Common wisdom once held that the Great Depression of the 1930s was caused by inadequate consumer demand and global tariff wars. Federal Reserve Chairman Ben Bernanke made a study of the era and concluded that tight money was the culprit.
Now Nobel laureate economist Joseph Stiglitz takes another look at the depression and comes away concerned that the United States might be undergoing the same kind of sea change that made the Great Depression so bad.
Stiglitz said that huge increases in agricultural productivity created an epochal structural change in the economy that was only resolved when World War II and the government spending the war required created a new manufacturing-based economy. The result was a decades long boom.
The question of this decade: Has the economy undergone another structural change that will cost millions of workers their jobs permanently? If that is the case, what does society do with those people?
The Economist and The Financial Times have both recently published several articles trying to answer those questions, and Stiglitz described his research in Vanity Fair. The information that follows was culled from those publications.
According to Stiglitz, a fifth of the American workforce worked on farms at the start of the Great Depression. Between 1929 and 1932 farm income dropped by a third to two-thirds because farms produced more than the market could handle, thanks to improvements in seeds, fertilizers, equipment and production practices. This created a huge increase in farm productivity, which lowered the price of agricultural products significantly.
Productivity improvements continued for years more. Today 2 percent of Americans produce more food than the country can consume.
When farm incomes fell, demand declined for goods and services produced in the cities. Farmers borrowed heavily to maintain living standards and to keep producing. Bankers never expected agricultural prices to decline the way they did, so they extended more loans to farmers than were prudent. Farmers couldn’t pay what they owed, so banks started to fail.
Stiglitz says that government spending during the World War II “completed a necessary structural transformation, moving America, and especially the South, decisively from agriculture to manufacturing.” The GI Bill that provided educational aide to servicemen “ensured that returning veterans would be equipped to thrive in a modern industrial society.”
There has clearly been a structural change since World War II. A third of the workforce was in manufacturing 60 years ago. It is less than 10 percent today. Even so, the United States still produces about 23 percent of the manufactured goods in the world — China produces about 25 percent — because the American workforce is so much more productive than it once was. Stiglitz said that most of the manufacturing jobs lost in the 1990s were lost to productivity, not globalization.
New Mexico has seen this firsthand. Intel once employed about 6,500 people here. Now it employs about 3,500, mostly because of productivity improvements in chip manufacturing.
Most economists say the economy has undergone a structural change away from manufacturing to services, a term that covers everything from landscaping to financial planning.
A lot of economists and business people are worried that the move to services could be costing the nation its middle class. The Bureau of Labor Statistics says the five fastest growing job categories between now and 2018 are expected to be registered nurse, home health aide, customer service representative, food preparation worker and personal home care aide. These are all services, all jobs that are difficult to send offshore, and all areas where productivity improvements are very slow to appear.
You can’t sustain a middle class if everyone is a food preparer or home health aide.
At the same time, there is an amazing number of vacancies for skilled labor, which suggests to some economists that the nation’s problem is a mismatch in the skills workers have and the skills businesses need.
A survey by Deloitte and the National Association of Manufacturers found that American manufacturers have 600,000 unfilled positions because of a lack of qualified workers. The number of unfilled positions in the economy has risen 35 percent since June 2009. A Kauffman Foundation survey of fast-growing, privately held companies says 40 percent are seeing their growth stifled by an inability to find qualified workers. Only 13 percent say they are held back by lack of demand.
There is clear evidence Americans are losing the global skills race. American 15-year-olds rank 25th among the 34 member nations of the Organization for Economic Cooperation and Development in mathematics and 17th in science.
A Federal Reserve Bank of San Francisco study does question if a skills gap is behind the vacancy numbers. It found that the vacancies occur in skilled and unskilled areas alike and suggests the vacancies exist because employers are in no hurry to fill them, given the uncertainty in the global economy.
The Financial Times worries that the American jobs-creation engine is broken. From the mid-1980s to the mid-2000s, from 450,000 to 550,000 businesses with at least one employee were created in the United States each year. In 2009 the number was 400,000. The number of self-employed people who incorporated their businesses was 5.06 million in November, down from 5.37 million in November 2009. The peak year for business startups was 2006, a full year before the recession began, which indicates something was going wrong before things got really bad.
What that thing might be is still not understood. The truth is, we don’t fully understand why businesses hire and fire people.
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