The Reckoning

I am unable to understand why a society that complains of unemployment should encourage and embrace every conceivable possibility of replacing human labor by mechanical devices.George Frost Kennan, Around the Cragged Hill (1993), pg. 101.

We are suffering, not from the rheumatics of old age, but from the growing-pains of over-rapid changes, from the painfulness of readjustment between one economic period and another…We are being afflicted with a new disease…namely, technological unemployment.John Maynard Keynes, "Economic Possibilities for Our Grandchildren" (1930). As quoted in Essays in Persuasion (1963), pgs. 358, 364. Emphasis in original.

I don’t understand what’s happening to my country.Grandma, January 15, 2014.

In my previous post, I mentioned how George Packer’s latest book The Unwinding evoked a visceral sense that the country’s political and economic trajectories are untenable, and that it was hard to avoid the conclusion that we’re heading toward A Reckoning.

Over the holiday, I found myself driving along U.S. Route 220 in Virginia, about an hour north of the hometown of Dean Price, one of the central characters of The Unwinding. As I traveled that road, which I’d cruised down several times before, I was reminded of Packer’s chronicling of the decline of the textiles and tobacco industries in the Carolina Piedmont, and how in a very real way, America has been gutted.

Standing on the floor of Congress in 1991, it would have been hard to imagine that as the United States took the mantle of global hegemony, seeking a “new world order [of] peace and security, freedom, and the rule of law,” within 20 years it would be reeling from a series of political, financial and foreign policy crises. While much of that time period came to be characterized as the Great Moderation, in retrospect it is hard to avoid the conclusion that underneath the gangbusters performance of the stock marketThrough the 2000 dot-com bubble—until it crashed. Then the surge back from 2004-2007—until it crashed. And then the 2009-present alpine climb — which likely will crash at some point, even though nobody thinks it will. and relatively stable GDP growth, a rot in the body politic was festering, driven by declining economic security and an erosion in American institutions (see charts below).

These charts are but a selective snapshot of the dynamics that took place over the previous two decades. You could choose others; highlighting, say, that nearly one in three U.S. manufacturing jobs disappeared (~ 5 million positions), with socioeconomic knock-on effects on cities and households across the country.

There is a constellation of narratives for this decay—globalization, outsourcing, information technology, NAFTA, China, stock option incentive plans, quarterly profit targets, unions, immigration, Reagan, regulation, Wall Street, Wal-Mart—providing ready explanations that conform with one’s ideological predilections.Not an exhaustive list. But one ineluctable conclusion is that politics failed to ease citizens’ transitions as they navigated the structural changes taking place in the U.S. and global economies.

The Last Leg

As households bore the burdens of adjustment themselves, the policy decisions (and indecisions) in the wake of the global financial crisis revealed a skew toward the interests of big business and the megabanks.  While the rationale for the policy decisions may have been sound, the outcomes have been greater inequality, perceptions of less opportunity, and a crisis of accountability (see charts below; click to enlarge).</p>

Six years on from the financial crisis, corporate profits are at all-time highs, the S&P 500 Index is at all-time highs, late-model luxury vehicles seem to be on every corner, yet wages have lagged.  In 2012, the median wage in the United States was $27,519, while 67.1% of wage earners took home less than or equal to the average wage ($42,498).6 The chart below — which serendipitously hit my inbox while drafting this post — shows that the ratio of corporate profits to wages is at an all-time high (and greater than two standard deviations above the post-World War II average). I’m reminded of a quote from Carroll Quigley: the facade of prosperity over unsound economic conditions was practically worldwide.This is a quote from Carroll Quigley's Tragedy and Hope: A History of the World in Our Time (1966), pg. 342. In context, the quote reads: “The economic effects of these soft prices after 1925 were adverse, but these effects were concealed for a considerable period because of various influences, especially the liberal credit policies of the United States (both foreign and domestic) and the optimism engendered by the stock-market boom. The facade of prosperity over unsound economic conditions was practically worldwide.”

