How to stop the jobs crisis and bring jobs back home
The Great Recession has been going on for four years, with no end in sight. A great part of the problem is financial: we borrowed too much money for too long and now don’t have the ability to pay off our debts. That is the reason why governments across Europe have been calling for austerity measures.
The argument for austerity is as follows: governments have spent too much money on social programmes. They have borrowed from the future to pay for expenditure for today. To get our fiscal houses in order, the argument goes, we need to cut government expenditure. This will reduce our borrowing requirements to pay for everyday items and will enable us to keep on paying the interest on our debts when they are due. Note that no government has a policy of paying down our debts: the best that they can hope for is to maintain debt levels and not default by failing to pay interest payments. As a goal, the ambition is rather modest, but the damage being caused to our societies is huge.
Unfortunately, whilst important, this policy ignores the fundamental problem with our economies. While politicians may struggle with the issue of indebtedness and fret over which social or military programme to cut, they are ignoring the central social and economic threat to our countries: the loss of good jobs. If you have good jobs you can afford to pay lots of taxes, which allows the government to pay for the various programmes that it is used to spending money on. If you have no jobs, you have no taxes and you cant afford to do anything.
This raises two questions. First, why are the good jobs leaving? And second, what can we do to bring them back?
Why are the good jobs going away?
When I was growing up in Margret Thatcher’s Britain I remember being taught about the concept of primary, secondary and tertiary industries.
Primary industry was all about mining, timber and other extractive industries. This was deemed as dirty, primitive work, to be avoided if possible. It smacked of miners – who were on strike at the time in Britain, putting the whole country at risk as coal power stations ran out of coal.
Next came the secondary industry – this was all about manufacturing. Manufacturing was one step up on the evolutionary ladder from mining, but was also deemed as somewhat primitive and undesirable. Yes, Britain’s wealth and empire had been built on the back of flooding the world with cheap, high quality, British goods rather like China today, but we had not been doing so well for a while and so it was best to focus on what we should be doing instead: tertiary industry work.
Most people now refer to the tertiary industry as the service industry. It represented the pinnacle of an evolutionary process that had started with the ideas of David Ricardo and Adam Smith in the late 1770s and 1820s. Manufacturing should be de-emphasised in the economy and the primary industry should be killed off.
Thatcher and her successor, Major, helped to propel the service sector into the stratosphere by introducing reforms to the financial services sector which created a revolution in finance. Sleepy building and mutual societies that had required you to save with them for years before you could take out a small mortgage were sold off and high street banks rushed in to capture market share, offering easy credit for household purchases and easy mortgages that enabled a bidding war on house prices that inflated the value of property.
Latched onto the financial services sector was a posse of clever lawyers and accountants that helped wrap sophisticated financial instruments around basic commodities, “adding value” along the way. The financial reforms unleashed by Thatcher in the UK and Reagan in the US are directly linked to the long boom that we lived through for nearly three decades, despite occasional blips, and the crash that occurred in 2008.
This ideal of an advanced economy, living off the brains and talents of its citizens, as opposed to the brawn and labour of its workers, is appealing. This ideology is also comforting and helps to explain why we are no longer a manufacturing powerhouse in Britain: we chose to leave manufacturing to be done by workers in poor countries rather than the counter claim that we simply stopped being good at it. It also helps to explain why we want to emphasise higher education amongst our citizens as they are supposed to be competing with their brains as opposed to with their brawn.
As manufacturing has gone out of favour, free trade, in stark contrast appears to have provided so much. It has taken our, unwanted, dirty industries and relocated them to poorer parts of the world. It has opened up other markets of the world to our products. It has enabled us to buy goods at prices that would be impossible to match in the West, providing us with a level of material wealth that has been unmatched in history. All of this is wonderful.
And yet, if you no longer think that manufacturing is worthwhile, you will have no vested interest in protecting and promoting your own manufacturing sector. This is great news for countries like China, who are very interested in promoting and protecting their manufacturing sector.
This is classic disruption theory, as articulated by Clayton Christensen. In his various books he describes how if a company wants to move up the value chain, it will leave its previously occupied space empty, enabling competitors further down the value chain to move up to fill in the empty space. As with all such disruptions, however, eventually there is no place for the higher value seeking company to go: they run out of space to move up into and they wake up to discover that even their high value work has been taken over by the nippy newcomers. However, in this scenario, it is not companies that are being disrupted but entire countries.
