The Internet, with all its benefits, has really hurt the American economy. It’s a little theory of mine. Here is how I came to that conclusion…
The Lost Decade+
Since 2000, right about the same time the internet started playing a strong role in a global economy, the S&P 500 index has actually declined 20%. That means, if you “invested” all of your money in the S&P 500 12 years ago and pulled it out today, you’d have 20% less than what you started with, excluding any dividends and inflation. Correlation doesn’t always mean causation. But, isn’t it peculiar that we’d see a net loss of market wealth at a time when the Internet made a global economy possible?
The “lost decade” of investing is close to becoming the “the lost 12 years” and counting and globalization is to blame.
That’s not all. Outside of health, education, and government, the U.S. didn’t add any jobs in the decade that started in 1999, despite our population increasing by 10% in the same time period.
Globalization’s Impact on our Jobs
Some may argue that there was a globalized economy before the rise of the Internet. That is partly true. However, globalization was only available to the largest of the large multinational corporations who had the resources to take advantage of it – large industrial manufacturers, large scale commodity (food, energy, mineral) importers/exporters, and the largest clothing manufacturers.
Today, a 19 year-old living in his mom’s basement can set up an e-commerce store and sell cheap goods from a Chinese manufacturer that pays its workers $1.50 an hour, whom he found through a global marketplace like alibaba.com. Any individual or corporation can find a cheaper alternative if they look long and hard enough online. This simply wasn’t possible for most until the last decade. Between 2001 and 2010, the U.S. lost 2.8 million jobs due to its trade deficit with China alone, 1.9 million in manufacturing.
The Internet put globalization into turbo mode.
Can you blame a company as big as Apple, AT&T or Comcast (call centers), Nike, or GM for taking advantage of cheap labor and materials to drive up profit margins, particularly when all of their competitors are already doing it? Can you blame www.live-in-moms-basement-lampshades.com for re-selling lampshades made in China that cost them one-fifth the price similar lampshades made in the U.S. would cost them? Particularly when all of their competitors are already doing it and every consumer has become skilled at finding the lowest priced alternative online? Loyalty to the American worker means nothing to Wall Street or to Joe Startup who is looking to make the best living for himself.
The Race to the Bottom
Corporations exist to make increasingly higher profits and they’ve succeeded. But it hasn’t been from adding more employees or paying higher wages.
If work can be done cheaper elsewhere, it will be. With a world population nearing 7 billion and growing quickly, there will always be a few hundred million, or billion people willing to race to the bottom and the American worker will lose 9 times out of 10.
In the process of globalizing everything we sell or buy we have made many of our jobs obsolete. These jobs simply aren’t coming back. The factory worker, call center rep., shoemaker, tailor, and farmer are all dying a slow death in the U.S.
To say “we need to start making things again” totally misses the reality of the marketplace.
The jobs that will remain will either be:
- location dependent/high wage/high expertise: doctors & other medical, electricians, lawyers, on-site engineers, professor, executives, etc.
- location dependent/low wage/low expertise: grass cutters, restaurant workers, retail workers, etc.
- location dependent/medium wage/low expertise/union jobs: construction, public blue collar, public white collar, transportation industry. Note: there is a corporate/political war against unions to drive wages lower with these jobs. This class may not be around in 20 years.
- location independent or dependent/high expertise entrepreneurial: self-employed writer, photographer, restaurant owner, etc.
Employer-based, location independent jobs, regardless of expertise, will be close to 100% outsourced.
Surviving & Thriving in the New Economy
I started off this post with the premise that the Internet has “destroyed” the American economy. In reality, it has destroyed the old American economy. The old economy had a heavy reliance on manufacturing and a unionized middle class to drive it. As these middle class jobs have been outsourced to the global economy, unemployment has risen and the average American’s spending power has decreased.
We are in a transition period that may last decades. A successful new growth economy may eventually emerge, but things will never be the same. This does not have to be a sad story. You can respond. America can respond.
How can you respond? You can choose one of the four alternatives above. Only two seem acceptable to me. The first is the employer based location dependent/high wage/high expertise jobs. You need a lot of education, expertise through experience, or both to land one of these jobs and be successful with it.
The other is the entrepreneurial route. 70% of Americans want to be self employed. Is it at all a surprise with the war against unions and the race to the bottom by corporations that people want to take matters into their own hands? If you can create something unique or provide a high value service to others, you can succeed.
If you like working for others, choose the first. If you don’t, choose the second. Any other alternative will leave you vulnerable and without a real career to speak of.
No matter how you move forward in the new economy that has been created by the Internet, the irony is that you’ll need to embrace the Internet every step of the way in order to succeed. With it, there is no reason things can’t be better than before.
Was this written by Luddites?
“Employer-based, location independent jobs, regardless of expertise, will be close to 100% outsourced.”
That is simply untrue. Any generic job *could* be. Ask a lot of companies who outsourced software development in the early 2000’s — there are drawbacks. Language barriers, poorly maintainable code, etc. that make one of the most attractive jobs to outsource far less practical.
If you have any sort of niche industry, you won’t see it popping up in India or China. For example, I do litigation support for long-tail liability insurance claim recovery. It’s location-independent for where I need to be to work, but there are jurisdictional concerns intertwined with case law that aren’t something simple to master and outsource.
