Where Will the Jobs Come From?

The election is over but the central problem remains: millions cannot find jobs.

The Republican creed says that the government doesn’t create jobs, that lower taxes and less regulation are what will cause free market forces to create jobs. The wealthy are the “job creators”, so leave more money in their hands.

Democrats believe government programs — education, infrastructure, etc. — are needed to spur job growth and that those already well off should contribute more in taxes — their “fair share” — to make that happen.

Both assume that jobs are out there, like seeds in the soil, needing only a little sunshine and water to bloom. But what if neither are correct? Is there a darker truth that neither political parties nor the presidential candidates had dared voice?

The subprime mortgage crisis in 2007 that led to steep job loss and the ultimate crash in 2008 caused America to notice seemingly for the first time that much of its prosperity was an illusion.

For decades we had been paying for the good life with unearned money. Banks promoted homeowners to trade the equity they had built up in their homes for renewed debt — home equity loans. Buying on credit had largely replaced money, with credit card debt building constantly right up to the economic collapse, peaking at $972 billion in September 2008. The stock market added its good vibrations, with the S&P 500 multiplying 15-fold from 1980 to the dot.com plunge in March 2000, and rising again to that same level in July 2007.

There was speculation that housing prices might never stop rising, spurred by interest rates held low by the Federal Reserve that caused people to refinance and spend the new-found gains. Fed Chairman Alan Greenspan had even encouraged us to buy houses using adjustable rate mortgages, praising lenders in a 2005 speech for offering a greater variety of "mortgage product alternatives" other than fixed-rate mortgages. “It was quite a system”, said Nicholas von Hoffman, in The New York Observer:

“You bought a house on a next-to-no-money down basis, the house increased in appraised value by 10% even before the first load of dishes got put in the dishwasher. You refinanced the house to extract the 10% appreciation and spent it on a vacation, and by the time you’d returned from the camping trip to Colorado or the Kalahari Desert, the value of the house had gone up another 10%”.

That prescient 2005 article went on to forecast the housing collapse and “voilà recession”.

Then came that collapse. Everything fell back to earth. No more house to borrow against, with their value plunging 28% below peak, ending the seemingly inexhaustible wellspring that had supplemented wages.

The new reality woke us with a cold shower of uncomfortable facts — facts that had gone unnoticed for decades, masked as they were by an illusory prosperity. We were told that, except for the upper income groups, Americans had not done all that well during the late decades of the last century. In the 45 years since 1967, the median income of the American male had actually flatlined, according to the Census Bureau. Adjusted for inflation, he earned $32,694 in 1967 and $32,986 last year. Average household income for the bottom 60% of all Americans had risen by only 17%, and most of that rise had come from the early years. Since 1980 household income rose only 6% (and has fallen by 11% since 2000). That household income has risen at all is because women entered the work force. They have seen their income double during the period, but to a median of only $21,000.

That the rest of households — the top 40% — fared much better has become common knowledge, with income rising 58% since 1967 (88% for the top 5%). But today there are 104 million people — a third of the population — who have annual incomes less than $38,180, which is twice the poverty threshold for a family of three, says Census Bureau bureau data.

What are the causes? Globalization has certainly taken its toll on American working class wage earners, vulnerable for enjoying a much higher pay envelope than the rest of the world. When low cost global telecommunications made possible the outsourcing of low level jobs such as call centers, companies quickly realized that white color work such as software coding, accounting, legal research, even x-ray and scan evaluation could also be transplanted to the other side of the world. Then one of every three manufacturing jobs — almost 6 million in the most recent decade alone — disappeared. American companies relocated facilities to foreign shores to take advantage of lower wages, and in some cases, the hundreds of thousands of engineers churned out by countries such as India and China, whereas American youths were going to film school and majoring in "communications". All these realignments have combined to eliminate jobs in the U.S. and suppress the wages of those that remain.

There’s no going back. U.S. multinationals have developed worldwide supply chains for commodities, engineering, production, parts and assembly and are increasingly decoupled from the U.S. They will simply move elsewhere if tax or other legislation attempts to short-circuit these elaborate networks. They’re doing fine selling to markets everywhere and are increasingly indifferent to the travails of America’s labor force, exemplified by that Apple executive who said, "We don't have an obligation to solve America's problems."

How could the results of globalization been any different? Free trade between rich and poor nations has the inevitable leveling result of cutting the living standards of the former while raising those of the latter. U.S. multinationals have eagerly promoted globalism and membership in the World Trade Organization so as to gain entrance to foreign markets but with little concern for the obliteration of U.S. industries such as electronics and textiles.

And so, in the United States, those fortunate enough to find employment found themselves taking substantial pay cuts in comparison to the jobs they formerly held. Worse still, Louis Woodhill at Real Clear Markets peels back the job numbers to show that so many of the jobs heralded by the Obama administration are only part-time — 403,000 of the 559,000 added in the last quarter. He could have added that if part-time jobs are not counted as what he calls “decent” jobs, the unemployment rate would be more like 15%, and that still doesn’t count those who have given up looking for work. There is concern that this trend will intensify when Obamacare takes full effect, that businesses will hire two part-timers to avoid the requirement of buying healthcare for one full-time employee.

