Globalization? Fuggedaboutit. Regionalization is the Key to a Prospering Planet.

Jun 20, 2011Jon Rynn

earth-150Jon Rynn continues his exploration of what a manufacturing-centered economy might look like, arguing that keeping production concentrated in smaller areas can bring wealth to all.

earth-150Jon Rynn continues his exploration of what a manufacturing-centered economy might look like, arguing that keeping production concentrated in smaller areas can bring wealth to all.

We often hear that a globalized economy is the best kind of economy. But could a world economy based on a set of strong regional systems, each one centered around a thriving manufacturing sector, serve us better in the long run? I argued in the first post of this series that economies are ecosystems, and that manufacturing is a necessary part of an economic ecosystem. In my second post, I proposed that manufacturing underlies economic growth, and machinery can allow us to have ecologically sustainable growth. Now I want to pursue how the innovation that underlies beneficial manufacturing growth is dependent on the close proximity of the various “niches” of the economic ecosystem, and what this means to our perception of how the global economy functions best.

Despite the rhetoric of globalization, the wealthiest economies have historically been regionally based. By “region," I mean a geographically contiguous area, separated from others by a barrier. The premiere example of this is the United States. Europe is another natural region, which has now integrated itself formally, although it was always integrated in fact. Japan, China, and India are also always considered separate economies. In fact, the regions that have the least cohesion are the poorest, such as Africa. While Africa is a natural economic region, it has been “integrated” into the world economy at great expense because its various pieces have become resource-generating appendages of wealthy, regional economies, instead of remaining parts of a manufacturing-centered, integrated African economy. The same could be said for the Middle East; Latin America is somewhere in between and is part of the global “lower middle class” as a result. The post-Soviet set of countries of central Eurasia are poorer than their oppressive predecessor partly because they are not as integrated as they used to be.

What are the advantages of operating in a contiguous geographic area? After all, according to neoclassical economic theory, an exchange is an exchange is an exchange, whether it is between a customer and a local store or WalMart and a supplier in China. The problem is that an economy is composed of both exchange and production; you have to have something produced before you can exchange it. And like an ecosystem, production relies on many sub-networks of production and exchange that require a physically close set of interactions, particularly when it comes to innovation.

Innovation can be seen as the product of three main sets of “human capital” -- scientists, engineers, and skilled production workers. Scientists create a “stock of knowledge," to use Simon Kuznets' phrase. This stock of knowledge is used by engineers, who design the machinery and processes that are used in the factories and construction sites and other sites of production. Skilled production workers then use these factories and other production centers to create the wealth that societies survive on.

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Just as it would make no sense in a natural ecosystem such as a forest to have the trees in one place, the deer that eat the leaves in another place, and the bears that eat the deer in yet a third place, so it makes no sense to have the scientists, engineers, and skilled production workers spread out all over the globe, with little or no interaction. It is one of the great ironies of modern economic life that the industry that is perhaps doing the most to disperse these groups, the financial industry, is so geographically concentrated that it can simply be referred to by a single street, “Wall Street." The financial industry concentrates itself for the same reason whole regions work best in a geographically bounded area: the main players can talk to each other, observe first-hand the processes that underlie their industry, and very quickly change practices as the larger environment, or ecosystem, puts pressure on the industry to change.

Engineering and research centers are now moving from the United States to China, just as factories have moved. These moves increase innovative capacity when researchers and engineers can interact with and witness first-hand the operation of machinery and factories, talk to other engineers and skilled production workers, and take advantage of the serendipity and unexpected encounters that also make cities the centers of innovation, as Jane Jacobs emphasized in her books. It isn't just within one industry that these interactions are beneficial, but also when several industries interact within a city region, as, say, publishing, fashion, and (now only some) manufacturing have in the history of New York City.

So couldn't each city region then replicate the entire set of industries? City regions aren't large enough to provide everything they need; trade is critical to production. In the US, for instance, different city regions have specialized in different industries. I mentioned New York City, but Cincinnati was known for machine tools, Pittsburgh for steel, of course Detroit for cars, and we have had Silicon Valley, an outgrowth of the San Francisco economy, as the premiere example of a center of innovation. The idea is to have a large enough area to encompass all of the various niches of an economic ecosystem, and also one that is small enough to encourage a rich network of interactions.

In order for this weaving together of city regions to occur, the government has to create a transportation network. The Interstate Highway System served this purpose after World War II, as the railroad system did before (and as I have argued, probably will again sometime in the future). A communications network is also necessary, again generally either run by governments or supported by them.

