Thursday, November 6, 2014

Malthus was just 220 years early


The average earnings of U.S. men between 25 and 34 with only a high school diploma have fallen 25% since 1979, according to Census Bureau data. Women in the same category have done better, but their earnings also have fallen. Given that GDP per capita has risen 73% in real terms since 1979 on World Bank data, those are shocking statistics. Their implication is that the value of the labor of people with ordinary skills has gone into a deep decline even as the country and the world has gotten richer. In other words, Thomas Malthus' gloomy prophecies, written in 1798, were not wrong. They were merely early.

Malthus' basic prediction of human starvation and misery was based on the maximum possible agricultural output increasing at an arithmetical progression while population increased at a geometric progression. Thus over the long term population would always outrun agricultural production and could be brought back in line only by population reduction through starvation.
In his time, Malthus was wrong. Even in the 18th century, agricultural output was increasing through improved farming techniques beyond the mere gain from bringing new land into production. In the 19th and 20th centuries, farm mechanization has hugely improved the labor productivity of agriculture, freeing up billions of people to seek more profitable work in newly emergent industries and, later, services. Since 1950, hybrid-seed technology—followed by the beginnings of genetic manipulation—has further boosted agricultural output.

On the other hand, improved medicine has allowed people to hang around the planet longer and produce more children. Both those tendencies have worsened the Malthusian problem and have only partly been offset by declining birth rates and new contraceptive techniques. Today, the world's population is galloping towards 8 billion, compared with 1 billion in Malthus' day.
The gigantic increase in population since Malthus' day and the overall improvement in global living standards would naturally lead toward the conclusion that there isn't a problem. The optimists' view, simply stated, is that technological progress will always outrun the human tendency to produce more humans. Even technological developments that seem to facilitate such production, such as modern medicine and the availability of fertility treatments, only enable us to take more control of our destinies, in the long run slowing the rate of population growth.

The decline in wages for young U.S. high-school graduates is evidence that this view is now too sanguine. If a Malthusian problem were to occur, we would expect it to occur first in the rewards of modestly skilled people in the world's highest-cost labor markets, because their work is most easily substitutable and can be undercut by emerging market labor. That appears to be what is happening. In the U.S. at least there is a supply surplus of modestly-skilled workers, driving down wages. Since the labor-participation rate in the workforce has dropped sharply since 2008, and these statistics include only workers who are employed, there is clearly a major supply-demand imbalance.

In order for workers to be paid more than the Malthusian minimum below which their survival is impossible, their labor output needs to be combined with capital, natural resources (including land) and knowledge—either their own or someone else's. In the last 20 years globalization, allowing for worldwide supply chains to be constructed more cheaply, has raised wages in emerging markets and tended to depress those in the U.S. However the overall creation of wealth has continued at a rapid pace; with U.S. GDP per capita rising 73%. Moreover, the return to knowledge workers has increased immeasurably, partly because globalization allows their relatively scarce skills to be applied more broadly in the global market.

When you look in detail at the prospects for U.S. workers with limited attainments (they would normally be called blue-collar workers, but increasingly if they are to prosper they need to find opportunities in traditional white-collar occupations), the prospects are grim. Their knowledge is increasingly duplicated by emerging-markets workers who are becoming better educated all the time as their economies grow richer. A high-school education is no longer the calling card to a decent blue-collar way of life, while college has become astronomically expensive, without reliably producing knowledge and skills that justify its cost.

Natural resources form a happier story for blue-collar Americans because of the opportunities for cheap energy through the fracking revolution. Here their main enemies are the environmentalists. The young modestly skilled worker in Scranton Pa. has much better prospects than the young modestly-skilled worker in Binghamton NY, because Pennsylvania allows fracking of the Marcellus Shale common to both states and New York doesn't. In Binghamton, the worker's main hope is to dress up in an ill-fitting tuxedo and get a job as croupier in the casino which Governor Cuomo has promised to open—and then hope to have the self-control and willpower not to gamble away the limited resulting earnings in the slot machines.

