Engine of Destruction or Engine of Creation?

The American Job Machine, by Richard B. McKenzie, Washington, D.C.: Cato and New York: Universe Books, 274 pages, $24.95/12.95

Last September, the Senate Budget Committee's majority staff ignored the budget deficit long enough to publish a "study" with the basic premise that "the dominant trend in American job creation during the 1980's has been for low-paying jobs to replace those which provided a middle-class standard of living." The study reported that since 1979, 50.4 percent of all new jobs paid less than the poverty wage of $11,610 a year. It made all the networks.

The same week, Business Week's cover story focused on the "growing skills shortage." The headline read: "Needed: Human Capital. Who will do America's work as the demand for skilled labor outstrips a dwindling supply?" Business Week warned that "as work becomes more knowledge-intensive employers are fishing in a shrinking labor market." It showed that across the country, in market after market, skilled jobs are going begging and help-wanted advertising remains at near-record levels. In fact, over the last two years, the Labor Department's monthly surveys show that more than half of new jobs are "professional and managerial"—its highest skill and pay rating.

Americans have a right to be confused: If we are, as Democrats argue, creating only "low-pay service jobs," why are we up against a "skills shortage"? The answer to this apparent contradiction is brilliantly developed in a book that the media have predictably ignored, The American Job Machine, by Clemson University professor Richard McKenzie.

The U.S. economy is indeed the job creation wonder of the world, contends McKenzie, but it is the job-destruction champion, as well. The mark of a thriving economy is both a high rate of plant openings and new jobs and a high rate of plant closings and job losses. "Job creation and job destruction go hand in hand," McKenzie writes. "That is the central message of this book."

While the two are fundamental to each other, however, they are in serious conflict politically. The problem in a democratic society is that only the job and plant losers know who they are and make political noise, pushing for protection, whether in the form of explicit trade barriers or plant-closing laws to slow down job losses. The result is what McKenzie calls the evil of "jobilism." In the 17th century, mercantilism prevailed in Europe; national wealth was measured by the amount of precious metals possessed, and commerce and agriculture were manipulated accordingly. Today, under "jobilism," political energy is devoted to artificially protecting or stimulating current jobs irrespective of whether those jobs are good for the economy as a whole.

The destructive nature of jobilism is already evident in the stagnation of the social-welfare economies of Europe, where governments have deliberately ossified labor markets with a panoply of government protections. These include tough plant-closing laws (it has cost Krupp Steel over $5 billion so far to close down just two very unprofitable steel plants), mandated health benefits, mandated childcare programs, mandated paid parental leave, the forced maintenance of permanent jobs for tenured employees, and so on. Jobilism, McKenzie says, "is nothing less than a euphemism for socialism with an updated rhetorical twist."

It is no accident that job creation has totally stagnated under the weight of these policies. Since 1970, while the United States has created 36.6 million new nonagricultural payroll jobs, Europe has created less than 2 million, failing even to counterbalance job losses. In other words, protectionism costs more jobs than it saves.

McKenzie underscores this point by examining the Reagan administration's 1984 Voluntary Restraint Agreement (VRA) on steel imports, which cut the foreign percentage of domestic sales from 26 percent to 22 percent. The policy did increase U.S. steel employment by about 17,000, but it caused even bigger job losses in steel-using industries from metal fabrication to electrical machinery, for a net loss of nearly 36,000 jobs.

McKenzie reminds his readers that economist "Joseph Schumpeter warned the policy makers of his day that the fatal flaw of capitalism was likely to be its creativeness and energy, not its failures to achieve greater income, wealth and opportunity. " It is by "creative destruction," observed Schumpeter, that lower-quality and lower-technology products are replaced by higher-quality and higher-technology products, constantly destroying old jobs and generating new ones. "Unfortunately, Professor Schumpeter correctly feared that democracies might not allow capitalism to flourish because they cannot politically tolerate its destructiveness."

No three states more vividly demonstrate the political dynamics of "creative job destruction" than the Carolinas and Georgia. Even as an estimated 300,000 textile and apparel jobs have been lost (mainly to productivity gains), job growth in those three states has far outstripped the nation, as have the low unemployment rates. In North Carolina, the real per capita disposable income has risen nearly twice as fast as it did in the 1970s. The reason is obvious: booming high-tech and information sectors are offsetting losses in the textile industry, with jobs paying between $4.00 and $7.00 an hour giving way to jobs with annual salaries of $25,000 or more.

Yet lawmakers in these states are pushing hard for stiffer quotas to relieve their "depressed industries." McKenzie's chapter on the textile industry is a courageous exposure of the hypocrisy of an intensely profitable but generally badly managed industry attacking "unfair imports" for the natural job losses that accrued from its delayed and grudging productivity gains. It is easy for those of us who live in the North or on the coasts to savage such protectionism. To teach at Clemson in South Carolina and do so takes guts.

As Newsweek's Robert Samuelson wrote two weeks after the fraudulent Senate Budget Committee study was released, "The job gap is fictitious." Nonetheless, there is an element of truth to it: The old high-paid blue-collar jobs in steel and autos are declining, even as new high-tech jobs, many misclassified as "service-sector," are soaring. But contrary to the rhetoric, most of the jobs on the rise are higher paid and higher skilled than those on the decline, as McKenzie demonstrates.

One of the great media scandals of the past three years is that even as the low-pay-jobs thesis was given almost unlimited and prominent play, consistent scholarly rebuttals by responsible public statistical agencies were ignored. Never was this more evident than in the June 1988 issue of Monthly Labor Review, put out by the Bureau of Labor Statistics. Two of its labor-force economists, Michael Horrigan and Steven Haugen, detailed evidence that the percentage of families in lower-income brackets has been declining, while the percentage in higher brackets has been rising. With the exception of the Washington Post, the media have completely ignored their study and others like it, including McKenzie's book.

The "people who may take the new jobs of the future (who represent the 'creative' dimension of 'creative destruction') are not nearly so well defined politically" as those whose jobs are being destroyed, observes McKenzie. As a result, "jobilism involves an unbalanced political debate." Policies are nearly always reactive instead of proactive, destructive rather than constructive. "Markets definitely destroy current jobs, but politics just as surely destroy future jobs by obstructing, delaying, or redirecting the restructuring of the stock of current jobs."

McKenzie's book is an unemotional, completely rational clarion call for political wisdom, full of solid examples and evidence. But don't expect it to be heeded. Even as Europe is trying to unbind itself from its own labor-market sclerosis, Congress is determined to inject that disease into our body politic. The politicians will not likely heed McKenzie's final warning: "With industrial and labor policies designed largely to save established jobs, European countries have managed to bring job creation almost to a halt. American citizens and policy markets have that stark record to review. It is hoped they will learn from that real world experience." Don't count on it.

Warren T. Brookes is a nationally syndicated columnist for the Detroit News.