Governments have historically also protected their territories economically and militarily in order to allow these regional production networks to grow to the point where they can compete globally. When governments bind together areas in this way, the regional economy becomes strong enough that global trade is actually increased. You need a world class production system before you can trade manufactured products, and governments have historically been a crucial builder of those regional economies -- as I shall argue in my next post. On the other hand, when a country like the United States allows its manufacturing base to be exported, it will open up yawning trade deficits, and eventually, slide into poverty. The choice is ours.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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Lynn Parramore on CBS MoneyWatch: Government has "Lost Sight" of Job Creation

Jun 20, 2011

You'd be hard pressed to find an American who doesn't know that we're in the midst of a great recession and an unemployment crisis. But if you only listen to what's going on in Capitol Hill, you might miss the memo. ND20 Editor Lynn Parramore joined CBS MoneyWatch to explain how we got where we are -- and what the government should be doing about it. "We have an immediate crisis, but it is not the long-term deficit, it is the fact that people are losing their jobs, they are losing their homes, they are underwater with their mortgages," Lynn says. "We do not hear enough discussion about that in Washington."

You'd be hard pressed to find an American who doesn't know that we're in the midst of a great recession and an unemployment crisis. But if you only listen to what's going on in Capitol Hill, you might miss the memo. ND20 Editor Lynn Parramore joined CBS MoneyWatch to explain how we got where we are -- and what the government should be doing about it. "We have an immediate crisis, but it is not the long-term deficit, it is the fact that people are losing their jobs, they are losing their homes, they are underwater with their mortgages," Lynn says. "We do not hear enough discussion about that in Washington."

Lynn points to the undoing of the FDR-era Glass-Steagall Act, which made it clear that commercial banks which take deposits "don't get to gamble with other people's money," as a major cause of the casino fever that took over Wall Street and led to the financial crash.

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And now government is focused on the deficit -- which is the wrong target. "If we really want to bring the deficit down, we have got to get Americans back to work," Lynn says. "I think we have lost sight of what government can actually do to get us out of a mess like this." How can the government pull it off? By implementing works projects that have the dual benefit of improving the country and creating jobs, like the Hoover Dam. "We can invest in things that will give us a long-term return," she reminds us.

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The Changing Class Divisions that Tear at Low Income Families

Jun 17, 2011June CarboneNaomi Cahn

family-150There is a new, successful family model that combines marriage and work -- but only for the middle class.

family-150There is a new, successful family model that combines marriage and work -- but only for the middle class.

A new study of newlyweds found that increases in workloads were associated with increases in marital satisfaction for both men and women.  The researchers expected this to change when the newlyweds became parents, and indeed it did -- for men. For women who became parents, however, increases in the amount of time and energy they devoted to work were associated with increases in their marital satisfaction. The authors speculated that, once they become parents, husbands and wives might respond differently to changes in each other's workloads; fathers might spend more time on childcare when their wives face high demands at work.

This is important information for those of us trying to balance work and family. On the other hand, increasing numbers of people in the United States are neither married nor employed. Family structure has become a marker of class, and studies can cloak profound differences among different types of families. Unpacking this research requires reconsideration of the relationship between work, marriage, and class. First, limiting the examination to married mothers skews the study from the outset. The most elite women, as measured by education, have become the most likely to marry, a reversal of historical trends.

Second, the most elite women have become the most likely to work. According to 2007 Census Bureau data, only about 26 percent of mothers with a college degree stay home with their children, while more than 40 percent of mothers lacking high school diplomas are full-time homemakers. College educated women are more successful in combining work and family than other groups in part because they tend to have the resources to pay for child care and other help, and because they are more likely to have flexible positions with more generous family leave policies.

Third, the best educated women have also become more likely to have partners who help with the children. Unsurprisingly, married fathers contribute more to child care than unmarried fathers, but even among the married, fathers who are college graduates contribute more than those without college degrees. Indeed, since the start of the Great Recession, the only group of women whose fertility rates have increased are those with graduate degrees, but only if the men in their lives assist.

For the college educated middle class, therefore, this study gets it right. It confirms the results of Penn State sociologist Paul Amato's in-depth comparison of the changes in family life between 1980 and 2000. Amato shows that over the last twenty years it is well educated, two-career families that have experienced the greatest gains in family stability. For two-career couples, women's workforce participation brings greater income and marital quality, along with greater pressure on men to help with the children.

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Amato found, however, that the same did not hold true for working class wives. The marital quality of  couples in financial distress dropped significantly during the same twenty year period. This was in large part because women in less satisfying jobs who preferred to be home with the children have increasingly found that they have to work because their husbands cannot support them. More recent studies confirm that unemployed men, in contrast with both unemployed women and men with stable jobs, are less likely to help with either the children or the house, increasing their partners' unhappiness.

The new study, by focusing on newlyweds, largely misses these effects. There is a new, successful family model that combines marriage, childbearing and workforce participation. It incorporates a more egalitarian division of work and family roles. It produces higher rates of income and marital satisfaction. It also, however, requires investment in men and women's education -- and it is increasingly beyond the reach of large portions of the public.

