Outside the Box

×

Outside the Box was retired on April 25, 2018, to make way for the new and improved premium research service, Over My Shoulder.

If you’re interested in joining John Mauldin, Patrick Watson, and the thousands of Over My Shoulder subscribers as they analyse important research several times a week, please click here to find out how you can subscribe for less than $10 per month.

The Biggest Threat to U.S. Jobs: The “Contestability” Nightmare

November 7, 2014

Today’s Outside the Box comes from Sam Rines of Chilton Capital Management in Houston, TX – a promising young economics contributor to The National Interest and a rising star who I met at Worth Wray’s wedding a few weeks ago.

Worth and Sam have developed quite the friendship over the past several months, but it didn’t take much convincing from Worth to get me to share Sam’s latest article with you. Sam’s work speaks for itself and I am VERY impressed by his insights on a wide range of economic issues – from the evolution of Fed policy and growing risk of a rising US dollar, to the long-awaited industrialization of India.

In his latest piece, Sam alerts us to a breakdown in the Federal Reserve’s full-employment mandate (one leg of its dual mandate, the other being stable prices). In a normal recovery, Sam reminds us, “[W]age growth and the labor market move together in a lagged fashion – the labor market heals and tightens, followed by wage increases as labor becomes increasingly scarce. But this has not happened during the current recovery, and it has not occurred economy-wide in quite some time.”

But why the breakdown? Janet Yellen herself points to growing inequality. Here’s Yellen (as quoted by Sam): “[W]idening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.”

But again, why – why the laggardly wage growth? Sam drills down and finds the problem rooted in what he (and others) are calling the “contestability” of many US jobs, and especially those of middle-skilled workers, whose jobs are liable to international outsourcing or antiquation by computer technology (robotic or otherwise). To make matters worse, much of the post-Great Recession job growth has come in the form of low-paying and part-time work. Thus we have the “hollowing out of the middle class,” which is tantamount to saying that the middle is slipping down the wage ladder, even as those on the top rungs continue to climb (since their positions require high levels of education and intellectual competence and are not very susceptible to competition from outside the country or from machines – or at least not yet).

So income inequality grows, and lower- and middle-skilled workers are unable to exert any pressure for their wages to increase. This trend, as Sam points out, is “at best disinflationary and may be deflationary. With stagnant wages across the economy, the middle cannot increase consumption – one can only borrow so much.”

This is a major trend with huge implications for US economic growth – and thus for Fed policy. Sam concludes his piece by saying, “The Fed is muddling the mandate to fight a wage war, but the Fed will struggle to justify its continuous actions to counteract those forces. The middle skills squeeze is not a swiftly passing phenomenon. It may mean that extraordinary monetary policy and unconventional intervention are increasingly normal.”

A conversation today triggered a memory. I just turned 11 years old, and it was Christmas morning. I’d retrieved a few toys out from under the tree and was looking forward to going out to play with friends. But my dad said that first I had a project to do. He had just bought all the equipment to open a small printing shop in Bridgeport, Texas. This was 1959 (we had just left the Stone Age), and printing was still done with hand-set type and on letter presses. The small press that was invented in the early 1900s was now powered by an electric motor.

My dad had brought home a type case full of 12-point Franklin Gothic lead type. He turned the case upside down on the kitchen table and said, “Put all the type back and then you can go out and play.” There was nothing else to do but sit and look at each small piece of type, figuring out what each character was and putting in its respective small box. It took forever, but I eventually finished and got up to leave. My dad said “Wait a minute.”

He asked me to come over and look at another case where he hadn’t labeled all those individual little compartments with the letters that belonged in them. He pointed to one and asked me which letter belonged in there. I didn’t know. Then he asked me a second one. I didn’t know that one either. He went back over to the kitchen table and turned that type case  – much like the one you see in the picture above – upside down. “Do it again.”

