Nearly Half Of Pandemic Job Cuts May Be Permanent

It has been assumed by many that the economy would return to normal quickly after the pandemic runs its course. A new study suggests that the downturn may be more prolonged and that many job losses will be permanent due to fundamental changes in the economy, however.

“We find three new hires for every 10 layoffs caused by the shock and estimate that 42% of recent layoffs will result in permanent job loss,” wrote Jose Maria Barrero, Nick Bloom and Steven Davis from the Becker Friedman Institute at the University of Chicago, quoted in Forbes.

The unemployment rate currently stands at 14.7 percent representing more than 20 million lost jobs. Many of the Americans who are still employed are being paid to stay home through the Paycheck Protection Program.

“It’s worse than it looks,” says Michael Reynolds, an investment strategist. “The labor force participation rate is even worse.”

The labor force participation rate fell to 60.2 percent in April, a level not seen since the early 1970s. The number is all the more startling because at that point there were far fewer two-income families.

It may get worse. If Congress does not extend the PPP and the economy does not recover, employees whose pay is currently being funded by the program may be laid off after it expires in September.

Even the lifting of stay-home restrictions may not be an immediate boon to the economy. Two new reports from the National Bureau of Economic Research suggest that states that did not have shelter-in-place orders fared just as poorly as those that did.

Rather, the economic destruction was wrought by people voting with their feet to not go into public places that they saw as a hot zone. My observations around Georgia, the first state to reopen, confirm that many, if not most, Georgia residents are not ready to return to business as usual. The same is undoubtedly true around the country, a new poll shows that 53 percent want shelter-in-place policies to remain for another month, and the world even though reopening activists are a vocal minority.

Without a vaccine or treatment, the global economy cannot return to normal without sparking a second wave of the pandemic. Rather than the “v-shaped” recovery initially hoped for by many, it now looks as though the recovery may follow a shape similar to the Nike “swoosh,” a steep downturn followed by a slow, shallow recovery.

Going forward, it is likely that there will be permanent changes to what we think of as normal. The online economy will grow while sectors that rely on close personal contact will decline. Many of the jobs in those sectors won’t come back.

The new economy will come with new jobs but the downside is that many low-income workers won’t be qualified for the new jobs. It’s also possible that the shift will mean a net loss of jobs for the foreseeable future.

The world was already undergoing a transition due to automation and the internet. That trend is going to be accelerated by the pandemic. It will get better but we are in for a rough few years.

Originally published on The Resurgent

Unemployment Jumps To 14.7%, May Take Decade To Recover

It is looking more and more as if the effects of the Coronavirus recession may be a prolonged downturn rather than a short recession. The Trump Administration’s optimistic view is that jobs will return almost as quickly as they were lost when the economy is reopened, but an analysis by JP Morgan paints a darker picture.

The Bureau of Labor Statistics announced today that the unemployment rate has reached 14.7 percent. The 10.3-point jump over the past month and the 14.7-percent unemployment rate are both the highest recorded since the metric began to be published in 1948.

In an interview with Bloomberg, JP Morgan Chief Investment Officer Bob Michele said that it could be more than a decade before the US recoups the job losses that it has incurred over the past several months due to the global pandemic. Michele said that the recovery won’t be as simple as flipping a switch to turn the economy back on.

“It’s going to take years, or longer to get back to where we are, or where we were,” Michele said.

Michele said that unemployment is predicted to peak at about 15-20 percent. The recovery from the peak will take months.

“When you look at the congressional budget office forecast for the end of 2021, they have unemployment at nine percent, so sure, materially better than where we’re going to peak in the high teens, but during the peak of the financial crisis, unemployment hit 10 percent,” he said. “So even looking out a year and a half from now, we’re still going to be roughly where we were at the peak of the financial crisis.”

“The other thing that we are focused on is what happens when the people return and the PPP [Paycheck Protection Programs] run out?” Michele said. “Are businesses going to find that their customers aren’t returning the way they were pre-crisis and are they going to end up starting a round of layoffs that nobody has anticipated?”

There is evidence that layoffs are coming in some industries when the PPP money is exhausted in September. United Airlines has already begun a process that will furlough more than 4,000 pilots and a third of its management and administrative staff.

“One of the things we did was to just predict a downdraft in the second quarter, somewhere around 10 percent, so call it 38 to 40 percent annualized, and say that’s the trough, and then start this journey back up to the long-term trend rate,” Michele said. “To catch up to the long-term trend rate that’s been in place, call it 1.5 percent, pre-crisis, to fill that output gap, we estimate it will take ten to twelve years.”