This study fails to show the class based increases in employment instability -- instability that in the long run discourages marriage and contributes to family instability. The fact that the middle class is successfully combining work and family roles says little about those for whom both work and marriage are becoming increasingly difficult to obtain. While the Great Recession has at least temporarily decreased divorce rates, it has also lowered marriage rates. Any focus on newlyweds therefore is likely to include only those who can marry, and that overwhelmingly means the better educated with the best jobs. For the rest of the country, the prospects for marriage and jobs remain bleak -- so news about how to manage the tensions between work and family are not comforting.

June Carbone is the Edward A. Smith/Missouri Chair of Law, the Constitution and Society at the University of Missouri-Kansas City.

Naomi Cahn is the John Theodore Fey Research Professor of Law at George Washington University Law School. She is the author of numerous books and law review articles on gender and family law.

Cahn and Carbone are the co-authors of Red Families v. Blue Families.

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The Bronx's Slow Burn: NYC Budget Cuts Fall on the Most Vulnerable

Jun 17, 2011Bryce Covert

Cuts to human services are concentrated in an area with sky-high poverty and unemployment rates.

Cuts to human services are concentrated in an area with sky-high poverty and unemployment rates.

New York City is not unique in the fact that it's facing severe budget cuts. In the face of a debt overhang of $112 billion in states across the nation, cities are getting less and less financial support from their capitals. That means mayors have to consider slashing spending where they can. But many have protested Mayor Bloomberg's cuts in New York as falling on those who are already the most vulnerable. And with a new Google map of where the budget cuts will fall, it's clear to see that the Bronx is taking more than its share of pain.

The Bronx is already struggling economically. It has a sky-high poverty rate: 28.5% of its residents live below the poverty level, compared to 14.2% of residents in New York State overall. That's the highest rate for any urban area in the country. It also has the highest unemployment rate in the state, standing at 12.7%. An area like that could use programs that help put people to work, educate the youngest generation so they can get jobs and invest in youth unemployment programs, and take care of those who are struggling to survive.

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But that's not how budget cuts are going to play out. The area is slated to lose 20,166 youth employment slots, leaving those kids without a way to learn skills over the summer. Eleven childcare centers will shut their doors, denying parents the care their children need while they job hunt or try to maintain a job. The area will lose five senior centers, which will put into question the care they normally receive, potentially landing them back into the care of struggling families -- or out on the street. And 14 Out of School Time programs will be closed down, which give children a safe place to be after school while parents work or look for a job.

The elderly, the young, the struggling, and the unemployed will be hardest hit by these budget cuts, even though they had nothing to do with creating the mess. Looking at the map, the wealthy area of the Upper West Side of Manhattan appears to coast by almost completely unscathed. The Financial District, home to Wall Street and the source of our economic troubles, isn't slated to lose any programs. If budget cuts must be made, why should they fall on those who can least afford it?

Bryce Covert is Assistant Editor at New Deal 2.0.

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Tom Ferguson on the Budget Battle: "We've Got Two Conservative Parties"

Jun 14, 2011

In a recent interview with New School Radio's Antonio Seccareccia, Roosevelt Institute Senior Fellow Tom Ferguson weighs in on the budget debate, which he sees as "the end stages of the Reagan Revolution." The problem, he says, is that there are essentially two conservative parties at the national level: "Republicans want to cut, Democrats want to cut less." That leaves no one to defend programs like Social Security at a time when people need them most.

In a recent interview with New School Radio's Antonio Seccareccia, Roosevelt Institute Senior Fellow Tom Ferguson weighs in on the budget debate, which he sees as "the end stages of the Reagan Revolution." The problem, he says, is that there are essentially two conservative parties at the national level: "Republicans want to cut, Democrats want to cut less." That leaves no one to defend programs like Social Security at a time when people need them most.

As for the growing deficit, Tom argues that the Republican push to cut taxes without cutting expenditures created the problem.  However, it only became truly catastrophic after the financial crisis, since "financial collapses typically crush economies for years, and that's driven down the tax take of governments."  In order to close the gap, we need to return to full employment as soon as possible.  Tom believes President Obama's biggest mistake was his failure to pass a big enough stimulus in 2009, and the economy continues to drag because of his reluctance to push for another round.

Click here to listen to the full interview, including Tom's take on Social Security, the Bush tax cuts, state-level union-busting, and more.

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When Will Obama Sound the Alarm About Jobs?

Jun 9, 2011Jeff Madrick

Poor economic data has spread to the stock market. Maybe this will finally serve as a wake-up call.

Poor economic data has spread to the stock market. Maybe this will finally serve as a wake-up call.

