…often takes a very significant portion of their overall incomes.
10)Increasing size and cost of government. Todd Zywicki, drawing on data from Elizabeth Warren and Amelia Tyagi, compares two middle-class families, one in 1970 and one in the present era. In the 1970s case, only the father works outside the home; in the present-day case, both parents do. While the (inflation-adjusted) income of the present-day family is 75% higher than the 1970s one, the dollar value of their tax obligations is increased by 140%. (The Zywicki link comes via this Ricochet post, which is very relevant to the current topic.)
11)Cultural factors. A society’s economic growth is very largely a function of its culture. And for roughly that last 100 years, the bourgeois values that lead to wealth production have been increasingly disrespected and even mocked, throughout the western world. The excesses of the “self-esteem” movement, resulting in people who feel entitled to success and recognition without effort/accomplishment, represent one manifestation of this. Closely related is the increasing emphasis on fame rather than accomplishment, and on the short-term lucky win versus long-term creation of something worthwhile.
Aristocracies have always tended to value wealth forcibly extracted from others, directly or indirectly, over wealth earned through work. We have a lot of would-be aristocrats in this country.
One cultural factor which has been particularly harmful is the hostility toward manufacturing; I discussed this at length in my post faux manufacturing nostalgia.
12)Excessive reverence for theory-based knowledge at the expense of experience and tacit knowledge. Obviously, this is closely related to point 7, “runaway credentialism.” See my posts the dictatorship of theory and management mentalities. Attempts to force the real world into a theory-based Procrustean bed can lead to the widespread misdirection and waste of resources; also, excessive focus on theory-based knowledge acts, like the credentialism to which it is closely related, as an inhibitor of social mobility.
For discussion: Which of the above factors, if any, do you believe have played the most important role in our current economic pain? What additional factors would you suggest as causative?