Monday, November 9, 2015

A National Economy Divided

One of our nation’s many divisions and fault lines strikes Joel Kotkin as the most important. We have two economies: one is producing stuff and another is selling ideas. The first involves industry, manufacturing and energy. The second comprises the media, entertainment and the internet. Better yet, for those who work in the high tech economy, their work is clean while that of the manufacturing sector is dirty.

Thus, they feel more virtuous and more pure. About the lives of the workers at Foxconn, they do not much care.

As of now, the two economies are bifurcating, with the former leaning Republican and the latter becoming increasingly liberal and Democratic. The first is mostly located in flyover country, in Middle America. The second is concentrated on the coasts.

As a rule, people who produce stuff tend to be more practical minded. Those who traffic in ideas, or who believe that their business involves ideas, tend to be more idealistic. For these among other reasons, the first group is often drawn to the Republican Party while the latter has become increasingly Democratic.

When a Bill Gates starts intoning that we might need a socialist takeover of the government to fight global warming, you know that the tech oligarchs are all worshipping in the Church of the Liberal Pieties.

Worse yet, and ironically, the great minds of the tech oligarchs seem more susceptible to manipulation by whatever passes as serious thought. They aspire to be philosopher-kings, a class of Platonic guardians, and thus cling to whatever academic thinkers hold to be dogmatic truth. They seem to be allergic to the notion that they are businessmen like everyone else and that their work is susceptible to market forces.

Those who live by manufacturing and industry live by the verdict of the marketplace. They have never doubted the point. Those who traffic in big ideas prefer the world of abstract ideas. The plan might work; it might not work. Since they have access to capital to fund any cockamamie idea, they make money even if it does not work.

Kotkin points out that tech titan Elon Musk, to say nothing of the solar energy companies, live off of government subsidies. They do not have to live by the market, by decisions made by millions of little people. Theirs is a clean world, a confederation of great minds, where people think and code.

In the dirty world of manufacturing, and especially energy production, the government, especially when it is following liberal policies, has become an obstacle. It wants to shut down the coal industry and to repeal major parts of the Industrial Revolution… because of a prophecy. It bases its judgment on nothing an idea.

Kotkin defines the division and the growing conflict:

Today we see a growing conflict between the economy that produces consumable, tangible goods and another economy, now ascendant, that deals largely in the intangible world of media, software, and entertainment.

While the collapse in the price of oil has damaged American manufacturing, the tech oligarchs are now riding high.

In contrast, the tech oligarchs and their media allies largely embrace the campaign against fossil fuels. Environmental icon Bill McKibben, for example, has won strong backing in Silicon Valley for his drive to marginalize oil much like the tobacco industry was ostracized earlier. Meanwhile the onetime pragmatic interest in natural gas as a cleaner replacement for coal is fading, as the green lobby demands not just the reduction of fossil fuel but its rapid extermination.

In California, a state that is leading the world in green energy policy, the tech oligarchs have so much money that they do not really care about the cost of electricity. For everyone else in their neighborhood, the results have been calamitous:

Embracing the green agenda costs Silicon Valley little. High electricity prices may take away blue collar jobs, but they don’t bother the affluent, well-educated, Telsa-driving denizens of the Bay Area, who also pay less for power. But those rates are devastating to the less glamorous people who live in California interior. As one recent study found, the average summer electrical bill in rich, liberal and temperate Marin County was $250 a month, while in impoverished , hotter Madera, the average bill was twice as high.

California is showing us what a post-industrial economy looks like. For reasons that escape me the people of California keep electing people who implement policies that hurt them. It is worth keeping in mind that the tech oligarchs do not have a large number of votes. What they do have, however, is near-monopoly control of the media. Rather than worry about why the people of Kansas do or do not vote their self-interest, we ought to start asking ourselves why the poor and lower middle class people of California keep voting for liberal politicians.

Kotkin describes the post-industrial political economy of California:

In this way California already shows us something of what an economy dominated by the intangible sectors might look like. Driven by the “brains” of the tech culture, the ingenuity of the “creative class,” and, most of all, by piles of cash from Wall Street, hedge funds, and venture capitalists, the tech oligarchs have shaped a new kind of post-industrial political economy.

It is really now a state of two realities, one the glamorous software and media-based economy concentrated in certain coastal areas, surrounded by a rotting, and increasingly impoverished, interior. Far from the glamour zones of San Francisco, the detritus of the fading tangible economy is shockingly evident. Overall nearly a quarter of Californians live in poverty, the highest percentage of any state. According to a recent United Way study, almost one in three Californians is barely able to pay his or her bills.

From the point of view of the tech oligarchs Barack Obama is the perfect president. Perfect for them, that is. Since Obama is more cerebral and more self-aggrandizing, more concerned with looking smart than with the consequences of his policies, the tech oligarchs believe that he is one of them. He, of course, must believe that the tech bubble is proof positive of the greatness of idealism and the badness of pragmatic policy.