“That’s a long time, but is it unrealistic?” he asked rhetorically. “No, after the financial crisis it took about eight-and-a-half years to catch up to the long-term trend line.”

The length of the downturn may be dependent upon whether a vaccine or treatment for COVID-19 is found. Many people will not want to travel or congregate in public places until they can be reasonably certain that they won’t contract the disease or that it can be successfully treated if they do.

The economic difficulties would likely have been encountered regardless of whether the economy was shut down or kept open. Sweden, which was one of the few countries that did not suspend its economy and order a shelter-in-place, is also forecasting gloomy times ahead per CNBC. Decisions by Swedish citizens to social distance and stay home more often, even without a government order as well as a slowing global economy play into the forecast.

Michele also warned that the “massive” amounts of debt that are being undertaken by governments, businesses, and consumers could also be a threat to the recovery. Central banks will need to ensure that the cost of funding that debt does not escalate out of control, he added.

Michele did advocate “actual stimulus” as opposed to the government spending that has so far been aimed at minimizing losses to businesses and individuals.

“What about a trillion-dollar infrastructure spend, instead of spread out over 10 years, maybe spread out over four or five years?” he asked, “Something out there that creates new aggregate demand while we recover.”

One problem with additional deficit spending on infrastructure is that the United States is already deeply in debt from deficit spending during the good years. With spending increasing and the economy contracting, the national debt is poised to explode both in terms of real dollars and as a percentage of GDP. The implications of a post-pandemic debt crisis are uncertain but it can be assumed to very bad.

The good economy was to be the touchstone of Donald Trump’s re-election campaign. In the space of two months, however, the economy has been reduced to a shambles that will take years to rebuild. We will find out later this year whether voters trust the president to lead the reconstruction effort.

Originally published on The Resurgent

When Your Employees Hate You For Saving Their Jobs

The Paycheck Protection Program is designed to help businesses keep their empoyees on the payroll. One spa owner in Washington State was excited to be approved for the program so that she didn’t have to lay off employees. She was shocked when her employees angrily told her that they would rather collect unemployment.

CNBC reports that Jamie Black-Lewis was upset when her two nonessential businesses had to close during the shelter-in-place. She had to stop paying 35 employees – including herself – at her two spas.

Soon she found salvation in two forgivable loans from Paycheck Protection Program. The loans, one for $177,000 and the other for $43,800, would be used to meet payroll and pay other business expenses until she could reopen.

Black-Lewis excitedly held a virtual meeting of her employees to give them the good news, but, instead of finding relief and gratefulness, she says, “It was a firestorm of hatred about the situation.”

The problem, as the employees saw it, was that they would make more money if they collected unemployment than if they collected their regular paychecks. The CARES Act added a flat $600 weekly benefit to state unemployment payments. In Washington, where the minimum wage is $12 per hour, a 40-hour week for a minimum wage worker pays $480 before taxes. The $600 bonus is like an extra week’s pay for many people even though unemployment benefits normally pay only a percentage of lost wages.

“It’s a windfall they see coming,” Black-Lewis said . “In their mind, I took it away.”

“I couldn’t believe it,” she added. “On what planet am I competing with unemployment?”

The unwillingness of employees to stay on the payroll now creates a problem for Black-Lewis. The relief bill allows business loans to be forgiven under certain conditions. Among the requirements are that most of the funds have to go toward payroll, salaries must remain intact, and the number of employees cannot decrease. Businesses have until June 30 to rehire workers who have already been laid off.

The wording of the CARES Act creates what economists call a perverse incentive. A law that was intended to help keep workers on the job, when put into practice, is encouraging employees to ask to be laid off.

This is not a new phenomenon. A Cato Institute study from 2013 found that when all forms of government assistance were taken into account, welfare paid more than minimum wage jobs in 35 states.

I have even had experience with this problem myself. In 2004, I was a pilot for Independence Air. Independence had been borne of a regional airline, Atlantic Coast Airlines, that operated as both United Express and Delta Connection. After United’s post-September 11 bankruptcy, ACA lost its contract with United and tried to make a go as an independent low-fare carrier similar to Southwest and JetBlue.

The attempt did not go well, thanks in large part to the spike in fuel prices that occurred at the same time. I was furloughed (laid off in airline speak) in 2005 and went on unemployment with a wife and new baby to support.

I immediately started looking for a new job and found one after only a few weeks at Delta’s Atlantic Southeast Airlines subsidiary. The only problem was that thanks to a super-low probationary pay scale in ASA’s pilot contract, I made less as an employee than I did on unemployment.

