Monday, May 7, 2012

David Brooks, "The Structural Revolution": The War of Words Between Brooks and Krugman Continues

The war of words between David Brooks and Paul Krugman on the op-ed page of The New York Times continues.

Yesterday, in "Those Revolting Europeans" (http://www.nytimes.com/2012/05/07/opinion/krugman-those-revolting-europeans.html), Krugman gloated over the victory of François Hollande over Nicolas Sarkozy in France's presidential election, and hailed the end of austerity in that country. However, Krugman failed to mention that Hollande's election was attributable to France's Muslims, who account for approximately 9% of France's population and among whom unemployment is estimated as high as 60%, relative to unemployment of just under 10% for all of France. Sorry, but the end of austerity is not going to make a dent in the unemployment figure for this sector of France's populace.

Today, in "The Structural Revolution" (http://www.nytimes.com/2012/05/08/opinion/brooks-the-structural-revolution.html), Brooks begins by taking a swipe at Krugman:

"Many people on the left are having a one-sided debate about how to deal with a cyclical downturn. The main argument you hear from these cyclicalists is that the economy is operating well below capacity. To get it moving at full speed, the government should borrow and spend more. The federal government is now running deficits of about $1 trillion a year. Some of these cyclicalists believe the deficit should be about $1.4 trillion.

The cyclicalists rail against what they see as American austerity-mongers who resist new borrowing. They really rail against the European ones. They see François Hollande’s victory in France as a sign that, in Europe at least, the pendulum might finally be swinging from austerity to growth."

Brooks claims that these leftists are not addressing the "core issues," which are "structural":

"The recession grew out of and exposed long-term flaws in the economy. Fixing these structural problems should be the order of the day, not papering over them with more debt.

There are several overlapping structural problems. First, there are those surrounding globalization and technological change. Hyperefficient globalized companies need fewer workers. As a result, unemployment rises, superstar salaries surge while lower-skilled wages stagnate, the middle gets hollowed out and inequality grows.

Then there are the structural issues surrounding the decline in human capital. The United States, once the world’s educational leader, is falling back in the pack. Unemployment is high, but companies still have trouble finding skilled workers."

I agree with Brooks that hyperefficient globalized companies require fewer workers. However, I do not believe that a lack of skilled laborers is keeping unemployment high.

I am privileged to work with a very small number of companies in the biotech and medical device fields, and every day I witness how a few geniuses, aided by their computers, are able to do what entire armies of R&D staffers are unable to accomplish.

We live in an era of ever greater efficiency. We also live at a time when there is a shrinking space for mediocracy in the work force, particularly among the most highly skilled laborers. Neither of these trends show signs of abating.

Higher levels of unemployment are not going to disappear overnight, if ever.

Solutions for dealing with this problem? Sure, as I've often said, reinstate the Uptick Rule (see: http://jgcaesarea.blogspot.com/2011/08/paul-krugman-hijacked-crisis-paul-heres.html). Incentives can also be provided to bring manufacturing jobs home to the US from slave labor camps in China, but Americans must be ready to pay more for their iPhones.

11 comments:

  1. Are you suggesting that iPhones be manufactured in the USA? Can you give a ROM estimate of what an iPhone would cost if we had to factor in
    labor costs of 10x, a 12 hour work day, payments to lobbyists in Washington to help get laws passed to bring slave labor back to the US, ongoing bribes to EPA, DoL officials, local taxes, unions, a higher than usual employee suicide rate and class action law suits? My guess is roughly, $13-15K.

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  2. Thanks, anonymous, for your comment.

    As New Balance proudly declares (http://www.newbalance.com/company/):

    "In a global economy where quality components come from all over the world, New Balance continues to manufacture a percentage of its shoes in the USA. New Balance has five factories in New England - three in Maine and two in Massachusetts. With a high-quality labor force, unique modular teams that are continually challenged to offer creative alternatives to foreign competition, and the confidence to be different, New Balance is able to survive and thrive, and take a leadership position in an industry that has sent most of its production overseas."

    Me? I'm delighted to buy New Balance trainers and running shoes, which have consistently offered me the most comfort and best quality.

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  3. "We live in an era of ever greater efficiency. We also live at a time when there is a shrinking space for mediocracy in the work force, particularly among the most highly skilled laborers"
    Sorry, Jeff, I disagree with you. There is plenty of mediocracy in America, but the problem is that mediocrats are paid some 1000 times more than average worker.
    Yes, American jobs must be brought back. And yes, "salaries" of mediocrats must come down. American problems are structural and the country can't survive without profound structural (and ideological) reforms. BTW, Anonymous is concerned about unions (some 7% percent in private sector), but isn't concerned about obscene, barbaric "salaries" of meriocrats.
    I said it before and I can offer my wisdom again. This country of 3/5 humans and the ordered belief that "the rich are rich because they deserve to be rich" isn't reformable and can only collapse. What a spectacular collapse it will be.

