Labor Day Highlights the Need for American Restructuring

The world has changed!

Of course, entrenched interests fight the change.

An instance is the United States Postal Service:  we heard over the weekend that the Post Office faces the possibility of bankruptcy.

The high profile cause of this situation: email.

The cause that gets a lesser play is the position of the labor unions connected with the Postal Service.  The Postal Service is the nation's second-largest civilian employer, after Wal-Mart. As of 2011, it employed 574,000 personnel, divided into offices, processing centers, and actual post offices.  The employed are served by four major labor unions, the National Association of Letter Carriers being the largest. 
 
Offices have continued to be kept in existence in spite of declines in business and expenses, including wage and pension costs, have continued to grow relative to the services provided.  Now however, cuts are being proposed: proposed cuts include eliminating Saturday mail delivery, closing up to 3,700 postal locations and laying off 120,000 workers — nearly one-fifth of the agency’s work force — despite a no-layoffs clause in the unions’ contracts.  

In terms of the labor situation, Steven Greenhouse writes in the New York Times that “decades of contractual promises made to unionized workers, including no-layoff clauses, are increasing the post office’s costs. Labor represents 80 percent of the agency’s expenses, compared with 53 percent at United Parcel Service and 32 percent at FedEx, its two biggest private competitors. Postal workers also receive more generous health benefits than most other federal employees.” (http://www.nytimes.com/2011/09/05/business/in-internet-age-postal-service-struggles-to-stay-solvent-and-relevant.html?pagewanted=1&_r=1)

There are, of course, many different plans that are being floated around relating to what can be done to “save” the post office.  But these plans all point to one thing…the U. S. Postal Service must be restructured.  It cannot go on as it has been going on.

Resistance is expected: “The post office’s powerful unions are angry and alarmed about the planned layoffs. “We’re going to fight this and we’re going to fight it hard,” said Cliff Guffey, president of the American Postal Workers Union.”

This is just one high-profile example of what is going on all over America. 

The world has changed.

Entrenched interests reject the fact that they must change as well.

Let me just point out three major changes that are impacting the work force these days which have, I believe, massive implications for the future re-structuring of the United States economy.

First, the majority of labor unions no longer reside in the manufacturing sector.  Most employees that belong to labor unions work in the public sector.  The public sector, as we know, has vastly over extended itself, fiscally, in many areas of the country.  The existing economic problems connected with slow economic growth, high rates of under-employment, and a depressed real estate market have put government finances in these areas in bad straits.  Existing relationships are being re-worked as these governments try to get themselves back in control of uthe situation.

The relative growth rates in manufacturing employment dropped off beginning in the 1970s, and now growth in the public sector is seemingly dropping off.  This is a re-structuring problem.

Second, there has been a demographic shift in the workforce.  As reported in ‘The Slow Disappearance of the American Working Man,” (Bloomberg Businessweek, August 29—September 4, 2011) “The (economic) downturn has driven the share of men who have jobs lower than any time since World War II.”

“The economic downturn exacerbated forces that have long been undermining men in the workplace,” and “the impact has been greatest on moderately skilled men, especially those without a college education,” and African-American men and Hispanic men. 

This is another re-structuring problem related to the changes in technology and the changes that have taken place in education: “college graduation rates essentially stopped growing for men in the late 1970s,” whereas “women continued to pursue college degrees in greater numbers and have been more responsive to the changing economy in other ways.”

Third, the last fifty years has also seen a tremendous shift in American employment from the manufacturing sector to the financial sector.  The credit inflation created by the United States government has underwritten the finance industry and resulted not only in growing institutions but also in more and more innovation leading to the greater horizontal diversification of financial institutions.

The example of this is four of our large commercial banks: GE Capital, Goldman Sachs, Morgan Stanley, and ALLY (formerly GMAC).    GE Capital has $606 billion in assets and is bigger than all but seven U. S. banks.  It now finds itself regulated by the Federal Reserve where the Office of Thrift Supervision formerly regulated it.  But more, important is that GE Capital recently provided 40 percent of the profits of its parent company General Electric.  (Before the financial collapse, the contribution of GE Capital reached 75 percent of GE earnings.)   This shows how manufacturing has given way to finance in the United States.

The re-structuring of the American economy is going to have to take place over the next ten years or so.  This “fix” cannot be achieved through short-run solutions. 

In fact, short-run solutions will only exacerbate the situation.  This, of course, is what most of the economic policy of the last fifty years has done for the United States economy.  The credit inflation of this period has built up the financial sector of the economy relative to the manufacturing sector.  The credit inflation has also supported the growth of the public sectors as the inflation in real estate prices supported the government tax base and open capital markets allowed even small governmental units to expand their expenditures.  Finally, much of the economic policy of the government during this fifty years was aimed at putting people back into the jobs they had lost during periods of slow economic growth.  This “Keynesian” approach to the government’s economic policy had an unfortunate impact on male employment, especially those with a lesser education, because the jobs these people were put back into were jobs that were becoming less and less important in the economy.

