> What most don't realize is that working in construction,
> manufacturing and production, produces the foundation of
> a high skilled working class, and those skills are
> passed on the children, partly through work, partly
> through learning and growing up in such families and
> within such industrial systems. Even simple things like
> work discipline gets translated into school discipline,
> via the protestant ethic... This in turn lay the
> foundation for getting out of poverty and more than
> likely never going back. In most of the families I've
> visited in their homes, I usually ask about this or that
> picture of a grandson or daughter and what they are up
> to. Oh, he or she went to college and moved away. College
> often turned out to be on some scholarship at a small
> and relatively inexpensive place in the South or Midwest.
> When I asked about why there. The answer was often, well
> we have family there. I interpret that to mean two things.
> First, it was cheaper to live back there with family. And
> second, the college was likely easier and less competitive
> than the California state or university system here. I
> also suspect many small and middle sized colleges recruit
> in places like Oakland to keep their enrollments up.
>
> When de-industrialization hits places like Oakland and the
> East Bay and stays, the whole skilled working class
> disappears and is replaced with a poorly educated and
> unskilled prolitariat, an urban mass of disaffected.
> Revolution is not in the cards, rather all the host of
> problems of urban poverty complete the ruin. The decling
> working class families like those noted above, start
> exporting their kids to the rest of the country to go find
> a better life elsewhere.
>
> So then looked at another way industrial and manufacturing
> systems with fair wages (mostly unionized) acts as the
> primary anti-poverity social instrument and continues to
> work for the successive migrations of working class poor,
> no matter where they come from.
Chuck makes an excellent, and neglected, case. I have little to add of my own, but Thomas Palley does:
[subscription required] http://chronicle.com/weekly/v54/i31/31b01001.htm
Chronicle of Higher Education, from the issue dated April 11, 2008 THE MATERIAL WORLD America's Exhausted Growth Paradigm
1980 brought a new kind of business cycle, one that's no longer sustainable
By THOMAS I. PALLEY
The American economy is most likely in recession, and high debt and housing-sector problems spur fears that this downturn could be far more severe than the recessions of 1991 and 2001. The Federal Reserve and Treasury have taken unprecedented actions to stimulate the economy through interest-rate cuts, infusions of liquidity, and tax cuts, all of which are entirely justified but constitute short-term economic firefighting.
While America certainly needs to deal with the latest trough in the business cycle, we also need to recognize that the growth paradigm that has driven our economy for the past generation is exhausted. That also has implications for the global economy, which has relied on America as the buyer of last resort. Should the American economy slow, it is not clear other countries have either the capacity or the will to develop alternative engines of economic growth.
The recent economic expansion began in November 2001 with an extended period of jobless recovery, and for most of the expansion, employment growth remained below par. That compelled the Federal Reserve to lower interest rates despite a so-called recovery, to keep rates low for an extended period, and to raise them only gradually thereafter. The Fed's actions prevented a relapse into recession, but only by triggering a bubble in housing prices. They also fostered a chase for yield among investors that led to a disregard of risk, and that has come home to roost in the form of house-price deflation and massive losses in credit markets.
Why was the expansion so weak despite the massive tax cuts of 2001 and large increases in military and security spending? The answer is the overvalued dollar and a trade deficit that drained spending, jobs, and investment from the economy. As a result, much of manufacturing failed to participate in the expansion. Indeed, manufacturing actually lost 1.8 million jobs between the end of 2001 and the end of 2007. That is unprecedented, as never before has manufacturing lost jobs during an expansion.
The U.S. policy of a strong dollar bears substantial blame for the trade deficit. The policy was initiated by the Clinton administration on the advice of Treasury Secretary Robert E. Rubin, and the Bush administration continued it. The effect has been to make imports cheaper and exports more expensive, thereby increasing imports, decreasing exports, and encouraging offshoring of production. That, in turn, caused job cuts in manufacturing, reductions in production capacity, and reduced investment in domestic manufacturing.
Trade policy has also played a significant role by encouraging American corporations to move production offshore and shift to global sourcing. Compounding those trends were the export-led growth policies of China and other East Asian countries. Those policies promoted Asian exports and foreign direct investment in those economies, while hampering American exports.
The trade deficit and disregard for manufacturing are part of a broader policy paradigm in place since 1980 that created a new kind of business cycle. The business cycles during the administrations of Ronald Reagan, George H.W. Bush, Bill Clinton, and George W. Bush have strong similarities and are very different from those before 1980. The similarities are the detachment of wages from productivity, large trade deficits, inflation, losses in manufacturing jobs, and rising household debt.
