Hitting the Iceberg at 4.75 Knots

[c1ue]

Re: Hitting the Iceberg at 4.75 Knots

No doubt about it, things look pretty challenging for the good ol' U.S. of eh right now. But I can recall similar sentiments about US competitiveness compared to Japan in the late 1980's.

G,

The difference is that in the '80s (actually started in the '70s) the US as an overall economy was in much better shape. The deficit was growing due to Reagan, but was not at a 3rd world economy level.

The US economy and trade balance was also much more healthy.

Today - very little is made in the USA anymore. And as I've said many times - while Japan has an even higher deficit, they as an economy have a positive current account (and growing). Thus currency issues can (and are) isolated from the internal population.

Here in the USA, we have the opposite situation. Just paying our interest on existing debt is something like $1B/day.

If we could pay the debt off by cash, that would be fine. But the USA cannot and thus letting inflation rise will push all those foreign lenders away.

What happens then when no more money is forthcoming to pay the interest on our debt?

It is a nouveau riche collapse on macro scale.

[Chris Coles]

Re: Hitting the Iceberg at 4.75 Knots

Ash, GR,

In a way, you are both wrong, but in the nicest way.

What made the US successful in the past was investment of capital that made those higher paid jobs available in the first place. I like to quote Adam Smith on this as he put it very well:

"It will hereinafter appear that all jobs are created in direct relationship to the capital employed."

What has gone wrong is that everyone, not just the US, moved from the Victorian principal of investment of capital into shares of new businesses which were then traded on stock exchanges by anyone BUT either a bank or a government.... to governments and banks getting into making themselves the largest players in such stock and then, finding that they needed to keep better control, changed the rules to favour their needs.

Now, whomever starts a new business gets to be given the absolute minimum capital and the absolute maximum loan. So the immediate benefits of what we used to call capitalism, a stable capital base upon which to found a new long term business, (GR, I bet the companies you and your family worked for and prospered from were founded during the period 1960-1970), disappeared. Ergo the dot.com bubble crash; caused by one thing alone in my humble opinion, insufficient capital available to permit the initial start ups to survive the first ten years or so.

That process of the evolution of capital away from investment for the long term into funding loans from banks then led to their having to find other ways of lending which in turn leads to inflation.

Your long term prosperity must be founded upon long term capital investment into industries that you have not even heard of. That is the only way forward. Capital. Invested capital causes the local employment to increase and from that you get competition, (That wonderful aspect of capitalism), in your labour markets which in turn raises the long term income of the employed.

Immigration is just another aspect of a fully competitive market, better incomes attract labour to the place they can get paid better wages. The US succeeded precisely because they invested capital in new industry.

The only way forward is through long term investment into industry. Look at Canada. No trade imbalance. Long term policy led by all the nation, (not a minority), to invest into new high tech industry.

Ergo? SUCCESS!!

There is no other way, long term, Capital investment into new industry, a new, free enterprise raft of free businessmen, and businesswomen.

The only thing that held the whole together was success from the employees working their asses off to succeed for themselves.

You are good at your job and a competitor starts up alongside your company, you can walk out and better yourself, or stay for more money. That is capitalism. Wonderful competition. Nothing more needed but capital investment. The employees do the rest for the whole nation.

But since the 1970's, the banks, governments, (because they needed to borrow ever more money to spend on stupidities like funding hidden wars against small countries), and the financial institutions, (who made much more money from lending to the governments than capitalising industry.. because the governments made sure that was so), got the idea that success came from boosting the value of fixed assets and the rest is, as they say, history......

Now, regardless of the great boost I get from being credited with giving my own view from the sidelines here in the UK, I am going to pass for a few days as I have my own book to finish and this is a wonderful, but must be resisted deflection from my work.

Catch you all later in October,
_________
Chris.

[c1ue]

Re: Hitting the Iceberg at 4.75 Knots

Although the "equilibration of labour" (Steve Roach calls it the global labour arbitrage) will continue for some years, like any arbitrage it cannot go on forever. As Chinese (or Indian, or Vietnamese, or...) relative labour costs close in on US levels does this not present an even bigger challenge?

Foreign labor in IC (out of BRIC) will not EVER even approach US levels in cost.

As a scholar from the Chinese Academy of Sciences noted - it would require the resources of 4 Earths to permit all of the Chinese population to achieve a US-like standard of living at present economic/material efficiencies.

