Monday, April 25, 2011

Economics of Where We are at; and Where we are Going

I found a report (Ht MR) that tells us a lot about where we have been.  By telling us where we have been, it also tells us a lot about where we are going.  It notes that so far we have been able to trade off loss in some areas, by moving up the value chain.  It also notes that a lot of our employment growth has been linked to internal consumption (construction, government, health care, and retail).  It notes that retail has been driven by debt purchase, but does not further expand that to the fact that higher leverage (borrowing) also leverages up government tax collections as well.  So that not only is government not going to be able to keep increasing its employment numbers, it very likely will fall further: if not in numbers than in value. Items in brackets [] are mine, as well as emphasis via italics.

Note that when they are referring to tradeable versus nontradeable, they are referring to products or services that you can trade with countries overseas.  So for instance grain is potentially 100% tradeable, and construction is essentially 0% tradeable.

The trends in value added per employee are consistent with the adverse movements in the distribution of U.S. income over the past twenty years, particularly the subdued income growth in the middle of the income range. The tradable side of the economy is shifting up the value added chain with lower and middle components of these chains moving abroad, especially to the rapidly growing emerging markets. The emerging markets, themselves, are moving rapidly up the value-added chains, and higher paying jobs may therefore leave the United States, following the migration pattern of lower-paying ones.

The evolution of the U.S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States.  A related set of challenges concerns the income distribution; almost all incremental employment has occurred in the nontradable sector, which has experienced much slower growth in value added per employee. Because that number is highly correlated with income, it goes a long way to explain the stagnation of wages across large segments of the workforce.

Executive Summary

1.      Employment growth in the U.S. economy between 1990 and 2008 was substantial, on the order of 27.3 million jobs, off a base in 1990 of 121.9 million.

2.      Virtually all (97.7 percent) of the incremental employment stems from the nontradable sector. This occurred despite dramatic labor-saving technology in information processing that ran across all sectors of the economy.

3.      The leading employment sectors are government and health care, in that order, both on the nontradable side. Together these two sectors generated more than 10 million additional jobs over the period, accounting for almost 40 percent of the increment. Health care added 6.3 million jobs on a base of 10 million. Government added 4.1 million on a base of 18.4 million.

4.      Given the pressure on the government budgets, continued gains in government employment seem unlikely. Equally, health care absorbs a large enough fraction of GDP (on the order of 16 percent) that expansion in that sector is at least questionable. An aging population may require more health services, but the government’s ability to finance the expansion is in doubt.

5.      Growth in other nontradable services that generated employment gains—for example, retailing—has been driven in part by debt-financed consumption. After the financial crisis, the prospects for job growth in these sectors are duller.

6.      The tradable sector experienced job growth in high-end services including management and consulting services, computer systems design, finance, and insurance. These increases were roughly matched by declines in employment in most areas of manufacturing.

7.      The loss of employment in the manufacturing sector was caused by the out-migration of functions in global supply chains associated with lower valued added per job [We lost our more manpower intensive manufacturing jobs]. But as the emerging markets grow, they will compete for more sophisticated functions. This does not mean that the United States will lose all the sectors in which it has developed a comparative advantage—just that more potential competition is on the horizon.

8.      Manufacturing sectors that suffered a loss of employment nevertheless experienced rising value added. [What is not understood is that even the Chinese have been losing jobs to increased manufacturing efficiency] Therefore value added per job rose, in some cases dramatically. High-income jobs remained in the tradable sector.

9.      For the tradable sector as a whole, value added per job rose substantially, an increase of 44 percent from 1990 to 2008, far above the increase of 21 percent in the economy as a whole. The tradable sector is gravitating toward higher value-added components of global supply chains. These consist, in broad terms, of high-end services, some in manufacturing industries and some, like finance and insurance, in pure service industries.

10.  Given the prospect of slowing employment growth in nontradables and rising competitive pressure on tradables, major employment problems in the near future are a certainty. Even if the nontradable sector is able to continue to absorb the growth in the labor force, pressure on wages and salaries will be downward, and consequences for income distribution unavoidable.

11.  The post crisis shortfall in domestic demand is causing stubbornly high unemployment even as the economy begins to recover some of its growth momentum…. Although the U.S. trade deficit fell to $375 billion in 2009, from $702 billion in 2007, the adjustment came entirely from a sharp decline in imports, from $2.35 trillion to $1.95 trillion, whereas exports actually fell slightly, from $1.65 trillion to $1.57 trillion. In other words, the adjustment came from a fall in imports not a rise in exports.

12.  To create jobs, contain inequality, and reduce the U.S. current-account deficit, the scope of the export sector will need to expand. That will mean restoring and creating U.S. competitiveness in an expanded set of activities via heightened investment in human capital, technology, and hard and soft infrastructure. The challenge is how to do it most effectively.

I have no issues with item 12.  However, understand that the prescription to solve the ills of almost every country under the sun is for them to increase their exports and current-account deficit.  Without imploding your currency, it is about the only way for a debtor country, like Greece or the United States, to work its way out of debt.  It works so well that countries like Germany, Japan, and China make a habit of lending to countries so that they can import even more goods from them.

Since this may sound a lot like a Ponzi scheme, you may be suspicious that item 12 is not a likely outcome.  So where would that mean we are going?   We, or at least most of us, are going to be poorer.

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