Economic Force: Labor Shock

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Commuters on their way to work in Bangalore’s Electronic City

Bangalore, India, April 2009: Everyday Hosur Road feeds thousands of workers into Bangalore’s Hi-Tech Electronic City. Beside the roadway the ‘music of the streets’ is almost deafening; the drone of a 2-stroke 3 wheeled taxis is punctuated by incessant horn-beeping as workers pour into the city. It has an almost  pleasant quality, it’s evocative of an India that combines the aggressive desire for modern growth and international stature with a people who have learned to live with whatever life deals them. It is a study in contrasts, magical and a little bizarre, where high-technology and poverty drive alongside one another on the way to work.

Phoenix, Arizona, U.S.A. April, 2009: Back in Phoenix, Arizona, we see a different picture; among the palm trees on the west side of town,  the local strip malls surrounding one of the once-busy avionics engineering plants display ‘For Lease’ signs as does the once-busy avionics plant itself. The plant’s parking lot, once full of SUV’s and shiny new Honda Accords owned by legions of engineers, now sits empty. This plant location closed a couple of years ago, after many of its functions were moved to facilities in Bangalore, the Czech Republic and elsewhere. These high-tech jobs helped fuel Phoenix’s meteoric real estate appreciation in the bubble years, but recent events have been more unkind. Phoenix and Bangalore are poster children for this economic force we’re calling ‘Labor Shock’. This shock is happening because millions of new workers are arriving onto the world labor market, changing the relationship between supply and demand of labor, and drastically changing the societies on each side of that equation. Population, education, free flow of information, goods, and capital have all combined to intensify and accelerate the effects of the leveling of wages rates around the world.

The Economic Crisis Was Caused by Reduced Labor Income

This article argues that the bursting credit bubble is not the core reason for the advanced economies’ sudden reduction in spending. The credit bubble delayed that reduction, but can no longer prevent it. Rather, we assert that 1) the advanced economies are experiencing labor shock as they fail to adequately adjust to the changes in labor supply and demand, 2) that this shock is causing a severe wage income reduction in the developed economies, and 3) that the result of reduced income has been reduced demand from the West that is not being taken up in emerging markets, and therefore 4) that the reduction in developed economy labor income precipitated the credit collapse and is the fundamental cause of the current severe recession.

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Global I.T. industry wages and supply 2006 – 2010 according to IBM Global Services Division

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Global labor supply from export-oriented economies skyrocketed from 1980 – 2005

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Shipping volume doubled in twenty years. Imagine what the information flow and financial transaction flow numbers look like!

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In just twenty years, automation halved the number of workers required to manufacture a product in the U.S.

The Growth of Cheap Labor

Over the past few decades, the emerging economies have been furiously developing their labor forces in order to participate competitively in the world economy. Their efforts have paid off.  The chart to the right (produced by IBM’s Global I.T. Services division in 2006) shows the enormous increase in I.T. workers in India and China and the huge disparity in wages between their wages and those of workers in the developed economies.  To get a better picture of how effectively the emerging nations have targeted their labor development efforts, see the graph (supplied by the International Monetary Fund) that shows the growth of the labor supply that’s weighted (directed) toward exports. These emerging economies have done a magnificent job of aiming their strategic advantage (low labor cost) directly at the industries and labor categories in the advanced world which offer the greatest export earnings potential.

All that was needed was to increase the logistical capacity between the emerging and advanced economies, and the global income would come pouring in. The graph to the right, showing the doubling of sea-borne trade over the past twenty years, gives an index of how much the trade flows have increased.

The New Workforce is Highly Skilled

The skill level of the LDC worker has been growing very rapidly. In Bangalore, the engineers we visited are experts in their field. They run their software development organization at CMM Level 5, which is “world-class” by the standards of the Software Engineering Institute. These engineers are critical thinkers, challenging every assertion and filtering it through their knowledge and expertise. India has long had sophisticated defense and infrastructure capabilities, easily seen in such impressive facilities as the Indian Ministry of Information Technology building in Electronic City, which seems to sport more communications antennas than the Pentagon. India’s skill sets have not just come from free flow of information from the west.  Considering their high skill level, the cost of labor here in India and from the other LDCs is a bargain. No wonder Western companies are flocking here to set up their software development operations.

Labor Shock: Not Only a Result of Increased Supply

Technology trends are also contributing significantly to the labor shock. Take a look at the Manufacturing Output per Labor Hour chart to the right. This chart shows that it takes only half as much labor to manufacture something in the United States as it did just twenty years ago. Half as many people! And that very same advanced manufacturing technology is being exported to China and the rest of the LDCs as fast as possible. What does that mean for future labor-demand growth? Technology is moving us toward the negation of the need for human labor across all industries and locations. More and more products and services can be generated without any increase in labor.

Enter the Platform Enterprise

In leveraging globalization, technology has also changed the structure and function of organizations. We now have an entirely new breed of world-wide economic actor: the “platform enterprise”. The Platform Enterprise is designed to leverage comparative advantage, to perform design, development, and manufacturing in the locale that’s best suited to deliver maximum value for each function across the entire supply chain from raw materials to finished product. A typical product development cycle might have the design and management team in one country, with engineering resources in another, lower cost location. Data can be shared worldwide, 24-7. When it comes time to manufacture, corporations today have raw resources such as steel, copper, or silicon wafers shipped from Africa or S. America to another part of the world to be molded, cut, or stamped. Foundries in Taiwan turn out chips that go into electronics built in Korea, Europe, the US, or anywhere else. The finished products are made available worldwide. The new platform enterprise exists to maximize their profits by arbitraging between global sources of material and labor. These platform companies accelerate the rate of labor shock by maximizing the speed and efficiency of flow between the global input suppliers.

Capitalism Responds To Globalization

Electronic City covers a vast 10-mile-square swath of Bangalore. Visitors are directed through the bewildering maze of streets by placards that list countless Indian firms and multinational giants.  WIPRO, for example, is one of India’s I.T. leaders. Passing its huge complex one can see the firm’s private fleet of busses which daily brings in workers. Electronic City has a 75,000 strong workforce that’s transformed itself into a world-class technology powerhouse. In the past decade, the IT and engineering skills concentrated here have become a part of a trend, whereby labor cost is a driving force in structuring businesses for maximum profitability. Simply put, if a region offers a competitive advantage, there’s a platform enterprise that will market that advantage to the rest of the world.