The sudden weakening of the economic recovery is now undermining even the stock market. As usual, however, Wall Street is worried about profits and a possible double dip recession. But what the press and the Obama administration have not adequately taken up is how poor job and wage growth have been, even given the rate of GDP growth. And without more jobs and rising wages, we can forget a strong economy in the future.

It is time to make the record clear, especially as Austan Goolsbee leaves his post as Obama's chief economist. Goolsbee has spoken about the lack of family income growth being the biggest problem America faces. But there has been no passion in this White House about what is an alarming jobs performance. There has been some job growth in recent months -- until May, that is. But overall, the performance is abysmal and simply frightening.

That job growth, like GDP growth, would continue at a satisfactory rate was a wish and prayer for the administration. The inflation mongers, usually Republicans, have been still worse. The dominance of austerity economics in Washington will be seen as a historical folly of the first order. Cutting federal spending now is simply wacky.

Economist Andrew Sum and his group at Northeastern have done a close-up analysis of job and wage data. There has never been an economic recovery since World War II nearly as bad as this one.

Yes, there has been GDP growth, but it has almost all gone to profits, not pay. By most measures, there are still fewer jobs today than there were at the bottom of the recession. Just as disturbing, there has been no increase in wages. There are many measures of wages and salaries, but Sum and his group found that average hourly earnings of all private sector wage and salary workers were unchanged over the seven-quarter recovery. The typical or median full-time worker lost ground over this period. Hours worked grew only slightly.

And as we all know, unemployment remains very high at 9.1 percent. Underemployment -- those unable to find full-time work when they want it -- has about doubled, growing from 4 million to 8 million American workers.

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For the first time in more than sixty years, aggregate wages and salaries adjusted for inflation did not rise after seven quarters of recovery. What did rise was corporate profits -- and sharply. Here's the stunner, as Sum calculates: Pre-tax corporate profits in 2010 dollars rose by $464 billion and real wage and salaries in 2010 dollars fell by $22 billion.

Job growth out of the 1990-1991 recession was also slow. But not like this. Profits have never been as large a share of the growth of GDP.

This should fire up any Democratic administration. But at a recent presentation at the Harvard Club in NYC, Tim Geithner recently boasted about how much better the American economy recovered than did Europe's. That's only true if you don't look at jobs. And what is an economy ultimately, but jobs?

This disconnect between GDP growth and jobs is the economic issue of our time. Some of the jobs have been off-shored. Much of the slow job growth is due to companies' refusal to hire new workers because demand is so uncertain (not due to increased regulations). New technologies have a part to play. But it is hard to escape the fact that increasingly, corporations are in a battle with workers to minimize labor costs. Productivity growth is now the result of "efficiencies," not innovation. "Efficiencies" is now a euphemism for disregard -- and sometimes contempt -- for workers.

Those of us who took an economics course or two were taught to admire productivity growth. I remember fully believing that increases in productivity were usually accompanied by increases in the nation's standard of living. This was the capitalist defense of labor-saving machinery -- the industrial revolution. Throughout history it often worked, with some substantial help from progressive government programs that started in the late 1800s.

The relationship no longer holds, and government is nowhere to be found. We need more stimulus, an outright jobs creating program, tax incentives to keep jobs here, serious infrastructure and manufacturing investment by the government, and perhaps a reconsideration of free trade policies. As far as I can see, Washington just thinks we will blithely grow our way out of this.

Stock prices went up rapidly in this expansion along with profits. Maybe that's what makes Washington complacent on the jobs issue and turns its focus to budget balancing. As for the press, big finance also dominates their thinking. Now stock prices have been falling. This may prove the only wake-up call Washington can't ignore.

Roosevelt Institute Senior Fellow Jeff Madrick is the author of Age of Greed.

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Women Losing Ground as Jobs Crisis Rages

Jun 9, 2011Lynn Parramore

The recent jobs report shows an uptick for female unemployment. So much for the 'mancession'!

The recent jobs report shows an uptick for female unemployment. So much for the 'mancession'!

Jennifer, a Pittsburgh public school teacher, is one of those women you remember from the best of your grades school days. She's empathetic and enthusiastic. Her large brown eyes flash with keen intelligence. She loves her fourth-grade students, and laughs at the idea of 'productivity experts' coming in to tell her how to do her job and measure student progress. "Each child is different," she insists. "How is an accountant going to measure a special needs student who gained the confidence to raise his hand in class this year?" When our conversation turns to teachers and their job security, Jennifer's face darkens. "We teachers -- we call ourselves the 'bottom-feeders'. Decisions are made all around us that we have no control over. Every time someone is laid off, we all put in more hours to make up the difference. It's exhausting. And we never know who will be the next to go." Jennifer has something to worry about. By the start of the next school year, she could very well be out of a job.

