The American Interest
By: Walter Russell Mead
February 20, 2012
Beyond blue 5: Jobs, jobs, jobs
America's economic structure, the labor market and the American workplace have changed greatly in the last twenty years and will likely change even more in the twenty years to come. Some of these changes are unpredictable; others look baked into the cake. But as the blue social model continues to fade, the question of jobs will rise even higher on the national agenda. The American economy will not only need to create new jobs, it will need to create new kinds of jobs and new relationships between workers and employers as we work to build the next version of the American dream.
This is going to mean new kinds of policy at every level of government. In the 19th century, government promoted the rise of the family farm, selling cheaply and ultimately giving away millions of acres of farmland, and promoting the rise of railroads (which could carry the produce of western farms to world markets). In the 20th century the government promoted the rise of large, stable corporate employers that offered armies of white and blue collar employees lifetime employment and a bevy of benefits.
Those 20th century policies won't produce the same results in the new era. In many ways, the old jobs policies will now get in the way. The new economy needs a different framework to encourage new kinds of jobs and new industries; the faster we get to these the faster we will emerge from the death throes of the blue model into a new and much brighter world.
Some mourn the passing of the old ways; some are glad. It doesn't, fundamentally, matter. The real political division in American today is between those who think the old days can come back if the government does the right things (tax rich people; pump enough money into state and local government, health care and the higher ed industry; raise tariffs high enough and sprinkle enough subsidies on enough industries to protect and rebuild the manufacturing sector) and those like Via Meadia who think that Humpty Dumpty can't be put together again, no matter how many of the king's horses and king's men set up federal egg patching programs.
Those who think the magic can return are free to organize into political movements and rage against the dying of the light; it's a free country and VM thinks everyone should do their best to advance their ideas and policy options in the political world. But this fight will at most slow down the pace of change; the real contest in America is going to be about what to do next. Energy over time is likely to flow from nostalgia for the old toward the construction of the new.
Wanted or not, changes will continue. Manufacturing may well come back to the United States to some degree, but it will be capital intensive, automated manufacturing. Armies of blue collar assembly line workers won't be making middle class livelihoods from unskilled factory work.
Lifetime employment will continue to go the way of the dodo. So will many of the aspects of the employment relationship that went with that. Defined benefit pension programs are already pretty much toast; so too is the implied social contract that the employer, like a feudal lord, would provide lifetime protection and security so long as the employee, like a good and faithful serf, provided labor and loyalty.
Those who still have something close to lifetime employment - tenured professors and teachers, civil servants and other government employees, postal service workers - feel the unwelcome winds of change. Many who now have these benefits will likely lose them; such jobs will be much more rare and much harder to come by for new generations of workers.
As employment continues to shift away from manufacturing and routine information processing and administrative activities, the job market is likely to change in some unexpected and, to many, disturbing ways. Many white collar professions and, to use Robert Reich's phrase, the "symbolic analyst" jobs are going to experience some of the same pressures that manufacturing employment experienced in the last generation. Automation and outsourcing will combine to limit employment opportunities and income levels for most accountants, lawyers, architects and even some types of medical specialists. (X rays and CAT scans can be read as easily in India as at the local specialist's office, and given the exponential improvements in software, many other medical processes will become susceptible to outsourcing and automation.) There is no sacred dictate from on high mandating that design work and research need to be conducted in North America by people of European descent.
Many people who project the present into the future and believe that trees grow to the sky predict a future in which the upper middle class levitates into the economic stratosphere while the rest of America sinks into a post industrial quagmire as lawn boys and parlor maids. To do that is to miss this essential dynamic: the upper middle class also faces some destabilizing change. The serried, suited ranks of middle management and midlevel professionals face the scythe just as the steelworkers and the autoworkers once did.
In many and perhaps most economic sectors, the links between employers and employees are likely to weaken. It is not only that fewer people will work for many decades in the same big box processing plants - whether a factory making hard goods like automobiles or a facility making information products like an insurance company or a bank. As communication software improves, as telecom costs continue to drop, as management practices catch up with technological capability, many more people will work from home, or in small satellite facilities. Increasingly, they will work for more than one company at a time, bidding on assignments, perhaps, on a contract basis rather than as long-term employees.
In this sense the workplace will become less feudal and more transactional. People will date around with employers, rather than settling into long-term exclusive relationships. Entrepreneurs, free agents and freelancers will be much more common than they are now; lifers more rare.
