Holy Grail of Growth!

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Economic growth as far as the eye can see! A thundering flood of growth, enabling total tax revenues to increase while cutting the absolute share of income going to taxes. That is what Congress in the US have pledged will happen by their adoption of yet another version of trickle down economics. This post is not intended to discuss the merits of the tax bill. Instead, it is intended to discuss the holy grail that we seek – economic growth. What is it, and how is it different now than it was during the time period that Donald Trump seeks to return us to – when America was great.

Back in the 1950’s and 1960’s, the economic cycle was centered directly on manufacturing things. When the economy was good, factories that made things expanded. Capacity of making things kept increasing. Eventually, capacity exceeded demand, and the manufacturers of things cut back on production, procurement, and people. Layoffs would occur, and since the economy was in synch, cutbacks in one segment caused cutbacks in others. Within a few months, or a year or two, the imbalance in supply and demand would favor production, and the economy would reverse its downward trajectory and start expanding again.

This cycle held firm through the post war period, until the 1980’s. The byproduct of these economic cycles was inflation, especially when it was accompanied by deficit spending from the Federal Government. Severe fever medicine was supplied to the economy through crippling interest rates. I remember buying my first house in 1982, when I assumed existing mortgages. One was a smaller second mortgage with a 15% interest rate. The inflation fever broke, and the economy of the US began a glide path enabled by falling interest rates.

Throughout the 1980’s and 1990’s, the economic cycle began to change. US manufacturers, having grown complacent servicing their captive market, began to lose market share to those who paid attention to the voice of the customer and improved the quality of their products. Often those were foreign producers. Auto manufacturing was the poster child for this transition. But the change to the economic cycle accelerated due to the end of the Cold War, when the entire world became open for production. Now began the exodus of manufacturing jobs to lower wage nations as China became everyone’s favorite supply chain partner. No need to worry about those union workers and the environmental regulations – we will outsource both our labor and our pollution.

But a strange thing happened in the 1990’s – the economy grew even though the manufacturing sector declined. How was this possible? It was because an increasing portion of our economic output depended not upon the manufacture of things, but upon the manipulation of electrons. With the advent of the internet, it enabled generation of economic activity that relied much less upon the manufacture of things. Compare and contrast the economic activity of the old Ma Bell phone company, with their offspring, the cell phone and internet service providers. Since phone service was viewed as an essential public good, the old phone company received a monopoly to service a region. They were regulated so they would be ensured of operating at a profit, but not so much that their fees would generate a backlash. Then they had to maintain their system of copper wires and switching centers, and received payments from each household for renting their phones, for local service, and charges for each long distance call made by a subscriber.

Now look at the telecommunications sector today. Cell phone service is rapidly replacing land lines, and in order to provide cell service, it requires dispersed cell towers instead of a distribution network of fibers and poles. Much less stuff is required to maintain a network, meaning that manufacturing and resource use decreases, while the economic activity from cellular services grows exponentially. Then you have the alternative service providers, like those who bundle internet, cell service, and TV in one package. And then there’s the lucrative practice of selling data. Quite literally, the economic activity generated by electronic waves means that money is being plucked from the air. If you compared the fraction of income that was spent on phone service back in the 1970’s, with the fraction of income spent on cell service, data features, and internet service now, far more economic activity is occurring in the telecommunications sector now than in the era of Great America.

If you examine the economy over the last 50 years, manufacturing still maintains a high share of economic activity. But that share is spread more thinly across the landscape, since manufacturing productivity has increased so much, and manufacturing employment has declined precipitously. We are now at the cusp of yet another inflection point in productivity. Robotics and the use of Artificial Intelligence will replace the human worker at an increasing rate. In fact, one unintended consequence of the tax bill may be that companies who repatriate money from overseas and invest it in the US, choose to invest it in automation that further reduces the human input.

So it is possible to increase economic activity while decreasing physical inputs into an economy. We live better by consuming less. That is undoubtedly good for the environment, but how does that affect the world of labor and enable those who work to have motivation to improve their lot in the future?

The premise of the Make America Great Again movement is that we can withdraw into our own borders and internalize manufacturing, thus unleashing the ability to generate economic activity in every town in the nation. Manufacturing is viewed as the panacea that serves as a labor force relief valve for those who choose not to continue education. Yet now, manufacturing labor requires significant knowledge skills beyond that of a high school graduate. Many manufacturers despair of finding qualified candidates for their openings. Even if a candidate is able to pass drug screens, they are not willing to commit to a rotating shift lifestyle. And despite the desires of leadership to isolate the US economy, we are competing globally, and no one else owes us any economic favors now.