The realities of business in the 21st century have made this inevitable. When a business can reduce cost and increase margin, shareholders approve as profits increase. Investors allocate their capital where it can generate the highest returns. Today’s market trading technology and a hyperactive investment climate demands that capital allocations follow short-term results, and are not influenced by the effects of these investments upon the welfare of the workers in any particular region.

Labor Incomes Fall,  Advanced Economies Contract

So the bottom line rules today’s global markets, and as the biggest expense for most companies is labor, the labor pool bears the brunt of cost cutting. Just because cheaper labor or the automated platform enterprise is available does not mean businesses have to use it. Businesses must make the choice to use this potential. However, in the business environment we have experienced the past few years, many have been forced to use this potential to stay afloat, and naturally, have responded with a vengeance. The increase in global trade patterns shows the extent to which non-raw materials have comprised an increasing percentage of trade. We have shifted to the platform enterprise, but the shift has had huge unintended consequences.

The term platform enterprise may excite Wall Street with dreams of ever-greater profits, but back in Phoenix, it has meant something completely different. Engineering jobs began to move offshore in the city’s avionics plants around the late 1990s. At first, the trend helped companies meet a constant demand for engineers. A few Indian engineers even began showing up in Phoenix from Bangalore, courtesy of H1B visas. Technical information flowed both ways. But gradually, as the aviation industry peaked, and times changed. Hiring freezes were put in place. New cost targets we established for software development which practically dictated that manpower could only be applied from offshore to stay within budget.  Rates dropped in the local contract engineering community. Several rounds of layoffs in the past few years predated the current economic crisis. Now, as the economic storm has arrived in full force, the winds in Phoenix have been among the most severe. Hundreds if not thousands of qualified aviation engineers in the area now look for work alongside everyone else. A 10% across-the-board pay cut was recently announced at one company, and all contract engineers were let go on the same day. The collapse of the real estate bubble in Phoenix has been extreme, so that Phoenix leads the nation in home price depreciation and foreclosures. The effect of the Labor shock is stark and undeniable.

The Adjustment Process

The labor shift has been evident for over a decade now.  It’s clear that the shift is good for Bangalore, but it’s hurting the people of Phoenix. Let’s take a look at what happens when a job is moved from an advanced to an emerging economy. The advanced economy must create not just a new job, but a new industry. If it makes sense to move one I.T. job to Bangalore, why not a million jobs? And that’s just what happens: a whole industry gets moved.

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Jobs were moved from manufacturing to credit-bubble industries like retail, home construction and hospitality. Look at the anemic job growth in I.T. – the sector that was supposed to drive job formation for decades. Not!

Let’s take a look at how the U.S. coped with the loss of manufacturing and then I.T. jobs over the past decade. The table to the right shows the job losses in manufacturing, the anemic job growth in I.T., and the moderate job growth in health care, state and local government, home construction, finance and real estate, the hospitality industry, and retail. The only bright spot was the modest increase in technical service jobs. Health care is arguably consumption, state and local governments are consumption, and the finance, real estate, home construction, hospitality, and retail industries are substantially dependent upon credit, which has crashed. Because labor income is falling, consumption across the board is, and will continue to fall. The advanced economies have not generated new, defensible, wealth-producing industries at the same pace that their mainstays are moving to lower-input-cost regions of the world.

Won’t the Emerging Economies Make Up the Demand?

So as the advanced societies struggle to adapt, what of the LDCs who are gaining the jobs?  Won’t their consumption increase to offset the demand drop in advanced economies?  Economists, almost to a man, pin their hopes on increasing demand from LDCs.  Look to the east, we are told, for they will lead us out of the downturn.  This may happen, but it will not happen fast.  To answer why, we can again return to the streets of Bangalore.

We discussed the challenges facing India today with an engineering manager for an avionics outsource company. He manages several dozen employees, the equivalent of a senior manager in a US company.  He is proud of his Maruti hatchback, a small subcompact equivalent to a Chevrolet Aveo.  Most of his engineers ride scooters and motorcycles, as they are much more affordable and bettter suited to commuting than cars.  Average Indians (as opposed to Mumbai’s jet set as depicted in ‘Slumdog Millionaire’) are not prone to western style debt levels, so will consume only what they can afford.  And this is much less than their advanced-economy counterparts.

Another factor limiting India’s consumption is the infrastructure.  In many instances, the streets are relics of the distant past, with few signals, dirt patches, potholes and a wide array of obstacles such as pedestrians, bicycles, vegetable carts, and of course cows. India has the desire to put more automobiles on its roads, but the reality is they will struggle to do this.  Another limiting factor is energy. Rolling blackouts plague Bangalore, including Electronic City, its economic flagship.   India has nowhere near the power generation capacity required for its vast population.  India simply can’t consume anywhere near the pace of an advanced economy; the infrastructure can’t deliver the necessary inputs. It’s going to be several decades before the developing economies can supply enough demand to compensate for the falling demand from the West.

Meeting the Challenge

The falling incomes in the advanced economies that result from Labor Shock pose serious challenges.  While supply and demand imbalances have existed before, the scale and rapidity of the phenomena is daunting, and may well be unprecedented. Never before has it been possible for man’s labor to be so mobile and so sensitive to global wage and cost structures.  The inevitable result of this would appear to be extreme deflationary pressure on wages, with severe ripple effects across the advanced economies, and coupling effects into the developing economies.

At some point in the future, global labor prices will reach near-parity. But the process of equalization is going to be painful. The question in many people’s minds is no longer “what’s happening”. Many of us have rejected the idea that turning on the credit spigot is the answer. We’re looking at incomes, specifically incomes from labor, and alternatives to labor income for those that made their living selling labor into this increasingly globalized market.

Alternative strategies for workers and affected businesses are not only possible, they are probable and are needed now. Look at what the emerging economies have accomplished in just the past twenty years. Why can’t the advanced economies develop and promulgate new industries, just as the emerging economies did?