The problem for the West, however, is that places like China can have comparative advantages in everything, simultaneously. China can be great at manufacturing AND resource extraction. It can produce cheap plastic toys AND state of the art high speed rail engines and networks. It can produce food and generate more patents per year than almost everyone else. It can provide low cost labour for manufacturing AND churn out thousands of PhDs in advanced materials science and biotechnology.
Manufacturing is also the heart of an ecosystem of services sector jobs. Financiers, lawyers, accountants and consultants all need manufacturing companies to exist so that they can provide their services. Without manufacturing those service sector jobs will eventually disappear as there is nothing for them to provide services for. Without those manufacturing and service sector jobs, there is no income to pay for all the other things that we value in life. It will result in losses of jobs in tourism, entertainment and leisure sectors. The jobs will disappear in construction and furnishings. The knock on effects are enormous.
So the answer to the first question – why are the jobs going away – is simple. We have failed to realise the importance of having a balanced economy with primary, secondary and tertiary industries. Our pride has made us think that service sector jobs are somehow superior to manufacturing jobs. Since we have not valued manufacturing, we have put in free trade policies that have enabled manufacturing jobs to be lost to foreign competition and to foreign imports. Until we change that mindset, they will not come back. If we wait too long our economies will be so hollowed out that even if we wanted them back, it would be too late.
What can we do to bring the jobs back?
If we want to bring the jobs back we need to agree on two things. First, that we want to bring manufacturing back into our home territories. Second, we need a policy that will encourage companies to bring those manufacturing jobs back. And for that, all we need to do is go back in time and also pick up some pointers from the Chinese today.
The European Union is a bit of a monster at the moment, with laws and regulations that are forced upon unsuspecting member states without a clear democratic mandate. This was not always the case. The precursor to the European Union was the European Economic Community, which was established through the Treaty of Rome, signed on the 25th March 1957.
The Treaty of Rome’s aims were relatively modest: to create an internal common market of goods, services and capital that was free of trade barriers and tariffs. This was to be supplemented by the concept of “Community preference” whereby products produced within the EEC would be favoured over imports wherever possible. Tariffs on imports was the main way of supporting this concept. Essentially protectionism.
The European Union should institute a very strong policy of “European Union Preference” whereby if companies want to sell goods and services into the European Union they need to relocate their manufacturing operations within the European Union. If the products are not available in the European Union then tariffs may not be warranted. In the meantime, it should abandon the World Trade Organisation, whose policy is to supervise and liberalise international trade, in order to enable it to put up more tariff barriers for products coming into the European Union.
The European Union is, after the United States, the biggest economy in the world. It has the ability to put these policies in place and for companies to be forced to play along. This will create jobs and stability in the European Union. Will this mean that many of the cheap products that we have become used to from China will now be more expensive. Absolutely. But it is cheaper as a society to pay more for a flat screen TV than it is to have millions of people who are unemployed and rioting.
But what about people in the developing world? Wont they be harmed by these policies? Not necessarily. There is nothing stopping them from instituting a similar set up. If you want to sell goods and services in Latin America it seems reasonable that you should build factories there to provide good jobs there as well.
China, of course, already does this with great success, despite being a member of the WTO. It forces companies who want to do business in China to enter into joint ventures with local Chinese companies, forcing them to hand over decades worth of intellectual property in the process. It has a a strong preference for buying products from other Chinese companies, despite the fact that there are Western companies that offer better products for less money. China even restricts the number of foreign films that can be shown in China – a policy of promoting Chinese cultural values over those of foreigners.
The United States could enact a similar policy: if you want to sell goods and services in the US you should do so within the borders of the US and perhaps Canada and Mexico.
What this does is still enable a level of free trade, but it is free trade between countries that have a similar level of social values and laws. It encourages companies to compete on quality and service, rather than compete in a race to the bottom, a race to drive down labour costs and a race to countries with the weakest social and environmental protections.
This is how we reverse the trend and bring back good jobs to our societies.
All we need now is to find some politicians willing to sign up to this programme.