Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

22 June 2016

Saving the Global Middle Class


[For a popular recent post on the death of so-called “conservatism” in the United States, click here.]

The problem
The non-solution consequence
A real solution: keeping future industries onshore
How to do it
Conclusion

The problem

The developed nations’ middle class is in an uproar. Here in the US, we have The Donald demagoguing, and Bernie still pushing Hillary to the left. In the UK, we have London Mayor Boris Johnson pushing hard for Brexit. On the Continent, we have otherwise good leaders putting up razor-wire fences to halt the free flow of humanity that is the EU’s founding principle.

There are several causes for this widespread uproar, but immigration ranks high among them. Why else would millions of Yanks vote for a man who promises to wall out Mexico and make Mexicans buy the wall? Why else would Hungary and the Serbia, one generation away from living for two behind the Iron Curtain, wall themselves off from hapless immigrants? Why else would Britons, once renowned for their tolerance and openness, yearn to make the English Channel a barrier again, rather than rely on the wisdom of their laws and leaders?

Throughout the developed world, the middle class is terrified of immigrants. Some of their terror comes from terrorism, abetted by cultural and linguistic chauvinism and outright xenophobia. But a lot has to do with fear of losing jobs. Rightly or wrongly, the middle class fears that immigrants will take jobs and steal a middle-class lifestyle from them and their kids.

Practically every time you see a refugee from Syria interviewed, he (most are males) says he wants to study. That drives fear into middle-class parents on two levels. They fear that an immigrant will steal their kid’s place in a great university. Even if he doesn’t, they fear he will steal a job that doesn’t require a university education. The middle class views life as a zero-sum game in which immigrants are unwanted and unfairly privileged new players.

If jobs were plentiful and their growth self-evident, this terror might abate. Nineteenth-century America, for example, had such a vast need for workers in its exploding steel mills, railroads, farms and mines that it opened the floodgates to immigration from everywhere.

But those days are over. Even in America, the heady days of populating a whole continent and building a brand-new infrastructure are more than a century behind us. The populations of the US and Europe (including Britain) are now stable or declining. Therefore so is the demand for things that depend on a headcount: housing, home appliances, cars, and even smart phones. Innovations and upgrades provide some chance for new sales, but at a rate nothing like that during past market openings or population booms.

How many times in the last ten years have you bought a new TV? With a stable population, the developed-country market for things like that is saturated, except for a trickle of new sales for upgrades and replacements for worn out and obsolete stuff. Add to that the low cost of transportation to and from, and labor in, not-yet-so-developed nations, and you have a huge magnet drawing jobs offshore and a global middle-class crisis.

The non-solution consequence

Economists like to present a consequence of this crisis as a “solution.” They say that we Yanks and others are moving toward a “service economy.” And yes, they are right: 70% or so of our Yankee GDP now comes from services. But their point is descriptive, not prescriptive. At least it should not be.

There are three reasons why a service economy is undesirable, at least from the perspective of a middle class. First, most service jobs pay little and involve little prestige and self-respect. Think of the personal-service roles that many immigrants perform: waiter, barkeeper, barber, hairdresser, housekeeper, maid, babysitter, cleaner, gardener, nanny, and tailor (an almost vanished profession today). It’s hard to earn a middle-class living in these jobs, let alone in big, expensive cities like Berlin, LA, London, New York, Paris or San Francisco.

Second, a service economy exacerbates inequality. There are service jobs that earn big bucks, but they aren’t the ones that most servers perform. Think of lawyers, accountants, wealth managers and bankers. In a service economy these well-paid servers literally lord it over the lesser-paid, who are much more numerous and have trouble maintaining middle-class status. In a country like ours, which outlaws nobility and titles in our Constitution, this smacks of teachery. (Mid-level service professionals like plumbers, handymen, and landscapers can support a middle-class lifestyle, but they are under siege by a booming do-it-yourself industry and the proliferation of free, accurate and helpful online instructions for fixing anything.)

Finally, by and large, service occupations don’t create wealth; they just maintain it or move it around. In four weeks you need another haircut. In one or two, your lawn and trees need trimming again. When a doctor heals you with drugs or surgery, you only revert to your pre-disease state. When a lawyer wins a suit on your behalf, money changes hands and the lawyer often takes a cut, but no wealth is created. Bankers and wealth-management folks don’t create wealth except when they serve as investment bankers and fund new ventures, which they do less frequently. (Buying stock also doesn’t create anything new, although it may motivate management to work harder if it raises the price.)

So a service economy is a recipe for stagnation. If made egalitarian and cohesive, it might feel good. It might even be idyllic. But it wouldn’t be going anywhere.

When population-growth stalls, as it has throughout the developed world, real economic growth requires more than just more and better services. Feudalism provided a full-service economy, but no rational person would trade it for our modern one.