I’m only a little slow. When I finished and Dad started asking questions, I knew the answers. It was the start of a decades-long process love-hate affair with the printing business. I Actually made money in college going around to the print shops and offering to clean up their “hell boxes,” which were the boxes and buckets full of type that had gotten jumbled and that no senior printer wanted to take the time to put back. So what do you find in hell? You find a printer’s devil, which is the young apprentice who does all the dirty work. And it was dirty. But by the late 1960s printing with actual type was on its way out, and then there were no young apprentices. Business was good, but within a few years all that knowledge was simply arcane trivia, of no use in the real world.

I was training with yesterday, and while he was putting me through my paces, he was reading a report on his phone about the political changes. “What’s the GOP?” he asked. As I pumped away on the exercise bike I told him it stood for “Grand Old Party.” I went on to explain the term and added, “In the early days, writers would often set their own type for their newspaper columns. Republican Party had a lot more letters in it than GOP.” And then I explained setting type. You could see he was thinking I must be really old. And I thought back to all the hours I hand-set type as a young man.

And continued to pump. The Beast is pushing me harder as time goes on, and it’s helping, but leg days just kill me for the following few days. My legs feel like they’re wrapped in lead. For years I focused on upper body in my workouts, and my legs became appallingly weak. But knowing that as we get older our wheels take on ever more importance, I’m trying to get them in some kind of working order. They say no pain, no gain, so I must be gaining a lot. Surely?

Have a great week. Fall is in the air. Can Thanksgiving be far behind?

Your pretty much hurting somewhere every day analyst,

John Mauldin, Editor
Outside the Box

Get John Mauldin's Over My Shoulder

"Must See" Research Directly from John Mauldin to You

Be the best-informed person in the room
with your very own risk-free trial of Over My Shoulder.
Join John Mauldin's private readers’ circle, today.


The Biggest Threat to U.S. Jobs: The “Contestability” Nightmare

By Samuel Rines
The National Interest, October 22, 2014

The Federal Reserve’s mandate has never been well defined, and there are no concrete definitions to adhere to. Federal Reserve Chair Janet Yellen has begun to deviate from the traditional characterization of full employment to something far more nebulous. Recognizing this shift is critical to understanding the Fed, and its new relationship with the two esoteric mandates of stable prices and full employment. 

At a conference in Boston, Yellen stated that she was concerned about rising inequality. Before listing off a blistering round of statistics that show the US has become more unequal over the past few decades, Yellen succinctly articulates why the Great Recession was responsible for widening the gap further: “But widening inequality resumed in the recovery, as the stock market rebounded, wage growth and the healing of the labor market have been slow, and the increase in home prices has not fully restored the housing wealth lost by the large majority of households for which it is their primary asset.”

One piece in particular of the above statement stands out – and has broad implications for understanding the Fed mandate. A normal recovery would see wage growth and the labor market move together in a lagged fashion – the labor market heals and tightens, followed by wage increases as labor becomes increasingly scarce. But this has not happened during the current recovery, and it has not occurred economy-wide in quite some time.

The new target for the Fed may be best described as not simply “full employment” but “full wages.” At first glance, it seems unreasonable for the Chair of the Federal Reserve to be concerned with how the income of the country gets dispersed. However, in many ways, “full wages” are at the intersection of the fed mandates. In essence, Yellen is admitting that the past few decades were not kind to a significant swath of the US, and that this endangers future economic growth.

Many of the jobs US middle-skilled workers once took for granted can now easily be outsourced or contested – even some previously thought untouchable. This “contestability” is increasing as more jobs become relocateable or replaceable with computing power due to advances in communications technology. Contestability is fundamental to Yellen’s concern. If a US job is contestable internationally, then US workers are competing with cheap labor around the world. This limits the bargaining power of the US worker, and keeps a lid on wage inflation in the US. The cheap-but-educated global labor force is becoming an increasing threat to the US worker.

Yellen sees this middle-skilled squeeze phenomenon in the data, but also sees the lack of deflationary wage pressure on the top of the income ladder. The highest-paying jobs tend to have little competition from outside – requiring creativity and high levels of education. The question to ask is why this has occurred, and whether the factors underlying it are dangerous to the US economy.