Thus the labor cost advantage will mitigate over time, but it will never go away or even approach a reasonable (i.e. 2x) ratio barring the invention of both fusion power and Star Trek-like molecular fabrication.

You are correct in that the ICs have a huge challenge - but the challenge is not economic - it is social.

The present unspoken social compact is that if you work hard and save, your kids will be better off, and some later generation - presumably soon - will have the life you see on TV and movies in America.

What happens when these populations collectively realize that even in America life is not like TV or the movies? And never will be?

Finally,

The end result may be more Americans employed in manufacturing, but still with a lower standard of living.

This end result won't happen unless the trade barriers go up. I also am not certain that the lower standard of living is necessarily guaranteed; I believe that the problem today is that the true societal cost of a good is not calculated.

My thesis is that having a cheaper $ cost widget can actually hurt an overall economy if the $'s spent in production are not available for recycling through more of the economy.

For example - making a $10 widget in the US vs. a $3 widget in China.

The $10 widget translates into $7 in labor vs. $1 in labor; however the $7 in labor then ripples through the American economy starting at the American manufacturing worker. The $1 is gone and replaced with $.75 in profit for Wal Mart and $.75 in profit for some nameless manufacturing corporation.

The base concept is like the velocity in money supply calculations.

Is the American economy better off with the $10 or $3 widget? Note I am not talking about the manufacturing company nor Wal-Mart specifically.

Finally I believe that the US does have 1 major world advantage: farmland.

The big beneficiaries of this entire fiasco will be the American Farmer.

I just hope the vast amounts of budget devoted to subsidies will now cease.

[donalds]

Re: Hitting the Iceberg at 4.75 Knots

Three related points to the discussion:

1. Since the beginning in the early 70's and the dramatic rise in the Fed interest rate (Volcher) we have witnessed a gradual decline in US wages. This coincided of course with the decline in manufacturing. In any case, with a decline in wages for US workers (and with it a decline in leisure time), we also witnessed the beginning of a gradual and significant increase in the stock markets, up to 2000. All this coincided with the financialization of the US (and global) economy. In this and other ways we have seen the gradual shift of more and more social wealth away from workers to the well-to-do. As compensation for declining wages, the finance economy grows increasingly dependent on ever increasing debt to fund consumption (tied of course to imported deflation from China, etc., which is just another way of saying cheap labor).

2. This is so obvious is goes without saying: capitalism has exceeded by light years any economic system in searching out and exploiting (developing if you prefer) new makets, including labor markets. One could argue that the US war in Iraq was, among many factors, aimed at opening the M. East to US (and in the process cutting out its competitors: France, Russia, etc.) capital penetration. As for developing new markets, capitalism has succeeded in doing so through disaccumulation elsewhere (call it creative destruction if you prefer); think of the decline of US industrial base and the shift to Asia as an example: can't have one without the other.

3. So often economic analysis fails to come close in fully appreciating the role of Nature. Here I am talking of oil, wood, metals, etc. After all, any and all products originate from the earth. So what's the significance of this obvious statement? There are limits to material exploitation. Humanity can go on looting nature at the expense of future generations for only so long. Eventually we begin to hit the wall. For eventually the externalities of development, i.e. pollution, effects on health, loss of species diversity, even biological de-volution, create a feed back loop that can't be ignored. We are being confronted with this today, climate warming being the most obvious example. Nature always bats last.

[ASH]

To GRG55

GRG55 -- Thank you for your comments on my post. In response to your remarks...

1. I don't want to give the impression that I think it is a certainty that the US is doomed to experience a decline in its absolute standard of living, as opposed to merely a reduction in its rate of growth. I just think it is very likely, given the sort of calculation that c1ue cites regarding 4 Earths. I'm afraid one of my rhetorical faults is phrasing opinions as though they were facts!

2. Regarding global labor arbitrage spreading to higher-end manufacturing and other "first world" economic activities -- you bet I'm worried! I have pretty much concluded that living off the value of one's labor is going to be a losing proposition in the long run. I work in a somewhat protected corner of the economy (I have a Ph.D. in the physical sciences, and work on projects which require American citizenship), but I have more-or-less concluded that my (future) children's labor won't be as valuable in their time as mine is now, even if they have the same level of ability and training. The unofficial plan is to amass enough capital while my labor is still valuable so that I -- and perhaps my children -- won't have to survive by labor alone down the road.