With a new baby in the house, it was difficult to give up the extra money. However, I saw that the pay cut would be a temporary setback. Before long, I would be making more money working than not working. It was a no-brainer.

For workers who have been locked into low-paying jobs for long periods, however, the choice might not be so easy. This is especially true when the unemployment benefits continue for an extended period, such as the 26 weeks granted in Washington. The difference in take-home pay would be YUGE for a low-income worker who earns an extra several hundred dollars per week on COVID unemployment for six months. It isn’t a matter of being lazy, it’s a sound financial choice, at least in the short-term.

And the fact that it’s a short-term choice is the real problem. When unemployment runs out, these workers will be looking for jobs in an economy that may very well be in a recession. Their original jobs may be long gone, either taken by someone else or eliminated, and new jobs may be scarce.

The other problem with staying on unemployment is that it doesn’t take raises, promotions, and benefits into account. Workers who come back on the job would be eligible for raises and promotions to better-paying jobs. This was what happened to me after I had worked at ASA for a while. Longevity on the job meant that I was entitled to higher pay rate. I also got promoted to a larger airplane which included a pay bump as well.

People who stay on unemployment also forgo the fringe benefits that come with jobs. These often include health insurance, which should be considered a must-have in the Coronavirus era. Likewise, unemployment does not come with a 401k to help save for retirement.

Finally, working at a job, even a low-paying one, is a stepping stone to better things. Building a resume helps workers become qualifed for better jobs that come with higher pay and more benefits.

On the other hand, long gaps of unemployment are a red flag to employers. Business owners like Black-Lewis may think twice about rehiring workers who would rather sit home on unemployment than come to work. In a job market with millions of unemployed people looking for jobs, it should be easy to replace workers who don’t demonstrate a good work ethic.

Workers would be well-advised to forgo the unemployment “windfall” and hang on to their full-time jobs for many reasons, but the fundamental problem of government benefits that are too generous is one that won’t go away with the pandemic. While unemployment benefits are well-intended, if they encourage people not to work, employers end up competing with the government for workers. If a program encourages workers to collect benefits rather than work, it has not been well-designed.

President Trump recently signed an Executive Order suspending immigration for 60 days, claiming that the move was needed to get Americans back to work. In reality, the competition for jobs is not between American and foreign workers. It’s between businesses and the government.

Originally published on the resurgent

CEOs Weigh In On When America Should Return To Work

The unprecedented economic pause that America is currently experiencing comes with a question: How and when should the economy be restarted and Americans sent back to work? The Trump Administration and business leaders are working together to walk the tightrope between restarting too early, which could rekindle the pandemic, and waiting too late, which could cause irreparable economic damage.

“The damages of keeping the economy closed as it is could be worse than losing a few more people,” Tom Golisano, founder and chairman of Paychex Inc., told Bloomberg in March. “I have a very large concern that if businesses keep going along the way they’re going then so many of them will have to fold.”

“You’re picking the better of two evils,” said Golisano. “You have to weigh the pros and cons.”

Golisano advocated partially reopening the country. Hot spots would remain under lockdown, but people in areas that were not hard hit could venture out and return to work.

Golisano’s comments echo the president’s repeated desire to put the country back to work. Mr. Trump originally targeted an end to stay-at-home orders for Easter Sunday but was forced to relent on that plan in the face of predictions of catastrophic death tolls. White House medical advisors predicted that ending the mitigation strategies early could increase deaths from 200,000 to more than two million.

The desire of the president and business leaders to get America back to work conflicts with the advice of medical leaders such as Anthony Fauci. Speaking to CNN last week, Fauci said all governors “really should” issue stay-at-home orders to slow the transmission of the virus, adding “I just don’t understand why we’re not doing that.”

Fauci’s belief in the need for Americans to stay home has earned him attacks from some pundits such as Rush Limbaugh, who called Drs. Fauci and Birx, both prominent members of the Coronavirus Task Force, “data-slaves” and members of the “Deep State.” The anger and threats directed at Fauci prompted the Health and Human Services Department to give the immunologist a security detail last week.

Nevertheless, Americans can’t stay home forever. The question is when to send them back into the workplace.

Gary Cohn, a former Trump economic advisor and president of Goldman Sachs, said in Axios that business leaders need “a realistic timeframe” because they are concerned that employees will leave to take other jobs. Further, some business owners are mulling whether to cut their losses and “just lay my people off and shut down and give the landlord the key.”

Dr. Fauci said last week that the return to work is dependent upon the results of the mitigation strategies.