The term ‘mancession' popped up in discussions of a 2009 Bureau of Labor Statistics report that showed a greater job loss for men than for women at the outset of the Great Recession. Sensing cultural jitters over this finding, the American Enterprise Institute's Mark Perry seized the moment, drumming up outrage about an ‘unprecedented' gender gap favoring women by 2 percentage points. Quelle horreur! On New Deal 2.0, historian Alice O'Connor challenged this conclusion, noting that the gap was already closing in 2010 as pink slips in manufacturing and male-dominated sectors slowed, while those in female-dominated professions like education and human services started coming fast and furious. In October 2010, O'Connor explained that the real picture of how how the downturn impacted men and women is far more complicated than Perry let on:

"More fine-grained analyses of the data... show considerable differences in the impact of male job loss across lines of class, race, age, and region; not all men have been affected equally by the downturn, nor women for that matter, suggesting at the very least that there is more to the so-called gender gap than meets the eye. Nor has the Great Recession shown any “favor” to women when it comes to wage losses and poverty rates, both of which are on the rise. And historical experience reminds us that men have also lost the large majority of jobs in past recessions, as they did in the Great Depression, due to the fact that they are disproportionately represented in traditionally hard-hit and better-paying sectors of the economy. Indeed, one could use this observation to conclude that the gender gap in job loss reveals just how stratified the labor market remains, with nearly 90 percent of construction jobs held by men, and nearly 70 percent in manufacturing. The “mancession,” however, comes to a simpler, if misleading conclusion: men suffered far more from the Great Recession than women, and by the time we actually recover, they may find themselves even further behind."

Fast-forward to June 2011. The jobs report released last Friday makes one thing abundantly clear. The jobs crisis sucks for everyone. It sucks for men. It sucks for women. The suckage is particularly intense for young people and people of color, no matter what their gender. The Center for American Progress reports that May is the 23rd month of unemployment at or above 9 percent since the Great Recession began. This is more months of high unemployment of such magnitude than during any other recession going back to the Great Depression.

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The jobs report also leaves no doubt that Perry's suggestion that women have been simply sitting out the bad economy, paring their fingernails, is nonsense.

If you look at the BLS statistics over the last year, it's obvious that while men were hit harder initially by the economic crash, they have experienced a bigger improvement as the economy has shown signs of life. Women were hit less hard initially, but their situation has showed little improvement. In fact, it's gotten worse since last year. The report shows that in May 2010 civilian women over 20 had an unemployment rate of 7.8. One year later, that rate has risen 8.0. On the other hand, civilian men over 20 experienced a whopping 9.4 unemployment rate in May 2010, but that rate was down to 8.9 in May 2011.  The picture for women looks bleak in the short-term, too. In April, 2011, women over  20 had an unemployment rate of 7.9, but the rise in May to 8.0 shows that they are losing jobs, not gaining them. Some recovery!

It's not difficult to understand why: Women are the shock-absorbers for government budget cuts. In May, the government axed 29,000 workers, with most of the decline coming from local governments. As the national debate has focused on deficit-reduction instead of the far wiser economic strategy of creating and maintaining jobs, state and local governments have let go 175,000 workers in six months. Teachers have been at the center of the budget storm, and 76% of public school teachers are women.

But it gets worse. State and local governments are poised for a round of record-breaking layoffs when the new fiscal year starts on July 1. Teachers and school employees will be ravaged by the layoff tsunami this summer as hundreds of thousands receive pink slips around the country. Human services workers and nurses are also likely to take a big hit.

With women feeling so much pain, can we finally put the mancession meme to rest? It does far more to divide working people than to explain our plight. And it doesn't do right by Jennifer, who is wondering, after ten years as a public school teacher, why she feels like a bottom feeder.

Lynn Parramore is the editor of New Deal 2.0, Media Fellow at the Roosevelt Institute, co-founder of Recessionwire, and the author of Reading the Sphinx.

**Follow Lynn Parramore on Twitter at http://www.twitter.com/lynnparramore

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New Low Paying Jobs Will Lead to High Debt

Jun 8, 2011Bryce Covert

If workers can't cover the basics with their income, they have to turn to credit cards.

This week's credit check: Median real income fell $5,261 over the last decade. Our total revolving debt comes to $796.1 billion.

If workers can't cover the basics with their income, they have to turn to credit cards.

This week's credit check: Median real income fell $5,261 over the last decade. Our total revolving debt comes to $796.1 billion.

Last week's jobs report was pretty bleak, and talk of a double dip recession looms. But for all the doom and gloom, there has been a slight uptick in jobs numbers in recent months. Some people are starting to get back to work, even if it's a very, very slow trickle. So now a further question needs to be asked: if and when jobs come back, what kind of jobs will they be? What will they pay? And what will that mean for our swollen levels of consumer debt?