3. One thing working in our favor is that the psychological perception of wealth is relative (or so I've heard). If we're fated to climb down from our material excesses, then at least the pressures are such that we'll mostly do it together. That should take the edge off in the long run. In the short term, though, I see problems. As you remarked, labor arbitrage started at the low end of the spectrum of skill, and it has been operating for a long time. Easy credit has allowed many families to continue living in the style to which they were accustomed, even after the value of their labor had dropped below the level at which doing so was affordable. If it becomes harder to borrow to finance such luxuries, then the gap in material wealth will widen suddenly between those who were paying cash and those who were buying on credit. That might sting a bit!

4. Just for the record -- I don't actually support any level of minimum wage. I was trying to point out that the absence of ghettos -- and, in the extreme case, civil order -- are luxuries which must be paid for. You can pick any two of efficient labor, lack of slums, or low taxes -- but not all three. It's a bit of a tricky question which two you pick, though. My preference is to have no minimum wage, thereby allowing market forces to establish an efficient labor market, which will create a larger volume of economic activity to tax (and then redistribute so I don't have to look at slums, or face riots in the street). Here we have market efficiency on the revenue generation side, but unless you're redistributing cash, then you've got to face goverment innefficiency on the payout. On the other hand, if you enforce a minimum wage, the labor market is inefficient and there is less tax revenue to collect, but maybe the working poor do a better job of employing the subsidy. (Also, I do agree with your point about inequality of outcome being a great motivator for effort.) Anyway, what I was trying to say is that when you're importing labor from someplace hopelessly poor, the free market value of labor equilibrates with whereever the labor came from. Thus, if you don't want to live in the third world, you need to either pay more than what a third worlder will work for, or redistribute the fruits of the economy through taxation.


Cheers,
Andrew

[ASH]

To Chris Coles

Hi Chris. I agree entirely with your observations about how the concept of 'investment' has been corrupted. I may have misunderstood the sense of your post, but I got the impression you feel this is the only story here. Are you really trying to reduce this to a single-variable problem determined by productive versus non-productive investment of capital? Labor arbitrage is partly about the investment of capital (third world countries investing in education for their workers and infrastructure, capitalists investing in physical manufacturing facilities, etc.) but it seems extreme to deny the role played by the supply of labor and the motivations which price it when talking about the migration of manufacturing jobs. In my defense, the phrase "To the extent that the capital equipment and technical skills required to produce a given good can be assembled in multiple labor markets..." was, in fact, a nod to capital investment -- and fair warning that my piece wasn't going to be talking about its role in the equation.

Cheers,
Andrew

[GRG55]

Re: Hitting the Iceberg at 4.75 Knots

Foreign labor in IC (out of BRIC) will not EVER even approach US levels in cost.

As a scholar from the Chinese Academy of Sciences noted - it would require the resources of 4 Earths to permit all of the Chinese population to achieve a US-like standard of living at present economic/material efficiencies.

Thus the labor cost advantage will mitigate over time, but it will never go away or even approach a reasonable (i.e. 2x) ratio barring the invention of both fusion power and Star Trek-like molecular fabrication.

You are correct in that the ICs have a huge challenge - but the challenge is not economic - it is social.

The present unspoken social compact is that if you work hard and save, your kids will be better off, and some later generation - presumably soon - will have the life you see on TV and movies in America.

What happens when these populations collectively realize that even in America life is not like TV or the movies? And never will be?

Finally,



This end result won't happen unless the trade barriers go up. I also am not certain that the lower standard of living is necessarily guaranteed; I believe that the problem today is that the true societal cost of a good is not calculated.

My thesis is that having a cheaper $ cost widget can actually hurt an overall economy if the $'s spent in production are not available for recycling through more of the economy.

For example - making a $10 widget in the US vs. a $3 widget in China.

The $10 widget translates into $7 in labor vs. $1 in labor; however the $7 in labor then ripples through the American economy starting at the American manufacturing worker. The $1 is gone and replaced with $.75 in profit for Wal Mart and $.75 in profit for some nameless manufacturing corporation.

The base concept is like the velocity in money supply calculations.

