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.

The Devastation Of New York City's Economy

A big theme in the current election cycle is the plight of the workers and the towns that have seen their factories close and their jobs move elsewhere, often to China or Mexico.  I have written about some of these towns on this blog, including Galesburg, Illinois here, and Van Wert, Ohio here.  On a larger scale, Detroit and Cleveland could also be cited.  Appealing to the displaced workers left behind in such towns is a focus of the campaigns of all of the remaining presidential contenders.

But I would argue that, over the course of my lifetime, no town has seen its economy devastated to nearly the extent that the economy of New York City has been devastated.

But wait a minute, you say -- isn't New York City's economy doing rather well these days?  I didn't say that it wasn't.  What I said was that New York City's economy has been devastated, and devastated more than the economy of just about any other town, over the course of my lifetime.  Do you think there is something inconsistent between an economy being devastated and the same economy doing rather well?  If so, why?  I don't think there is any inconsistency.  Indeed, I would say that for an economy to be doing well thirty or fifty years from now, a nearly essential pre-condition is that it get thoroughly devastated on an ongoing basis between now and then.  You may not want the devastation to happen all at once, but you definitely want it to happen.

Let us consider the extent of the devastation of the New York City economy over the course of the past 60 years or so.  If you are not familiar with this story, it is a real eye-opener.

• According to the story linked above, in 2004 Galesburg, IL, lost its biggest employer, a Maytag factory, to Mexico.  Really?  Let's talk about real devastation: manufacturing in New York City.  In the 1950s there were around one million manufacturing jobs in this city.  This New York Times article from 2000 gives a figure of 37,000 manufacturing businesses in New York City in the aftermath of World War II.  An article here from 1993 by Samuel Ehrenhalt in the Monthly Labor Review traces some of the intervening history.  By 1980 the number of manufacturing jobs in NYC had shrunk by around half, to about 500,000.  By 1991 it was 184,000.  Today it's about 70,000.  This decline is not one lousy factory, it's thousands upon thousands of companies, completely wiped out.  The iconic New York City manufacturing industry was lady's apparel.  Have you ever seen one of those pictures of the rows and rows of women in a New York City garment center loft hunched over their sewing machines making clothing for the world?  Ehrenhalt gives figures of 231,000 such jobs in New York City in 1966, and 84,000 in 1991.  (And of course he talks about how important it is for these jobs to be "preserved"; they weren't.)  ABC News here gives a number under 20,000 for 2011, and without doubt it's even lower today.  The remaining apparel manufacturing in New York today is for very specialized things like Broadway show costumes.  Believe me, nothing in your wardrobe was made in New York City.  Undoubtedly, most of your clothes were made in places like China and Mexico, if not Thailand, Sri Lanka or Bengladesh.
• If there's one thing that New York City is known for in the world it's having the world's most spectacular port.  The port is the reason the City is here.  The New York Times article linked above gives a figure of 400,000 jobs in New York City in the 1940s and 50s in "port-dependent" businesses, including 14,000 sailors and deckhands, 36,000 longshoremen, 40,000 in port-related trucking and warehouse operations, 30,000 in ship construction and repair, and so forth.  Try even to find any of that today.  There are no piers handling freight at all in Manhattan, and only the most minimal amount in Brooklyn and Queens.  Such ocean freight operations as continue to exist in the region are in New Jersey, and highly automated at that.  The number of "port-dependent" jobs in the City is at best 5% of what the number was at its peak.
• How about "wholesale trade"?  According to a chart in Ehrenhalt's article, that was the single largest industry category of employment in New York City in 1960, with 315,000 employees.  By 1991, "wholesale trade" didn't even make it into the top ten industries, and employed fewer than 90,000.  Believe me, it hasn't come back.  Hey, we "cut out the middleman"!
• Surely retail is an industry that New York City continues to be known for.  People from all over the world come here to shop, and the iconic New York City retail institution is the big department store.  Stores like B. Altman, Gimbels, Bonwit Teller, Best & Co., Arnold Constable, Abraham & Strauss (Brooklyn) and Gertz (Queens) are well-known names.  Oh, they're all gone.  Today we're basically down to four full-scale department stores, but actually two of them are part of one company (Macy's and Bloomingdale's) and the other two are part of one other company (Lord & Taylor's and Saks), so it's really only two; and both are struggling to hang on amid big sales declines attributed to the growth of internet retailing.
• But what about headquarters of major companies?  When Fortune first started putting out the 500 list in the 50s, about a quarter of those top companies had their headquarters in New York.  By 2012 it was down to 43 (and most of them are different companies).  And in many cases it was the biggest and most prominent companies with the biggest staffs that picked up and moved.  Take the oil industry.  Here is a New York Times summary of the relocation of that industry out of New York in the 70s and 80s.  In the mid-80s Exxon had its headquarters and some 4000 employees in a gigantic office building on 6th Avenue that was part of the Rockefeller Center complex.  In 1987 they picked up and moved to Texas.  Mobil (then a different company from Exxon) had an almost-as-big building and staff on 42nd Street across from Grand Central.  In the same 1987 they moved to Virginia.  Texaco occupied a big chunk of the Chrysler Building, another huge building next to Grand Central.  They moved to Westchester in 1977 (and later merged with Chevron and went to California).  Shell went in stages in the 70s and 80s to Houston.  The big office building at 70 Pine Street in the financial district was built as the headquarters of the Cities Service company, later Citgo.  They got bought by the government of Venezuela in the 80s, and we know where that has gone since.  Citgo had moved out of 70 Pine Street even before that, and today that building is undergoing a residential conversion.  As just one example in the non-oil category, AT&T (then the dominant monopoly national operator of land-line phone service) in the late 70s contracted to build a fancy new headquarters at 550 Madison Avenue.  Here is a history of that building at Wikipedia.  AT&T hadn't even finished the building when in 1982 they were forced by the government to divest all their regional operating companies and downsize drastically.  They never even completely moved in, and began transferring operations to New Jersey and subleasing the space, mostly to Sony.  By the 90s AT&T was long gone, and the building was known as the Sony building.  Sony was then flying high, but in the intervening 20 years Sony has also hit hard times and has gradually downsized.  Today there is talk of 550 Madison also undergoing residential conversion, although most recently it seems that those plans may be shelved.  AT&T?  They are very largely a mobil phone company and are based in Dallas.
• Surely the big investment banks are and always have been the backbone of the New York economy?  Actually, prior to 2008 there were five of them (Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, and Bear Stearns).  Three of the five promptly went broke.  Only GS and MS survived largely intact.  Bear Stearns mostly disappeared, with some pieces picked up by Chase; Lehman also mostly went away, although substantial pieces got bought by Barclays; and Merrill Lynch did the best of the three, largely bought by Bank of America.  Lots and lots of people got laid off.

