Book Review: The American Job Machine by Richard B. McKenzie

Economies grow stronger through what Joseph Schumpeter called creative destruction. Some firms go out of business while others are born. By not allowing some companies to fold, government prevents resources from being freed for more productive uses. This book points out some unrecognized advantages of job destruction. The central message is that job creation and job destruction go hand in hand.

McKenzie destroys a number of myths about the U.S. economy. The pace of economic change is not accelerating, although increases in productive efficiency have enabled more workers to go into the service sector. Concern over the expansion of the service sector is mostly unwarranted and misplaced. We are not becoming a nation of hamburger flippers.

Part of the problem lies in how we classify goods and services. Hamburgers are goods when purchased in a supermarket, but they are services when bought in a fast food restaurant. Computers are goods when they are purchased, but are part of a service when leased. Truck drivers are classified as manufacturing workers when they move their company’s goods from one site to another, but are service workers when they work as independent contractors to transport the same goods.

America is not de-industrializing. Manufacturing output has varied between 20 and 24 percent of GNP rather consistently over the past 40 years. Yet manufacturing jobs, as a percentage of total employment, have been declining because companies can produce more goods with fewer work-crs, and because businesses have been changing the way they produce goods. For example, some accounting, payroll, and data processing functions that formerly were done internally have been contracted out to independent providers. The result is that jobs in the “goods” sector have declined while jobs in the “service” sector have increased. Yet the same jobs are being performed for the same companies. Furthermore, the relative decline in goods-producing jobs has not caused a general downward shift in income.

Government officials in recent years have stated that the displaced worker problem is large and that government should play a more active role in reducing this problem. Yet an analysis of the statistics shows that most displaced workers soon find jobs. Attempts to alleviate the problem, such as plant closing laws, may actually make matters WOrse,

The proliferation of low-income employment is generally seen as bad. But McKenzie shows that such a view is simplistic. One reason for the increase in low-income jobs is that the baby boom generation has entered the work force, and they had to start at the bottom, just like everybody else. Also, many students and housewives have entered the job market on a part-time basis, and older workers are cutting back to part-time work rather than retiring completely. The result is often that family income has improved, although the statistics show that more individuals are earning low pay.

The trade deficit “problem” may not be a problem at all. The trade deficit is measured by the difference between imports and exports, so a decline in exports will increase the trade deficit if imports remain constant. Yet exports may decline because an expanding internal economy has siphoned domestically produced goods away from world markets. American producers are selling to other Americans rather than to foreigners. So a trade deficit can be caused by an expanding domestic economy—which is a sign of economic health rather than sickness. McKenzie points out that attempts by government to restrict imports also have a tendency to hamper exports, so restrictions on trade tend to be self-defeating.

Many jobs in the textile and apparel industries have disappeared in recent years. But few of the job losses, especially in textiles, have been caused by imports. Mechanization and increased productivity have caused most of the job losses, and increased productivity has come about partly because of worldwide competition. Reducing the pressure of foreign competition by imposing trade restrictions will reduce the incentive to find additional ways to be more productive. In short, imposing trade restrictions is counter-productive.

In the final chapters, McKenzie exposes some fallacies in the popular thinking on minimum wage laws, government retraining, and mandated fringe benefit programs. The common thread that runs through each chapter is that government intervention and “tinkering” in the economy retard rather than expand employment.
Professor McGee holds a law degree and teaches accounting at Seton Hall University.