In the old system workers were represented by labor unions - almost one third of the workforce at the peak, higher if one considers only blue-collar workers. The labor union is predicated on long-term employment; if all the workers are going to be working in the same Ford plant until retirement, it makes sense for them to band together and fight for higher wages.
But in the labor market of the future, workers are less likely to need bargaining agents who improve their working conditions and pay through a rule-making process at their long-term employer. They are more likely to need a kind of career agent who helps them negotiate work contracts for short term gigs and develop a long term plan to keep their skills sharp and move with a changing economy into new fields. Fewer of us will build careers by lifetime service to a single firm; more of us will seek improved pay and more agreeable work by switching companies and even fields. Fewer of us will be represented by the successors of Jimmy Hoffa; more of us will have a personal Michael Ovitz on call.
I'll write some more about agents as one of the careers of the future in a later post. These agents are likely to combine some of the functions of a lawyer, a mentor and a financial planner; they may work on commission or for an annual fee. They will compete with each other to attract clients who have or who can acquire skills that are in demand; they will provide many Americans with the kind of life, career and education advice that will help them navigate the choppy seas of a changing economy. People are likely to use agents not only to help with employment, but with health care management, education, taxes, financial planning and so on. In the future, everyone will have a staff.
But the weakening of the ties between employer and employee is another way to speak of the "entrepreneurialization" of the American labor market. In the 19th century, most Americans were entrepreneurs: operators of family farms. In the 20th century, most were employees, often of very large companies. In the 21st century we are likely going to become more entrepreneurial again, only instead of selling the produce of our farms, we are going to be selling the services we produce based on our skills and our imaginations.
The new economy is likely to involve more agents and small entrepreneurs; the falling cost of information dramatically lowers the capital cost of new business start ups. For the price of a personal computer and an internet link, an entrepreneur now has access to information and clients locally and worldwide that giant corporations couldn't assemble in the 1960s. But the bewildering variety of information available on the web, and the vast number of options consumers have creates needs for reliable, trustworthy filters. Most people can't deal with the masses of data on the web; they need retailers who can package that information into something they can use.
Many white collar professionals will turn into information retailers providing sophisticated and personalized services for households. Just as the industrialization of manufacturing meant that ordinary people now had access to an abundance of material goods once out of reach of all but the richest, so the industrial revolution in information will place sophisticated services in the hands of the mass market.
More, the proliferation of small information-based business will create markets for B2B information service: consultants who help small entrepreneurs manage technology, cash flow, marketing and other functions.
Currently, the American legal and regulatory system is set up to bind as many people to employers as possible. The government wants you to be a wage slave and sets up a regulatory framework that keeps as many of us as possible yoked to bosses and management. The IRS doesn't like the self-employed, fearing they many conceal income. Banks and credit card companies view such people with suspicion, and it is notoriously difficult for start ups and part time enterprises to have access to formal finance. Many services are hard for the self-employed to get on terms like those made available to employees of large corporations: from health insurance to retirement planning, many things are harder and more expensive for the self-employed. The payroll tax system is brutal: the self-employed pay both the employer and employee halves of Social Security and Medicare taxes, almost 20 percent of income and likely to go higher. Many cities will tack on unincorporated business taxes, mass transit taxes, and other interesting feudal exactions and dues.
There are other, subtler ways in which the current system favors old style large employers over small firms. The cost of hiring people can be prohibitively high for small businesses: the paperwork involved in hiring so much as a cleaning person or babysitter can be cumbersome. Hiring full time workers involves negotiating the requirements for worker compensation, unemployment insurance and much else. The cost of these barriers cannot be calculated: jobs foregone, businesses stifled in their cradles, ideas untested, innovations untried.
In order to create the kind of job and service explosion that can provide better incomes for more Americans going forward, the government needs to shift policy. It must favor the small firm and entrepreneur: the owner-proprietor group needs to become the apple of the government's eye. Their taxes should be cut; their paperwork burdens drastically reduced; regulations should be rewritten and simplified to meet their needs.
Cutting paperwork is much cheaper for the government than cutting taxes, by the way, and its effect on small business is likely to be much more profound. Small, lightly capitalized business enterprises are usually led by people who don't have much time or know how when it comes to bureaucratic requirements. Even very basic payroll issues - filing and paying estimated taxes, managing benefits such as unemployment and disability insurance and so forth - stretch their capacity.
