Are we becoming a "service" economy?
I'm very big on free trade. Very big, and I'm concerned about all the myths today. We talk about "trade imbalances" and "trade deficits" -- words that, to some, imply a balance is ideal, no matter the cost. There are a lot of other terms thrown around which also confuse most people, like "exporting" jobs.
We must be careful about the word "service," which can mean different things to different people. Socialist-liberals like the EPI, or 89, think heavy industry has always been the key to American economic success. They think we're turning into a nation of waiters and janitors while our "good jobs" are "exported" abroad. I disagree because the evidence shows quite the contrary. The EPI likes to claim that we've had declining real (adjusted for inflation) wages since the 1970s. That was true, but it started to reverse in the early part of this decade. Wages are now rising faster than inflation, which is why Social Security needs to be tied to prices, not wages.
The U.S. has continued to prosper because we have a comparative advantage in innovation, and we have a high degree of freedom and prosperity that attracts innovators from abroad. It's true that in the past, our innovation was in heavy industry, or at least we depended a lot on it. Everything's changed with the return to free trade, and companies using foreign labor pools.
Today, we still have a comparative advantage in innovation. However, it's no longer based in heavy industry. It's in design. It's in thinking. As Ed Leamer (a great UCLA professor and economist) once put it, companies like Microsoft and Disney provide us with cheap plastics and textiles. We create the software, movies, etc., that China and India cannot easily make. Meanwhile, China, India and others create plastics and textiles more cheaply than we can. Then we trade, and it raises the standard of living for everybody.
So many worry about American companies moving manufacturing plants overseas, but most R&D stays right here. The R&D jobs are the ones we want to keep: they're the thinking jobs, the highest-paying jobs, unlike the low-grade manufacturing jobs set up in Bangalore or wherever. (If they didn't pay better than manufacturing, then by definition nobody would want to do them.) Sure, Intel and others have set up R&D centers in India, but most that started here will stay right here. If it's true that Indians and Chinese will work for a fraction of our workers, why do the jobs stay here at all? Ah, that's simply because there are things the Indians and Chinese can't do as well as we. Maybe you can hire six Indian programmers for the price of one in Redmond, but Microsoft knows they get better output from their American employee.
I'm not being racist, just observing that China, India and other similar nations have a comparative advantage in labor-based work. There are things they can't do as well as Americans, because we (and most other Western nations) have a comparative advantage in capital-based work. That's true even in these days of supposed high capital mobility. I argue that capital mobility hasn't equalized any economies, let alone made the U.S. a "service-based" economy of waiters and hamburger flippers ("race to the bottom" just isn't true). Uninhibited capital mobility, I think, is actually sharpening the delineation between labor-intensive economies and capital-intensive economies.
I highly recommend reading what Ed Leamer has said about this. He's pointed out that technological advancement has destroyed more jobs than free trade. You want manufacturing jobs? High-paying ones? Fine, let's start destroying the robots at auto plants. In fact, let's destroy all our factories, all our technology that reduces the need for human labor. They're destroying jobs, don't you know?
Caroline Baum once wrote for Bloomberg that there's an economy with 100% employment, and in fact it'll have more work than workers: a hunter-gatherer society. Plenty for everyone to do, just no free time to enjoy life, and no excess income to have anything beyond food and shelter.
Our economy has gravitated to a pretty good compromise. We have a high standard of living, a really good unemployment rate, and sustained economic growth. Americans are lazy and stupid, we're always told, compared to Europeans and the Japanese? For being smarter, where are the Europeans? For being better working, where are the Japanese? They're graying cultures sitting on demographic time bombs, mired in economic stagnation.
For being such supposedly stupid and lazy people, we've done pretty well, haven't we? I firmly believe the U.S. is blessed by God. It started with the blessings of prosperity on our original colonists, and with the bulletproof George Washington. You may recall that Washington was shot at during one battle of the French & Indian War, and none of the many bullets could hit him. That was the Hand of Providence. It's the individual blessings that have sustained our great country.
Labels: Free trade