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Friday, June 17, 2011

Obama’s Economics Lesson

Did he really say that?

President Obama apparently thinks that until the latest recession, no business realized it might reduce its workforce by substituting machines and other high-tech devices. When asked by NBC’s Ann Curry why he hasn’t been able to convince business owners to hire more people (as if the question makes any sense), Obama explained:

There are some structural issues with our economy where a lot of businesses have learned to become much more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller, or you go to the airport and you’re using a kiosk instead of checking in at the gate.

It is astounding to hear Obama invoke the old argument that technological advances create permanent idleness among workers. I haven’t heard that one in years. These days foreigners get the blame for lost jobs. Obama has dredged up a real oldie but not-so-goodie. As Henry Hazlitt wrote long ago, “Destroyed a thousand times, [the fallacy] has risen a thousand times out of its own ashes as hardy and vigorous as ever.”

Does Obama really believe what he said or is it just a convenient way to deflect blame for the jobless “recovery”? Does he assume the average voter will take him at his word? Unfortunately, the state of economic understanding leads one to think he might be right about that.

What’s New?

I surely hope Obama realizes that this process is not new. It has been going on for a long time – roughly since the time of the wheel. In 1900 nearly 40 percent of the American workforce was on the farm. That was down from 90 percent in 1800. By 1990 the percentage shrank to less than 3 percent. Machinery and then computers (and other advances) were major reasons for the change. Similarly, American manufacturing keeps growing, but manufacturing employment has fallen. Mark Perry writes, “U.S. Manufacturing output has more than doubled since 1975 … while manufacturing employment has decreased by about 8 million jobs…, resulting in more than a three-fold increase in worker productivity (output per worker) since the 1970s.” (See employment charts and Perry’s quotation here.)

Again, technology can explain these changes.  More (and better) work can be done by fewer people because of computers and other technological wonders. Yet the declines in farm and manufacturing jobs did not create permanent mass unemployment over the long haul. Why not? Because there was other work to do. Our desire for goods and services (including leisure services) is essentially limitless. New jobs arose to absorb the workforce that had become superfluous in farming and manufacturing. And since the combination of rising productivity and competition (despite government constraints) lowered prices, consumers had more money to buy the things those new jobs produced. Living standards rose. What’s more, because of growing consumer demand, employment increased even in existing industries that adopted the new machines. (See Hazlitt’s article.) Bastiat’s principle of the “seen and not seen” is relevant here. Most people don’t associate the rise of new jobs with the passing of old ones.

A caveat: I am abstracting from any government interventions and privileges, including subsidized or direct R&D and sundry regulations, that artificially hastened the conversion from human labor to machines. Without those interventions, the process might have taken more time and traditional firms with wage labor might have been supplanted by other forms of enterprise. However, that is not relevant to theoretical point here.

Life Is Change

Of course change requires people to learn new skills and to be on the lookout for new opportunities. This can be a hardship, especially for older people set in their ways. But shifting consumer tastes impose the same requirement. Life is change, and the point of an economic system is consumption not employment. If government would get out of the way, people would be better able to adapt and cushion the hardship through mutual aid, contract, and other nonstate methods.

Since the recent financial debacle, companies have been buying new equipment but are not hiring fast enough to lower unemployment. On the surface that seems to support Obama’s statement, but we have to look closer.

Where companies can have the same work done by using machines or hiring people, the government in various ways has tipped the scales toward the machine. Obamacare is a prime example. Anything that raises the cost of hiring makes the case for buying equipment instead (or outsourcing) more attractive. On top of this we see a reluctance to start new ventures that is attributable to the myriad government obstacles to correcting for the malinvestment that occurred during the housing bubble and to what Robert Higgs calls “regime uncertainty” — the chilling effect that unpredictable government policymaking can have on the economic climate. (Lots of rules have yet to be written for medical insurance and the financial industry.) A third factor is the government-banking complex, which is nervous about lending money after all the bad decisions made during the late bubble. (Banks would rather earn 0.25 percent on reserves left on deposit with the Federal Reserve than lend to entrepreneurs.)

Structural Changes

While there are indeed structural changes that interfere with employment, they are not the ones Obama imagines. In so many deep-seated ways government, hand in hand with political capitalists, has squelched the vitality of the economic process. It’s no wonder unemployment has become an intractable long-term problem.

The way out is not more Keynesian “stimulus,” targeted tax preferences, or even mere tax cuts. We need a radical elimination, at all levels, of subsidies, monopolistic privileges, taxes, and regulations, which restrain entrepreneurship, unorthodox forms of enterprise, and self-employment. Then we can have our high-tech machines and employment too.

  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.