Sunday, June 18, 2006

Mini-discussion with Jerry Pournelle on jobs

Pournelle carries on an open-ended discussion on the hidden costs involved in manufacturing jobs bleeding away from the U.S. to other countries. He has advocated a 10% "revenue" tariff to act as a barrier to other countries unloading goods here that we have no chance of making at the same price. Those are just a couple of points he talks about.

I jumped into the discussion a couple of weeks ago and was rewarded with some reaction. First I wrote to his web site:
Subject: Walter Williams on Creative Destruction

Dear Jerry,

I've read most of your comments about the abandonment, more or less, of the skilled worker in America, the people that made up a goodly portion of the middle class that have now been cast aside for efficiency's sake. That is, their jobs have leaked away to the Far East. What is to be done with this expanding pool of skilled workers that now have no useful role to play, since their jobs have been filled by, perhaps, several people making a puny fraction of what that skilled worker made?

I know that you're looking for an answer. I don't have one to offer, at least for the question you're posing. I think that "creative destruction" covers the the situation as presented, though the question as to the human cost will settle itself over time.

For example, this brief piece by Walter Williams on "Disappearing Manufacturing Jobs", makes the point. The point being one that we've all heard many times: should something have been done for the buggy whip manufacturers or the whalebone corset manufacturers or the lamp oil manufacturers? What should have been done over the period that our agricultural sector shrank from 41% of the population at the turn of the 20th century down to 2% in the 21st century? (Of course, some will point out that there sure seem to be a lot of illegal immigrants in agriculture, but that's a side issue!) Williams asks what happened to the switchboard operators of the 70s. Anyone can add to this list. American RAM manufacturing jobs, American TV and electronics manufacturing jobs, crafts industry (needles and thread, crocheting, rug hooking, doll making, artificial flowers) manufacturing jobs, flower-picking jobs, office supplies manufacturing jobs, auto manufacturing jobs, many of these jobs no longer exist in this country. But how is it that we're still able to buy all of this stuff? Is it because we're borrowing money that can't be paid back? Or is it because we continue to offer things to other countries through our own changing comparitive advantages? I'm certain that the reasons are many, but it sure looks to me like our economy props up a goodly portion of the world.

I try to visualize just what sorts of things would happen to us if we slapped tariffs on everything to allow us to, what? Catch our economic breaths? Restore pensions and health insurance? The industries that overspent on all sorts of things, whether it was fancy-schmancy world headquarters or gold-plated pension plans or expensive product features were bound to fail in world markets eventually. It's that creative destruction that catches up with them.

The only thing that is NOT creatively destroyed anywhere in the entire world is government. And since only government can impose a tariff, I'm sure they'll get around to it during the next administration.

What do you envision would be the result of such a tariff? The preservation of jobs? How many jobs will be lost because the tariff raises the price high enough that less of those protected goods are purchased? I would say just look at the steel tariffs from the early days of the Bush administration. What did they do for us? How many jobs were saved?

I've considered that maybe a 10% tariff would help provide job training for those people most threatened by job losses. But then I wondered whether we'd just be setting up another bureaucracy that would never close up shop but would ask for larger and larger budgets year after year. Pournelle's Iron Law triumphs again. I don't have the answers, but a temporary measure like a 10% tariff for revenue wouldn't do much more than reduce consumption so that that 10% would eventually be counter-balanced by job reductions to offset the reduced demand.

Is it worth trying? Well, sure, pick an industry that's hurting and "save" it with a 10% revenue tariff. I'll make a Julian Simon bet that in 10 years that industry will be less of a factor in the economy than it is today since cheaper and more efficient alternatives will have been found, and that that industry will employ fewer people than today. Matter of fact, I wish there indeed were a way to test this. Simon had a much easier time of it with the bet he had with Ehrlich. They just had to monitor the commodities markets.

What about book publishing? What if the market for books changed so much that the traditional author/publisher relationship were altered significantly? I mean, hardback book publishing would decline in favor of paperback, then paperbacks would decline in favor of e-books, then e-books would decline in favor of video. You, personally, may not be affected by those sorts of changes in the industry because you have so many areas and interests to write about...and you're in the, shall we say, sunset of your career. But doesn't it seem reasonable to assume that public buying trends regarding book publishing will change beyond recognition? What, if anything, should be done about that?

