The fiery rhetoric during the most recent US presidential election has missed the point. The economic dislocation thrust upon so many Americans is due more to technological advances from capitalism. Canada needs to study the US example and find ways to reap the benefits of dynamic capitalism while supporting those left behind.
By Sean Speer, Nov. 24, 2016
INTRODUCTION
Donald Trump’s surprising election victory has produced a wellspring of early commentaries on its meaning for Canada. His pronouncements about trade, climate change, defence spending, and a range of other issues will invariably affect Canadian interests and it is critical that we are ready for the potential eventualities.
But Canadian policy-makers also need to derive some lessons from the issues that animated the presidential election and what it may mean for our own politics. The election revealed a growing public unease with the vicissitudes of dynamic capitalism that is not indigenous to the United States. A recent report found that more than 40 percent of Canadians are worried about their jobs being lost to automation and other technological advancements. It thus behooves Canadian policy-makers to grapple with how to continue realizing the benefits of dynamic capitalism while supporting those affected by the process of creative destruction.
Political experts continue to study exit polls and other data sources to better understand what motivated voters to elect Mr. Trump, but it is widely accepted that worker displacement and job precariousness were animating issues for a sizeable share of his electors. The shorthand explanation is a growing anti-trade disposition and economic anxiety in parts of the country. The full story is doubtless more complicated and requires some deeper thinking.
It is important that we think about how to help those experiencing the financial and non-financial effects of economic dislocation including the respective roles for business, government, and civil society in supporting them and their families. It is fair to say that this may prove to be among the most important economic and societal questions of our time. We must match its consequence with proportionate rigour and humility.
This short essay therefore does not purport to be conclusive. It is a preliminary and immediate formulation of one policy observer’s thoughts on the topic. The goal is to begin to reason through some of these big questions and what they may mean for Canada. The commentary takes the form of seven posits about creative destruction, left/right politics, and the limits of public policy.
1/ Creative Destruction is a Net Positive to our Economy and Society
The first posit is that the process of creative destruction, whereby the market produces a ceaseless churn of ideas, technologies, firms, and industries, is a feature rather than a bug of dynamic capitalism. As economist Joseph Schumpeter famously wrote:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.
The process he described is the means by which we create new and better products, become more productive and richer, and ultimately have higher living standards. It is decentralized, dynamic, and driven by market signals, gaps, and opportunities. Creative destruction is ultimately about how economies evolve.
This dynamism is neither an abstraction nor a process divorced from regular citizens. Not only does it contribute to higher hourly wages and higher living standards, it produces goods and services (think, for instance, of Uber or iPads) that improve and enrich our lives. Market-driven innovation is thus an egalitarian exercise that broadly benefits society and the general welfare.
But the “destruction” part of the phrase is an inextricable part of the bargain. The process of creating new industries does not occur without sweeping away parts of the pre-existing order. Jobs are lost, companies disappear, and industries are reconfigured. That is the nature of capitalism.
As economists Michael Cox and Richard Alm write: “A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever.” Put differently: we do not have the option of picking the good aspects of dynamic capitalism and eschewing the bad. They are one and the same. Flinching in the face of economic anxiety and agitation would therefore cause us to forgo the benefits of innovation and productivity.
2/ We Cannot Neglect Concerns about Worker Displacement and Job Precariousness
The second posit is that, of course, the subject of creative destruction and its implications for the economy and society have received considerable attention ever since Schumpeter coined the phrase in the 1940s. We are hardly the first generation to feel anxious and uncertain about the dynamic effects of market capitalism or to witness whole industries undergo technologically enabled transformation. One example: the US agriculture sector has seen its share of national employment steadily fall from 70 percent in 1840 to roughly 2 percent today. This is neither the first nor the last time that policy-makers will need to confront public concerns about worker displacement and job precariousness.
But, at the risk of sounding ahistorical, it does seem that the current magnitude of economic dislocation and its public awareness are higher than in recent memory. Technologies such as advanced robotics and artificial intelligence may prove to be even more significantly disruptive if widely adopted. The election of Donald Trump confirms its elevated place in our politics in any case.
We are witnessing similar nascent public anxieties here in Canada. Finance Minister Bill Morneau was recently excoriated for his comment that the future of work will likely involve more churn and have millennials experiencing multiple careers. The negative reaction to what is a patently true observation highlights the public’s conflicted views about the benefits and perceived drawbacks of dynamic capitalism. The Uber/taxi dispute in some cities and the ongoing political influence of supply-managed dairy farmers are other examples of the complicated politics of creative destruction.
So it seems inadequate to simply cite the disappearance of carriage- and harness-makers or blacksmiths as proof that this current experience is not unusual and thus not worth concerning ourselves with. Flouting these questions strikes us as not only a failure of empathy, but also as a doomed political strategy in the face of evidence that these issues seem to have growing resonance. There must be a middle ground between panic and neglect.