The times have changed.  Employment practices must change to meet the needs of the modern world. 

Re-structuring is never easy and we can expect a lot of pain in the process.     

Maybe Things Have Changed

During my professional career, three things have seemingly dominated the American culture. First, the labor unions; second, the manufacturing industries; and the third was home ownership.

I spent my formative years in Michigan and nothing dominated the newspapers more than the activity of labor unions and the car industry. That was just a part of the society there. Of course, there was the steel industry and in the case of unions there was the coal industry and so on. Nothing is more vivid to me than the role of manufacturing and labor unions in the culture of my youth.

If anything else came close it was the idea of home ownership and the suburban sprawl. It was especially important to put the returning soldiers into homes and to help them live the “true” American life.

These days are gone, but the role they played in this earlier existence still dominates our national life and our political philosophy. Maybe that needs to change. Maybe we need to re-direct our attention.

The manufacturing industries have become a smaller and smaller part of the United States economic machine…for better or worse. The economy has shifted toward information and “information goods”. An “information good” is broadly defined as anything that can be digitized. Besides the computer industry, three other major subcategories in this area are in financial services, higher education, and government. Finance, colleges and universities, and government deal, primarily, with information and “information goods”.

The “new” structure of commerce in the United States is tilted toward the more educated, the more mobile, and the modern urban community. The “old” structure relied more on physical effort, the stationary, and the suburban life.

That is, the driving forces in this new modern world are not cars, and steel, and manual labor.

The thrust of the labor unions has also changed and it seems as if unions have spread into the area of government as the presence of government has grown in the society over the last fifty years. Back in “the good old days”, unions were connected with industry and hard and dangerous jobs and “national” monopolies. International competition was not a threat at that time.

Today, the presence of unions has radically shifted. In the United States most union members are connected with government. This is also the case in the rest of the western, democratic nations. Labor unions are still important in the automobile industry, but the automobile industry is just not as important any more. I have seen figures that indicate that something like 60% of the membership in American labor unions these days is related to government. This move has completely changed not only the location of labor unions in the United States; it has also changed the focus.

The desire to get Americans into their own homes has been present in the country since the country was started. This was felt to be important not only for individuals themselves, but for the substantial positive externalities that were felt to accompany the growth of home ownership.

Today, we may find that renting may become more prevalent in the faster-moving, more educated, “urban” workforce of the 21st century. And, this mobility is becoming more global than just national.

The economic policies of the government have been built around the above factors which, I contend, are not as prevalent as they once were.

Monetary and fiscal stimulus were more effective in an age of “heavy manufacturing” because these industries relied upon fixed capital, huge plants and machinery, and a “local” labor force. When unemployment happened, labor stayed “at home”, both in terms of location, but also in terms of skills because the workers needed to know little else. Monetary and fiscal stimulus put these workers back to work in their old jobs as sales picked up. New investment also was created as the economy rebounded.

The same is not true in the Information Age. “Information” companies do not have huge plants and large machines to maintain. Downsizing and the shifting of the employees occurs incrementally and more rapidly than in the past. People move and re-train and change. Monetary and fiscal stimulus is not so effective because the companies and have “moved on” and do not re-hire people back into their old jobs as did the manufacturing firms. The employees have also “moved on”. Furthermore, these companies do not have large capital investments to undertake that help the economy to re-start.

The labor union issue is surfacing in another way. Labor unions connected with government workers have become very important in recent years and have been very successful in gaining large settlements related to health benefits and retirement. A recent edition of the Economist magazine has covered some of the issues here. The problem: “One California mayor estimates that the effective cost of employing each police officer and fireman is $180,000 a year. That sum is not their take-home pay. For police and firefighters, the big costs occur when they stop working—retirement at 50, combined with inflation-linking, health benefits and lump sums for unused sick leave…California is also shelling out fortunes to retired state and municipal managers; more than 9,000 have retirement incomes of over $100,000 a year.”

And, these pension promises have been subject to “Alice-in-Wonderland accounting.” The Economist presents figures that pension liabilities are estimated to be around $5.3 trillion, compared with $1.9 trillion of assets. “The total shortfall of $3.4 trillion is the equivalent of a quarter of all federal debt.”

So, when it comes to governmental employees, the fighting is not over peanuts. And, this is a worldwide issue as can be noted in the riots taking place in Greece, Italy, Portugal, Spain and France over their government’s retirement and pension payments. And, yesterday it was revealed that the new austerity budget of the British government contains a reduction of 500,000 public sector jobs. “Today, the fight begins,” states the general secretary of the largest government union in the UK.