While manufacturing jobs were being outsourced to low wage countries, we shrugged that off; we decided we’d be a “services economy”. Then “information economy” sounded better. Economists in the '80s and early '90s said we should not bemoan the loss of mundane jobs to other countries, because this freed the newly unemployed to shed numbingly repetitive factory floor jobs and move up a level to higher skilled and higher paying work. That has again become the theme, with new emphasis on retooling ourselves to stay competitive by learning math and engineering or technical training at community colleges.

There has always been a fallacy to the economists’ argument, and not just that so many of those higher paying jobs have also moved overseas. The fallacy is that, the higher up the skill ladder one goes, the less jobs there are. It’s a pyramid, with fewer jobs at each level, which seems never to have occurred to those optimistic economists, so often lost as they are in theory. Thousands once manned the factory floors, for example, but the engineers and designers of the products they built numbered only in the hundreds.

One need only look at today’s super-growth stars for examples. The New York Times last year made the point that all the employees at Facebook, Twitter Groupon, Zynga and LinkedIn — companies with a collective market value of about $170 billion at the time — could all fit in a basketball arena. Facebook this year bought Instagram, a San Francisco company, for $1 billion. It had 13 employees. From presidents to pundits we hear about America’s prowess in “innovation”, but what if most innovation comes from companies like these, providing relatively few jobs — and those held by highly skilled engineers?

Several forces are aligned against job creation. With Americans having less to spend in the recession and worriedly paying down debt with what money they do have, the economy has lacked the demand to spur American businesses to hire and ramp up production. Major U.S. corporations instead wait on the sidelines while some $1.7 trillion accumulates. And now along comes the year-end “fiscal cliff” as if to persuade them of how wise their reticence has been. There is widespread fear that, barring action by Congress and the President, the simultaneous reversal of all Bush tax cuts, the rise of payroll taxes to normal, and the “sequester”’s cutback of $100 billion or so in defense and other spending will combine to reprise the recession.

It’s not only lack of demand and abundance of uncertainty that has stalled hiring. The recession has taught companies that they can make do with less employees. They've discovered productivity of a different sort. The Wall Street Journal reported that revenue per employee at S&P 500 companies rose from $378,000 in 2007 to $420,000 in 2011.

When they do decide to add to production, compared to the ongoing cost of paychecks and employee benefits, corporations are finding that the math of investing in ever less costly robotics is compelling.

And the machines have become ever more adept. Software and tooling now make it possible for those groping arms on auto assembly lines to perform three or four jobs, not just one. And robots have been developed to work far faster and perform delicate operations, such as those in the photo which, each of which says this New York Times piece on robots,

“endlessly forms three perfect bends in two connector wires and slips them into holes almost too small for the eye to see. The arms work so fast that they must be enclosed in glass cages to prevent the people supervising them from being injured.”

That means robots can soon take over small appliance assembly, displacing even Chinese workers. The number seems preposterous, but the CEO of China’s Foxconn says he plans to install more than a million robots. He equates Foxconn's million employees with animals and "to manage one million animals gives me a headache.”

The inefficient mom and pop stores on main Street are long gone, replaced by big box stores that left mom and pop to find work elsewhere, but Wal-Mart needed only so many greeters (and has dispensed even with them). Chains of warehouse-size stores have brought us imported goods at much lower prices, but they need less workers and the outflow of jobs to the foreign producers who fill store shelves has left fewer of us with the money to buy the goods — a downward vortex.

To displace or cannibalize those stores have come the online distribution center companies, the largest being Amazon, that operate with far fewer employees than the stores. Some months ago Amazon paid $775 million for Kiva Systems, which makes robots that roam warehouses, picking goods off the shelves to make up orders — work formerly done by people.

At least online ordering creates jobs in the delivery companies. But vision technology is coming in newer robots that can sense shapes of boxes so as to pull a box from a shelf and rotate it into position with boxes already collected so as to form an optimal cube for binding with plastic wrap. As their cost drops we can expect such machines to be adopted by companies like United Parcel Service and Federal Express, where wage earners in the tens of thousands now do the job.

We are developing an economy of surplus people. And we are all doing our part. First we learned to use ATMs, thinning the ranks of bank tellers. Ticket booths are gone; we buy subway and railroad tickets from machines. We pump our own gas. Supermarkets and chains like Home Depot now have us do our own checkout, eliminating those jobs. We book airline flights ourselves and even print the tickets. Getting us to do the chores is another way companies increasingly divorce the connection between increasing profits and hiring people.

Politicians and economists regularly assume that innovation and new ideas will create industries we cannot even imagine. But there’s an argument that The Next Big Thing has already been invented, at least as pertains to job creation. Think about it. Just what more is there that we all need? A currently running commercial tells us that we can now hand off our playlists to friends, phone to Bluetooth phone. Miraculous, but hardly essential to life, or life-changing, as were the inventions of locomotives, automobiles, planes — or appliances such as washing machines, for that matter.

Rana Foroohar ends a recent column in Time with: “Whoever ends up in the White House will have to grapple with the fact that growth may never be what it once was”.

So we are left with the question: Where in the future will we find jobs for tens of millions of people?

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