There is certainly a big difference between moving some jobs between locales and creating a brand new industry. But that is the task that confronts the advanced economies: to create new industries faster than they’re being lost to wage arbitrage and automation. So far, we’re losing the race, and that is the fundamental reason that we’re in a recession.

Change From the Bottom

It is highly unlikely that the innovation and entrepreneurship that creates industries can come top-down. This is why Washington and Wall Street, and the investor-class in general can’t solve what ails the advanced economies. At RealEconomy.Org, we think the solution will come from the bottom up, and will take the form of massive peer-to-peer  collaboration directed toward business formation and entrepreneurship.

Next Up

Our next article will continue with the theme of identifying the fundamental forces  that are driving our economy. Labor shock is one such force, and it’s a very powerful one, but it’s by no means the only one. The BrainTrust at RealEconomy.Org collaboratively writes these articles, and we are actively recruiting advanced thinkers, entrepreneurs, and other aware and active people to help one another better understand the economic environment we’re in, and the means we’ll use to cope with it. We welcome your participation.


Originally published at the RealEconomy.Org blog and reproduced here with the author’s permission.

49 Responses to "Economic Force: Labor Shock"

  1. MM CA   May 11, 2009 at 6:18 pm

    Great Article, well thought out, good comparisons… it Tells of what happened, what went wrong and why. it shows the problems for the Developing countries moving forward… but it does’nt seemt to address the US labor market, except in the terms of how the oversees labor market affects our Jobs. Need to read it again….I’ve wracked my head on where Good paying US JOBS will come from and it shard to see it. The one good paying industry we have left whcih is health care is about to go on a 10 years cost cutting/restting hatchet job. no longer will RN’s make 100K plus i believe as an example. So take away health care and what else is there… Green Energy type jobs/industry- Big Oil wants no part of that anytime soon in the next 10 years… so what is left 15.00 an hour service jobs… maybe some 75k Finanical jobs, some 60k manufacturing jobs… We have big problems figuring out where good paying jobs will come from….

    • Anonymous   May 13, 2009 at 8:38 am

      why do you think RNs should make 100K plus when everybody else makes in the range of 30K?what do you mean where good jobs will come from. aren’t you being greedy trying to land a job more than 60K?you can’t close your eyes, and ignore rest of the world which is sharper than you but survives at less than 1/10 of your salary. You better look at them as your competition. And if you are wondering how it happened. you need to look back at past 50 years how Dollar has been forced as THE currency of world and everybody else has been investing in it.America needs to lose it’s debt and realize it’s not a wonderland, and behave like everybody else.

  2. Anonymous   May 11, 2009 at 6:55 pm

    Not very useful, I’ve figured out all that by myself long ago. US of A is overall much poorer than it thinks, I doubt it’s even as rich as Brazil.

    • OuterBeltway   May 11, 2009 at 7:54 pm

      I’m delighted to hear you’ve got it all figured out. So can you tell us:a. What are the industries that the advanced economies can use to provide good-paying jobs, and that are defensible – e.g. won’t be outsourced, and can produce products that can be traded for the things these advanced economies import, such as oil and key minerals, and most consumer manufactures?b. What steps would you recommend that the average household take in order to transition their income source from an industry or job that is vulnerable to “Labor Shock” to one that isn’t?I’m eager to read your response.

    • MM CA   May 11, 2009 at 8:24 pm

      So whats your solution? All ideas welcome… it’s all in the numbers…

      • Karl Marx   May 12, 2009 at 2:39 am

        The diagnosis is the easy part, re my comments on the RGE blogs after NR’s article on the Schmess tests and after the first Braintrust article (Baby Boomers), under various aliases(Ishmael or Ismael, MC Ripper, Ex-terminator, Bakunin, JM Keynes). Having made it a good while ago, I’ve been thinking about the prescription eversince and I do have some radical suggestions in mind, but putting them in words is a formidable task. However, even the prescription is a piece of cake compared to the implementation, which would require a political and institutionnal change of tsunami pith and moment.

      • Karl Marx   May 12, 2009 at 2:58 am

        PS: numbers are a) unreliable, b) misleading c) irrelevant d) cooked and above all an impediment to creative and fuzzy thinking. Economics has replaced (Political) Economy, much for the worse, leading us to the present condition.

  3. ex VRWC   May 11, 2009 at 7:24 pm

    @anonIf you figured it out, great! Seems many don’t get it, however. You are in the minority. You should have been a partt of the [email protected] CAI wish we had better answers for US and advanced economy jobs. That’s where the bottom up strategy will have to play. If there were pat answers we would be effecting them already.