A real solution: keeping future industries onshore

So if we’re going to grow as a species, we’re going to have to invent new things and new services, which have never been made or done before. We can’t progress as a species by doing old things for each other over and over again. Our ape ancestors did that when they sat grooming each other in trees or on the beach. Civilization didn’t start until Homo sapiens began inventing new things and new ways to use old ones, starting with raising cattle and growing crops.

If this analysis is correct, then there are only two ways to save the developed world’s middle class. We must invent new things to manufacture. Or we must use new things, or old things in new ways, to invent services that have never been performed before. (Making old things will pass to less-developed countries with lower labor costs, as it has been doing for a generation.)

One new technology promises to do both: the new gene-editing technology called CRISPR-Cas9. Here’s how it might change developed-nation economies for the better.

Let’s think ten or twenty years ahead. Let’s suppose that CRISPR-Cas9 has made possible truly personalized medicine, plus designer farming and animal husbandry. (We’ll leave aside for the moment the most controversial application—designer babies—because the immediate economic consequences would be similar.) What new jobs might this brave new world create?

First of all, gene editing is not magic. It’s science and technology. So it will need gene sequencers and the reagents and supplies they use, in order to read the existing genome to be modified. When gene editing gets going, it will probably become automated also, at least in part. So machines that automate the process, which may include sequencers, will have to be invented, perfected, distributed, serviced, and upgraded.

The editing machines will likely be more complex and more various than gene sequencers. Why? Because sequencers use a single (Nobel-Prize-Winning) technology, polymerase chain reaction (PCR), to cut apart the stands of DNA and amplify them. Editing the gene sequence will likely require a series of different and mutually distinct technologies, especially if performed in vivo, i.e., in living cells. So there may be separate machines, or separate modules, to perform various types of editing.

Making, selling, distributing and servicing these complex systems will create whole new manufacturing and service empires. But that’s not all. One key object of gene editing is personalized medicine, which will be, well, personalized. That means that medical complexes will have means and trained staff to “read” the genome of each patient and to modify it to the heart’s desire, using all the equipment and supplies just described. In other works, every large medical practice will have to become, in part, a microbiological laboratory and workshop. There might have to be half a dozen trained technicians for every physician.

Good jobs in the medical professions and related manufacturing, sales and service will explode accordingly. The same thing will happen in designer farming and animal husbandry. In addition, those fields will require a phalanx of monitors and testers to prevent modified animals or their genes from straying prematurely from field to field or pen to pen.

CRISPR-Cas9 is not the only technology that promises to require new things and new uses for old things, thereby creating good middle-class jobs. The future of manufacturing lies not so much in single things, such as cars, TVs and iPhones, but in the making, integration and use of complex systems.

One example is the reusable spacecraft that Paul Allen’s, Robert Branson’s and Elon Musk’s companies are working on. If they ever succeed, let alone to the point when they can support human colonization of the Moon and Mars, they will begin to look a lot like current aircraft companies, with all the tens of thousands of good jobs they offer. Not only will they have to assemble spacecraft and perform launches; they will also have to recover spent stages, refurbish and refuel them, and perform all the service and public-contact functions of a general shipping or transportation company.

A second example of systems integration is what Elon Musk is apparently trying to do in buying SolarCity. With a Tesla factory, his Gigafactory for batteries in Reno, and SolarCity under his belt, he could offer customers complex systems to drive on the Sun. Solar arrays on their roofs or their land could charge storage battery arrays during day, which could recharge one or more Tesla cars’ batteries at night. The customer might never have to pay a dime for gasoline or electricity and (with Tesla’s current offer of free “supercharger” power for customers) could drive as far as he or she wanted for free, with zero carbon footprint.

How to do it

How do developed countries keep these technologies and related good jobs at home, and stop their drift to low-wage nations and regions? Isn’t that the key question of economic policy for the twenty-first century?

There are three possible answers. The first is to note that some of these new technologies may be intrinsically resistant to offshoring, at least to some degree.

For example, the conversion to clean energy will create local jobs in installing, maintaining and servicing solar arrays and windmills, regardless of where the solar panels and windmill components are made. And just as infrastructure repair and improvement must be done where the infrastructure is, namely onshore, personalized medicine must be done where the patients are. So the vast bulk of the service industries that CRISPR-Cas9 develops will probably be onshore.

You can imagine doctors sending cells to a factory in China or India to be re-engineered. But difficulties of preservation in vivo and viability, not to mention trust on the part of patients and doctors, make that outcome unlikely. Manufacture of sequencing and editing machines and supplies might migrate offshore over time, but the process might take years or even decades.

