More than two decades ago, the Nobel Prize-winning economist Wassily Leontief imagined a world where productivity was so high that machines would produce all physical goods. There would be just one manufacturing job: the human worker who flipped the switch. Leontief wondered, what would everyone else do for a living?
His answer was that the immense wealth generated by all that productivity would have to be redistributed so that other people would have useful employment providing services to complement all those physical goods. Otherwise, nobody could afford to buy the products.
Leontief's industrial dystopia has arrived a lot sooner than most economists forecast. There have been "automation" scares before. But in our own era there were adequate mechanisms of redistribution, so that increased productivity eventually produced other jobs at decent wages. As recently as the 1990s, rising productivity ended up producing rising employment and earnings.
Today, however, high productivity is blending with increased outsourcing so that job growth lags far behind gross domestic product growth. As Representative Barney Frank observed in a recent economic address, "We are at a point where the ability of the private sector in this country to create wealth is now outstripping its ability to create jobs." The reason? "A disproportionately large share of the increased wealth in this society is now going to the owners of capital," Frank explained.
Two paths are possible. We can just let the market allocate the fruits of all that productivity by leaving private wealth highly concentrated. The wealthy would then create personal service jobs by hiring legions of chauffeurs, caterers, nannies, housemaids, decorators, butlers, etc. In the retail sector, a few astronomically wealthy entrepreneurs would hire legions of low-wage sales clerks. This would soak up the unemployed, but rather in the manner of Upstairs-Downstairs England.
Alternatively, we could tax some of that private wealth and use social investment to create decent jobs that would serve a much broader range of human needs -- jobs in teaching, health care, child development, and other high-quality public services. Relatedly, we could use the power of government regulation and trade unionism to ensure that private service-sector jobs -- at hotels, nursing homes, Wal-Marts, fast-food joints, and so on -- pay a living wage. To the extent that postwar America avoided the social fate of late Victorian England, it was because we used government to tax, spend, invest, redistribute, and regulate. Public investment can also keep the economy at full employment, which in turn strengthens the bargaining power of all workers.
The second front is trade policy, which is interacting with technology to accelerate the drain of manufacturing jobs. It does make sense to have poorer countries absorb some jobs once performed by Americans. But today, China and India have such immense capacities to absorb technology and jobs (but not purchasing power) that the pace is unbearable. Worse, China (and to a lesser extent India) flouts the trade rules from which it derives benefit. China is anything but a conventional capitalist economy. Credit is subsidized and allocated by the state. Its currency is manipulated. Its workers have no rights. China steals Western intellectual property and negotiates coercive technology transfer terms with U.S. trading partners. Because China is not free, trade with China needs to be managed.
More broadly, we need a strategy for systematically raising the purchasing power of workers in the Third World, just as we need to redistribute it at home. The best place to start is to enforce their right to join unions. The AFL-CIO recently filed an innovative trade complaint, calculating that China's illegal repression of workers' rights translates to an improper 43-percent cost advantage, which in turn has cost America 727,000 jobs.
Finally, social investment needs to help American entrepreneurs create export winners that generate good manufacturing and service jobs for the domestic and global economy. Public investment in energy independence would create millions of good jobs at home. As former Federal Communications Commission Chairman Reed Hundt observes, a policy of providing every home in America with high-quality broadband would create new technology jobs and better position America to compete globally.
Advanced technology, rapid productivity growth, and global commerce can be reconciled with plentiful good jobs. But not if we leave everything to the private market.