As a sample of the changing nature of publishing, I just posted a book review of John Derbyshire's new book, "Unknown Quantity" on this week. That's the second of two reviews I've written in two years. Out of curiosity I checked my "ranking". I am currently ranked 259,373rd. I don't know how many reviewers there are, but I do know that the top reviewers have posted more than 10,000 book reviews each! To me it seems one of the easiest ways to get "published" that I know of, except for blogging. But if one posts a book review of a new book right away, the chances are a lot of people interested in that book will read it.

Anyway, I've gotten off the track. Again, I wish there were a way to gather more information about the effects of a limited tariff such as you suggest.


Steve Erbach
Neenah, WI

Pournelle's reply:
If one's god is Mammon, then maximization of consumption is clearly the proper goal.

I had this conversation with Dr. David Friedman, an old friend among the sanest people I know, last week; it is a repeat conversations I always have with economists: what are the TRUE COSTS of Free Trade in a world in which there are political realities? What is the economic cost of anomie? When you export a job, the benefits are to those who import and sell the goods, and to their customers; when you support the person whose job has been exported by giving him a place at the public trough, who bears the cost? What are those costs? And what is the cost of taking an independent, self-supporting, taxpaying citizen and converting him into a public burden who knows that he is no longer contributing to his society; is no longer the breadwinner for his family? Who knows now that the only way to "get a raise" is to support even greater "social spending"?

What is the economic cost of anomie? I have never heard an answer from the economists.

Nor have I heard an analysis that distinguishes between a job lost due to technological change – the classic buggy whip maker – and a job lost to an overseas sweat shop that pollutes the environment and pays the highest wages in its region – and those are paltry. Creative destruction of poverty in Canton, China is a Good Thing; but is it good for Canton, Ohio? I have seen few analyses that even address these questions.

I then wrote a reply:
Subject: Creative Destruction

Dear Jerry,

» it is a repeat conversations I always have with economists: what are the TRUE COSTS of Free Trade in a world in which there are political realities? What is the economic cost of anomie? When you export a job, the benefits are to those who import and sell the goods, and to their customers; when you support the person whose job has been exported by giving him a place at the public trough, who bears the cost? What are those costs? And what is the cost of taking an independent, self-supporting, taxpaying citizen and converting him into a public burden who knows that he is no longer contributing to his society; is no longer the breadwinner for his family? Who knows now that the only way to "get a raise" is to support even greater "social spending"? «

I hesitate to suggest this, but I think you've just set up a false dichotomy; that is, we either preserve the jobs of those "independent, self-supporting, taxpaying" citizens, or they go on the dole.

As I said in my letter, I don't have any answers. I haven't taught economics as you have; so if YOU don't have any answers, I have exactly zero chance of coming up with any.

However, Dr. Williams makes a point that is germaine to your concern:

"Imagine for a moment that technology hadn't destroyed most of the jobs of those 41 percent of Americans working in agriculture in 1900. Where in the world would we have gotten the manpower to make all those goods produced now that weren't even imagined in 1900? Jobs destroyed through the market forces of creative destruction make us all better off, and that applies also to job destruction that comes from peaceable, voluntary exchange with people in different cities, states and countries."

Now I'm going to indulge in standing up a straw man...fair warning: Are you saying that perhaps this present phenomenon of the export of jobs "to an overseas sweat shop that pollutes the environment and pays the highest wages in its region" is so different in kind from anything that has gone before that we're in danger of [FILL IN THE BLANK WITH HORRIFYING FUTURE SHOCK-TYPE CATACLYSMIC SOCIAL UPHEAVAL]?

I loved your book, "A Step Farther Out". If you accept the erection of my straw man, it would sure seem as if you reject the premises on which you based your book. Or am I now guilty of offering up a red herring?


Steve Erbach

To which he replied:
Yes. I am saying that there is a fundamental difference between having a job go out of existence because not needed, and having it exported to a place that has no environmental laws, no minimum wages, no health care; precisely in the same way as it would be different if we imported slaves to do someone's job, then conscripted him into the army to help suppress the slaves.

And finally I wrote this:
Re: Creative Destruction

Dear Jerry,

Your reply stayed with me this past week until I was re-reading Paul Johnson's "A History of the American People". He wrote about the rapid loss of manufacturing share the U.S. experienced in the 70's, as well as the "spate of regulatory legislation passed by Congress in the 1960s and 1970s." As a result American business productivity suffered. The decade of 1967-1977 saw American manufacturing productivity grow by only 27% compared with 70% in West Germany, 72% in France, and 107% in Japan.