Solution: be something special. This has always been the answer for job security. Just like in the 50’s when we “made stuff”, screwing in screws and bolting bolts can be done by damn near anyone. Now the “anyone” also takes into account machines and foreign markets. Tough. Adapt & survive. Never get comfortable.
A luddite is a person who is opposed to technology. Nothing in my commentary says that I’m actually opposed to technology. I’m simply stating the facts around how the Internet has changed our economy. At the end of the post I state, “With it, there is no reason things can’t be better than before.”
Damn that internet for lowering prices, increasing access to cheaper alternatives, expanding consumer choices, and allowing businesses across the globe to connect and better serve their customers. Damn it to hell!
Maggie – I sense your sarcasm, but I actually agree with you. The Internet has been great for consumers and great for businesses. It’s also brought us economic harm in the short-term. Long-term, I expect that to change if people adapt.
Unfortunately who are these consumers, are they a different species of animals, aliens from outer space? You make an arbitrary line between consumers and producers, everybody is a producer and everybody is a consumer, everybody needs food and water and the only way to get that is MONEY, the only way to get money is by a job. You see you may have more choices but what good are those when your job has been outsourced to Chinese slave labour?
If you’re still not getting the drift, imagine your self as a business, and your employer as a the consumer, if the consumer has more choices, cheaper alternatives why they should they hire (employee) you, what’s the result you starve to death.
Seems like these are all well-known issues that American businesses had every indication would arise. Many failed to respond. And many now American businesses took advantage to adapt where the too big to fail companies didn’t. This allowed companies like Google to prosper while newspapers and old media didn’t. I think there are business lessons here. And individual personal finance lessons as well. It wasn’t the internet. It could be any market force. Hope the lessons are learned
I don’t agree with all of your examples for the high wage earner who will survive outsourcing and the like (think legalzoom.com, recorded lectures, and robot assisted surgeries). But specializing in a particular field, especially if it is not location specific, or creating your own business is the way to go.
I have come to a similar conclusion as you hence one of the many reasons to start my own business. I am just getting things underway, but plan to be a dominant player in my industry within 2 years.
There is something missing from the analysis. A lowering of supervisory standards. Look at the instances of lead in the paint of children’s toys from the far east. It costs more to inspect plants and items thousands of miles away, so the inspections are simply not done. Look at the cases where people got sick and died from food and it took weeks or months to track down the source. Years ago, if someone got sick in a eating out, the owner could tell you who he bought the food from, and that supplier would indicate the appropriate local farmer. The technology exists today to mark batches of food, but the companies are cheating on the costs. This is much the same as years ago when it was common practice for factories to dump dirty, poisonous waste water back into the rivers instead of cleaning the water up. The true cost of doing business was not being paid by those who were making the profit.
Curiously enough, as much as everyone complains about energy costs going up, the more oil prices rise the better it is in the long run for American manufacturing because increased shipping charges make the foreign goods more expensive.
Not long ago did I read – and I think this was Krugman’s column in the NYT – that some amount of manufacturing is actually returning to the US, just because of supervisory issues as Warren stated. This is also reflected in criticisms of the theory of the race to the bottom: a lot of the time, the drawbacks to outsourcing actually outstrip it’s benefits.
Regardless, there’s no doubt that the Internet wrecked the old economy – not just for you Americans, but for Europeans, and for Africans, and for Asians as well. This is Schumpeter’s creative destruction! I would venture that it is even more important than the introduction of the microprocessor. So the S&P 500 is falling – i.e. the significance of listed companies is being diminished, probably quite likely because of crumbling barriers to entry and new opportunities given by the Internet. “The economy” isn’t being damaged, it’s being changed!
The internet definitely spurred globalization. Globalization has obviously made it possible, and sometimes more cost efficient, to outsource jobs to other countries. However, I wouldn’t say that the internet has decreased jobs throughout the world. We still make now what we made 10-20 years ago, tangible items. The internet has increased the need for an entirely new skill set.
That is a really interesting take on the American economy for the last 10 years.
I would argue that the nature of work has changed in a very fundamental way here in the US…..there seem to be many more small businesses starting and thriving lately.
In particular, publically traded companies have really taken advantage of the outsourcing route, but at some point, the cycle will reverse as the dollar continues to weaken.
Good article though.
I agree with most of your statements. I am also looking for a definitive conclusion on whether the internet did in-fact kill jobs.
Globalization has been happening since the silk road.
Outsourcing has contributed to loss of jobs, but business has to outsource to stay competitive.
The Internet took away tax revenue from towns/states but not really from business. It also increased business for most, as now their audience was much larger than just locals.
Outsourcing in aerospace/aviation was not cost effective as foreign machine shops and meterials often had to be sent back due to defects or re-machined to FAA specs… shipping across the pond multiple times is NOT cost effective, neither are jet engines falling off planes or just blowing. LMAO! Why don’t we ousource plutonium production?
The Economic slump was do to WALL ST., overspeculation and plain old human GREED!
Not the internet. The internet created jobs, just ask silicon valley!
I’ve always wondered why there weren’t more posts like this. It’s so obvious the Internet has destroyed many businesses not only in the US, but also around the world. Before the Internet, people bought things without paying much attention to their prices. Now that it’s so easy to compare prices, we don’t want to be ripped off anymore. Reasonable prices are welcome, but that also means the margin has shrunk dramatically for companies. Why can they survive without profit? There’s always a limit to cost reduction.