And in many ways – they are dangerous. If ignored long enough, the disintermediation of the middle class is at best disinflationary and may be deflationary. With stagnant wages across the economy, the middle cannot increase consumption – one can only borrow so much. If contestability continues to erode the wages of US middle-skilled workers, wages could be pressured or even decrease toward more internationally competitive levels. This would be disastrous for consumption and inflation expectations, especially in a service oriented economy where many of the jobs could be at risk. 

If the U.S. continues to see this type of wage pressure, there may be enough jobs (for people who want them), but the ability to consume at previous levels will not be there. Deflation – generally – is bad for an economy, and wage deflation might be the worst kind. Deflation puts pressure on prices, making it more difficult to consume on the aggregate as the economy previously did. The standard of living declines. Further, the potential for wage pressures, in the current recovery, is low. The jobs created during the recovery disproportionately skew towards part-time relative to previous recoveries, and part-time jobs do not yield much bargaining power. There are few reassurances about the labor market.

This puts the Fed in a particularly odd place. Its mandate is supposed to be two separate pieces of a puzzle, but Yellen appears to have identified an intersection. The Fed runs the risk of missing both its “full employment” and “stable price” mandates without pursuing – either explicitly or implicitly – a “full wage” target.

Yellen’s statement has little to do with fairness or equality. It is directly connected to ensuring the US has created enough uncontestable jobs for the Fed to step away, and these jobs are the type that will lead to – or at least allow for – future wage pressures. Prime examples are the jobs created by the current shale oil boom and housing construction during the boom through 2006. Many of the jobs created for the oil patch require the presence of the worker – and cannot be done without a significant amount of education. These characteristics make them difficult to offshore or relocate. As quantitative easing begins to roll-off, the ability of the US shale revolution to stand on its own will be tested, and the jobs engine of Texas may suffer. This would be a tremendous hit to a sector where wage pressures exist, and the contestability is low. The Fed should be watching this closely.

Yellen’s wage war is a battle the US does not know it must win. For the Fed, it ties together both pieces of its mandate, and gives them a reasonable basis for stimulus when observers feel it unnecessary. The Fed is muddling the mandate to fight a wage war, but the Fed will struggle to justify its continuous actions to counteract those forces. The middle-skills squeeze is not a swiftly passing phenomenon. It may mean that extraordinary monetary policy and unconventional intervention are increasingly normal.

You can read more of Sam’s work in The National Interest by clicking here: http://nationalinterest.org/archives/by/10797.

Discuss This

0 comments

We welcome your comments. Please comply with our Community Rules.

Comments

Page 2 of 2  < 1 2

bensimo@juno.com

Nov. 8, 2014, 5:36 a.m.

Sam’s analysis is far too narrow and leaves out the most important factors.

Our corporate tax code punishes companies for basing in the US.
Our corporate tax code makes it financially unsound to repatriate profits made in foreighn markets thus forcing companies to use these funds overseas and not in the US.
Our fiscal policies are anti-business and force businesses to limit employment.
Our regulations and the threat of future regulations have created an environment where businesses cannot reasonably predict their costs and thus dare not undertake new initiatives.
The Fed’s ZIRP reduces the cost of automation so low as to make labor uncompetitive.
The Fed’s ZIRP takes $400 Billion/year from savers and gives it to those with money or connections like big bankers.
As pointed out by Terry, our educational system does not equip potential workers with the basic skills they need to enter the workforce thus not meeting the need of businesses.

There are other factors as well, but the above all powerfully mitigate against jobs in the US.

Kenneth Hill

Nov. 8, 2014, 5:27 a.m.

Jobs are also being “contested” internally through illegal immigration. Wages are not rising because the supply of labor for lower level jobs keeps rising. It is more than mere coincidence that wage stagnation correlates well with the surge in illegal immigration.

Nick Jacobs

Nov. 8, 2014, 1:36 a.m.