Few things in history move linearly, but I struggle to find any indicators that suggest labor will get a fair shake anytime soon. On the contrary, I suspect that the squeeze on labor still has room to run. The most recent Minutes of the Federal Open Market Committee note that a couple members’ business contacts “continued to focus on investments intended to reduce costs and were still cautious regarding investment to expand capacity, [and] that concerns about health care costs were holding back hiring.” Moreover, companies are increasingly adopting robots to replace human laborers (see chart below) — and good grief, what happens with broader adoption of 3D printing?I think there's room for this technology to foster distributed innovation/R&D, but I'm less convinced that it will take place at sufficient scale to offset the broader labor market trends. White collar jobs are under pressure as well, and may be about to go through a similar trend as that of manufacturing in the previous two decades.See, for example, Paul Beaudry, David Green and Ben Sand, “The great reversal in the demand for skill and cognitive tasks,” January 2013.

Barring unforeseen catalysts, the continuing squeeze of labor is likely to exacerbate inequality while diminishing broad-based economic opportunity.  These trends are unsustainable.  It’s not hard to imagine a stratification of the body politic into a camp that pushes aggressively for the palliative of greater redistribution of wealth,“It is the lesson of history, after all, that every attempt at social leveling ends with leveling to the bottom, never to the top.” Kennan, op.cit., pg. 129. and another that clings to a past that can’t be resuscitated.  The rise of populist politics, then, may just be getting warmed up.

This would seemingly be the last leg.  If sentiment that the country no longer offers opportunities for most Americans increases, politics could become more contentious and partisan, thereby inhibiting the ability of politicians to address the very problems they were elected to solve.Look no further than today's Washington for an example. This process of reflexivity would enable angers to fester, demagogues to emerge and people to call the system itself into question.This is all a bit gloomy of a prognosis. I don't think the path dependence is quite so strong, but this outcome strikes me as conceivable.  A correction of some variety seems inevitable.

Challenge and Response

The men of a given generation are generally unaware of the degree to which they envisage their contemporary history within an assumed framework, ranging events into certain shapes or running them into certain moulds which are sometimes adopted almost as in a day-dream.  They may be sublimely unconscious of the way their minds are constricted by their routine formulation of the story; and only when the World is different, and there emerges a new generation not locked from birth in the accepted framework, does the narrowness of that framework become apparent to everybody.Herbert Butterfield, Christianity and History (1949), pg. 140. As quoted in Arnold J. Toynbee, A Study of History: Abridgment of Volumes VII-X by D.C. Somervell (1957), pg. 266.

To this casual observer, the calcification of politics in Washington is symptomatic of a body politic trying to recapture a way of life that no longer exists, or at best one that is pursuing a quixotic attempt to return us to a higher level of comfort on the same downward economic trajectory. It’s as if leaders in government and business are trying to squeeze the last drops of blood from a stone. In a sense, who can blame them? American primacy is all they’ve known, and the quest for greater efficiency and productivity has been the playbook for several decades running.

But all this speaks to a failure of imagination. The post-World War II economy was an anomaly — there’s no going back to the way things were. And if that’s the case, should we expect leaders who came of age during that period of relative stability to come up with solutions to today’s problems?

I suspect not; the “assumed frameworks” are too rigid. The generation coming of age, however, in an international system defined by entropy and whose economic prospects are much more uncertain may be more willing to take on the shibboleths that have constrained political progress.

In A Study of History, the historian Arnold J. Toynbee posited that civilizations rise and fall through a process of challenge and response. I worry that the magnitude of the challenges have yet to be internalized; and I fear that the transition between accepting today’s world and adjusting to tomorrow’s — The Reckoning — could get turbulent; but I am cautiously optimistic that younger/future generations will respond to these challenges with ingenuity, catalyzing a political realignment that will lead to regeneration and prosperity. We just can’t see it yet.