Is the American economy better off with the $10 or $3 widget? Note I am not talking about the manufacturing company nor Wal-Mart specifically.

Finally I believe that the US does have 1 major world advantage: farmland.

The big beneficiaries of this entire fiasco will be the American Farmer.

I just hope the vast amounts of budget devoted to subsidies will now cease.

C1ue: Great food for thought! Not sure I can keep up with you but here's my best shot...
Regards the closing of the labour gap, my original post was trying to promote discussion by taking it to a logical, if not practical, conclusion. I agree the gap may never close - but let's also remember that forever is a looooong time.

On a productivity adjusted basis I don't think the real gap will be as large as the apparent gap visible on the surface. Taking your argument that the USA no longer manufactures much of anything, I assume then you agree that it has largely become what everyone calls a "service economy"?

Following on that logic, the opportunities to achieve dramatic labour productivity improvements would appear much less in a service economy than in a manufacturing economy. Capital to automate a factory is useless without any factories. Similarly, most service sector businesses involve somewhat "linear" labour improvement - e.g. the only way a lawyer or haircutter can increase their income, in the absence of the ability to raise prices, is to work proportionately more hours. Yes, automation and technology such as voice mail, word processors, on-line databases and Blackberries, have made big strides improving service sector productivity. But I am not sure how much more of that is left. Hence, in aggregate, I would think the industrializing economies (your IC) should be able to improve labour productivity at a much faster rate than service sector economies like the USA, and the gap will steadily narrow.

I agree completely with your point that there are major social implications, especially given such large labour forces. However, these are the same societal stresses that gave rise to the Luddites during the Industrial Revolution, and the western trade unions in the 20th century. In those instances capital eventually won over labour, and it probably will again in IC.

As for the $10 vs $3 widget, I can only respond by asking another question - If the American economy is better off with the $10 widget, would a $100 widget not be better, and a $1000 widget better still?

I don't know the answer frankly (does anyone really?). But will reveal my own bias by admitting that my opinions on the subject are somewhat influenced by "The Competitive Advantage of Nations" (Michael E. Porter, 1990, the Free Press Division of Macmillan, Inc. NY).

[GRG55]

Re: Hitting the Iceberg at 4.75 Knots

G,

The difference is that in the '80s (actually started in the '70s) the US as an overall economy was in much better shape. The deficit was growing due to Reagan, but was not at a 3rd world economy level.

The US economy and trade balance was also much more healthy.

Today - very little is made in the USA anymore. And as I've said many times - while Japan has an even higher deficit, they as an economy have a positive current account (and growing). Thus currency issues can (and are) isolated from the internal population.

Here in the USA, we have the opposite situation. Just paying our interest on existing debt is something like $1B/day.

If we could pay the debt off by cash, that would be fine. But the USA cannot and thus letting inflation rise will push all those foreign lenders away.

What happens then when no more money is forthcoming to pay the interest on our debt?

It is a nouveau riche collapse on macro scale.

C1ue: I lived through the '70s and it wasn’t that great. Watergate, an impeached President, two oil shocks, gasoline line-ups, people writing letters to the editor about their neighbour’s "wasteful" Christmas lights, the 55 mph speed limit (the dumbest law since Prohibition), high unemployment (unless you were in oil-soaked Texas), hostages in Tehran, and Carter telling everyone to turn down the thermostat and knit a sweater.

After Volker’s chemotherapy 21% interest rates, things looked pretty bleak from the bottom of that recession. Yes, I agree the US and global economies had not been driven to the gargantuan excesses we have today, since the FIRE economy was in its infancy. However, pessimism was pretty high. Now once again things look pretty bleak, and “shorting” America may be an excellent timed trade, but for 200 years it’s not been a very good investment strategy.

I remain supremely confident that at some point (hopefully soon) the American people will have had enough and WILL seize their Republic back from the Goldman Gang apparatchiks and sycophants that populate the Wall Street-Washington axis of snivel.

As the crisis deepens I expect to be inundated with articles and books pronouncing:
- the end of the “American Empire”;
- the inexorable unfolding of the “Asian Century”;
- the coming “global dominance” of China;
- the virtues of Russia (kleptocratic Kremlin capitalism);
- the disappearance of the very last barrel of oil (likely into a Hummer);
- blah, blah, blah...
All will be based on a kernel of fact so each particular apocalypse will sound plausible. Finally we can look forward to the inevitable Business Week cover. This will no doubt feature the Economic “Death of America” (not to be confused with the jihadist “Death to America”). By then the crisis will be over.