  4. MM CA   May 11, 2009 at 8:23 pm

    let me add this- somthing i wrote the other day… sort of like a “NEW DEAL”NO JOBS, NO JOBS, NO JOBS- so whats the fix? here is one:Ask yourself how much have we injected into saving, fixing , bailing out Banks, Wall Street, Auto’s, Fannie, Freddie, China? by most estimates it is TRILLIONS… is it 4 trillion, 6 trillion, 11 trillion – probaby something in those numbers. Now what have they all done with that money? Most of the receipients of the “Trillions” have themselves made massive job cuts and layoffs. That alone tells me they dont feel they will need the workers moving forward to service the economy because they also see no JOB Creation.So back to the fix:There are probably 50 consistent posters on this site and another 50 or so who all contribute. Everyone writes well, thinks intelligently, comes across as caring for the country and its people, seems smart, seem like they have business backrounds… another words, Good people. So take those 100, Make Roubini the CEO, start a company and ask Obama for 1 Trillion in hard cash to run a buisiness that actaully creates jobs. here is what 1 trillion can create:My Plan Annual Cost Employees Salary Bene$1,000,000,000,000 $70,000 14,285714 $50,000 $20,000$2,000,000,000,000 $70,000 28,571429 $50,000 $20,000My Plan Annual Cost Employees Salary Bene$1,000,000,000,000 $84,000 11,904762 $60,000 $24,000$2,000,000,000,000 $84,000 23,809524 $60,000 $24,000Now we have just employeed over 14 million at 50K annual salaries, with full health, 20 paid vacations days, 401k/pension contributions – another full benefits. Cost 1 Trillion. I threw in scenario’s for what 2 trillion would do and also if everyone made 60K annually. Most fortune 500’s average about 30-40% in fringe costs. samller companies less. so i took the higest rate of 40%. make sure everyone is covered and not on the cheap. So everyone is already poking holes… What about overhead costs, facility costs etc…it all depends on what these folks do. right now they are employed doing nothing… so there are no fixed costs other than small administration costs for payroll and benfits.How about a Green energy company prodcuing solar, wind, alternative products for commericial and residential consumers throughout the country. It includes installing and maintaing these products… I would declare a national solar energy mission — solar energy including waves, wind, photovoltaics, solar thermal and passive solar architecture. Open up the whole frontier and make that the priority as we convert our country to renewables. Get Boone Pikens to run it and have Roubini or(Braintrust)manage the $$$$ Rememebr everyone makes the same salary for now.Now figure that income taxes on this company and all the workers could effectivley return 150 Billion – 250 billion back to the gov’t annually. But the first three years of this effort, those taxes that would be paid have to be used for the overheads required to run a company this big.. for the company buy the materials needed. Revenue generation/prices for the products and serivces would be made afforadable to all.to sum it up- give me, give us 1-2 trillion and we could create anyhwere from 11 million to 28 million jobs depeneding on the amount received…But no instead, we have chosen to go down the roads of portecting and funneling Trillions the PTB that could care less about JOBS and JOB creation.The above is just to point out how the money should be used and sure anyone could poke holes in it, but its rough and high level. But i am convinced i could find 100 people from this site that could make soemthing similar work.

    • OuterBeltway   May 12, 2009 at 7:31 am

      MM CA- when I first read this, I thought “yeah, nice story, but it’ll never happen”. And it won’t, but I really like your illustration, because what I got out of it was “Even if you just handed out that money to workers, you’d do more good with it than throwing it at the bankers”.Now, if that money was invested into businesses, businesses what could actually survive in tomorrow’s economy…then you’re not spending $1T so people can eat for a year. You’re spending $1T so they can prosper for decades.Bottom up means putting the money into the hands of the creators – the innovators and effort-makers and sweat-equity people that actually create new industries. The David Packards and Eli Whitneys and Muhammad Yunus (Grameen Bank, Microfinance) of the world…who are currently starved of resources.MM CA: in the next edition of your solution, would you please work in a section about resource allocation mechanisms?

      • MM CA   May 12, 2009 at 12:32 pm

        thats all I do in my current position, resource allocation, productivity improvements, etc… ill say one thing, being in a fortune 50 we have hammered away at increasedproductivity, but have also hammered away at job reductions and cost reductions… this has been going on for almsot 3 years and has only intensified the past 8 months. Avg wages for our techincal people have been driven down by 25% duirng this time… So all these mechanisms are “viewed” as good for profits by the Corp, but to me they are destructive of our work force for the long term and also the economy. And unfortunatley i suspect all Companies have been and are in this mode..you are correct in the illustration of my view of all the Trillions thrown at the banks.i’ll noodle on your question in more depth…

  5. GSM   May 12, 2009 at 2:15 am

    I commend the Brains Trust team for this undertaking. And wish you the very best of luck.Your post above explains pretty clearly to me how , while high paid jobs migrated overseas, the US grew it’s economy through consumer indebtedness rather than savings and real wealth creation from investment and production. The US economy grew through consumption. Unsustainable once debt creation imploded.In NR’s “schmess” blog post, I vented my thoughts on how vastly impaired (to put it politely) collateral has now effectively obstructed the US consumer’s ability to borrow. This, in an enormous economy by far the world’s biggest, reliant for it’s growth on expanding consumer credit/debt.The Banks were not content with just the profits from a lending framework. They then invented a new universe of revenues in the fictitious capital from derivatives, largely held off balance sheet. With some help from legislators and a compliant Central Bank.The underlying value of US Bank assets have collapsed , along with their derivative “assets”- regardless of how FAS157 allows the Banks to ‘value” them. They are gone. Bank balance sheets are a wasteland.The message from the Stress Test is clear – the upright middle finger and “whatever it takes”. I’m hearing it. It sounds desperate to me.It’s hard to understate the precarious nature of the US economy right now, given it’s “one trick pony” formula for growth (expanding US household credit ).Where to from here for the US? Gov’t backstopping the US economy is an unsustainable condition. However, looking to the US Administration, I don’t see yet emerging actions of substance that could foster growth that could potentially supplant the wealth and collateral so far destroyed by the GFC. And that destruction has still yet to run it’s course. Lot’s of rhetoric yes- but no specifics… No Grand Plan. No policies that could change the current course for the US economy and US businesses. No meaningful incentives to assist restructuring or promotion of technological imperatives. What I see are efforts at stalling an immediate financial meltdown and then (re) constructing the old illusion : – “if we can get the credit flowing again, all will be just fine”. Back to the future, Obama. My concerns are ; is that capitulation? In reality, are there really no other practical economic models for the US to aspire to? Or, if there are, are they so economically tough, unpalatable and complex that they could only be successfully deployed beyond a Presidential term (or 2)? It would seem so from what I am seeing.So what then? Well, they roll the dice. And hope that all ends sufficiently well that the façade they are busily repairing fools enough people to prevent them doing things down the road like; runs on banks, tax strikes, workers rioting, social unrest, breakdowns in services – a total breakdown of national confidence. Another Depression.That is the game in play right now I believe.WE are the game, the only game that matters for now.Therefore, monitoring of reliable data points is more crucial than ever before. Reliable data, reliable analysis of the data , correct interpretation of data (and news) – these are the honest signposts to what our future holds. NOT the obscene spin, blurb and outright BS fed to us by the MSM and our Govts. These crucial data points, as I observe in the context of history and the current economic condition seem to be relentlessly removing the potential for favorable outcomes. Leaving Poor outcomes. Alarming outcomes.So my humble message to all is; be on your toes folks. Be well informed, be prepared and be nimble. All is NOT what it seems. Sometime very soon this mirage of green shoots are going to have to deliver real growth and not just the promise of it. The clock is ticking. If real growth is a mirage, it will expose the limitations of “All the King’s horsemen and all the King’s men……….”.And then, there will be a lot of very unhappy and desperate campers to deal with.