3/ These Issues Transcend Left/Right Intellectual and Political Divides
The third is that these questions do not easily conform to typical left-right preconceptions. Donald Trump’s electoral success cannot be interpreted as a validation of progressive or conservative ideas. He was a decidedly non-ideological candidate and his voters seemed to be motivated by non-ideological considerations. Mr. Trump’s economic message was a hodgepodge which drew from progressive ideas on trade and entitlement reform, and conservative ideas on taxes and the regulatory state.
This is somewhat intuitive. Voters concerned about worker displacement or job precariousness are unlikely to be motivated by a dogmatic check-list. Their concerns are less about first principles and more about practical matters such as rising living costs and economic opportunities. Mr. Trump’s economic populism offered the popular aspects of the Democratic and Republican orthodoxy and voters responded accordingly.
More generally, though, it will require thoughtful contributions from across the intellectual and political spectrum to craft an effective and positive agenda for those negatively affected by creative destruction. It will involve grappling with big questions about the trade-offs between efficiency and equity, the relationship between inequality and mobility, and the risks of diminishing incentives for entrepreneurship and risk-taking.
The first step should involve each side abandoning cartoonish characterizations of each other’s positions. No mainstream progressive voices are proposing a legislative prohibition on automation in particular or capitalism in general. No mainstream conservative voices are wantonly dismissive of the impact of economic dislocation on families and communities. These are questions that transcend partisan or ideological lines and we should treat one another with respect and goodwill in trying to address them.
Nobody has a monopoly on good ideas in the face of the opportunities and challenges posed by dynamic capitalism and there is more room for overlap and consensus than people may realize. An upcoming commentary with a former economic adviser to federal NDP Leader Thomas Mulcair on expanding the Working Income Tax Benefit to help low-income workers is evidence of this potential for a commingling of good ideas.
4/ Dislocation is Multidimensional
The fourth point is that it is not merely an economic matter and it would be a mistake to think about it only in materialistic terms. A guaranteed annual income has become a common response to the acceleration of automation and digitization in the workforce. The presumption is that displaced workers will lack financial resources and a basic government-provided income will fix the problem. But as US economist Arthur Brooks has recently shown, the real consequences of economic dislocation are much more multifaceted than one’s paycheque or bank account.
Much of the anger and frustration that have come to dominate post-election explanations seems to be less an expression of economic sentiment and more a sense of loss, or what Brooks and the Dalai Lama have described as “feeling superfluous.” It draws on an Aristotelian conception of work that sees it as a source of dignity and identity.
One person feeling unneeded or undervalued is unfortunate. A large number of people is a growing social problem. New research from political economist Nicholas Eberstadt of the American Enterprise Institute (AEI) shows that millions of American men have left the labour market (the share of men 20 and older without paid work is nearly 32 percent) and are now idle. The economic and social costs of what he calls a “normative sea change” could be significant in the short and long run.
The upshot is that any policy agenda to address these big questions must recognize that financial support is a necessary yet insufficient solution. Conservatives should come to see the utility of income-support programs with strong pro-work biases. Progressives should come to see the limitations of redistribution to address the problems that ail dislocated regions and workers. An effective policy response must speak to the financial and non-financial aspects of worker displacement and job precariousness.
5/ Robots rather than Free Trade are at the Root of the Issue
The fifth is that the US campaign’s focus on free trade and, in turn, cheap imports and outsourcing to lower-cost jurisdictions as the primary reason for worker displacement and job churn was wrongly placed. Notwithstanding Mr. Trump’s campaign message about renegotiating the North America Free Trade Agreement and rejecting the Trans-Pacific Partnership, the evidence shows that much of the concerns about negative job effects of free trade are misguided.
Yet this growing popular opposition to free trade continues to mount. And such views are hardly unique to the United States. A June 2016 poll by the Angus Reid Institute found that only one in four Canadians believes that the NAFTA has produced a net benefit for the country.
Technological adoption has been more responsible for economic dislocation than free trade or outsourcing. It is then less a matter of domestic production moving elsewhere or being replaced by cheaper imports and more readily explained by technologically enabled productivity gains. Put more simply: production has remained in the United States and Canada but employment has declined.
The result is that US manufacturing continues to set production and export records during this period that its share of national employment has fallen. A recent Ball State University study, for instance, finds that productivity gains are responsible for 88 percent of manufacturing job losses since 2000. As the economists write: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.” Or, as AEI economist James Pethokoukis has put it: If Mr. Trump is concerned about economic dislocation, he should “shut up about China and start railing against robots.”
This is not to say that free trade is not a contributing factor or that we should be dismissive of people’s concerns because they are mostly caused by automation and digitization. But it does mean that a public policy agenda designed to speak to the public’s anxieties must focus on the right issues. Abandoning free trade will forgo the enormous benefits that these agreements provide and have limited effect on worker displacement or job precariousness.
