I remember sitting through economics courses listening to
lectures on labor mobility and capital mobility, and their flows in relation to
countries competing globally. Fast-forward ‘X’ number of years [I’m not going
to date myself.], and I’m looking at the same concepts, but this time with a
more realistic perspective.
For a country like the US, that a generation ago was leading
the world economy with manufacturing at its base labor was an especially
important factor of production. Capital in the form of investable funds has
always been relatively available and at relatively low costs in the US, but
particularly so in the post-depression decades. Labor on the other hand was not
available in similar abundance. The economic models would suggest that an economy
with abundant capital and scarce labor should specialize in services versus
manufacturing as services are less labor intensive.
In the time frame that the US was making strides in
manufacturing, the rest of the developed world was recovering from World War
II. With the US being one of the few participants that did not suffer domestic
destruction from warfare, there was no recovery time between switching from
war-supply manufacturing to consumer goods manufacturing as the capacity
already existed. And with industrial capacity decimated across the developed
world and Asia, there was artificial demand for US made goods. The external demand would have spurred
investments in manufacturing technology in the US to keep growing capacity, but
also making the sector relatively more capital intensive.
By the start of the US-Korean War, manufacturing would have
been on the rebound across the developing world. Again, as the economic models
would suggest, countries where capital is relatively scarcer than labor should
specialize in more labor intensive production, like manufacturing. So while
manufacturing and export centers materialized organically across the globe, it
took US government wartime spending to artificially propel the manufacturing
base forward at home. This would however, be the last war to have this benefit.
Since the protectionist days of the great depression, the
major trade participants of the world, and progressively more minor ones have
been moving towards connectivity and away from isolation. In an ever
globalizing world, capital and to a lesser extent labor would have begun moving
across borders with more and more ease, which meant global imbalances became
more apparent. As the global market for capital and labor sought to reach a
state of equilibrium, the US economy began a fundamental shift towards services
and away from manufacturing as the increasing cost of labor would have
destroyed competitiveness.
By the time the Vietnam War was in full swing, the US
economy was at the height of the transition from a manufacturing based economy
to a service based economy. At that point, manufacturing had almost been
completely eroded away by the high relative cost of labor, while the
technological infrastructure to make a service based economy more viable was
still in its early stages of development under the guidance of the military.
Unlike previous war-time spending campaigns by the US
government, which had subsidized and stimulated the manufacturing base,
spending on the Vietnam War did not ‘trickle down’ to the man on the street. He
had not had a job in manufacturing in years and his skills were outdated for
the technological applications. The service sectors that were emerging at the
time required a re-tooling of the American workforce and so also increased in
capital intensity. Though it would have been much easier at the time [and
frankly still is today] to increase the capital stock in the US by allowing
more foreign investments than to increase the labor stock by allowing in more
foreign labor.
The period following the Vietnam War was plagued with high
unemployment and high inflation, which ushered in the era of stagflation.
Tracking the US Balance of Payments of accounts we can see that the US became a
net importer of manufactured goods in the middle of the 1970s, but did not
become a net exporter of services until the middle of the 1980s. Almost a
decade of no clear base for economic growth and fiscal drag from financing war,
and the threat of limited supplies of oil due in part to geopolitics, US economy
was in dis-equilibrium.
Balance of Payments on Services
(Billions of $US)
Balance of Payments on Merchandise
(Billions of $US)
The level of economic hardship that was experienced by so
many during that period was indicative of what happens when an economy is too
heavily weighted in one sector over the many, and how artificial supports
[whether intended or unintended] tend not to work over time.
During the same time period that the economy was
re-inventing itself, Congress was hard at work putting together new ways to
make things better now, but worse later. In 1977 Congress passed the Community
Re-investment Act (CRA) and, in my opinion, this put a series of events in
motion that inevitably lead to the housing market bubble of the early 2000s and
the ensuing global recession. That piece of legislation, along with others
de-regulating the largest banks and financial institutions, created the space
for a secondary market for mortgages to develop. Along with that came the idea
of securitizing mortgages and reselling them to investors, from there the rest
is history.