    • Free Tibet   May 12, 2009 at 4:08 am

      I saw your schmess post about 3 days after you posted it. Thought it too late to comment.No grand plan: so it seems. We’re trying to prepare ourselves without waiting for solutions to be given to us from those who really don’t have incentives to do that. In the end we depend on ourselves.I’ve written a lot that dovetails with what you’ve said. It may find its way here someday.

    • Free Tibet   May 12, 2009 at 4:16 am

      More on that. Monitoring the data points isn’t enough. I don’t think we can see where this leads. But it’s pretty clear it isn’t going to end well. That’s enough to know to be sure that we have to create our own solutions. Each of us might do that independently. But we will each be more vulnerable than if we were to collaborate effectively.

    • OuterBeltway   May 12, 2009 at 6:37 am

      GSM: We are definitely taking heed, and preparing. Not doing the rage-ventilating anymore – we did that for a year, and things just got worse anyway.This is why we focus on bottom-up. At the bottom, in our households, in our neighborhoods, among our friends and within our small businesses, we have power. We make the decisions.The next thing we did, just as you suggest, was to get a facts-based worldview. There’s a lot of hype and dis-information present in almost every venue that exists, and it’s tough to take action when all roads look the same. Hence the “Top-10 Forces” list, and this is why we ask, beg, cajole and otherwise obtain feedback from every smart person we can find, especially the ones that disagree with us. We do our best to present, but we make an even greater effort to listen, and learn from others.On the theme of “facts-based worldview”, it bears repeating that all advanced economies (can’t think of an exception, really) are facing the same problem: lower-priced labor, free flow of trade, information and money, and automation are exerting a huge downward force on advanced-economy labor income.We have main choicesa. Adapt to less incomeb. Bring the developing world’s income UP toward oursc. Find industries that have defensible, sustainable competitive advantages (e.g. cannot be exported away like I.T. and manufacturing)The problem is big and thorny, and the timeline is now very short because the debt-crutch broke.So, we must adapt, and do it now.You may ask yourself: what capacity, what capability exists that could possibly be equal to a task of that complexity and size? This is the question posed above in the post by Karl Marx.Well, Karl, now you know why we like the concept of massive collaboration. If you get enough people, enough brainpower, and you learn to effectively concentrate that power – that is, how to collaborate – you can get things done. Think of a magnifying glass, a little sunlight, and piece of paper.GSM, you and several others on this board have the brainpower, and a magnifying glass is now in existence. When do you think would be a good time for these smart humans to pick up the magnifying glass…look around for something to experiment upon …?2 * 2 = 44 * 4 = 1616 * 16 = 256256 * 256 = 65536It doesn’t take too many expansion cycles to become a powerful force. The main thing is get started.

  6. Anonymous   May 12, 2009 at 3:54 am

    World population is unsustainable – by virtue of constrainst imposed by a limited supply of land, water, renewable energy, habitat for the natural world, etc.Couple this with labor shock and you have a very, very unpleasant future…barring miracles.It’s nice to see an article like this, which indicates mainstream economists are finally willing to look at reality. But it’s only a small step.

    • OuterBeltway   May 12, 2009 at 7:15 am

      While we (the BrainTrust) are not professional economists, it must be pointed out that the folks at RGE have been very supportive of our little project, just as they have been supportive of a great number of very diverse economic perspectives.Thanks to RGE for the platform. Thanks to the thinkers here for the push-back and debate.And yes, we are facing an unpleasant future if we don’t adapt. That’s expressing it on the negative – the “consequences”.But my dread-n-fear cup runneth over, and I’m ready to transcend.So let’s put in on the other dimension. What about this colossal opportunity? When, in the past 100 years, has it been more possible to chart out a whole new economic design? An economy based on extraction and unbalanced consumption finally caves in. Is anyone truly surprised? No. Are you ready to design Economy 2.0? Grumbling won’t get it – that’s the sixties move, and it failed. We need to create.At this moment in history, we have the best set of tools humanity has ever possessed. Education, communication, compute power, mechanical power, abundant energy, plenty of food, and an eon of accumulated technology – speech, writing, tools, government – you name it, it’s here.I say let’s marshal and progress. Get the smart people together, devise the latest edition of the tools we need, and have some good times on our watch.Sail this ship, baby! Put her on her tail and jam the throttle all the way down!

  7. ex VRWC   May 12, 2009 at 4:24 am

    While we are not mainstream economists they have granted us this platform. As you say its a step. But we write to point to the need for action. To see clearly is just a start, and this article represents a collective effort to build that clear picture. We intend much more than just that.Mark Snyder

  8. Karl Marx   May 12, 2009 at 5:48 am

    Just a few anectodical points:Health care spending is 17% of GDP in the US and some 8-12% in UE countries and Japan. The dollar amount is almost twice higher in the US than in France, and as far as I remember health indicators are better in France, plus everybody is covered by the State run social security, while premiums are a constant percentage of incomes (with a ceiling) whatever the number of dependants, and basic dental care and prescription eyeglasses are included; there’s a deductible for ambulatory care, but it’s vaiwed for the long term jobless who are also exempted from contribution, and retirees pay only a fraction of the regular premium. How comes? Medical schools are free but apply a numerus clausus, doctors don’t have to pay astronomical professionnal liability insurance and repay student loans, and governement has a very strong bargaining position when it comes to fees setting and drug pricing. What? Communism in America? Don’t even think about it.Don’t misunderstand me: I’m no great fan of France, but international comparisons can be instructive. Just shows that you can’t have millionaire doctors and outrageous bills at the same time as universal and affordable medical coverage.Not to mention lawyers

    • Guest   May 12, 2009 at 8:03 am

      When you think about it, there is no real reason for doctors to be paid outrageous salaries. I suppose it is the number of available slots in medical schools that limit the supply, thereby artificially inflating remuneration. But really, it is no more academically difficult to become a medical doctor than it is to become a scientist or engineer. Most of the medical doctors I have encountered are rather average.