After all, wages have not fared well in recent decades. The 2000s saw them actually fall for the first time in recent history. Before that, they had stagnated for 30 years. And it seems that the jobs many people must now turn to are offering lower pay. As the LA Times reports: "In April, average hourly earnings for production and non-supervisory employees was $8.76 an hour when adjusted for inflation, down from $8.93 two years ago." In particular, post-2008 income has seen a "significant drop."

Part of this is because the new jobs are concentrated in low-skill, low-pay work. As Annie Lowrey reported, "The National Employment Law Project took a closer look at employment and jobs-growth data in February... [It] says that just 14 percent of recent job growth comes from high-wage industries. About half comes from low-wage industries." Most jobs are coming in "temporary help services," work that comes with little benefits or security. Restaurants and food services businesses have made up 7% of hiring, particularly fast food joints. This is in line with economist David Autor's findings, which he recently explained at a Next American Economy breakfast meeting. The economy has lately experienced a "polarization of job opportunities [with] rising employment in high-skill, high-education, high-wage employment," he says, "and the other in relatively low-wage, low-education employment with fewer opportunities in the middle."

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This is also due to workers having less and less power against their employers. As one woman who took a lower pay job told the LA Times, employers know it's their market. "They know so many people want it," she said. "They're going to get someone to do the job." She's backed up by economists and labor experts, who say 9% unemployment leaves workers with little bargaining power. And speaking of bargaining power, another factor is the reduced clout of unions, which have seen their ranks dwindle and have had to swallow policies like two-tier pay systems that mean lower wages for new hires.

So what does this have to do with credit cards and debt? Everything. While many think that credit card and other consumer debt goes to buy frivolities like plasma TVs and SUVs, it really goes to paying for the basics. As explained in "Up To Our Eyeballs":

[A] typical American family spends less today on so-called consumables (furniture, clothing, appliances) than its counterpart of a generation ago. The big spending increases have come in the "unavoidables" -- transportation, energy, and the three h's: health care, higher education, and housing. The places where we spend more turn out to be where we borrow more, too.

As Robert Reich recently wrote, over recent decades we've been working harder but making less. This has led to poorer and poorer savings rates with higher debt:

During the Great Prosperity the American middle class saved about 9 percent of their after-tax incomes each year. By the late 1980s and early 1990s, that portion had been whittled down to about 7 percent. The savings rate then dropped to 6 percent in 1994, and on down to 3 percent in 1999. By 2008, Americans saved nothing. Meanwhile, household debt exploded. By 2007, the typical American owed 138 percent of their after-tax income.

It may be little wonder, then, that our total revolving debt comes to $796.1 billion, with the average household carrying $14,743 in credit card debt. Student debt is set to hit $1 trillion this year. Outstanding mortgage debt is at $2.4 trillion. Job loss is one of the leading causes of bankruptcy, and the unemployed are by far the worst off. But the story won't be much better if people re-entering the labor force take pay that's too low to cover the bills, forcing them to turn to debt.

There is a silver lining to this storm cloud, as the LA Times reports: "The median compensation for chief executives of large U.S. public companies climbed 27%, to $9 million, from 2009 to 2010, according to a study by corporate research firm GovernanceMetrics International." At least someone is doing well in this economy.

Bryce Covert is Assistant Editor at New Deal 2.0.

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How to Throw Away an Election

Jun 7, 2011Marshall Auerback

The relentless push for fiscal austerity is sinking the global economy -- and Barack Obama's reelection prospects.

Yes, it’s true: the earthquake and tsunami in Japan, the European debt crisis and rising gasoline prices have all contributed to a grim employment picture, which seems to be getting worse, not better. But that’s still no excuse for inaction on the increasingly dire employment situation, where policy makers (including the President) seem to have thrown up their collective hands and suggested, “There’s little more we can afford to do.”

The relentless push for fiscal austerity is sinking the global economy -- and Barack Obama's reelection prospects.

Yes, it’s true: the earthquake and tsunami in Japan, the European debt crisis and rising gasoline prices have all contributed to a grim employment picture, which seems to be getting worse, not better. But that’s still no excuse for inaction on the increasingly dire employment situation, where policy makers (including the President) seem to have thrown up their collective hands and suggested, “There’s little more we can afford to do.”

Nonsense. And that sort of policy defeatism should worry President Obama, particularly as we accelerate towards a debt ceiling budget deal that is virtually guaranteed to accelerate the prevailing negative trends now omnipresent in the global economy.

Consider the evidence: Goldman Sachs has a current activity index (CAI) for the U.S. which has gone from 4.3% in April to 1.2% in May. Last week Morgan Bank dropped their Q2 GDP growth forecast for the U.S. to 2.5%. This week ISI dropped their Q2 forecast to 2.0%. We have zero growth in US real disposable income over the last four months. That largely reflects the impact of oil, and a downward revision to personal income.

