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Tuesday, September 16, 2003

How Not to Defend Your Lifestyle

Mats asked a question on the comments section of SemiDaily Journal that merits an answer. Mats' question:

Edward writes - "The manufacturing jobs are not the problem. The numbers to watch are the services ones, and not the low end cleaning and age-care, but the high value end. If the US cannot produce growth there then there could be a big problem." - and I have to ask about the reason behind this. Because I got the impression that the US could produce just anything right now if there only was a demand for it. I mean; if demand is the main problem, wouldn't then the low end jobs (whose posessors are most likely to spend their wages and perhaps even more) be the most important ones?

Now I suppose I'm not sure demand is the main problem. This is a very long story, but to keep it quick, you have to think of the THREE deficits: federal, trade, and private indebtedness. So on all levels in one sense there is loads of demand. The US is buying a lot, what it needs to do is sell, since one day this money has to be paid back in some form or other. If not you have some version of the 'pyramid fallacy' - at a time when the age pyramid is inverting.

Now assuming something like a run-up from argiculture, to industry, to services, to information based services, all the OECD has moved from agriculture to industry, and mainly we are now moving (have already moved) from industry to services. So when I say the loss in manufacturing is no problem, I don't mean it isn't a problem for the people who work in the factories, obviously it is. I mean historically the US can only expect to maintain a very limited manufacturing base. So it has to import, so it has to export. What can it export? Information, and information based services. This is where the 'madman' Kurzweil is important. If we are on an exponential ride downwards as far as information costs go, then making a living selling information is going to be hellishly tricky.

Also, I have a second argument, which I owe to Mokyr, that start-up costs in the information age are a lot less than in the industrial one. Think Google. Also the human capital component is much more important, and human capital formation in parts of the third world is relatively cheaper. What they need is some 'on the job training' in the west. Schroeders short-term 'green card' visas are a godsend for the third world, and the worst of all worlds for the EU. I'm not in any way EU patriotic (I mean I'm a European, and I'm happy with this, but I still think patriotism is the 'last recourse of the scoundrel'), so I'm not worried about the 'problem'. Good luck to the third world for once.

Now back to the US. To pay for the manufactured imports they need to export. But it seems the trade surplus in services (see my US roundup on Bonobo last Friday) is declining. This is extremely bad news for the US. Then we come to the currency problem. They need to drop the currency to turn things round. This, of course, effectively means dropping per capita incomes in the US, as it means US consumers will have to pay more for their consumption. But then we have the problem of the 'reserve currency'.

If we had a gold standard the US could devalue with respect to gold. But when your currency is the modern equivalent of gold, what do you do? They tried devaluing vis a vis the yen and the euro, and this isn't working. They want now to try against the renminbi, but this is comic when you look at how much the renminbi would have to rise to make any difference. And then, of course, the best bet is that the Chinese financial system would crash under the strain. So there is a problem and no easy answer. That's why some people say gold will come back. I doubt this. But we are very much on a voyage into the unknown, and it is not clear how things will unfold. That's why I like these ideas of 'emergence' and 'self organisation'. You can't know what the program will produce until you run it.

The low end jobs, propensity to consume argument is OK, but you have to be able to defend the proportion of high end jobs in your economy if you want to maintain your 'lifestyle differential'. Of course, maybe neither Mats nor I would be crying too many tears about this problem.

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