The love-fest between Obama and Silicon Valley grows from a common belief in being extraordinary. The same media that has marveled at Obama’s celebrated brilliance also hails Silicon Valley’s ascendency as a triumph of brains over brawn.

The tech world is a mind over matter world. It’s a world where stuff gets manufactured, but gets manufactured over there, somewhere far, far away, where no one of their friends needs to get his hands dirty. The tech oligarchs are oblivious to the world outside of their bubble.

In contrast to engineers laboring in Houston or Detroit, those who work in Silicon Valley focus largely on the intangible economy based on media and software. The denizens of the various social media, and big data firms have little appreciation of the difficulties faced by those who build their products, create their energy, and grow their food. Unlike the factory or port economies of the past, those with jobs in the new “creative” economy also have little meaningful interaction with working class labor, even as they finance politicians who claim to speak for those blue collar voters.

Of course, the tech economy does not produce very much in California. It produces iPhones in China and hires programmers in India. It touts the virtue of diversity but never practices what it preaches. When the cost of energy becomes too high it moves its server farms outside of California.

Worse yet, it does not produce very many jobs. This problem characterizes the Obama economy, where, despite the low unemployment numbers, workforce participation rates are as low as they have been for decades.

In contrast to advances in energy, autos, and homebuilding, which produced good blue collar and middle-skilled jobs, the benefits of the current tech boom have been limited, both in terms of job creation (outside of the Bay Area) and increased productivity, for the vast majority of voters.

Kotkin asks whether it is degenerating into a civil war? After all, a house divided against itself cannot stand. I suspect that the real challenge for the tech oligarchs is to continue plying their rough magic on the populace at large, exercising enough mind control to get people to vote for the oligarchy’s interests and not their own.


jim sweeney said...

California, where I live, is filled with millions of voting immigrants while those voters who tended conservative have been herded into fewer and fewer gerrymandered districts by the overwhelmingly Mexican legislature. Turd worlders continue to breed turd worlds. Plus we have the NorCal liberals in SFO and its environs while Sacramento is a company town. SoCal has been transformed by the end of the aerospace and other manufacturing firms into a mini-Mexico even as its liberals and Hollywood have stayed on. There are few non-liberals left and, of course, the Republican party is moribund and moronic as usual. You cannot name one Republican "leader" in the State or even one aspiring, conservative political candidate. There are none of those animals here any more.

Anonymous said...

Listen to this podcast by NYSERDA and New York Academy of Sciences regarding the history of finance for high risk high reward research, development, demonstration, and commercialization:

Markets with cut throat price competition could not subsidize new technologies due to the total lack of internal or external finance for research, development, demonstration, and commercialization. Society must subsidize a new technology via finance in commerce or government, much the way we must subsidize a 2 year old before he or she can grow up to cooperate and "compete" with others as a 20 year old.

Ares Olympus said...

Stuart: While the collapse in the price of oil has damaged American manufacturing, the tech oligarchs are now riding high.

This statement makes ZERO sense. Everyone wants low oil prices, at least if you need low energy to produce stuff.

What he actually says is this:
Joel: Plunging prices are also beginning to hurt many local economies in the U.S., particularly in the “oil patch” that spreads from west Texas to North Dakota.

But its still all dishonest. Oil has ALWAYS been a Boom and Bust industry, and what has fueled THIS boom is not oil but debt.

And Joel's entire deluded article COMPLETELY missed the financial industry, which doesn't clearly fit within the "information economy" and the "manufacturing economy", although it clearly is close to the "energy industry" - extracting ONE TIME wealth and leaving ghost towns in their wake.

If its really a divide between the elites of the coasts, and the earthy farmers and producers of the flyover land, then the flyover states ought to be asserting their independence, taking their money OUT of the ponzi scheme financing of big business, and reinvesting in local economies that are NOT extractive, but generative, that can be credible AFTER the fake money economy of the coasts crashes.

I confess I don't see the path out of this predicament. All I'm sure about is retirement investments, and college investment funds are a disaster waking to happen, and since a majority has some skin in the game, 50% who have $10k in the markets from their stocks and retirement accounts will AGAIN support bail outs the 1% who have billions to lose, in the next market crash. By "support" I mean they won't have an armed revolution.

And that's the real elephant in the room, and neither democrats or republicans have any answer to that threat.

Ares Olympus said...

Here's a related new blog on the question of employment, discussing the difficulties of job creation.
Believers in "technology always creates more jobs than it destroys" also overlook the work of Immanuel Wallerstein (and others) who identified the job-killing trend that cannot be reversed: the cost of labor is rising for systemic reasons that supercede supply and demand of labor.

In other words, the total compensation costs of labor rise even when labor is abundant or in over-supply.

