There Is No Alternative To Embracing Automation

Salena Zito, whose work I often admire, has a long piece in the New York Post from Sunday headlined "This is the next Democratic stronghold to crack like the Rust Belt."   It seems that Ms. Zito has done the same thing that I have done many times, namely taken the Acela train between Washington and New York.  If you do that, it's hard not to notice the very large stretches of devastated, abandoned and burned-out America -- some in Newark, some in Trenton, a huge part of North Philadelphia, some of Wilmington, the majority of Baltimore.  Zito:

Outside, a different Acela corridor rolls by — one roiled by isolation, decay and societal changes, a world ghosted by technology, corrupt politicians and bad city planning.  Shuttered machine shops, refineries, steel mills and manufacturing plants near Trenton and Philadelphia slide past the window like a kaleidoscope of sorrow; scores of once-charming century-old houses are now covered in graffiti and dot areas in and around Baltimore, Newark and Wilmington, Del.

There are also some upscale places along the route, although somehow the train's view doesn't offer much of a flavor of the nice suburbs of New York and Washington.  But as to the large and highly visible decayed areas in these cities:  could they now be ready to try another political approach, rather than whatever it is that has brought them so low?

Ms. Zito then moves on from description to diagnosis and prescription.  Unfortunately, I think that she then gets it all (or nearly all) wrong.  Her diagnosis of the problem, in a word, is "automation":

[M]ostly, it has been unrelenting automation that has eliminated middle-class jobs and lives. . . .    [One study] determined [that] every additional robot used in automation reduced employment in a given commuting area by three to six workers, and lowered wages by 0.25 to 0.5 percent. There are 1.5 million robots out there working in what is left of industrial America, and that number is projected to double in less than 10 years.

And how about a prescription of what to do?

The hard truth is that no one has any idea what to do with the under-employed, high school-educated people who once were able to carve out good, middle-class lives with their own hands, as long as they were willing to work.  But somebody had better figure it out soon. . . .

Sorry, but no.  First:  sure robots destroy jobs.  They are just the latest gizmos to fill that role.  Earlier versions of such gizmos were industrial looms and mechanized tractors and reapers for farms.  Those things, between and among them, "destroyed" what were then the jobs of some 90+% of Americans.  Here's a chart from the Department of Agriculture that I used in a post back in August 2014.  

Notice that the process of elimination of the agricultural jobs was still going on in the post-World War II period.  A good 10 million or so of those jobs were "automated" out of existence during my lifetime, during the 1950s and 60s -- an era now looked back on as some kind of golden age by many of the uninformed, who can see only the expansion of factory jobs during that time and not the devastation of agricultural employment.  And by the way, the jobs in agriculture were backbreaking, miserable jobs that paid just barely enough to subsist when the harvest was good.  When the harvest was bad, you starved, or lost your farm to foreclosure, or more likely both.  Is there anyone who seriously would want those jobs back today?

Those jobs were replaced by many things, manufacturing not a small part of the total.  But manufacturing is no more immune than agriculture to the processes of creative destruction.  Literally every factory, sooner or later, is going to be driven out of business.  It may happen because of a better process involving robots, or it may be by (temporarily) cheaper labor in a China or a Mexico, or it may be by a guy across the street with a better design for the product, or it may be that the owner dies and doesn't have a good successor, or it may be something else.  The fact remains that every job will some day go away.

So what to do about that?  When Ms. Zito says that "no one has any idea what to do with the under-employed, high school-educated people," she is just wrong.  What to do about it is obvious.  It's the "creative" part of "creative destruction."  Entrepreneurs and investors, given a good business climate and the rule of law, will create and grow new businesses and soak up the excess labor -- no matter at what level of skill.  That is, unless government hinders, obstructs, or prevents that process from proceeding.

The essential problem of Philadelphia, Wilmington and Baltimore is not the automation and the closure of what were once hundreds of viable factories.  That happens everywhere.  What distinguishes these places is that nothing has yet come in to replace the failed businesses.  The problem is that the people who are creating new businesses today are not creating them in these places.  Why?  The right place to look is at predatory government.  In these cities -- but not in others -- taxes are way too high, crime is not under control, labor regulations (minimum wage, wage and hour restrictions, favors for unions), and other regulations (including things like nitpicking "safety" and "environmental" rules) greatly increase the burden and expense of starting and operating a business.  Potential entrepreneurs either go elsewhere or just don't bother to go to the effort of starting a business.

To ask an obvious question:  If you had an idea for a new business that could be located anywhere in the country and could employ, if it caught on, a few hundred modestly-educated people at decent wages, is there any chance that you would choose Baltimore as your location?  You would have to be out of your mind.  Baltimore's murder rate is around 50 per 100,000 (New York's rate is 4 per 100,000).  They had riots in Baltimore in 2015 where the citizens looted and burned local businesses for weeks on end, and the police stood aside.  Is any sane investor really going to sign up to be treated that way?

The funny thing is, if you had come to my own neighborhood of Greenwich Village in the 1970s (or at least to substantial parts of it), you would also have had the impression that it was "roiled by isolation, decay and societal changes" and "ghosted by technology" -- just like the big swaths of Philadelphia and Baltimore today.  The former shipping piers had been completely abandoned for around two or more decades, and the first couple of inland blocks were nothing but abandoned factories and warehouses that had formerly served the port.  Here is a picture of what some of the piers looked like at that time:

Today the same waterfront is lined with gleaming new condos that fetch top dollar, averaging something around an amazing $4000 per square foot (that would be about $4 million for a standard-size 2 bedroom apartment).  Here's a relatively recent picture:

What happened?  A few things:

• Between the late 1970s and mid-1990s, the top New York State income tax rate was cut in a series of steps by more than half, from 15% to under 7%.  (There has since been some regression, but only a little.). Still, there was no development.
• Then crime began its dramatic fall.  Using the murder rate as a proxy, it was about 25 per 100,000 in the early 1990s.  By 2000 it had fallen to about 8 per 100,000.  That's when redevelopment in this area started to get going.  Today the murder rate is around 4 per 100,000 and redevelopment has soared.

Come to the Greenwich Village waterfront today, and you would have no idea that a couple of short decades ago it looked much like North Philadelphia and Baltimore today.

There is no reason that those places cannot see the same kind of renaissance that we have had.  They just need to make themselves an attractive place for new investment.  That means getting taxes down and crime under control.  And they don't have the Broadway theater, the opera and the museums like we have.  That means that they can't assume that our level of taxes will work for them.

Meanwhile, "automation" is going to proceed, like it or not.  Rail against it all you want.  Unfortunately, if we want the overall level of incomes to increase, that means that productivity must increase.  And that means embracing automation.  There is no real alternative.  But embracing automation does not mean that anyplace has to be abandoned and forgotten.  That is a function of the attraction of new businesses, and has little to nothing to do with the destruction of the old, which is inevitable.