The post-1980 business cycle has relied on financial booms and cheap imports. Financial booms have provided collateral to support increased borrowing that has financed spending on consumption. Increased borrowing has also been supported by easing of credit standards, and by financial innovations that have widened access to credit. Meanwhile, cheap imports have ameliorated the effects of wage stagnation.
That pattern contrasts with the earlier business cycles that rested not on borrowing but on wage growth tied to productivity growth and full employment. Spending, combined with full employment, encouraged investment, which increased productivity and fueled higher wages.
The shift from the old to the new business cycle was the result of profound political change associated with Reagan's election in 1980. It inaugurated a period in which business has been ascendant and labor battered. The shift was intellectually rationalized by economists such as Milton Friedman. The old business cycle rested on the combination of New Deal institutional innovations that strengthened labor, combined with demand-management measures pioneered in Keynesian economics. The new business cycle rests on policies that have sought to erode and repeal New Deal institutions, and demand management has been redirected to lowering inflation rather than securing full employment. Indeed, the language of full employment has been discarded.
The differences between the post-1980 and pre-1980 business cycles are starkly illustrated by policy. Previously the trade deficit was viewed as a serious problem because it was a leakage of spending from the economy that undermined employment and production. Since 1980 the trade deficit has been viewed as a helpful form of inflation control, and it has also helped hide the effects of wage stagnation.
The new business cycle has also changed monetary policy. Previously it was geared to supporting labor markets, maintaining full employment and wages, and encouraging the spending that drove investment and productivity growth. Now monetary policy supports asset prices in order to encourage borrowing, and rising wages are viewed as an inflationary threat.
The problem is that the post-1980 paradigm is tapped out. After a quarter-century borrowing binge, many households have hit their debt limits. Likewise, prices of assets (especially houses) are at elevated levels and at risk of falling, in some cases precipitously. In other words, this business cycle needs inflation in asset prices plus borrowing to drive spending.
More fundamentally, it is unclear how growth can be restored. Consumers won't be able to borrow their way out of this recession as they have the past couple. Lower interest rates are likely to be far less effective than before, with their effect similar to pushing on a slack string. Previously households had unused access to credit, which provided a launching pad for recovery. Now many are in debt to the hilt, and banks are far less willing to lend to risky borrowers anyway.
Mortgage refinancing is also likely to have weaker effects. First, the pool of high-interest-rate mortgages has largely been refinanced in prior recessions, leaving fewer mortgages worth refinancing. Second, falling house prices will make banks less willing to refinance existing mortgages, which may exceed house values.
The bottom line is that the post-1980 business cycle, which has relied on a combination of asset price inflation and persistent increases in borrowing, appears exhausted. Not only does the economy stand to lose the economic octane that those processes provided, it could fall into a downward spiral if asset prices decline and households shun further debt. Under these conditions, the Federal Reserve is likely to be able to do little to jump-start growth.
We need a new economic paradigm that restores the link between wages and productivity growth, and again makes wage income the principal engine of demand. Remedying the generation-long rupture of the wage-productivity link will require the restoration of policies aimed at full employment. Full employment will give workers bargaining power. That will encourage wage increases, which will fuel spending, productivity, and investment. Achieving full employment will require coordination of monetary, fiscal, and exchange-rate policies toward that end.
Also necessary is a change in the balance of power in labor markets. That will entail reforms and vigorous enforcement of labor law to end employer intimidation preventing workers from joining unions and bargaining for fair contracts. The minimum wage should be tied to average wages so that it rises as the economy grows. And unemployment insurance must be broadened and extended.
America must also start to close the trade deficit, which has hemorrhaged spending and undermined manufacturing. A new exchange-rate policy should prevent overvaluation of the dollar relative to the currencies of major trading partners. Only a clear and lasting commitment to such a policy will convince businesses to invest again in American manufacturing.
Lastly, developing economies must be weaned from their policies of export-led growth, and must focus on the development of domestic markets. In the realm of trade policy, that means putting an end to unfair international competition based on undervalued exchange rates, export subsidies, and unfair trade restrictions. That will require a new international economic architecture that promotes fair and balanced trade — a task that will require enlightened American leadership.
Thomas I. Palley directs Economics for Open and Democratic Societies. Previously he was director of the Open Society Institute's Globalization Reform Project and assistant director of public policy at the AFL-CIO. This column is adapted from a paper he gave at the most recent annual meeting of the American Economic Association.