The role of labor unions in the 21st century society seems to need to be re-addressed going
forward.

Finally, the pressure of the government to achieve high rates of home ownership must be re-visited. We, in the United States, have paid a major price for the emphasis placed on this goal and the resources that were allocated toward its achievement. Payment is still coming due in the area of foreclosures, commercial real estate bankruptcies, and the resolving of government support of Fannie Mae and Freddie Mac. It is very likely that we, the people of the United States, will be paying for this bailout for many years to come.

The whole point of this post is to argue for a change in some of the assumptions behind the economic policies of the leaders of the United States government. The world has changed. Maybe our leaders need to change their outlook as well.

Or, is that too much to ask?

The Problems of Recovery

Comparisons abound between the Great Depression of the 1930s and the Great Recession of the 2000s. So far, we seem to have avoided the depths that were reached in the earlier experience, but we still have to consider whether or not the breadth of the two might be similar. That is, almost everyone one forecasting the recovery of the United States economy in the 2010s seems to be expecting that it will be a long, slow process.

The comparison I would like to consider in this post is the possibility that both of these periods represent a time in which the United States economy was going through a substantial structural change. Many people that have studied the 1930s period argue that the economy that existed in the United States in the 1950s was substantially different from the one that existed in the 1920s. Huge shifts took place in both manufacturing and agriculture throughout the 1930s and these shifts were just accelerated in the 1940s, a period of world war. The underlying cause of this change: technology had changed and the American economy had to adjust to become a modern nation. However, the mismanagement of the financial crisis in the 1930s just exacerbated the depth of the decline.

The argument can be made that major structural changes had to take place in the United States economy as it entered the 21st century. Changes of the magnitude of the present adjustment did not take place during the shorter, less severe recessions of the post-World War II period because the buildup of technological change takes time in order to build up a sufficient backlog of the new technology to really be disruptive. By the end of the 1990s, the structural change connected with the move from a society based upon manufacturing to an information society was ready to occur.

This buildup was not really a sudden one. It has been occurring throughout the last fifty years or so. I believe that the decline in the figures on capacity utilization for the United States captures this change very well.

Note in the accompanying chart that capacity utilization continues to decline throughout the whole period since the late 1960s. Obviously, cycles in this measure took place that were related to the various recessions occurring during the time span, but each new peak in capacity utilization never exceeds the peak it had reached in the previous cycle.

This, I believe, captures the changing nature of the United States economy and the movement from the foundational base of the Manufacturing Age to the growing impact of information technology and the Information Age. The conclusion that can be drawn from this is that the United States economy is not going back to where it was. But, this will take time.

Let me just point out three important factors that are playing a huge role in this change: evolving technologies, changing structure of the labor market, and the rise of the emerging nations.

First, the core of American commerce is not going to be manufacturing as we have known it. The future belongs to information technology, biotechnology, and knowledge. For the government to attempt to “force” workers back into jobs they held in the manufacturing world is just going to postpone the changes that WILL take place and threatens the stability of the society by re-establishing the inflationary environment of the last fifty years.

Second, the age of the labor union is past: non-public sector labor unions are legacy. There was a time when labor unions were needed to temper the pressures and demands of the industrial age of the large corporation who needed large numbers of physical laborers. These unions now compose less than half the union population in America yet have an over-sized impact on the politics of the country. In the next fifty years, the importance of the labor union is going to decline, economically and politically, as the United States moves from the manufacturing base that has dominated the last fifty years into the Information Age described in the previous paragraph.

Third, the United States, although it will remain the number one economic and military power in the world, is going to see its relative position in the world decline. The reason is that major emerging nations are beginning to feel their power and exert it. The immediate group of nations that come to mind are the BRICs. But, there are others. China, as we well know, is starting to exert its influence throughout the world. We see Brazil directly challenge America in the World Trade Organization concerning tariffs and subsidies. (See “Tax Move by Brazil Risks US Trade War”: http://www.ft.com/cms/s/0/dbf4284c-2afa-11df-886b-00144feabdc0.html.) And, more of this is to come! This is going to provide its own pressure for the economic structure of the United States to change.

These adjustments are going to take time. There will be substantial pain for those of working age who are not trained or educated for the new era. I believe that even the number of underemployed, 16%-17% of the work force, under-estimates the structural problem that exists. Thus, the estimate of 11 million new jobs that are now needed in the economy to get us back to where we were before the Great Recession began also under-states the problem.

Investment-wise, just as in the 1950s, the whole structure of opportunities available is changing from the earlier age. But, one needs to consider the new format of the economy that is evolving out of the manufacturing age in developing ones portfolio strategy. Similar to the 1930s, the 2000s are producing a modernization of the United States that will alter the world as it has been known and will produce a world that we can’t even hardly imagine yet.