As I See It: What's Next?

Published: December 14, 2009

by Victor Rozek

Everyone is an expert now, but two years ago very few economists predicted the coming tumble, much less the depth and severity of the recession now gripping the country. Therefore, a good deal of skepticism is in order when listening to talk of recovery. For one thing, "recovery" is a relative term. Slowing job losses are heralded as proof of recovery--happy signs for economists, but meaningless to the 8 million people whose jobs have been eliminated.

These days, however, even the optimists are cautious. One thing almost everyone agrees on is that things will either get slightly better, or horribly worse. Ben Bernanke, the chairman of the Fed, recently warned that the economy still "confronts some formidable headwinds." By that he means that socialism worked well enough for the big boys, but the little guy can expect high unemployment for at least the next three years. So, keep that champagne on ice.

Still, IT was one of the non-financial sectors that actually benefited from the bailouts. Information technology and telecommunications--the common denominators across all sectors of the economy--profited from the mountains of money the government spent to prop up the recovery. But while IT lost fewer jobs than other sectors, one of the post-bubble consequences was that the industry was left with excess capacity. For the industry to grow, a substantial increase in end-user demand will be required, and based on prior bubbles, it will likely take years to shake off the surplus.

In that case, one would think that innovation and productivity would provide powerful antidotes to the ailing economy. But there is a twisted logic to economics that punishes workers for holding up their end of the recovery stick.

For those in a position to hire, recessions create exploitable conditions: an excess supply of labor, suppressed wages, and workers propelled to work harder just to keep their jobs. Increased productivity, which theoretically should benefit both employers and workers, now favors only management, because workers have no leverage. That, in part, accounts for the jobless recovery.

The figures for the third quarter tell the tale.

This may come as a surprise to those with stagnant wages, but the economy was wildly productive during Q3. Using seasonally adjusted numbers, productivity increased 9.5 percent in non-agricultural business sectors, even as unit labor costs fell 5.2 percent. In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent. Add those last two numbers together and that's a 20-plus percent swing, all in one direction. For management, fewer workers = higher productivity + more profit; while for workers, fewer jobs = lower wages + more work. "Call me crazy," says journalist Laura Flanders, "but the spoils are pretty nifty: fewer workers, lower wages, and a more terrified workforce. From a winners' point of view, what's not to like?"

Some economists claim that increased productivity will only depress employment for the short term. Indeed, for IT, productivity gains have historically fueled industry growth by contributing to falling prices. But an unforeseen side effect of a favorable price/performance curve was the exportation of user-friendly programming languages and development tools. By demystifying computing and making it affordable, computer usage increased dramatically in countries where it had previously been marginal. The more the domestic IT industry exported its productivity gains, the more competition it created for available jobs.

IT professionals remain vulnerable to exporting innovation and thus mentoring their replacements. The challenge for the IT sector will be to keep pushing innovation faster than it can be broadly assimilated, in effect staying one step ahead of foreign demand. And all things considered, the industry has done remarkably well in that regard. But that trend may by changing. For one thing, supercomputing has bumped up against the laws of physics, and beyond adding processors, no one knows exactly how to increase speed/performance at the top end. Parallel processing is not appropriate to all applications, and barring a major technological breakthrough, Moore's Law may have run its extraordinary 40-year course.

In spite of recent productivity gains, Americans are apparently worried about our continued ability to innovate. According to a Newsweek survey, 61 percent of Americas believe the recession has had a negative impact on our ability to innovate, and only 41 percent of Americans believe the U.S. is staying ahead of China on innovation.

And when American optimism is damaged, we are indeed facing a serious crisis. So what happened?

For most of us, events are free flowing, and we ride the river as best we can to avoid getting swamped. But in the face of recent economic events, it's getting harder not to acknowledge that we are being manipulated by forces beyond our control. And for working people, those forces have been especially malevolent. When huge transfers of wealth occur, such as occurred during this past decade, we can at least consider the possibility that the river flows are being managed.

Blogger John Newell offers this explanation. "The Establishment," says Newell, "sets the standard of living of the population as a compromise between their profits and their security. If the standard of living exceeds the set standard, the Establishment loses profits; if the standard of living is less than the set point, the Establishment's security is lessened." What we are seeing is a major adjustment.

But when the balance shifts too far toward profit, the Establishment must use increasing amounts of force to maintain its safety. And the reverse is true as well. When the working classes have too little wealth, or their safety is threatened, they will strike against people they see as oppressors. Then, a parasitic cleansing occurs. Just ask Louis XVI.

Well, there are a lot of angry people out there, and increasingly they are becoming desperate. If the job recovery lags behind the expiration of unemployment benefits and the exhaustion of available credit, what next? Angry and desperate is a bad mix, and the establishment might find itself scrambling to maintain its security.

Paul Krugman offers this visual: If in 1973 a height of six feet represented the average income, the income of the rich topped out at over 113 feet. Move ahead 22 years to 2005, and the average income has risen to a height of 8 feet, while the top incomes now tower at 560 feet. And that was before the multi-trillion dollar transfer of wealth known as the bailout.

What's next is that the tension between profit and safety will grow, and if everybody's worst nightmare--runaway inflation--occurs, all bets are off. IT professionals will remain more insulated than most, but if the best the government can do is slow the rate of job loss, it's going to be a long, and for some, a very desperate year.

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