“The highest-paying jobs tend to have little competition from outside – requiring creativity and high levels of education.”
Sorry, No.
The jobs done by million-dollar-bonus bankers do not require exceptional creativity, education, or ability, merely competence and the contacts to get the job in the first place.
And 8-figure CEO salaries? You have to be smart to win the contest to be CEO, but once there. you boost your salary by stuffing the compensation committee with your buddies. Academic studies have shown that CEO performance is not correlated with salary.

Duncan Hume

Nov. 7, 2014, 11:08 p.m.

I fail to see how “extraordinary monetary policy and unconventional intervention are increasingly normal” will solve a problem related to job contestability. Rather it seems fairly obvious that it will not, monetary policy is pretty much a stone age tool when talking about machine intelligence and global free trade. Ever since the dawn of the industrial revolution labor has worried about competition from machines, until recently that always turned out to be a misplaced concern. Now however robots can do the high end jobs - better than workers while foreigners can do the low end jobs for less cost, maybe this time there is nothing left but wealth and servitude. Janet has no tools to deal with either of these problems, we need an entirely different solution. I wish I had a suggestion but I do not although I am sure that the solution is not increasing debt levels to encourage consumer spending!

obyrnejeff@mac.com

Nov. 7, 2014, 10 p.m.

This misses the important technological vector. Just as the printer’s devil has been replaced by photo lithography, modern manufacturing productivity has been increased by orders of magnitude by instantiation of Herb Simon’s definition of a programmed decision. Everything that can be reduced to an algorithm and then a computer program has been. This allows more production per worker, thus increased productivity. For examples see Modern Machine Shop magazine. It is replete with articles about small to medium machine shops that had two shifts before 2008, laid off one and since have automated, often the same machines, and are now turning out three shifts worth of work with one shift of workers. They are starting to out compete the overseas shops too. This looks a lot like the farm business since 1914. A Midwestern farm in 1914 had 160 acres and was farmed with the aid of a hired man. Two families lived off of those 160 acres. Today, one farmer needs 1,000 acres to support his family and does it with only his wife to help. Watch any construction project today. Lots of machines and no shovels. Look at the pictures of Boeing’s line for the 737 and the one for the 787. Lots of people and almost no people. The story is the same. Increased productivity, better products, lower cost.

Craig Cheatum

Nov. 7, 2014, 7:54 p.m.

Unfortunately, we have been supporting business interests above all for 3 or 4 decades because they are the so-called job creators. Customers are the job creators and businesses exist to facilitate the transaction.

As a solution we need jobs for skilled and unskilled workers (especially the poor), while creating better education, better infrastructure, less consumerism, and more savings.  The cycle is possible if the investor class takes a leadership role, looking for opportunities to make our country a better place.  The Fed has bought time for the economy to heal and ideas to simmer.  It’s time for the private sector to show some initiative, with another benefit of gradually getting people working and off government subsidies.

There are improving conditions in employment and production capacity, but more is needed from our business leaders.

Craig Cheatum

Robin Day

Nov. 7, 2014, 6:38 p.m.

I believe the main purpose of QE was to replace the money outflows (oil imports plus trade deficit)  in order to keep the US economy lubricated. Shale gas and shale oil not only created high paying jobs, but also trimmed oil and nat gas imports and the related money outflows from the economy. Now with the addition of money pouring into the US as a safe haven, offsetting remaining outflows from a diminishing trade deficit and energy imports, QE could be ended.

Patrick Watson

Nov. 7, 2014, 6:05 p.m.

Sam hits on a really sticky problem. Where are these uncontestable jobs going to come from? Silicon Valley types talk about this and none have good answers. I heard Carl Bass, Autodesk CEO, lead a SXSW session on it last spring. He thought we might need a negative income tax to support all the people whom robots will render unnecessary. But he also pointed out how Keynes back in the 1930s was worried his grandchildren would not be able to find jobs. Somehow it all worked out.

Page 2 of 2  < 1 2