Whew!  Is there anything at all left intact of the New York City economy from 60 years ago? Really, not much at all.  And I challenge the people of any other city or town in this country to show that their economy has been more devastated than ours.

But yes, the economy is doing rather well.  The number of jobs in the City hit 3,720,600 in the latest (March) figures from the New York State Department of Labor.  This is a record high number since anyone started keeping track.  The unemployment rate was a very-respectable 5.5%, and the labor force participation rate (16+) was 58.2% (which is a few points behind the national average, but a substantial uptick for the City over recent years).

And thank God that all those old terrible jobs were wiped out!  There would have been no one to take the new and much better jobs!  Those hundreds of thousands of women hunched over their sewing machines made minimum wage back when the minimum wage was barely $1 per hour.  Yes, not every newly-created job pays more than every job that was lost, but overall the newly-created jobs are far, far better.  Not only do they pay better overall, but there is much, much less hard physical labor and there are far more comfortable working environments. 

So what the heck are all the new jobs?  Certainly, I could give lots of examples.  "Business services" is a general description of the kinds of things that people do who work in office buildings -- things like accounting, auditing, law, advertising, consulting, publishing.  There's a huge "tech" sector that didn't exist at all 20 years ago and was only getting started 10 years ago; and that sector consists of hundreds of companies doing wildly different things.  The hot new thing in the office market is for an entrepreneur to set up a few floors of an office building as "shared space" and sublet units to dozens of small and start-up companies.  Indeed, that's the kind of place where I have my office.  Oh, there's also a big government and healthcare sector (much bigger than I think appropriate).

But the real question is, does it even matter what all the companies are that hire all the people?   It's almost a certainty that by 60 years from now the large majority of them will be gone.  So what?  If you want to have a successful economy 60 years from now, the only thing that really matters is the new companies that get created between now and then.  That's how it works.  Look at what has happened to the New York City economy over the last 60 years, and ask yourself if you would really have wanted a government using its coercive powers to somehow force the "preservation" of all the old jobs and prevent the moving to China and other foreign countries of what really were the very worst and lowest-wage jobs.  This, of course, is what all of our presidential candidates are proposing.