In the meantime, to deal with the issue of paying the debt, I confess the only idea that readily comes to mind is to have Hank and Ben call the IMF and negotiate a work out to buy some more time…

[GRG55]

Re: To GRG55

...Regarding global labor arbitrage spreading to higher-end manufacturing and other "first world" economic activities -- you bet I'm worried! I have pretty much concluded that living off the value of one's labor is going to be a losing proposition in the long run. I work in a somewhat protected corner of the economy (I have a Ph.D. in the physical sciences, and work on projects which require American citizenship), but I have more-or-less concluded that my (future) children's labor won't be as valuable in their time as mine is now, even if they have the same level of ability and training. The unofficial plan is to amass enough capital while my labor is still valuable so that I -- and perhaps my children -- won't have to survive by labor alone down the road...

...Easy credit has allowed many families to continue living in the style to which they were accustomed, even after the value of their labor had dropped below the level at which doing so was affordable. If it becomes harder to borrow to finance such luxuries, then the gap in material wealth will widen suddenly between those who were paying cash and those who were buying on credit. That might sting a bit!

...Thus, if you don't want to live in the third world, you need to either pay more than what a third worlder will work for, or redistribute the fruits of the economy through taxation.

Cheers,
Andrew

Gosh Andrew. Look what we started...

Just touching on what I've highlighted, it strikes me that the natural human tendency is to extrapolate trends from recent experience. For some 25 odd years we have lived through the ascendence of the FIRE economy where capital trumped labour. I sense in your comment about your kids future, that you think this trend will not change. I am not so sure that amount of pessimism is warranted. I think the incredible excesses we have witnessed in the past couple of years could mark the blow-off end of that phenomenal time.

It's not just "ordinary" consumers who are suffering from the fact it is now "harder to borrow". All manner of overlevered hedge funds, bank shareholders, and high-rolling FIRE economy participants are suddenly seeing the "gap in material wealth...widen" as creditors move in and seize their assets. Although I am disappointed with the Bernanke Fed's behaviour and the capitulation by the BoE, I still can't help but think that these breathtaking excesses mark some sort of turning point in the credit cycle, capital will be destroyed (and who holds most of the capital!), and those who toil in the creation and provision of things the world needs will be the value creators for the next cycle. Maybe I'm just talking my own book...

On the matter of redistribution, PIMCO's Bill Gross had an interesting perspective. Here's the link:

http://www.pimco.com/LeftNav/Feature...ugust+2007.htm

[GRG55]

Re: Hitting the Iceberg at 4.75 Knots

Three related points to the discussion:

1. Since the beginning in the early 70's and the dramatic rise in the Fed interest rate (Volcher) we have witnessed a gradual decline in US wages. This coincided of course with the decline in manufacturing. In any case, with a decline in wages for US workers (and with it a decline in leisure time), we also witnessed the beginning of a gradual and significant increase in the stock markets, up to 2000. All this coincided with the financialization of the US (and global) economy. In this and other ways we have seen the gradual shift of more and more social wealth away from workers to the well-to-do. As compensation for declining wages, the finance economy grows increasingly dependent on ever increasing debt to fund consumption (tied of course to imported deflation from China, etc., which is just another way of saying cheap labor).

2. This is so obvious is goes without saying: capitalism has exceeded by light years any economic system in searching out and exploiting (developing if you prefer) new makets, including labor markets. One could argue that the US war in Iraq was, among many factors, aimed at opening the M. East to US (and in the process cutting out its competitors: France, Russia, etc.) capital penetration. As for developing new markets, capitalism has succeeded in doing so through disaccumulation elsewhere (call it creative destruction if you prefer); think of the decline of US industrial base and the shift to Asia as an example: can't have one without the other.

3. So often economic analysis fails to come close in fully appreciating the role of Nature. Here I am talking of oil, wood, metals, etc. After all, any and all products originate from the earth. So what's the significance of this obvious statement? There are limits to material exploitation. Humanity can go on looting nature at the expense of future generations for only so long. Eventually we begin to hit the wall. For eventually the externalities of development, i.e. pollution, effects on health, loss of species diversity, even biological de-volution, create a feed back loop that can't be ignored. We are being confronted with this today, climate warming being the most obvious example. Nature always bats last.

