2011-01-29

Sumner Replies on the Great Stagnation

First a quick item of business: Out of politeness, I am responding to Sumner here rather than on his own blog. He gets lots of replies, and my point is to a great extent a tangent on his original point. Rather than mucking up his blog, I thought I'd much up mine. ;)

To bring you up to speed, here is my original comment:
Prof. Sumner, there is much that you wrote with which I disagree, but one paragraph stood out in particular:
“That means we need more construction workers, and granite miners (quarriers?) We need more cooks and waiters. We need more hotel receptionists and maids. More people to work on Carnival cruise ships. I think our workforce is skilled enough to fill those jobs. It’s very lucky that the high tech companies that will provide all sorts of wonderful services do not need many workers. We aren’t Singapore, and would have trouble supplying them.”
You have basically just described the economy of the Dominican Republic. No, worse: You have described the economy of the Dominican Republic minus the sugar cane, tobacco, and rum.
A 3rd-world country with no cash crops, a plummeting currency value, increasing tax rates, and a shrinking interest in education.
Welcome to the new Dark Ages.
 Sumner replied as follows:
No, because the DR can’t produce all those high tech goodies, and it can’t even produce the houses and services nearly as well as we can. Carnival is an American company, not a DR company.
Sumner's point is threefold: (1) The USA is already a high-tech economy; (2) the USA has much higher worker productivity than the Dominican Republic; (3) The USA is where all those big hospitality companies are based.

I'm going to respond in reverse order:

Regarding (3), while Sumner is right about Carnival, he's not right about companies like Iberostar and Riu Hotels, which are the real hospitality stars in the DR. One is a Spanish company and the other is Brazilian. Sumner's point that the USA houses the headquarters of large international companies - and therefore we continue to demonstrate comparative advantage in intellectual capital - is true today. However, it is a tenuous and rapidly loosening grip on the international economy. I'm not a nationalist, but if we're talking about what's good for gross domestic production, we can all agree that more big successful companies = better. The USA is loosing ground to more competitive companies in countries that will probably not be considered "developing" later in my lifetime. The US economy should step up its game or risk becoming the inefficient producer.

Regarding (2), I'll cite from personal experience. I know a man who runs a one-man web design company. He does the aesthetic designing and client contact, then he outsources the programming to India and Pakistan. Remember, programming is supposed to be that kind of tech work in which the USA is vastly superior. Not anymore. Good code can come from outside the "developed" world, too.

Our higher productivity comes from a superior capital stock. That's it. Mises pointed this out in Human Action back in the 1940s, and probably earlier, too. As soon as the capital stock in developing countries catches up to ours, say goodbye to our comparative advantage.

Again, I'm not one to seek national superiority. But where do you want to live: in a declining country, or a rising one? The USA is declining. The developing world is rising.

Regarding (1), let's recall the context of the discussion. Tyler Cowen suggested that the USA can maintain its position as a major productive force if we make science and technology more socially illustrious. Sumner countered that in the future we will need a smaller technological workforce and a larger service-industry workforce.

So, were we to take Sumner's advice, how long would we continue to be a high-tech powerhouse?