Published On: Wed, Oct 17th, 2012

How To Make Sure The Next Generation Is Better Off Than We Are – Mohamed A. El-Erian – The Atlantic

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Everybody is writing about the youth unemployment crisis and has a series of prescriptions to cure the problem.  Writing in The Atlantic, Mohamed A. El-Erian, CEO and co-chief investment officer of Pimco, one of the world’s largest bond investors, notes:

What I am referring to here is the real risk that, for the first time in nearly a century in most western countries, our children’s generation may end up worse off than that of their parents. This sad state of affair is the result of a number of multi-year developments.
For too many years, our job creation engines were excessively re-oriented from competitive global markets to inwardly-oriented sectors that were taken to unsustainable levels (e.g., construction, finance, housing and retail). The result was an unbalanced and vulnerable labor force.
Our generation also overdosed on debt and credit entitlement. We got seduced by financial engineering, even believing that “finance” was the next (natural) stage of capitalistic economic development.
So we opted to de facto subsidize our financial sector. We sacrificed safety for the allure of the unquestioned efficiency of unfettered markets. And we fell in love with easy borrowed money, as opposed to earned income.
Too little genuine growth, too much debt, and a risk culture gone crazy culminated in the very messy global financial crisis of 2008 and its aftermath – a costly shock to society whose impact will be with us for quite a few years still.

So far, pretty standard stuff.  But he then goes on to explain the reason for this problem is lack of education, or insufficient education.  The solution is more and better quality education.  Most politicians in the West bang on this drum repeatedly as well.  Unfortunately, this is not the solution, despite sounding very clever.

The problem with this solution is that it is exactly what every other country is trying to do as well. Once upon a time, if you had a bachelors degree, and most people did not, you would be pretty much guaranteed a job and a higher paying job than everybody else in your country.  As more and more people in your country got bachelors, however, you would be less likely to get a job and even less likely to get a higher paying job.  Why?  There are only so many jobs in an economy that need very high levels of education.

One of the key characteristics of many jobs that require higher levels of education is that they are not linked to a physical location: they can be done almost anywhere with a good broadband internet connection. This means that young people are  not just competing with increasing numbers of fellow citizens for higher end jobs but with huge armies of young, very well educated, people across the developing world.  Those people’s cost of living is lower: food is cheaper, housing is cheaper, clothing is cheaper.  That means that they can take significantly lower salaries than young people in developed nations and still have a great standard of living (see article).

The only way that most young people in the developed world will be able to compete with this is by either dropping their salary levels to those in developing countries, moving to developing countries or by restricting the free trade of goods and services into developed countries.

The first option can only work if the cost of everything in developed countries crashes to levels in developing countries. Food prices need to crash, housing prices need to crash, clothing prices need to crash etc.  That could be done through hyper inflation.  But it wont be pretty.

The second option is an interesting one – get educated in the US and then move to India or Brazil. A lot of Indian Americans, for example, are doing exactly that.  The mantra could be “Go South!”.

The third option, trade barriers, works for manufactured products.  It is reasonably simple to impose trade barriers to goods and this would force companies to build factories within the region.  History Future Now has discussed this before, in the context of North Africa and the European Union (see article) and in a critique about Hayek and Keynes (see article).  With manufacturing, many service jobs will be located nearby, as it is more convenient.  But it is very hard to stop the outsourcing of jobs that could be done at the end of a broadband connection.

To be clear, education is very important. A population with a higher standard of education on average is likely to be more affluent than not.  But prescribing “more education” to solve the crisis of youth unemployment – and thus the future of our entire economies – is not going to work.

To read the full article click here:





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