A system that allowed small business to simply hire people with a handshake and pay them with a check, notifying the government once a year of amounts paid and to whom (and with the ability to deduct all reported wages from gross receipts for tax purposes) would likely increase the rate of business formation and hiring and if anything would result in a net increase of revenue for the government as more jobs were created and as fewer start ups and small enterprises would chose to operate under the table.
Taxes and insurance would be the responsibility of employees, and compliance could be enforced through the employer-filed reports of wages paid. Employers would have a strong incentive to comply with the reporting requirement because it will be simple (name, amount, social security number) and because full reporting would result in substantial reductions to their own tax bills. To ensure that workers aren't abused by this approach, a designated percentage of base wages would be earmarked for social insurance programs; in general it is less the dollar cost of some of these programs than the reporting and paperwork headache that is a problem for small business. Banks could be encouraged to set up payroll deposit programs that made regular estimated tax and other payments to government agencies, perhaps by working with existing payroll companies.
There are many other impediments to the operation of small business, especially in urban poverty zones where, perversely, regulations are often tightest where the poorest people live. Cities like San Francisco, New York, Chicago and even Detroit often burden small business with contradictory, expensive, poorly administered and bewilderingly complex reporting and permitting requirements - to say nothing of taxes. Many businesses are simply throttled before birth; others operate informally and in the shadows. This provides an underground labor market for undocumented workers, means that many workers are not getting social insurance coverage, and deprives many businesses of any access to the formal credit sector, limiting the chance for expansion and job growth.
These wrongheaded and self defeating policies were expensive in the era of the blue social model, which has seen an economic collapse in American cities without precedent in our history; they will be ruinous in coming years as the economy continues to shift.
Blue partisans tend to prefer "industrial policy" and "targeted investments" in infrastructure and elsewhere to generalized reductions in taxes and regulations as a way to promote economic growth and accelerate America's path into the future. I am not a purist and do not object to these measures always and in principle. I do not, for example, think President Eisenhower made a ghastly mistake when he inaugurated the interstate highway system.
But at this particular moment in history, the case for such policies is much weaker than at other times. This is partly because massive public investments generally go to large firms at a time when it is small business that we need to promote. It is partly because planned infrastructure investments work best when progress looks linear. In the 1950s it was relatively easy to project the immediate growth path the American economy was going to take. Today we are doing something much more complex and multifaceted, and it is not clear just how the bets should be laid. Moreover, the desperate hunger of large organizations and interests for government funds leads to intense pressure for white elephant projects like the California high speed rail project. (Repair of existing infrastructure is a different question and to the degree we clean up the long term fiscal picture and get public works costs under control, there is much to be said for infrastructure repair and renewal in times of high unemployment and low interest rates.)
It is also true that when political types think about "smart investments" they often let their wishes master their thoughts. Clean energy would be very desirable and there is a political constituency for it; politicians will invest in it despite decades of failure (in, for example, solar energy). The "smart investments" are almost always "feel good" investments and industrial policy almost always reflects the social and policy preferences of large and well organized interest groups. In a time of relative technological and economic stability that may not be so bad; these days, it can be ruinous.
Instead of making what industrial policy advocates always call smart investments in the industries of the future (and which much too often turn into ethanol and Solyndra type boondoggles), we need to be improving the climate for the creation of new enterprises. We don't now know exactly what new services, new organizations, new products and even new professions will characterize the unprecedented information-rich economy that is beginning to rise around us. Nothing like this has ever been seen before, and it is impossible to plan for a future shaped by so many disruptive technologies all coming on line in such quick succession.
In our times, the advantages of unplanned capitalist innovation and competition are even more valuable than usual. We need an era of social and business experimentation. Many of the bright young people who a generation ago would have gone to work for large corporations or law firms, or moved into tenure track academic positions, need to find new ways of making a living. The young people who would have gone into factory jobs or routine but secure clerical positions must also find new ways of using their skills and talents. The terrain is uncharted; the old systems don't work.
Government needs to clear unnecessary obstacles out of the paths of the pioneers of the new economy. The single most effective way the government can support the necessary change is to adapt its regulatory and employment policies to the needs of the start ups from whose ranks the leaders of the future will emerge. That is not the only type of change that would help, but it is the most important one.
The jobs of the future will not all come from start-ups and small business, but a very large proportion of them will. The best industrial policy we can have now is a policy that supports the rise of new information and service based enterprises. Small business and other, innovative forms of creative association (like co-ops and partnerships) will be a key engine of growth growing forward. We must do everything possible to accelerate and promote their growth; it is the best and fastest way out of our current troubles to the broad and sunny uplands that lie ahead.