6/ Any Public Policy Response Must be Carefully Crafted
An instinct for government to impede creative destruction in the name of protecting workers can be as counterproductive as it is understandable. Nobody enjoys seeing people lose their jobs and politicians tend to respond to vocal constituencies. But the inadvertent consequences of halting or forestalling dynamism can be significant. A public policy agenda to address economic dislocation therefore must be carefully crafted.
Protecting a particular industry or firm blocks new innovations and technologies and also precludes other workers from getting an opportunity. The cost can be in the form of lower incomes and fewer opportunities. The Uber example is a good one. Uber has created employment opportunities for marginalized workers including the hearing impaired and some former felons searching for a second chance. Thus blocking the company from entering the market in order to protect taxi drivers essentially chooses the current workers over prospective ones. The result is a static economy in which those on the outside looking in are unfairly neglected. As US political commentator Yuval Levin writes:
Providing business interests (or labour, or any other established, well-connected group) with special benefits or shielding established market actors from competition is therefore anathema to the ethic of capitalism and democracy.
Of course, this does not mean that we ought to be insensitive or unsympathetic towards those negatively affected by the dynamic churn of capitalism. Quite the contrary. It is the premise of this essay that we need to develop an agenda that speaks to their circumstances and helps them adjust. But it does mean that we must be careful about simple solutions. A renewal of protectionism or more state-directed corporate welfare, for instance, may proffer short-term political upsides, but will ultimately do more harm than good.
This list is far from exhaustive, but such an effective public policy agenda to address economic dislocation may include (in no particular order): education and career training reforms, more flexible labour market rules, an economic-focused immigration policy, expanding the Working Income Tax Benefit, liberalizing zoning policies that drive up housing prices, targeting unfair trading practices in other countries, and transition programming to help regions or countries experiencing structural economic changes. There are no doubt other ideas to be added, but this initial list should have broad-based and multipartisan support.
The key is a pro-growth agenda that creates the conditions for investment and job creation. We should not come to see dislocated workers as a liability to manage but rather assets to be cultivated and deployed. This requires a growing economy. Therefore, we need to pursue the basic building blocks of a pro-growth agenda, including low, competitive taxation, sound public finances, limited and predictable regulations, a pro-competition legal framework, and key public investments in human capital and basic infrastructure.
7/ An Effective Response to Economic Dislocation Cannot be Limited to Government
The final point (which relates to No. 4) is that an effective response to economic dislocation cannot be limited to government. The effects of worker displacement and job precariousness can come to assume a community dynamic with pervasive consequences that transcend public policy. It requires a more holistic vision that sees a role for civil society, communities, and families. As US public intellectual J. D. Vance has said about the plight of the white working poor in Appalachia: “Public policy can help, but there is no government that can fix these problems for us.”
It is important then to ensure that we create the conditions for community engagement and leadership. Solutions cannot be imposed from afar. Community politicians, church leaders, teachers, philanthropists, and parents must be at the root of these larger economic and social manifestations of dislocation.
Indigenous communities in Canada are an example. The federal government has a role to play with regards to better services and infrastructure, greater support for child care and early learning, and stronger families. But fundamentally, it is more about removing the obstacles to Indigenous communities defining and pursuing their goals and aspirations. As we have written elsewhere: “Real reconciliation cannot be managed out of Ottawa.”
The same insight applies to non-Indigenous communities dealing with challenges brought about by economic and technological changes. These communities must assume responsibility for their conditions. There is also a role for businesses to play their part in the form of retraining, settlement offers, and community participation. The point is that an effective and positive agenda to address these public anxieties and agitations about creative destruction will require more than public dollars or government programming. Civil society, broadly defined, must have a large role to help affected communities remain productive, healthy, and good.
CONCLUSION
The presidential election has partly put dynamic capitalism on trial in the United States and it would be wrong to assume the same sentiments are not present here in Canada.
It is important we come to understand the economic and social effects of economic dislocation and the respective roles of business, government, and civil society to help those regions and workers affected by structural economic changes. This will invariably involve contributions from across the intellectual and political spectrum. We must seek to address the financial and non-financial consequences of worker displacement and job precariousness. We must also recognize the limitations of public policy in addressing public concerns about creative destruction.
This short essay represents a preliminary and immediate attempt to reason through some of these big questions. It is rooted in a belief that we must strike a balance between panic and neglect and proceed with a high degree of humility in our ability to anticipate economic and technological changes and how they affect workers and communities. It is incumbent upon policy-makers and others involved in public policy debates to develop an effective and positive agenda that begins to address the public anxieties and agitations that were revealed in the US election.
Sean Speer is a Munk Senior Fellow at the Macdonald-Laurier Institute.
