De-Industrialization and the Displaced Worker

The shift from a manufacturing-based economy to a technology- and services-based one hasn’t been kind to the middle and working classes. That won’t change anytime soon.
May 2016
By Aaron M. Renn  |  Columnist
Senior Fellow at the Manhattan Institute

In George O. Smith’s science fiction short story “Pandora’s Millions,” society collapses when the invention of a “matter replicator,” like the ones from Star Trek, instantly renders most of the economy, and money itself, obsolete. Being a short story, this is resolved quickly with the invention of a substance that can’t be duplicated, followed by rebuilding the economy and society around services.

Real life doesn’t always recover so quickly from disruptions, as we are finding out.

Process improvements, technology and global trade, we were told, would be a great boon. And indeed they have been. Global economic output has soared, and some developing world nations have dramatically transformed themselves. The modern economy has tremendously benefited many in the educated classes. More important, a billion people around the world have been lifted out of $1.25-a-day poverty. This is a truly stunning achievement that should not be discounted.

Alas, not everything has gone as promised. The middle and working classes in the developed world have struggled, not just economically but also socially. While “creative destruction” would wipe out many existing jobs, we were assured that it also would create many new ones, just as yesterday’s industrialization provided better jobs not just for those displaced from the collapsing agricultural economy but for millions of poor European immigrants as well.

We tend to forget that industrialization involved a long and painful period of adjustment and that the beneficial outcome wasn’t guaranteed. Today we find ourselves in another such period of uncertainty, one highlighted in a recent McKinsey study citing the thousands of U.S. manufacturing jobs lost from increased goods trade with China since 2000. “Workers who lose their jobs in one industry should find opportunities elsewhere,” the study notes. “Yet this process does not always play out neatly and quickly.” As a recent academic paper entitled “The China Shock” put it, “Offsetting employment gains … have yet to materialize.” The Brookings Institution adds, “Household incomes and wages are stagnant or losing ground for all but the top tier of earners. … Nationally growth in low-wage jobs has far surpassed growth in middle-skill and higher-wage occupations.”

My Manhattan Institute colleague Scott Winship demonstrates that income gains are not disproportionately going to the top 1 percent, as some would argue, but writes that in part that’s because “so far in this business cycle, there have been no income gains to divide between rich and poor.” And both conservative scholar Charles Murray and liberal Harvard sociologist Robert Putnam have documented the social destruction that has gone along with and reinforced this.

There’s ample reason to believe these trends will continue. Northwestern University economist Robert Gordon argues that we are in an age of slower growth. But even if productivity growth does rise sharply, that may actually increase near-term job displacement. Researchers at Oxford University estimate that nearly half of all U.S. jobs are at risk of being lost due to automation in the next 20 years.

Unsurprisingly, this has generated discontent. Back through to the 1980s and ’90s, this was mostly limited to displaced industrial workers. Today that has grown to a much broader spectrum, from young master’s degree holders with piles of student loan debt who are stuck working at Starbucks to corporate middle managers losing their jobs to outsourcing or foreigners working here under H1-B visas.

Add to these the many people who have seen their wages stagnate or decline. Yes, some compellingly dispute the stagnant wage hypothesis, but clearly there’s enough that we can see is wrong to justify the feeling of pessimism many have about their own and their children’s lives. Cumulatively, there are many millions of unhappy people out there. The white working class may not excite much sympathy on the left, or increasingly on the right either, but if they are hurting this badly there’s little prospect of accomplishing the critical task of economically integrating black America into prosperity.

This has percolated through to the political system, with the rise of Donald Trump and Bernie Sanders, both questioning many of the premises of the current economic system. America is more receptive to these arguments than many ever would have believed possible. That’s because the current system has lost legitimacy in the minds of many. Not only did it fail to deliver the promised benefits to them, but then government turned around and bailed out the big banks in the financial crash.

The economic and social challenges facing America are serious and won’t go away by wishful thinking. The industrialization era was turbulent and produced many reform movements, not all of them good. Even if Trump and Sanders lose their momentum in the presidential race, the forces propelling them will remain.

Mainstream politicians in both parties need to take a gut check and provide more than bromides to the disaffected. They must acknowledge that the status quo has created a lot of losers. We need some serious policy proposals for how to start changing that. Failure to implement some new ideas will only perpetuate further social upheavals, and they might even get uglier than what we’re seeing today.