Economic expansion in the era of technology requires making a commitment to provide the labor force for high skilled manufacturing. This appears to be a requirement of the public sector to provide the training required, due to the failure of the private sector to serve as a competent trainer for skills. Think ITT technical and other private educators who delivered only excess debt instead of marketable skills. Community college needs to serve both as the foundation for trades education, and as the entry level for bachelor degree programs. It will require close coordination with industries so as to deliver potential employees with enough knowledge to be worth hiring. This increased support for community colleges is essential if we want to benefit from the leveraged growth that new manufacturing jobs can provide.

The other area where growth can be generated is in developing an extended plan for upgrading our deteriorated infrastructure. There are some places where private / public partnerships can be created to build new features, but that will result in ongoing expenses to ensure investment return to the private entity (think more and more tolls). Still, the huge unmet need in renewal of our existing infrastructure must be met by government expenditures. Again, this can be funded by the users of the infrastructures, but the traditional techniques like a gas tax will not work in the era of electric vehicles. At some point, those who keep trying to shrink government will have to realize that targeted tax increases are required in order to keep our civilization vibrant and productive, and to increase economic growth. The recent tax bill where simplification was touted, but the net result was to redistribute income up the income chain, shows that we as a nation are not ready to address the real issues facing our country. Maybe when multiple bridges collapse due to neglect we will realize our folly.

 

Past Performance Is No Predictor of Future Performance

 

Your right to swing your arms ends just where the other man’s nose begins. This adage has meaning beyond its original intent when considering our current world. Like it or not, since the earth is now crowded with billions more folks than it had 50 or 100 or more years ago, and thus the free range of motion of our own arms has shrunk. We no longer can pull our nation’s head and legs into our own shell and exist on our own island. The fallacy of this isolationistic perspective is being tested with the self-defeating policies that the Trump administration is attempting to implement.

According to the Trump doctrine, in order to make America great again, it is necessary to reverse decades of stitching together the nations of the world in greater interdependence so as to allow American exceptionalism to reign supreme. The world we knew when everyone who wanted entree into the middle class could walk into the nearby factory and punch their timecard in a manufacturing plant, that world no longer exists. We can mourn the absence of the world that existed when the US served as the only intact manufacturing entity after WWII, and thus held an immeasurable competitive advantage for decades. Those were the decades of greatness that the America First agenda wishes to bring back.

It is always foolhardy to craft national policy on the basis of nostalgia, but that apparently is what is motivating the America First crowd. Instead of looking behind us for inspiration (Immigration Act of 1924, Leave It to Beaver, Homestead Works of Pittsburgh belching sparks and smoke), I prefer an attempt to steer our country and its economy towards the future. What does the future hold? Where are the opportunities for new jobs that can provide a true middle-class lifestyle?

First, let’s acknowledge that many of the jobs of the future look a lot like the jobs of the past. In particular, skilled craftsmen and women have a bright future ahead of them. Manufacturers cannot get enough skilled welders. An industry trade group projects that the nation will need 290,000 new welders by 2020 in order to accommodate those welders who will retire, plus handle the new jobs being created within manufacturing and the energy industry. There will always be opportunities for plumbers, and electricians, and for skilled carpenters. These professions also offer the chance to become an entrepreneur, since most opportunities in these fields are local. The demographic wave of the baby boom generation crested long ago, and that wave is withdrawing from the shores of the labor market. The vacuum in the labor market must be filled, and for those who have desires to work with their hands, there are opportunities. What is needed is strong vocational training and/or apprentice programs to transition folks from novices to skilled craftsmen and women.

Next, let’s talk about energy. This field runs the gamut from solar panel installation, to wind turbine construction and maintenance, to electrical grid modernization, to drilling rig worker, and to pipeline construction worker. In my state of West Virginia, where the coal industry has scalped the tops of our small mountains, leaving behind ground denuded of topsoil, but a relatively flat surface, we have the opportunity to develop large-scale solar farms. These farms can be integrated with small scale agriculture intended to take advantage of the shade provided (ginseng, anyone?), and can serve as a career option for the last generation of coal miners and those who currently have no hope and are surrendering their future to oxycontin and heroin.