Wallerstein identifies three long-term forces that are undermining capitalism's key function, the accumulation of more capital:

1. Urbanization, which has increased the cost of labor.
2. Externalized costs (dumping private waste into the Commons, environmental damage and depletion, etc.) are finally having to be paid.
3. Rising taxes as the Central State responds to unlimited demands by citizens for more services (education, healthcare, etc.) and economic security (pensions, welfare).
Labor overhead is all the labor-related expenses paid by employers: the vast majority of pundits, most of whom have never hired a single employee with their own money, tend to overlook the overhead costs paid by employers: workers compensation insurance (soaring), healthcare insurance (soaring), disability insurance, unemployment insurance, 401K or pension contributions, etc.

The "solution" in the Digital Revolution is to eliminate all labor overhead and transfer all these risks and expenses onto the free-lancer. As a free-lancer/self-employed worker, I am well-acquainted with these overhead costs: it costs $15,300 annually to purchase stripped-down healthcare insurance for my self-employed wife and I.

I wonder how this fits within Joel's "two economies", but mainly I'd see the two economies are those who have skills to get on a gravy train, and those who don't, by whatever misfortune. There's a lot of money flowing, so geeks of out school working for the NSA can get paid $200k, while first year teachers are laid off every spring and rehired in the fall, if a school district decides it can afford them, while most of their money flows to the top and away from the students.

So my thought is we need a way to allow people to "thrive" on lower incomes, while accepting a world where a few are disproportionately compensated on top. And so I see "socialism" as a part of the answer, but not necessarily centrally organized. Socialism means cooperating with your family, friends, and neighbors to avoid the debt traps demands for middle class lifestyles.

But this "underground economy" isn't going to make much sense to people who have found a path for $80k+ salaries and benefits. It only makes sense when you're no longer willing to take the risk that $50k-$100k of student loans, and a $250k-$500k mortgage or $3k-4k monthly rent is a credible path to success.

Anonymous said...

Mr. Olympia writes a lot. It makes ZERO sense. -$$$

Stuart Schneiderman said...

It takes a lot of time and effort to write that much and to make zero sense. I would recommend that AO stop insulting people who are vastly more intelligent and better informed than he is... lest he find some of his productions deleted.

David Foster said...

Re the impact of lower oil prices on manufacturing: it is very true that cheaper oil is generally good for manufacturing, especially its more energy-intensive branches and the process industries that use oil/gas as feedstocks. But there *are* segments that are hurt by lower oil prices, namely, those that make equipment used in drilling and drilling support activities. These are relatively small as a % of the whole, though.

David Foster said...

Re the comment about finance, a pretty high % of finance people lean to the left, politically and culturally speaking. Generally, finance people generally seem psychologically more similar to "tech" industry people than to manufacturing and logistics people.

priss rules said...

Is entertainment really selling ideas? I suppose 'ideas' like 'gay marriage'.

Ideas used to be thoughts or propositions or innovations.

Now, it's any junk or image in fashion and entertainment, much of it pornographic and junky.

It's like the term 'creative'. Just about any urban dweller who buys coffee from Starbucks is now part of the 'creative class'.

Anonymous said...

Those who lean "left" have a more accurate understanding of the social role of finance in an economy that generates long term debt obligations. Those who lean "right" seem to think that prices can fall in so-called "free markets" without adverse long term consequences. The consequence is that long term debt contracts will be broken on a systemic level when prices fall too rapidly across all sectors of the economy, so a modern society is forced to manage the financial system via industry and government politics not via "free market" ideology.

Anonymous said...

I also wrote the above posts Anon Nov. 9 2:30PM and Anon Nov. 10 10:38AM.

One argument for "free" or publicly subsidized software (software not subject to copyright laws, or in which copyright laws are used to enforce open source publication standards) is that software is like language -- it does not obey the laws of thermodynamics -- whereas computer hardware obeys the laws of thermodynamics but is designed so the software can abstract away from physical reality. One cannot copyright the use of language in general because to do so captures an essentially public good via private property laws and is contrary to the public interest. One can copyright original expression embodied in language so software is similar to language and expression in the copyright domain. Hardware has some copyright coverage for ornamental use and is covered by design patents and utility patents that expire after a short time period compared to copyright coverage.

Financial instruments are mere abstract symbols or records that rely on human communication. The modern media and modern financial systems are abstractions away from physical production and delivery of goods into the realm of human meaning via communication.

Gross margins are high for software and digital goods that may have high initial production costs yet low reproduction and delivery costs for mass distribution. By comparison gross margins tend to be lower since prices drop as a factory produces and distributes goods with economies of scale. Society values human capital and soft goods (communication -> mothering) above production and delivery (fathering -> extracting resources to bring to other men, women, and children).

Anonymous said...

Stuart: Censor Mr. Olympia with impunity. We will all be grateful. Minds are not safe from this man's blather. Nothing there. -$$$