And May's jobs data were pretty dismal. The U.S. economy added only 54,000 jobs in May. That compares to the 220,000 or so jobs the economy had added in each of the last three months, and the unemployment rate up a tick to 9.1 percent.

The President’s advisers said Friday’s job report could be an aberration and should not distract from the president’s success in helping rescue the economy from the worst recession since the Great Depression. Some rescue! All of the contemporary data tells us that the current performance of the American economy is nowhere near sufficient to generate the jobs lost from the 2008 Great Recession. With the contribution from government now negative (and likely to intensify, given the negotiations on the debt ceiling) and the private sector saving ratio rising, we are increasingly dependent on the external sector for on-going growth. The fact is that with China introducing contractionary policies, the ongoing fiscal austerity insanity now enveloping all of Europe and Japan remaining in economic no-man’s land, it is hard to see the US emerging as an export superpower.

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The President hasn’t yet faced the prospect of a credible challenger coming from the GOP. But the policy response (even from self-identified progressives) remains problematic.

And it’s not just in the US. The slowdown seems to be getting serious all around the world. Greece, Ireland, Portugal and Spain all appear to be in the process of turning their economies into a modern day version of a Victorian debtor’s prison. Hopefully the euro zone and UK haven't yet reached the tipping point where austerity shifts from reducing deficits to adding to them (due to induced economic weakness), but it looks more likely to be the case. And hopefully Japan decides to go with an all out reconstruction plan without increasing taxes or otherwise 'paying for it’ through other forms of fiscal retrenchment, but that also appears unlikely, given the general tenor of policy making in Tokyo. We must also hope that China's second half weakness doesn't get out of hand.

And here in the US, hopefully neither the Congress, nor President Obama, achieve any serious near term deficit reduction. Doing so is hard to envisage, given that both sides are now negotiating on what to cut, rather than questioning the engagement in fiscal retrenchment in the midst of a self-evident economic slowdown.

It would be a refreshing change if the President explained that the only constraints we genuinely face are the limits of our productive capacity and available resources, including everyone who is willing and able to work, rather than focusing on misguided concepts like “fiscal sustainability” or “national solvency”. The President could deploy his considerable rhetorical skills and insist that we know that the we in the US can afford to defend ourselves, ensure taxes are low enough relative to spending to allow the private sector to employ anyone willing and able to work who doesn’t already have a good job, allow government to provide, maintain, and fund the public infrastructure we deem appropriate, including the military, legal system, Social Security system, transportation, and research and education, including the funding of private sector contractors for public purposes.

The Federal Reserve could pitch in by informing us all that QE and 0 rates reduce interest income for the economy, as indicated many times by Federal Reserve Chairman Bernanke, and therefore, as he indicated, further fiscal expansion is called for to sustain aggregate demand in order to ensure higher employment growth.

None of these hopes look to be in the cards, which could well leave the President in a highly vulnerable political position as we come into the 2012 Presidential elections, assuming (a big IF) the GOP can come up with a candidate who has a modicum of credibility.

Marshall Auerback is a Senior Fellow at the Roosevelt Institute, and a market analyst and commentator.

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Wanted: A Manufacturing-Centered Economics, Part 2

Jun 6, 2011Jon Rynn

money-globe-150To build a better economic ecosystem, we must understand the birds and the bees of reproduction machinery.

money-globe-150To build a better economic ecosystem, we must understand the birds and the bees of reproduction machinery.

Underlying most debates about economic policy lurks a single question: what causes economic growth? This question is key when an economy is stagnating or declining. The answer decides the fates of Presidents, political parties, and whole nations.

In my first post in this series I argued that an economy can be usefully viewed as an ecosystem comprised of different chunks or niches. Each niche, like manufacturing, fulfills a critical function. Today I want to explain how this perspective can give us a better understanding of what causes economic growth than what's offered by mainstream neoclassical economics. Armed with a better explanation of the dynamics of growth, we can offer better and more effective policy prescriptions than those driven by the current obsession with austerity and lower taxes.

Surprisingly, neoclassical economists have not had much luck explaining economic growth. Nobel-laureate Robert Solow, who is the most important growth theoretician, calculated in the 1950s that neoclassical economics could only explain about 20% of economic growth; the rest was “technological change," which has been impervious to neoclassical analysis ever since. And yet, according to the economic historian Angus Maddison, between 1913 and 1989 income per person in most developed countries increased almost five times (see chapter 7 of my book, “Manufacturing Green Prosperity," and also here). So how can neoclassical economics call itself a science if it can’t explain its single most important phenomenon in the economic universe? What if physics couldn’t explain why planets revolve around the sun?