No denying what you have observed, but I wonder a bit about the cause and effect. In 1. for example, are the declining wages dependent on debt and cheap Chinese labour, or is the newly available cheap global labour pool the reason for the declining wages, and the ascendence of capital over labour ("financialization")?

The war in Iraq is a touchy subject around these parts too, but I will venture the opinion that since the Arab Gulf sheikhdoms depend on US/UK military sponsorship (several of the Ruling Families would fall immediately if the military were to depart) there were no effective barriers to US capital penetration in the Middle East. Even in the case of Iran, removing the sanctions and funnelling the money through intermediary financial centers such as London and Tokyo would have allowed Wall St. to invest to their heart's content. The problem is Wall St. doesn't want to invest in plant and equipment; they want to "invest" in exotic credit derivatives. And until very, very recently there wasn't much of a market for that stuff out this way.

It doesn't pay to fool with Mother Nature - no argument from me.

[donalds]

Re: Hitting the Iceberg at 4.75 Knots

GRG55 says, in response to my post:

No denying what you have observed, but I wonder a bit about the cause and effect. In 1. for example, are the declining wages dependent on debt and cheap Chinese labour, or is the newly available cheap global labour pool the reason for the declining wages, and the ascendence of capital over labour ("financialization")?

MY RESPONSE: PERHAPS THIS IS LESS A CAUSE/EFFECT RELATION THAN A DIALECTICAL ONE, IN WHICH RELATIONSHIP BETWEEN TWO FORCES RE-PRODUCE EACH OTHER.

The war in Iraq is a touchy subject around these parts too, but I will venture the opinion that since the Arab Gulf sheikhdoms depend on US/UK military sponsorship (several of the Ruling Families would fall immediately if the military were to depart) there were no effective barriers to US capital penetration in the Middle East. Even in the case of Iran, removing the sanctions and funnelling the money through intermediary financial centers such as London and Tokyo would have allowed Wall St. to invest to their heart's content. The problem is Wall St. doesn't want to invest in plant and equipment; they want to "invest" in exotic credit derivatives. And until very, very recently there wasn't much of a market for that stuff out this way.

MY RESPONSE: I DON'T THINK THERE IS ANY DOUBT THAT THE M. EAST HAS BEEN LESS OPEN TO NEO-LIBERAL EXPANSION THAN OTHER AREAS OF THE GLOBE. THIS IS NOT TRUE ACROSS THE BORDER BUT IT IS WITH ENOUGH OF THE AREA, AT LEAST RELATIVELY SPEAKING. IN ANY CASE, NONE OF THIS WOULD MATTER EXCEPT THAT THE AREA CONTAINS THE BULK OF THE GLOBE'S OIL. THE US, AS REFLECTED IN THE PROJECT FOR A NEW AMERICAN CENTURY, PERCEIVED FUTURE COMPETITION FOR THE OIL COMING FROM THE LIKES OF CHINA AS POSING A LONG TERM THREAT TO US HEGEMONY. NOW THAT THE US WAR IN IRAQ HAS SPEEDED UP THE SPEED OF DECLINE OF US MILITARY HEGEMONY AS A CONSEQUENCE OF OVER REACH AND BLOW BACK, THE QUESTION NOW MUST BE POSED: ARE WE ALSO SEEING CLEAR EVIDENCE OF THE DECLINE OF US ECONOMIC AND FINANCIAL HEGEMONY? SHOULD THE US REAL ECONOMY SLIDE INTO A SEVERE RECESSION (WHICH SEEMS INCREASINGLY LIKELY) AND SHOULD THE CREDIT CRUNCH REDUCE THE POWER OF US FINANCE CAPITAL (A SITUATION IN WHICH FINANCE DRIVES THE REAL ECONOMY IS NOW BEING REVERSED, WHERE THE REAL ECONOMY RECLAIMS ITS PREVIOUS DOMINANCE, THANKS TO SUBPRIME AND OTHER TOXIC DEBT MATTER), THEN WE MIGHT BE WITNESSING THE COMPOUNDED DECLINE OF US HEGEMONY ON BOTH ACCOUNTS: MILITARY AND ECONOMIC/FINANCE, RE-INFORCING EACH OTHER IN A FEED BACK LOOP. A FLIGHT OF CAPITAL FROM THE US (WITH RISING LONG TERM INTEREST RATES), FAST DECLINING DOLLAR AND SUBSEQUENT STAGFLATION WOULD SEEM TO SUPPORT THE LATER, AS DOES THE WAR IN IRAQ SUPPORT THE FORMER.

