Productivity Is Killing the Middle Class

What changed? Being wont to oversimplfy, I’ll suggest it was the two “C”s -- Computers and China. Despite my general feeling that most office computers' primary uses are for playing solitaire, generating evidence (emails), and creating 60-page Powerpoint presentations where the main effort was the slickness of the presentation rather than actual analysis, computers and the Internet have actually contributed greatly to the productivity of American industry, much to the detriment of millions of middle managers.

Not to pick on a great company, but here's a typical example. UPS (UPS) last month guided higher fourth-quarter earnings (what’s good for Amazon (AMZN) is good for UPS), and also said that it planned to lay off 1,800 people in management and administrative positions in 2010. Here is the operative quote: “By leveraging technology and the management strengths of its people, UPS will reduce the number of Districts and Regions in its US small package operation.” That technology was not faster trucks, it was better computer systems.

China is obvious. The leading singing economist, Bruce Springsteen, put it this way in "My Hometown" back in the 1980’s:

"Now Main Street's whitewashed windows and vacant stores
Seems like there ain't nobody wants to come down here no more
They're closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain't coming back to your hometown..."

Computers killed white-collar jobs and outsourcing to Asia killed blue-collar jobs. Last fall, it looked like the rest of America, kids and the elderly, would be finished off by H1N1 flu, but that seems to have fizzled out.

Alan Greenspan probably didn’t expect this chart to look this way back in 2001 when he slashed the fed funds rate from 3.75% in August to 2.00% in December, and then finally dropped them to 1.25% -1.00% for 21 months starting in December 2002. He understood something was wrong, and this wasn't a period where the big banks had to be bailed out with a steep yield curve. Super low rates couldn't bring jobs back to the normal creation rate for the past 50 years, except in a few areas -- subprime mortgage brokers, for example.

So, starting in February, 2007 with the demise of the super-steroided mortgage brokers, it all unraveled until Ben Bernanke decided that a 1.00% Fed Fund rates didn’t work so let’s try 0% this time. Fourteen months into zero, no jobs, but great bonuses for bankers. And you wonder why there's a Tea Party now?

Productivity is killing the middle class. As bizarre as that sounds, it looks like the truth. There's no easy way out here. The curves on the chart for the past 20 years tell you that. If you have to search for any possible good news, it’s that we've hollowed so many manufacturing jobs in the past 20 years that how many more can be lost? It’s no different with middle managers. There can’t be that many left. These people need to be redeployed into new small businesses. Economic policy and/or stimulus needs to pointed in that direction.

How long will it take for that job-bleeding red line to get back to zero? Obviously, it’s all guesses, but look at the brown 2001 line. It took 24 months for that recession to recover the 2% jobs contraction. If we assume that we're now at the start of the turn, then using the same recovery slope as 2001, it will take 72 months (six full years!) to get back to the previous peak employment at the end of 2007, just in time for the 2016 presidential campaign. If the Democrats think that the mid-tern elections will be tough this November, wait until 2012 if the recovery is only to -4% on this chart. At least the start of the Obama Presidential Library in 2013 will generate some construction jobs.