August 24, 2011


Solving the Long-Term Jobs Problem (Arnold Kling and Nick Schulz, July 27, 2011, The American)

No matter how aggressively manufacturing output rebounds, and it has done relatively well the past two years, production workers in manufacturing will remain below 10 percent of the labor force. Manufacturing in the United States is so automated that labor input is not really a variable factor of production any more.

It's worth noting that this is a mark of manufacturing's maturation and ascent. It is not, as some would put it, a sign of manufacturing's "decline." American manufacturing is by most measures robust, healthy, and extremely productive. However, with the immense productivity gains over time from new technology and business techniques, fewer employees are needed even as output increases dramatically.

If not in sectors such as finance or manufacturing, where are the jobs that everyone on both ends of Pennsylvania Avenue says they want?

The two sectors of the economy that are increasing most as a share of output and employment are education and healthcare. In a new essay in the journal National Affairs, we call these sectors the New Commanding Heights. When Lenin coined the term "Commanding Heights" early in the 20th century, he was referring to critical industries that dominated economic activity, such as mining, farming, electricity, and transportation. While those sectors are still important, the economy today is very different than it was in Lenin's day, or even 20 years ago.

There are many reasons for the rise of these New Commanding Heights but it's enough to know that wealthy industrialized countries such as America will shift their consumption toward education and healthcare over time relative to other goods and services. Growing as they are, the New Commanding Heights of education and healthcare will increase in importance this century while other sectors undergo a relative decline. These sectors are where demand is rising and where there is potential for jobs to be created.

So what's the problem? The problem today is that government policy is impeding innovation and job creation in these sectors. Both education and healthcare are already heavily influenced or controlled by federal and local government. That means that the evolution of those sectors is driven by top-down command and control, rather than by bottom-up innovation.

To revitalize these sectors and revive the American job market, we must open up these industries to competition and entrepreneurial reform. This will require tolerating a certain degree of messy experimentation. But entrepreneurial growth in these sectors is what will get the American economy back to work.

Pardon the skepticism, but does anyone really believe that the health and education sectors will expand once you remove the massive government subsidies? Indeed, one of the chief benefits of restoring normal consumer practices--via HSAs, education vouchers, etc.--is that they will drive spending down.

Posted by at August 24, 2011 8:18 AM

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