It doesn't pay to fool with Mother Nature - no argument from me.

[c1ue]

Re: Hitting the Iceberg at 4.75 Knots

On a productivity adjusted basis I don't think the real gap will be as large as the apparent gap visible on the surface. Taking your argument that the USA no longer manufactures much of anything, I assume then you agree that it has largely become what everyone calls a "service economy"?

If you include financial engineering as services, then I absolutely agree

As for living through the '70s, while people were pessimistic, they weren't in actual jeapordy of going hungry. There is a huge difference between lack of hope for the present/future and no food on the table.

Where we're at is more towards the latter than former - just witness middle class living standards. And this is BEFORE the big inflation push starts.

Following on that logic, the opportunities to achieve dramatic labour productivity improvements would appear much less in a service economy than in a manufacturing economy. Capital to automate a factory is useless without any factories. Similarly, most service sector businesses involve somewhat "linear" labour improvement - e.g. the only way a lawyer or haircutter can increase their income, in the absence of the ability to raise prices, is to work proportionately more hours. Yes, automation and technology such as voice mail, word processors, on-line databases and Blackberries, have made big strides improving service sector productivity. But I am not sure how much more of that is left. Hence, in aggregate, I would think the industrializing economies (your IC) should be able to improve labour productivity at a much faster rate than service sector economies like the USA, and the gap will steadily narrow.

GRG, you are equating productivity with wages. As we have seen in the US in the past 10 years, increasing productivity does not always mean increased wages.

Furthermore if there are resource limitations - the higher productivity may just go toward paying the higher relative cost for a larger share of the limited resource. As mentioned previously - it is not that China/India cannot yet have a 2007 US standard of living, it is that without major technological changes, they CANNOT.

I agree completely with your point that there are major social implications, especially given such large labour forces. However, these are the same societal stresses that gave rise to the Luddites during the Industrial Revolution, and the western trade unions in the 20th century. In those instances capital eventually won over labour, and it probably will again in IC.

The difference between the Luddite era and today are several - I'll just talk about 2:

1) Farmers and artisans actually grow and create things. Service jobs by and large don't create anything physical. Hence the difference between rural poverty and urban poverty - a poor farmer may have to work a lot and be hungry when there is a drought, but by and large can survive independently. A poor urban citizen without work or welfare, dies.

2) The Luddite movement failed because ultimately it was a small number of artisans fighting the market forces of capital plus industrialization. Today the battle is between Western middle classes vs. capital plus labor cost arbitrage. As I've mentioned previously, it is not that there is a fundamentally better way to do what the middle classes have been employed to do in the past, it is that capital has found a way to make it cheaper. Thus many more people as a portion of the population are affected by this than the artisans of the Luddite era - which leads to political upheavel.

As for the $10 vs $3 widget, I can only respond by asking another question - If the American economy is better off with the $10 widget, would a $100 widget not be better, and a $1000 widget better still?

The specific value of the widget is actually irrelevant. Were it $100 or $1000, so long as everything else were proportionately worthy (or worthless ;)), the economy would balance out.

However, when you arbitrage labor outside of your immediate environs, there can be no balance. When the arbitrage occurs outside of your national borders, your government doesn't even get the payroll taxes.

I'm not saying we should become France with its myriad protected industries and labor, however, I am saying that the short sighted behavior of capital today is killing the host.

As much as I am critical of huge accumulations of wealth - in the first Gilded Age it was at least a result of creation: new industries, large standard of living increases across the board, etc.

In our present Gilded Age, the vast majority of wealth accumulation lies in financial manipulation, tax gamesmanship, and similar 'robbing Peter to pay Paul' behaviors. Labor offshoring is just one of many examples.

[GRG55]

Re: Hitting the Iceberg at 4.75 Knots

...GRG, you are equating productivity with wages...