Then I realized that you'd put your finger right on it: "no environmental laws, no minimum wages, no health care". That is, we have regulated ourselves out of competitiveness. That's why jobs are being exported to the Far East. Our worker productivity is very high, but it comes at the expense of doing more with fewer workers...because it's become more difficult to employ so many and stay competitive with the amazing regulatory load.

I note that at present EU countries typically have a higher unemployment rate than the U.S. does, as well as high regulatory and tax requirements...and lower productivity. The U.S. was socked by a big regulatory load dropped on us during the 70s so that we fell behind in productivity versus the Euros. But Euro businesses haven't taken to heart the lessons of American businesses confronted with the changing regulatory climate.

A friend of mine wrote during an e-mail discussion that European workers "are healthier, living longer, have lower rates of infant mortality, eat better quality food, are less obese, have access to public transportation and education of which we can only dream." To which I replied, "What I see are the crazy high tax rates, the nationwide strikes, the high unemployment rate, the low worker productivity, the near bankruptcy of their governments, the immigrant unrest that surpasses our own..." So, do European democratic socialist countries have the answer to job exportation? That is, by a greater imposition of the custodial state (as Herrnstein and Murray termed it) than we have in this country?

It looks to me as if the exportation of jobs from our shores is the price we pay for trying to stem the tide of the custodial state.


Steve Erbach

I tried to summarize all this for a friend yesterday. Mostly I feel that there can be no "solution" to the shift in middle-class manufacturing jobs bleeding away. It looks to me like we've decided that "all men are created equal" can be achieved retroactively through legislation, regulation, and taxation. We are, by God!, going to make sure that everyone has an equal shot at everything. So since manufacturing jobs are more hazardous than office jobs, we responded by establishing OSHA and imposing a regulatory bureaucracy. Since there was too much emphasis on male-only sports in public colleges, we responded by establishing the Title IX bureaucracy. Since medical care is beyond the means of lots of folks, we responded with the Medicare / Medicaid / insurance bureaucracies.

Pournelle's Iron Law of Bureaucracy is the explanation for why manufacturing jobs have fled our shores. We can't be competitive if Indian iron foundries, for example, allow their workers to wear nothing but loincloths. Or where shoe factories in the Far East employ natives at a tiny fraction of what the ILGWU workers used to make over here. We have regulated ourselves out of competitiveness. To stay in business, corporations employ overseas workers in manufacturing because if the stuff was made in the U.S.A., no one would buy it because it'd be too expensive.


Anonymous said...

I wish I could remember all the "jobs" I've had over the years. And here I am, pushing 50 and learning a new trade because computer publishing is on the wane. My market doesn't have the same ramifications of global exodus as many manufacturing industries, but technical publishing is definitely in trouble. (It will fix itself, but not in time for me.) Why protect those in global bubbles, but not me? Personally, I don't want the protection, but the question's valid.

Steve Erbach said...

Susan (at least, I presume it's Susan),

When you say the technical publishing is in trouble, do you mean that fewer hardcopy books are being published, or that fewer copies of books are selling...? I subscribe to Safari Books Online and I find that it's very handy. The publishers, I'm sure, get some pittance every month for every book of theirs that winds up on subscribers' bookshelves. Looks to me like the Safari model might be a model for, say, new fiction or cookbooks, too. Yes, one has to have a computer to access the books, but as wireless becomes more prevalent and portable e-book readers get lighter and more convenient, there'll be fewer books in the brick-and-mortar bookstores.

I'm going to quote from a correspondent on Pournelle's site regarding the changes in publishing. He was reacting to my job exportation post:

"In my view, book publishing has already changed. Conventional book publishing is a mass market phenomenon, which seeks to satisfy all initial demands by choking every channel of distribution. The result of this is overprinting of those few titles that do make it through the marketing department's gauntlet of what they think will sell. (Forget about literary merit. That has been delegated to the professional agents who must pass on all entries to this race and have exclusive rights of presentation. Since they can only make a living by presenting 'best sellers' the midlist has disappeared, as has the careful nurture of new talent for the long term. Maxwell Perkins is very dead at this point.) This crisis especially affects fiction, which is forced into defined genres that must meet these same expectations, and a marketplace where non-fiction is the preferred flavor. Since the incremental cost of printing another book shrinks as the the quantity goes up, the result is a glut of books.