As for capital, the reality is that monetary policies since 2008, and to some extent since 1995, have reduced the capital available to support American workers' jobs in a number of ways. First, by creating a global surplus of capital they have narrowed the differential between U.S. and emerging markets capital costs, thus eliminating a major U.S. cost advantage. Second and even more important, they have reduced returns on U.S. savings below zero in real terms, leading middle class savers to abandon saving and attempt to live on their credit cards. Apart from leaving Americans with mountains of debt, this process has reduced the capital available for small businesses, which depend crucially on private savings to form.

According to Brookings Institution data, while the firm exit rate in the U.S. has remained approximately constant since the 1970s at about 8-10% per annum, the firm entry rate has catastrophically declined, from close to 15% in 1978 to less than 8% today. The problem has worsened in the grim years since 2008, when it has dropped from 11% to 8%. That's in a period when the venture capital industry has grown enormously and hedge fund and private equity funds have proliferated like weeds. The reality is that formal venture capital companies are almost completely irrelevant to the formation of small businesses. They aren't interested in truly small business, preferring to gamble instead on chimerical Silicon Valley "startups" that produce incessant operating losses but appear to offer the potential of becoming the next Facebook.

The vast majority of small businesses are financed out of personal savings (both of the entrepreneur and of his friends and relatives), bank borrowings and cash flow. If, as in Janet Yellen's America, savings are depressed, then small-business formation and small-business employment creation, the source of the majority of new decent jobs, is suppressed.

It is particularly alarming that in the period since 2008 the small business formation rate has fallen below the small business exit rate. In other words, even with the growth in population, the small business sector is structurally shrinking. America is half as entrepreneurial as it was in 1978, and that's partly the Fed's fault (to be fair, it is also the fault of the mad excess of regulation, especially burdensome on small businesses compared to large ones).

Technology, for so long the workers’ friend, may now be about to become his enemy. When jobs such as supermarket cashiers, truck drivers and fast-food cooks and servers can be automated, it's not clear what the modestly skilled are going to do for a living. Charles Murray, otherwise a sensible conservative, has recently suggested that instituting sharply increased welfare payments (paid for by higher taxation) will be necessary to take care of the vast population of less skilled workers who cannot find employment.

That looks to me like a cure that would be worse than the disease. While welfare payments allow purchase decisions to be made by the recipient, and are thus preferable to other forms of government spending, their distribution is still a function of government. With such a high percentage of the economy in the hands of corrupt, incompetent and politicized bureaucrats, freedom must inevitably die.

There is another solution: drastic reduction of population (over whatever period is necessary to accomplish this through incentives and without coercion). If the world’s population were one billion instead of eight billion, the amount of land and resources available per unit of labor would be octupled and the environmental damage caused by production would be reduced by seven-eighths. Similarly, the amount of capital available per worker would be greatly increased (albeit probably not by a factor of eight), while the knowledge base per worker would octuplet (although the rate of adding to it wouldn't). With labor suddenly scarce, even at the modestly skilled level, the returns to labor would be greatly increased. The modestly skilled, both in the U.S. and in emerging markets, would be able, through mass robotization, to enjoy lifestyles of which their ancestors of today can only dream.

In the meantime, a U.S. government can ensure that immiseration of the modestly skilled is prevented by instituting policies friendly to their needs. Interest rates can be raised, so that savings recover, as does the capital available for small businesses. Immigration controls can be tightened, so that personal service jobs are available for domestic modestly skilled workers, not left to immigrants. Pointless environmental restrictions, such as New York State's ban on fracking, can be scrapped, maximizing blue-collar job opportunities and reducing energy costs for domestic manufacturing.
Malthus was right, although he would find totally bewildering today's world in which his ideas are once again relevant. But the economic signals are becoming increasingly clear, and we ignore them at our peril.
posted by Martin Hutchinson

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