      • Karl Marx   May 12, 2009 at 10:44 am

        As a general rule, developped countries that have opted for “private” (between “” because actually there’s a sizeable tax subsidy in many cases) health insurance, assumed to be more efficient than the state-run variety thanks to healthy competition, have much higher expenses for hardly better care than the public variety, and much richer doctors. Just compare Switzerland (private) and Japan. That has a lot to do with bargaining power, since state run systems are monopsony buyers of medical services and prescription drugs. In Switzerland, arguably one of the wealthiest countries on earth, neck to neck with Lombardy if it were a country instead of an italian province, insurance is private (mutualist) but compulsory, and the yearly rounds of premium increases are a national psychodrama. And hundreds of thousands families just can’t afford it, for a couple with two children the bare minimum is 700$/month, with 2500 $/year deductible. Doctors are doing fine.

  9. OuterBeltway   May 12, 2009 at 6:59 am

    One of the things I recently wondered was whether the health-care industry was just another version of the bubble-induced finance-and-real-estate economy – a place to “park” a lot of workers because there were no globally-viable industries extant to absorb those workers forced out of manufacturing and I.T.I’m not for a second suggesting some grand conspiracy. I truly don’t think TPTB (whoever they are) are smart enough to plan something like this. I just see it as a sort of a physical phenomenon, like water flowing downhill.Take a look at that table in the article, where it shows the top job-growth industries. Health care, state and local government, and then bubble, bubble, bubble, and bubble. That’s our jobs lineup guys: consumption, consumption, consumption, consumption and …. more consumption.The singular bright spot, and I’m eager to focus the reader’s attention upon it, is the “Professional, scientific and technical services” line. Ahhhh, like a cold glass of water in a parched desert.And in that line I see our salvation. To me, that line shouts “THINK!!”.And being the dutiful little turtle that I am, I obey.Someone above asked “What’s your solution?”My solution is to think…to understand what the economy of tomorrow is going to look like, and then to design business models that have a chance of succeeding in that tomorrow, and then get together with my friends and business associates, and implement those new business models. So, the solution is to think and cooperate.The process is fairly simple, and the machinery the BrainTrust is building makes it much easier and a lot more fun to do. Would you rather blog-and-grumble, or collaborate-and-build?Which sounds like more fun?

    • Anonymous   May 12, 2009 at 8:28 am

      It’s not either/or. Both are natural responses …and it’s worth noting that pep talks and inspirational horseshit are NOT creative thinking.I deliberately used the word “miracle” in my first post because that’s what we’ll need. A Cal Tech physicist (Daniel ?) pointed out that the technology to replace oil does not exist, not even close, and without it a population of more than 2 billion or so is unsustainable. We are running out fast and that only begins to describe the stress we’re putting on our environment.As the stresses become unbearable, war and violent social disintegration will become the only solutions. The Four Horsemen of the Apocalypse. We’ve been there before, many times, as a response to much less difficult problems.

      • OuterBeltway   May 12, 2009 at 9:02 am

        OK. Both are natural responses, and you’re correct, inspirational talk is not creative thinking.But enthusiasm beats fear every time in the creativity department. And our collaborative solution is very creative, and it engenders additional creativity.How much creativity does your Four Horsemen offer up?If you’re so advanced that words of encouragement seem condescending and banal, then surely you can come up with something besides war as our only response to stress?And for those readers that feel I’m talking down or using platitudes, I invite you to participate. Throw your solutions on the table for debate.It’s one thing to be a critic, it’s quite another indeed to create. Criticize the article – tell us where it’s deficient. Explain why massive collaboration can’t work, won’t work, isn’t up to the task. Pinpoint the deficiency, and propose a fix. Identify a completely different alternative.But now that we’ve established the creativity floor at “war is the only alternative”, let’s see if we can crank it up a notch next go-round.

        • Guest   May 12, 2009 at 11:18 am

          There’s nothing wrong with the article. Au contraire. But it offers no solutions and only begins to outline the problem.As for creativity, people like Einstein, Feynman, Pauling require no pep talk and no particular incentives. For those who do, there are people like Netflix’ founder Hastings. Plenty of them. The rewards they provide inspire people like Simon Funk to focus.The rest of the population – all 99.99 per cent of them? The best they can do is encourage the use of contraceptives, try to cut back consumption/demand – exactly the opposite of what economists are recommending – and hope their betters will come up with something before they become cannon fodder.But that’s only part of the strategy. If it alone is followed the irresponsible gain an insurmountable competitive advantage.The other part is preparation of, and willingness to use, overwhelming, brutal military force.

          • ex VRWC   May 12, 2009 at 11:33 am

            You want inspirational BS. I will give you inspirational BS. Contrast the ‘we all pulled together’ tripe from WW2 with the reality of that war. Millions dead worldwide. Generations lost. Rotting corpses on the beaches at Iwo Jima, Saipan, a thousand other nameless islands. Jews buried and burned. Millions wiped out by famine in Ukraine. On and on and on.No war is not the answer. The Four Horsemen do not provide salvation from economic gloom. What they provide is death, despair, destruction. To millions of men, women, children, animals. They take us toward the dark ages, not toward the future. Never forget that

          • Karl Marx   May 12, 2009 at 11:45 am

            The heart is a lonely hunter. Can you give me an example of outstanding creativity, be it science, philosophy, litterature, arts or invention, by committees. Just compare the Macintosh invented by a couple of hippies in the early 1980’s and the crummy ersatz Windows 98 cranked out by laborious teams of nerds who actually won an intellectual property suit arguing obvious plagiarism.It saddens me deeply to see a creative genius (Steve Jobs) make a late comeback as a marketing genius