"Because of the doctrine in law called 'First Sale', no further author royalties will be paid, and because of the disintermediation provided by the Internet, a secondary market in used copies quickly springs up, driving the price on some as low as a penny when the new copies cost as much as thirty dollars. This puts authors in a nice little squeeze. Selling the next book depends very much on whether or not the advance for the present one has been 'earned out'. Complicating that is the fact that the size of the advance dictates the size of the promotional budget. If that is not adequate, then unsold copies soon crowd the remainder sales table. No one maintains a backlist anymore. For tax reasons, as well as the fact that storage costs.

"The disintermediation in the marketplace provided by on-line booksellers has led to the gradual disappearance of the small independent bookstore. Only chains have the economies of scale to survive the costs of direct retailing and their selection pales next to that of Amazon and the rest. Indeed, the 80/20 rule applies here, with most of the books on the shelves selling so seldom that they are known in the trade as 'wallpaper'. Retailers cannot make up the difference with special orders or even better coffee. If one is going to go to the trouble of ordering a book, then the Internet provides a much easier and more convenient method. And people who used to sell books to used book stores now have found that Amazon and eBay give them a much more diverse and profitable channel. So the used book store has retreated from the street to the spare bedroom, with a marketplace that is open 24/7. I do this myself a little, and most of my stock comes from library and other charity sales. Most of it is work long out of print, so the canard that used book sales on the Internet hurt those of new books is not entirely accurate. Again the 80/20 rules applies.

"The future of publishing may be changed by the advent of 'print on demand' books. Many small presses have already taken this route since it allows them to closely match supply to demand. E-books will continue to be a niche category because they really have to be printed out to be read with any ease. (I speak as the publisher of these.) What e-books do provide is another form of disintermediation by eliminating the conventional publishers from the equation. As they demand more perfect, ready to sell, texts, the advantage in small publications shifts to the author who is willing to to make a more direct connection to the consumer. Amazon Shorts is a case in point. I am not the only author who is serializing a novel there, and one was recently dropped in six parts at once. The genius of this program is that it allows everything to be printed out and gives authors a much higher royalty than conventional publishing. with its multiple levels of distribution, allows. My current novel, in 14 parts, will ultimately pay me a better per copy royalty than conventional hardbound publication probably will. And there are no remainders. It is no coincidence that Amazon now has its own "Print on Demand" book printing company.

"So what is to be done, is for authors to become better business people and embrace these changes in the marketplace and the technology for delivering text to customers and give serious consideration to not letting old school publishers and agents dictate the terms by which their work is published. Supply and demand is a sword with more than one edge.


"Francis Hamit"


Steve Erbach
The Town Crank

Anonymous said...

Nice analyzation, but the question was about protecting markets, not making it in the publishing industry. :)

Everything changes -- I've never had a job where we all sat tight and repeated our mantra day in and day out -- you adjust, change, or you die. I just haven't been fortunate enough to be in a business that didn't have to adjust to changing technology or the market. I don't see why anyone would want to protect a global market from the innovations forced by the market.

Steve Erbach said...


» Nice analyzation, but the question was about protecting markets, not making it in the publishing industry. :) «

Heh! I admit that I focused only on your remark about technical publishing being in trouble.

» I don't see why anyone would want to protect a global market from the innovations forced by the market. «

I don't see how anyone could protect a "global market"! There's a global market for automobiles, so, I suppose, the individual companies and countries that benefit from that market are interested in shutting out competition for personal transportation.

Say that somebody invented a really practical, safe, inexpensive, and roomy hovercraft that could not only glide down city streets but could scoot over water and rough terrain. I imagine that the existing lobbying muscle of the auto industry could see to it (since the legislators are covered with auto industy pocket lint) that hovercraft were subjected to extraordinary regulatory requirements that would raise the bar for hovercraft manufacturers and make it tougher for them to make headway.

Is that what you're talking about? If not, would you care to expand?

Steve Erbach
The Town Crank

P.M.Lawrence said...

I also emailed Jerry Pournelle on this topic a couple of years ago. In case you are interested, here is the article I worked up from that. It links back to that email and Jerry Pournelle's feedback, and also to some other related work of mine.