My discussion question for today: In a world with global and highly-efficient transportation and communications…and billions of people who are accustomed to low wages…is it possible for a country such as the United States to maintain its accustomed high standards of living for the large majority of its people?…and, if so, what are the key policy elements required to do this?
Henry Ford did not establish the five-dollar day out of the sheer goodness of his heart. He did it because worker turnover had become unacceptably high: people didn’t like assembly-line work, and they had alternatives. Suppose Ford had then had the option of building the Model T in a low-wage country, say Mexico. Maybe he wouldn’t have needed to bother with the American $5/day wage and the productivity improvements needed to support it. (Although Ford being Ford, he still might have implemented the manufacturing innovations and process improvements even without strong economic necessity to do so.)
America’s premium wage structure has, I think, been historically enabled by several factors:
–Large amounts of excellent land, which made farming an attractive option for may people
–Absence of a thicket of regulations and bureaucratic oversight to inhibit the development of new ways of doing things
–Absence of traditional status hierarchies, prohibiting the full development of human potential
–A stable legal system, allowing for long-term business relationships to be created and maintained
–A patent system which allows innovators to profit from their ideas.
–A highly-literate population
–A large internal market
–Slow and expensive trans-oceanic transportation and communications, inhibiting the undercutting of American wages by low-cost labor abroad. (Economists will remind me that those same limitations also had a negative effect on American prosperity by inhibiting potential exports and thus limiting our benefits from comparative advantage)
–Tariffs on imports, which for much of American history (up to about 1950) were quite significant and were an important source of Federal government revenue. (Some history here) Of course, it can be argued that, like the transportation and communications limitations, this factor cuts both ways.
–Relatively low costs for military activities…both financial costs and human costs…compared to many other countries
–Low-cost energy: coal, oil & gas, waterpower, and electrification
–A political structure and a global public image of America which encouraged immigration of those who valued freedom and opportunity. (And, of course, the limitation of transportation & communications tended to imply that immigration would be a permanent decision, or at least a decades-long one)
The United States has enjoyed a beneficent feedback loop between wages and productivity–higher wages tended to encourage/require more mechanization and other forms of productivity improvements, which in turn made possible the payment of still higher wages. This virtuous circle, combined with the other factors mentioned above, drove substantial increases in the median real (inflation-adjusted) household income. (See chart) But since the late 1970s, the growth has tended to stall out, especially after about 1999…although there has been some recovery since 2015.
Much of this stalling-out has been due to the growth of China and other formerly-undeveloped countries as export superpowers…but there are also other factors at work, some of which represent the reversal of positive factors that I mentioned earlier. I’d note particularly:
–The failure of the education system to provide reasonable levels of literacy and numeracy for a big part of the population.
–Increasing bureaucratization, which imposes direct costs as well as its impacts on productivity…and tends to slow everything down, to the point that implementing any large-scale project in the physical world is usually like swimming in glue.
–The tightened environmental restrictions on companies in the US, combined with the much-less-stringent restrictions in many other countries, giving a great economic edge to certain kinds of production in those other countries.
–Increasing credentialism, which both inhibits the use of human potential and imposes direct costs through imposition of often-pointless educational requirements.
–A dismissive and disrespectful attitude toward people who work with their hands, combined with an absence of any kind of trade-related training from most of the school system.
–Public policies which have favored service companies and producers of intangibles over ‘thing’ companies.
–The large-scale theft of intellectual property by other countries, most particularly China
–The exploitive vacuuming-up of wealth by government employees, in their own self-interests, as with the pension plans of some states and municipalities
–Despite all the talk about The Digital Age, and Robots Are Taking All the Jobs, actual productivity improvements have not been all that stellar.
I have often seen it argued that the offshoring of so much economic activity, and the consequent stalling of incomes, is due to the decisions of selfish and short-sighted managements of American companies. And it is true that many companies have tended to jump at the offshore alternative (sometimes without a proper analysis of costs and benefits) rather than doing all they could to improve their US-based operations. But it is also true that not all companies are US-based. If all US washing machine manufacturers (let’s say) had nobly and patriotically decided to continue doing all their manufacturing (parts and final assembly) in the US, then you can bet that many European and Asian companies would have been very happy to take advantage of low-wage countries while selling their products into the US market. How many Americans, in real life, would be willing to pay a premium of more than a few % for a ‘Made in the USA’ product?
At present, there are worker shortages in almost all fields and geographical areas, which is driving up nominal wages. Whether it will also drive up inflation-adjusted wages, and whether this will be sustainable, remains to be seen. There are relevant threats on the horizon, including Biden’s plan to increase the corporate tax rate and also his ‘green’ policies, which would certainly drive up energy costs. Also the tolerance of crime–almost the encouragement of crime–by important factions of the Democratic Party and their media allies. All of these things have economic impacts which will/would certainly impact the real wages of most Americans.