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  4. Ah, Jeff, I checked the label and it says that my shoes are "Made in USA of IMPORTED and domestic materials which should diminish your delight.

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  5. Again, from New Balance (http://www.newbalance.com/usa/#/made-in-usa): "Twenty-five percent of New Balance shoes sold domestically are produced by our US workforce, using US and imported materials. When possible, we obtain materials from domestic suppliers. At times, due to availability, economic or quality reasons, there is a need to import components from foreign sources. Where the domestic value is at least 70%, we have labeled the shoe 'Made in the USA.' Where it falls below 70%, we have qualified the label referencing domestic and imported materials."

    Yeah, they are not entirely "Made in the USA," but they have managed to keep five factories operating in New England. Let's give credit where credit is due.

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  6. You must have the '9xx' series or perhaps the top of the line 1xxx series trainers. Very nice! I just checked the label on the inside tongue of my beloved NB '707s; "Made in Vietnam". Guess China labor costs were too expensive for New Balance. Please link to the post below, then try to cite another fine example of US manufacturing.
    http://routingbyrumor.wordpress.com/2007/12/27/new-balance-shoes-made-in-usa-yeah-right/
    Perhaps, Apple can come out with a diamond studded version iPhone made in the USA and charge a premium price for it? They can even borrow some of that "...domestic value is at least 70%" text from the New Balance label.

    Reinstating the Uptick rule is a good start but the US really needs to abolish accounting loopholes such as the "Double Irish With a Dutch Sandwich" technique which allows corporations to legally avoid paying billions of dollars in State and Federal taxes.

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  7. I don't run (what's the hurry?) and my comfortable walking shoes are 846.

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  8. See: http://bangordailynews.com/2011/07/29/business/new-balance-struggles-as-last-remaining-major-u-s-athletic-shoemaker/

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  9. Ah, Jeff, if I may ..
    Speaking of structural changes. Something tells me that a civilized workplace with 40 hour workweek, vacations and sick days could be a partial solution to our unemployment problems, not to mention a number of other problems.

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  10. Brooks’s contribution confirms what many know to one degree or another. We are in deep trouble and no quick growth fixes will provide a way out. He is talking big. He is talking about the end of the welfare state—that is, the end of the period that we can take at least to the 1930s if not before. He is talking about an economic revolution.

    The word “revolution” is not particularly popular among economists. The fact that Brooks is using it is very significant.

    One of the few instances when economists use “revolution” in a positive sense is in reference to the Industrial Revolution. Indeed, the Industrial Revolution that started in England and then spread throughout Europe and the world laid the foundation of our modern world. It broke the Malthusian loop. It resulted in an unprecedented long-term economic growth, as well as increases in the standard of living and population.

    If this is the kind of revolution Brooks has in mind, then his recommendations certainly fall short--vague references to creativity, skill and productivity notwithstanding. But what can create such unprecedented growth at this day and age?

    One of the obvious answers is the production of knowledge. Much of our economy today depends on knowledge production. In contrast to other forms of production, the production of knowledge has infinite demand. The economic benefits of knowledge production are infinite too. When radio waves were discovered, nobody knew what they could be used for. And yet, their discovery eventually led to the creation of whole industries. We need to invest more in knowledge production, to produce more knowledge, and produce it more efficiently. However, such transition will not be simple. The development of industry required new institutional forms, new forms of the distribution of power, new patterns of consumption, new values—in a way, it profoundly affected the entire way of life. Such transition requires open-mindedness, courage, and enormous amount of creativity. We cannot move forward by intoning old chants and prayers, patching up what cannot be patched, or worse, blaming each other for our predicament.

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  11. "One of the few instances when economists use “revolution” in a positive sense is in reference to the Industrial Revolution. Indeed, the Industrial Revolution that started in England and then spread throughout Europe and the world laid the foundation of our modern world. It broke the Malthusian loop."
    Oh, really? And all economists are alike? Is it possible that some are actually educated, intelligent and oh horror know history. Yes, the Industrial Revolution started in the country which EXPLOITED more than half of the world and since it wasn't enough for "ladies who lunched" and their lunching male companions - they also made sure than their own English children rotted in sweatshops. What not to like here, what not to admire? Let's repeat the charms of Industrial Revolution with all the predictable consequences. Do I get to choose in which chopping heads revolution I can participate?
    If Brooks writes what you say (I doubt), he is wrong and Krugman is right. Since I don't read either of them (for different reason)...

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