The problem is that neoclassical economics relies on a model of reality that is similar to the model use by physicists to understand things like gases and fluids. There is no growth in a gas or fluid. When things change too fast in a gas, for instance, the system explodes –- it's all very unstable and stressful. But neoclassical economics doesn't have the analytical tools to explain growth because it bases its understanding of production on David Ricardo’s concept of “diminishing returns”. You can’t explain how something grows if you are using a concept that explains why something diminishes.

There is, however, a science that is very comfortable with the idea of accelerating growth – biology, and in particular, evolutionary biology and ecology. Organisms reproduce -- bees do it, birds do it, and as I will argue, machinery does it, too. Reproduction leads to exponential growth, that is, steady growth that builds on itself, and that can even accelerate.

But how can we have growth forever and not destroy the planet -- or, to be more precise, the biosphere? Again, ecology is comfortable with this issue, because it is a fundamental aspect of all ecosystems that there must be balanced growth. In other words, no one part of the ecosystem can run out-of-control and reproduce forever. No part of a sustainable ecosystem can produce something -- like greenhouse gases or pollution -- that destroys the ecosystem as a whole.

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Well, then, how can we keep economic growth going and not destroy the ecological foundations of the economy? In both natural and economic ecosystems, there are two main sources of change: technological change, and change in the quantity of the output of the various parts of the system. In a natural ecosystem, technological change takes place in the form of “variations”, as Charles Darwin called them, of the offspring of organisms. We now know that DNA controls these changes. And depending on how these genetic “variations” fit into their environment, their populations may increase or decrease in size, which then feeds changes back into the ecosystem.

In a manufacturing ecosystem, the processes of change are similar. In order to understand this, we have to delve a little deeper into the “natural history” of manufacturing. The most important parts of the manufacturing system are the machinery niches, or industries. These are the ones that provide the equipment for the factories that output the manufactured goods that the society uses. When these technologies change, it becomes possible to create different kinds of goods, or to create more goods with the same resources. But how are these kinds of factory machinery made?

At the center of the economy resides a set of extremely important machinery industries –- let’s call them "reproduction machinery" –- which, if we continue with our ecological metaphor, can be viewed as collectively reproducing themselves. And since they can reproduce themselves, like birds and bees do, they can drive the economic growth of the economy, decade after decade, century after century.

Now you may be more familiar with the organisms that inhabit the volcanic vents in the deep Atlantic than you are with these kinds of machinery, but they are not that difficult to understand. There are machine tools, the machines that make parts (usually steel) that are used to produce most other machines, from cars to new machine tools. So machine tools can make more machine tools. However, they do it with help from other reproduction machinery – for instance, steel-making equipment, the huge pieces of machinery that take molten iron, carbon, and a few other elements and output the various kinds of steel that keep the current civilization running – such as the steel for the machine tools.

So we have machinery that creates the substance. We have material used for other machinery. And we have machinery that forms or shapes this material. Form and substance are two helpful categories of production that are nice to have control of if you want a modern civilization. Of course, we also need energy, and the main energy for making machinery is not oil, but electricity. We hope that machines like windmills can become the dominant way to make this electricity, but currently something called an electricity-generating steam turbine does the trick, formed out of steel, using machine tools. Once we have energy, we certainly want to be able to process information, and so we have semiconductor-making equipment, which makes the semiconductors that make all the other machinery better and better, including other semiconductor-making equipment.

When reproduction machinery gets better, everything else gets qualitatively better. When there is more reproduction machinery, there can be more of everything else – which becomes a problem if we are using everything up and destroying the environment and the climate. So we need to concentrate on making everything qualitatively better, not increasing everything quantitatively. This means living in moderately-sized living spaces, for example, and making them much more comfortable and efficient. It means using the same amount of space in a city to house more people, but making the city more comfortable and efficient. And it means using wind instead of coal, computers instead of paper, and electric vehicles that are more comfortable and efficient instead of oil-based ones. And recycling everything, just like a natural ecosystem.

The machinery industries are critical, both for economic growth in general, and in particular to create the kind of economic growth that is ecologically sustainable. They are more important for the optimal functioning of the economy than, say, the level of taxes or deficits or regulation. And yet, the United States has allowed its machinery industries to decline from 50% of world output to less than China’s 16%. Unfortunately, much of what remains is owned by foreign companies, and they do the high-value engineering outside the US. For the neoclassical economist, this is not a problem, because in the neoclassical world, the economy is global. In my next post, I will explain why economies are actually based on world regions – like the United States. And I will show why and how governments must design these world regional economies instead of relying on a simplistic model of markets based on outdated and faulty economic thinking.

Jon Rynn is the author of the book Manufacturing Green Prosperity: The power to rebuild the American middle class, available from Praeger Press. He holds a Ph.D. in political science and is a Visiting Scholar at the CUNY Institute for Urban Systems.

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