Now let’s address the elephant in the room – the Republican-led conspiracy to deny that changes in energy policy are necessary, in order to mitigate a warming environment due to burning fossil fuels. I’ve seen the entire range of beliefs of those who refuse to acknowledge that atmospheric effects from anthropogenic emissions are changing the thermometer setpoint of the earth. Some of their stated beliefs are possibly correct (example – we may be entering a solar minimum period that may overwhelm any changes from atmospheric composition). Some of their beliefs are simply incorrect (temperature records are invalid since they represent a change from rural to urban temperature measurements, and besides, climate scientists have fudged their records, and besides, you know, thermodynamics is just so wrong). Some of their beliefs are based upon religious claims, like mankind has no capability of overruling God’s control over our environment. And some are purely conspiratorial in nature, such as the belief that claims of global warming are a tool of the one-world agenda deep state that wishes to impose political control over each and every aspect of life in our country, causing us to cede our sovereignty to a one-world government.

To refute each of these beliefs would take more space than my blog normally uses, and besides, my argument is that in order to transition away from fossil fuels, it is actually necessary to use one version of fossil fuels more extensively than we have in the past. Of course, that fuel is natural gas or methane, which has the virtue of emitting much less carbon dioxide per kilogram of input than any other hydrocarbon. Simply put, displacement of a high carbon fuel source (coal) with methane is the main reason why the US has reduced CO2 emissions over recent years. According to the US Energy Information Administration, CO2 emissions in the US decreased 12% between 2005 and 2015, and the drop is mainly attributed to replacement of coal by natural gas in electric power generation. So if we are waiting for renewable energy to take its place as the primary power source , or if we are awaiting for advancements in either fusion or fission (see thorium reactor cycle) in nuclear energy, then methane serves as a reliable bridge fuel.

Methane also offers many opportunities for jobs. Since much of the methane resources available through fracking are not in areas with pipeline infrastructure, it is necessary to build new pipelines, and that is a key source of job opportunities. Fracking also requires many more drill rigs due to the rapid depletion of fracking hydrocarbon reservoirs. I know that there is much dispute over environmental damage done by pipelines and by fracking. But it is not realistic to transition directly from dependence upon coal, to a totally green energy solution. Methane offers a transition period that enables maintenance of the living standard we enjoy that relies upon intense consumption of energy. Those who rely upon and believe in the moral superiority of coal and oil will not give in easily, though. In West Virginia, one of the bumper stickers used by the proponents of coal is “Let the Bastards Freeze in the Dark”. Those stickers are often affixed to the bumpers of diesel pick-ups that have been fixed with special combustion controls that dump excess fuel into the cylinders, causing a cloud of black smoke that they use to obscure the visibility of Prius drivers, like myself. I’ve been coal rolled a few times.

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Photo of rolling coal from Jalopnik.com. Justin Westbrook credited on story.

Jobs in agriculture have been decreasing for generations. Many city dwellers are now several generations removed from the farm and from rural life. Yet amazingly, farming is now coming into the cities. High technology hydroponic farming is making it possible to use some of the urban real estate that used to house factories, and convert it into high-yielding produce farms. In the suburban/rural interface, high-tunnel greenhouses are allowing intensive cultivation on small plots, enabling small-scale farmers to supply the local produce markets for cities that want organic produce sourced locally. As western diets move away from corn and soy based food chains to more vegetables, look for the number of people making a living growing food to increase steadily.

One area where the job demand is increasing is also one where the wages earned do not reflect the value provided to society. That is in the personal care industry. Whether we are looking at home assistance provided to the elderly, or the labor needed for assisted living facilities and nursing homes, these workers provide a service that our society should value. The low wages provided for these workers shows that the current job market does not value these workers, and as a result, those who are in the field are often overworked. Abuse (either intentional or not) can result, since in our society we do not properly value this form of labor.

What should we not look for in the future job market? We should not look for low-value manufacturing to return to this country, regardless of the tariffs imposed on those exporters who are accused of manipulating their currency to hurt us in the US. It is unlikely that we will ever see inexpensive metal implements to be manufactured in the US again. It is also unlikely that we will see basic garment manufacture to be sourced domestically again – unless the manufacturing processes are automated to such an extent that the number of jobs associated with the manufacture is reduced by an order of magnitude from the old garment mills. US manufacturing jobs will increasingly be focused on huge, high-tech machinery, or on processes that can be completely automated. Either way, the new manufacturing worker must be educated and trained well beyond the existing labor forces capabilities.

What we will find as we swing our nation’s fists wildly in an attempt to protect ourselves from the rest of the worlds increasing integration, is that our fists are as likely to strike ourselves in the nose as we are to rain blows down upon our perceived adversaries. The world’s economies are too tightly interwoven to enable one country to extricate ourselves from the tentacles of commerce without ripping our own economy to shreds. Beware the effect of unintended consequences as we try to make America great again.