  10. plongka10   May 12, 2009 at 11:32 am

    Having trawled the web for a number of years and visited sites ranging from the ethical to the cranky, I can’t help but believe that there are technological advances that HAVE been made that would, for example, replace the reliance on oil, but they are being suppressed by TPTB. I am reminded of such things as the “everlasting car tyre”, heralded in the Seventies, that never saw the light of day (IP bought up and not developed). This is an ongoing theme that I continue to bump into. How about the Hutchison Effect?I am extremely sceptical of talk of conspiracy, but I seem to keep going round in circles on this matter, which leads me to believe that there are new, exploitable technologies – it’s just not in the interests of the military-industrial-financial complex to allow them to see the light of day. There are just too many anecdotal reports of amazing new technological developments that fail to see the light of day. Now, it may be that these developments fail to deliver, but I can’t believe that ALL fail.Which leads me to the conclusion that suppression is going on. We, in the West, are going to have to get used to a reduction in our living standards.It may be argued that oBama is merely trying to cushion the fall in living standards, in order to avoid the potential for hostility on the streets – you can be assured that contingency plans are in place to deal with this in the short term. But that is where I see the West going – into peonage, unless there is a determined effort made not to play the game that TPTB want played. In that respect, I believe this is a good start in building a commuity to set a new framework. What that framework is – now thats the question. In the meantime, it is my belief that there should be a general withdrawal from playing the current game, in terms that have already been discussed. Get out of debt, cut up your credit card, get local, etc, etc.

  11. MM CA   May 12, 2009 at 12:39 pm

    @OB- make sure you post this link on future NR psot for a while so people can stay on this excellent work you have all done!

  12. MM CA   May 12, 2009 at 12:39 pm

    When is the next conference call?

  13. PhilT   May 12, 2009 at 6:22 pm

    Dear OuterBeltway and BrainTrust -I have read all of your posts to this point and congratulate you for making your Autumn vision Spring into reality, and thank you OB for requesting a response from me. I hope you find it worthwhile and forward looking.Let’s look around us at what is given :* Zombie Banks* Zombie Automotive manufacturing sector* Broken healthcare system that is a cancer on the remaining economyThe list goes on … but let’s keep it simple and stop here for the moment.Enter this excerpt from April 2009:

    “The President and the Congress have committed an unprecedented amount of money to reinventing how Americans move around the country,” said Walz, a member of the House Transportation committee. “This high speed rail system, much like the interstate highway system will be designed based around good data and smart economics. This is about creating jobs and fostering a good business environment in southern Minnesota, and I am thrilled that both the Winona and Rochester Chambers are here today, as well as labor members who represent working families.”

    Entire press release >WALZ, OBAMA ADMINISTRATION DISCUSS HIGH SPEED RAILAlso, a visit to WhiteHouse.gov has the Administration’s vision =>President Obama, Vice President Biden, Secretary LaHood Call for U.S. High-Speed Passenger Trains-Vision for a New Era in Rail Entails Clean, Energy-Efficient Option for Travelersimho, There is a tremendous struggle between abandoning old, defunct business models & govt. models that benefit only a few of us at the expense of the rest of us AND creating new, vital models that will benefit the most instead of just the few. The reasons for this struggle are many and they are multi-dimensional, BUT it is not apparent that anyone is actually asking and answering one question:How do we get from where are to where we need to be?I think that the Administration’s push for High Speed Rail is one of the only issues that forces this question and, of course, asking & answering the other foundation questions – those being:Exactly where are we now, and what do we want out of the future?If discussion is restricted to this High Speed Rail topic, then it has the potential to be manageable and finite as opposed to nebulous and infinite.When you , OuterBeltway, were brain storming on RGE blog about creating what has become the BrainTrust, I envisioned that the fruit of your energies would focus on a topic like this one, and using the tools of the time and leveraging the tremendous brain power that many of the contributors to RGE possess, could tackle a topic such as this high speed rail topic, find the strengths, the weaknesses, and sure it up in to a really viable component of a National Transportation strategy – that to this day neither the Administration nor Congress have asked for. You have done great work thus far, perhaps now is a time to fine-tune and focus…Respectfully yours,

    • ex VRWC   May 12, 2009 at 8:14 pm

      Hi Phil,I will answer for my part. Your call for understanding ‘Exactly where are we now?’ is one of the fundamental questions that have driven us along our course up to now. But the desire for focus is definitely there among the group. And not just on a macro level, even at a micro level. Like the question: “What will drive a successful business model for a restaurant in the economy we now face?”.The idea is we have teams dedicated to questions such as these, large and small. Our beneficiaries (users, customers) are both Average Joe (or Jane) and the aforementioned Winona and Rochester Chambers, and the Southern Minnesota Business Development folks and those labor members they mention. All need to have this vision of the economy, what is really going on with it, where it is going, how can they navigate it.So, fine-tune and focus? Absolutely. Discuss business models as they apply to a national high-speed rail project? Absolutely. Discuss how Average Joe can launch a business to operate with the development of high speed rail in Southern Minnesota? Absolutely. We don’t call it ‘massive’ collaboration for nothing. Is it a big vision? Absolutely. Is it needed? Absolutely.It is coming, just as you are calling for, along multiple vectors. These articles are just test runs of our collaboration that serve two purposes: to figure out how we collaborate and use the tools, and to figure out what we think the picture is that will guide our efforts. We cannot ask the economists to do it. We cannot ask the government to do it. We need to do it. There are brains to be tapped, and we are tapping them.Mark Snyder, aka ex VRWC

  14. Anonymous   May 13, 2009 at 2:41 pm

    I work for the Phoenix company that is described in the article. Let me tell you the reality of what you claim about Bangalore. It takes 3x as many persons to do the job of 1 US engineer, and of those 3, 2 are usually hierarchical managers. I am rarely allowed to talk with the developer. When I receive the product, I have to then ALWAYS (in 8 years…) fix it. I consider the English skills abysmal–and I myself am an immigrant from another country that does not speak English! As a woman, I see constant discrimination as well.There is no creativity or independent thought. I can tell a Western World student intern to do XYZ and 9.5 times out of 10, that person will go off and work it. For working with India, I have to provide so much in the way of requirements that it is not a cost savings. It’s like working with my toddler. “Go to the potty.” Then I have to tell the baby to wipe. And how to wipe. Whereas with my older kids, I just tell them to go.