Similar analysis applies to reusable spacecraft, as least as long as the launching pads are onshore. The weight of the reusable shell of the first stage, plus the risk of damage in transit, makes long-distance transport unlikely. And the steady improvement of launch vehicles and platforms probably requires engineers to be onsite for visual inspection and close consultation. Remote electronic communication would be possible, of course, but it probably would be be too expensive, awkward and inconvenient for engineers working at the peak of creativity and time pressure.

A second possible means of keeping these industries onshore would be legally prohibiting them from going offshore. In a separate essay, I debunked the notion that “free trade” requires factories to more where labor is cheapest. There is even room to doubt that the bulk of postwar trade treaties (GATT, NAFTA, and WTO), had as a goal even permitting whole factories to move, as distinguished from freeing their products from tariffs and other trade barriers.

Whatever the truth of this latter point, there is absolutely no doubt that nothing in our trade treaties required Americans to send 60,000 American factories offshore, let alone using American capital and American technology, to complete with American workers at home. That was a conceit of the 0.1%, who believed the process would help maximize some abstract measure of economic “efficiency” and, not coincidentally, increase their income and personal wealth astronomically.

So there may be nothing to prevent Congress by law, or the President by executive order, from prohibiting the offshoring of factories using new American technology or American capital. Such a prohibition, of course, would be quite different from ordering any of the 60,000 already-offshored factories to come back. That would constitute a clear political interference with existing business. The catastrophic “plan” of Herr Drumpf would be even worse. It would try to force the 60,000 factories to come back by imposing huge tariffs on their products in contravention of existing trade treaties.

The notion of keeping certain leading-edge American technologies at home by fiat is likely to be controversial whether the fiat is legislative or executive. But it deserves exploration, if only because the agonies of the developed-nation middle class are probably the most socially destabilizing force acting globally, now and for the foreseeable future. Yet there is another expedient, one which relies only on existing law; to that we now turn.

There are those who seem to think—fuzzily in my view—that our existing trade treaties give Yankee business people carte blanche to transfer our factories, technology and jobs abroad to enrich themselves and ostensibly serve some abstract goal of “economic efficiency.” I think they are wrong.

Anyway, no one will resolve that issue in a short essay like this one. But it is indisputable that some aspects of those selfsame trade treaties rigorously protect intellectual property globally. The so-called TRIPs Agreement, which is an Annex to the WTO agreement, forces treaty partners to protect intellectual property abroad much as we do at home. The Agreement protects patents, copyrights, trademarks, trade secrets and semiconductor chips (“mask works”), and it requires our trading partners to have injunctive and temporary relief.

This grand international legal edifice, which our trade negotiators spent almost a generation building, could keep jobs in new industries onshore in two ways. First, governments could provide innovators with tax or direct incentives to assert their intellectual property to keep innovative industries onshore, at least until they had developed an insuperable lead or dominant customer base worldwide. (One non-tax incentive might be an extension of the duration, or strengthening of the effect, of the relevant intellectual property.) Particular items of intellectual property, such as dominant and pioneering patents or copyrights on key complex software, would the become the business “levers” to avoid offshoring factories.

If incentives were deemed insufficient, the United States could “condemn” (acquire by condemnation proceedings) the key patents and other intellectual property and assert them to keep factories from going offshore. Its doing so would raise issues under the Fith Amendment to the Constitution, which requires just compensation for public use of private property. But saving numerous domestic jobs and industries would likely serve a public purpose. Then the only legal issue would be how to compensate for a prohibition on hypothetical foreign use of American-invented IP. That would be a highly speculative enterprise whose resolution would likely give the American branch of the industry time to develop full strength.

Conclusion

As I have written, the world’s liberal, free-market economies, led by Britain and the United States, have done the rest of the world a great favor. Over the postwar generations, they have transferred an astronomical amount of capital and technology to the developing world. In the process, according to The Economist, they have raised a billion people out of extreme property.

Doing so was not a gift. It was an exercise of enlightened self interest. But as the process has continued, the interest has become less enlightened and more focused on the self-enrichment of a tiny class of plutocrats, and on fuzzy and disputed abstractions like economic “efficiency” and “shareholder value.” If kept on its current course, the process is highly likely to reverse itself, but only after a troubled time of extraordinary economic and political instability worldwide.

In an age of terrorism and the proliferation of nuclear weapons, economic and political instability are things to avoid. It’s far too late for us Yanks to bring back the 60,000 factories that our own capitalists have already sent or built offshore. And any attempt to disadvantage those factories by imposing tariffs or similar disabilities would only maim a postwar economic system that has now taken three generations to erect, and that has helped avoid major wars among major powers during all that time.

So it appears that the best way to quell the growing instability without destroying what the world has built (including GATT, NAFTA, WTO and maybe TPP) is to keep future innovative industries onshore. Western governments have the power to do that, perhaps directly but most certainly by exploiting the global structure of intellectual property protection that these very same trade treaties have set up.

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