Not correct. They don't equate, but they certainly do relate. It may be, as you say, that increased productivity doesn't always lead to higher wages, but it is almost certain that increases in real unit wages across an economy will not occur in the absence of increases in aggregate productivity.

I tried to illustrate the point that in a service economy it is perhaps more difficult to raise labour productivity, and therefore the only way to improve "standard of living" is the "linear" response of working proportionately more hours - i.e. more output from more input, instead of more output per unit of input. Isn't this exactly what has happened in recent decades as the US shifted to a services economy - longer hours, more working spouses, etc?

...The difference between the Luddite era and today are several - I'll just talk about 2:

1) Farmers and artisans actually grow and create things. Service jobs by and large don't create anything physical. Hence the difference between rural poverty and urban poverty - a poor farmer may have to work a lot and be hungry when there is a drought, but by and large can survive independently. A poor urban citizen without work or welfare, dies.

2) The Luddite movement failed because ultimately it was a small number of artisans fighting the market forces of capital plus industrialization. Today the battle is between Western middle classes vs. capital plus labor cost arbitrage. As I've mentioned previously, it is not that there is a fundamentally better way to do what the middle classes have been employed to do in the past, it is that capital has found a way to make it cheaper. Thus many more people as a portion of the population are affected by this than the artisans of the Luddite era - which leads to political upheavel...

Pardon me if you think I was equating England 200 years ago exactly with America today - but I stand by my observation that the societal stresses are pretty much the same. A "small number of artisans fighting the market forces of capital and industrialization" in pre-Victorian England is just a microcosm of today's global "...battle...between Western middle classes vs. capital plus"...industrialization. Only today the industrialization that seems so threatening is going on in China, and India, and Korea, and Brazil, instead of just down the canal at the textile mill in the next town.

And it's not just Western middle classes that feel threatened. The BBC recently did a news documentary within which they interviewed a small sample of rural India. The universally fearful sentiments expressed about Indian urbanization, industrialization and globalization sounded (to me) a great deal like those I would imagine the acolytes of Ned Ludd would have expressed in their day. And some of the solutions proposed smacked of "a small group of artisans fighting the market forces..." and most definitely were worthy successors to Ghandi's advocacy of the charkha.

[c1ue]

Re: Hitting the Iceberg at 4.75 Knots

it is almost certain that increases in real unit wages across an economy will not occur in the absence of increases in aggregate productivity.

I think we could go down an extended discussion on terms - but I will assume you mean purchasing power.

I have no idea whether the last 10 years of clearly above average productivity growth has been accompanied by similar increases in purchasing power.

In this case wages themselves are not relevant - it is the wage vs. prices and adjusted for inflation which matters. It is thus possible that the recent decades of 0 real wage growth has simulaneously been a time of significant purchasing power increase.

Something to keep an eye out for.

Pardon me if you think I was equating England 200 years ago exactly with America today - but I stand by my observation that the societal stresses are pretty much the same.

GRG,

Actually I was not faulting you at all - you are absolutely correct that the societal stresses are the same.

My point was two-fold: that the percentage of population involved is much greater now than before hence the likelihood of a different outcome is increased, and furthermore that the absolute effect on people (i.e. poor but productive as a farmer, vs. poor and with nothing and no prospects as urban unsubsized poor) is similarly greater.

I don't think we're going to have a revolution in America, but I do think we are now much closer than many people think.

Going back to the income graphs and look at many many are 'average' or 'below average' - it is not a small number.

[GRG55]

Re: Hitting the Iceberg at 4.75 Knots

...I don't think we're going to have a revolution in America, but I do think we are now much closer than many people think.

Going back to the income graphs and look at many many are 'average' or 'below average' - it is not a small number.

Frankly C1ue, a little revolution may not be such a bad thing...

I suspect that many more people, than either of us might imagine, out in the rest of the world are waiting and watching for the American people to take back their Republic. I continue to be surprised that almost every time I have coffee with any of my Arab friends they inevitably steer the conversation over to that topic in one form or another. To my amazement a few actually express a considerable amount of despair over the state of US political leadership (you'd almost think they had...a vote) Dem and GOP alike.

Sometimes the stuff that humourist Andy Borowitz puts out hits pretty close to home: "...after a new study showed that only one in 1,000 Americans knows what the First Amendment is, Vice President Dick Cheney said, "Good, then no one will notice when it’s gone."