    • ex VRWC   May 13, 2009 at 5:36 pm

      And I worked at that company as well. And I have worked with other situations that were completely the opposite. Definitely your mileage does vary with outsourcing. And what you say about creativity is true to some extent, but not universally so.But, I strongly caution that we should not make the mistake of underestimating the level of skill or education that will be brought to bear in these locales by these emerging market workers. And it will only trend more toward the levelling we describe. These people value education, we don’t so much anymore in advanced economies. Their kids are learning math and science (when they have enough wealth to access the education). Our’s aren’t. Your experience may have more to do with the culture of your company and how it approaches globalization and management of its labor force as it does the quality of the people involved.If our approach is ‘well, they will never be able to do it as well as we do here’ we will certainly find ourselves on the outside looking in someday. If our approach is ‘we better get aggressive to adapt to this change’, and assume the change is real and fundamental, we will benefit in the end regardless.

      • Guest   May 13, 2009 at 9:23 pm

        Why would you learn math or science when the jobs that use those skills are easily outsourced? Take engineering jobs, for example. It’s hard to become an engineer. The courses are academically rigorous and the work is demanding. But in the end, it’s a job that highly susceptible to the economic cycle and the work is readily outsourced to a lower cost country. So why bother? It’s a shame to say that, but it jibes with economic reality.I fully agree with what you have said about not underestimating the skill or educational levels of the workforce in emerging markets. Even as jobs were being off-shored, I heard (supposedly bright) people giving the “they’ll never be able to do it as well as here” argument and predicting that the jobs would have to be repatriated. Why? Are they dumber in emerging markets? I don’t think so.

        • OuterBeltway   May 15, 2009 at 9:27 am

          You pose a great question, Guest. The maintenance of Western incomes is going take some hard-nosed analysis and some cleverness…and I believe it’ll require a major step forward in collaboration skills. This is a multi-disciplinary problem, and it cuts all the way across economic and social strata. That’s bad news (requires people that aren’t used to cooperating to work well together) and it’s good news (the tools to do this kind of collaborating are right around the corner).Your post is a significant step forward. You’re facing the facts square-up. OK.Now it’s time to start generating potential solutions, and start a massive debate about which ones are going to work, and how to implement them. In a nut-shell, that’s what the BT is doing, and we invite everybody that’s got a stake in tomorrow’s economy to get involved.Remember: it’s not a zero-sum game. If the LDCs get a better life, that’s great. We WANT them to succeed.The task before the advanced economies is to design the business models that embody the next edition of modern economy, with all that entails. Sustainability, balanced income, appropriate resource allocation to those areas that deliver the maximum benefits to society, etc.Normal stuff. We just need to include a lot more people in the decision-making process this time around.

        • ex VRWC   May 15, 2009 at 1:12 pm

          It jibes with todays economic reality. Tomorrows? I am not so sure. I think we will find, by passing through the fire, that the way we have lost our abilities to engineer things is a very bad thing. We see this already. Just look at the big corporations’ attempts to create new, complex products. This is readily evident in, for instance, aviation. We are about to find out just how much we have slipped as we try to re-engineer health care. Or energy. Guess what, engineering a health care system or a smart energy grid requires people skilled in math and science, in logical thinking. And creative thinking.LDCs can build yesterday’s products and today’s products. Can they invent tomorrow’s products? We have yet to see. Do they have a better chance if they have math and science skills? Of course. Can we turn out business and finance people that will make that future happen? Well, those people are necessary, but they are only a part of the solution. Someone will have to design and build it for their to be any ‘it’ to build a business around.What acts in our favor? Good old ingenuity, entrepreneurship, and can-do attitude. It can overcome a lot of the disadvantages. But so long as we throw our treasure and our political capital at the status quo, hoping to somehow resurrect it, we will impede the future, not usher it in. This is why we champion bottom up change.

  15. Guest   May 15, 2009 at 6:38 am

    India needs strict population control overwise I have no sympathy for slum dogs – seems to be their agressive way of controlling the world. No more than 5 people per sq kilometer and only if they have an average wage of over 35,000 US dollars – that’s the way it should be for all countries. Thank god I live in Australia – Canada is ok too but too cold.

    • nik og jay   May 15, 2009 at 7:13 am

      Should the spare ones get exterminated?Thank god you live in Australia!

  16. Guest   May 15, 2009 at 9:04 pm

    Even if wages are lower in LDCs, usually productivity barely match it.Most of the problem comes fromn the monopsonic nature of the jobs markets where the parasitic managerial aristocracy confiscated the productivity due to the disequilibrium caused by the downward-sloping labor supply curve ( we must eat and so settle for some notion of living wage instead of our productivity). The solution is political. We need a counter-coup to the one perpetrated by the financial industry in the last forty years

  17. Guest   May 16, 2009 at 2:48 pm

    That’s much too narrow. My guesstimate is that parasitic activity accounts for at least one third of GDP in the US and mabe a little less in the UK, and at least 25% in most OECD countries, partly offset by the “gray” economy. The US have, per capita, the highest health care expenditures, number of homicides, penitentiary population, number of lawyers and tax accountants, military expenditures, “contribution” of financial services to GDP, law enforcement expenses, political campaign expenditures, and so on.

  18. Re-Belle   May 18, 2009 at 5:46 am

    The problem is not micro, but very macro indeed. It’s foremostly political, but I’m afraid the necessary reforms won’t ever happen through the ballot.

  19. PhilT   May 21, 2009 at 3:49 pm

    From On Point:

    The British know something about rise and fall. Their Edward Gibbon wrote The Decline and Fall of the Roman Empire. Their own empire came and went.Now, two big British historians and thinkers who live in the United States are thinking hard about the American future. Simon Schama says he’s in love with America, and sees the makings of potential renewal emerging right now. Niall Ferguson admires America too, and sees — even so — the makings of disaster around us.

    Listen to ==> Assessing the American Future from Thursday, May 21, 2009

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  21. Anonymous   June 27, 2009 at 8:22 am

    This article should give credit to the originator of this analysis.http://cynicuseconomicus.blogspot.com/2008/09/banking-crisis-what-is-really-going-on.html