“I think if we get to the part of the curve … when it goes down to essentially no new cases, no deaths at a period of time,” Fauci said, “It makes sense that you’re going to have to relax social distancing.”

That metric may be met at different times in different parts of the country and for different industries. Areas that have already flattened the curve might be released for work before areas that have not yet peaked, for example. Industries in which workers can be separated from each other or where they can wear masks and gloves could also be restarted earlier than those in which people are in close proximity without protection. People who have already recovered from the virus or who test negative might also be returned to work earlier than those who have not been tested.

Cohn also cautioned that past downturns had shown that depression and substance abuse can become problems for people who don’t work regularly and are worried about their financial wellbeing, saying, “No one wants to talk about this, but can you even get workers back who aren’t so addicted or depressed they can actually function?”

The flip side is that workers, especially those who are high-risk, may refuse to return to jobs if they feel that the situation is unsafe. This is especially true as the death toll continues to rise and thousands of new cases are reported daily around the country. Those employees who did return to work might find that there were no customers since many people would prefer to shelter-in-place rather than risk becoming infected on a shopping trip.

“If this goes on too long, the fear builds more and more,” the executive of a global company told Axios. “We need to lay the groundwork for the fear to ebb.”

For the fear to ebb, the death rates will have to fall. Right now, the IHME models are predicting that won’t happen nationally until April 16. For many states, the peak will come even later. The CEOs that Axios talked to said that most workers probably wouldn’t be back on the job until June at the earliest but that phased restarts should be taking place by May.

At this point, it is too soon to reopen the economy, but state and local leaders will have to start making those decisions within the next few weeks. The decisions need to be made in consultation with medical experts and with an eye toward preventing a resurgence of the outbreak.

“A lot of people are concerned” about the economy, Dallas Mavericks owner Mark Cuban said, but then added that he would “err on the side of safety, every single time.”

Originally published on The Resurgent

Fed Estimates Unemployment Could Hit 32%

A new report by the St. Louis Fed says that the worst is yet to come from the Coronavirus downturn. Economists at the Fed estimate that the economic fallout from the pandemic could kill 47 million jobs. That would translate to an unemployment rate of 32.1 percent.

The numbers reflect what St. Louis Fed economist Miguel Faria-e-Castro calls “back-of-the-envelope” calculations. Faria-e-Castro said that the unemployment rate may be lower if unemployed workers drop completely out of the workforce. The figures also do not reflect the effect of the recently passed stimulus which extends unemployment benefits and subsidizes businesses that keep workers on their payrolls.

Nevertheless, Faria-e-Castro told CNBC, “These are very large numbers by historical standards, but this is a rather unique shock that is unlike any other experienced by the U.S. economy in the last 100 years.”

The first wave of unemployment filings from the pandemic eclipsed records with 3.2 million new claims. That number is certain to go higher.

Faria-e-Castro says that there are 66.8 million workers in occupations that are “occupations with high risk of layoff.” These occupations run the gamut of the service economy and include sales, production, food preparation, and other services. There are also another 27.3 million “high contact-intensive”  jobs at risk. These include positions such as barbers and stylists, airline workers, and food service.

Faria-e-Castro estimated that about half of these jobs would be lost in the short term. That works out to just over 47 million jobs and a jobless rate that could be worse than the 24.9 percent unemployment rate at the peak of the Great Depression.

The upside is that the downturn may be brief. As soon a the lockdown is ended, people will venture back out and there may be pent up demand. By the end of April, many laid-off workers will be returning to their jobs.

However, with a vaccine for COVID-19 at least a year away, it is unlikely that things will return to normal for the remainder of 2020. Even as people leave their homes, the need for social distancing will continue to prevent new outbreaks. Many people, especially those in high-risk categories, may not want to travel or spend a lot of time in public until the virus has been totally defeated. Still, the worst part of the downturn should be mercifully brief.

Faria-e-Castro cautions that the disruption in the job market “will be unparalleled, but don’t get discouraged. This is a special quarter, and once the virus goes away and if we play our cards right and keep everything intact, then everyone will go back to work and everything will be fine.”

Originally published on The Resurgent

Unemployment Claims Soar Past 3 Million

Last week I reported on a Goldman Sachs estimate that new unemployment filings could increase 800 percent to more than 2 million. The reality was much worse. The sudden onset of the Coronavirus pandemic and associated stay-at-home advisories and orders led to a record-breaking unemployment report with 3.28 million Americans filing first-time unemployment claims over the past week.

It was expected that unemployment numbers would be bad, but the actual numbers were worse than expected. Yahoo Finance reported that economists had expected about 1.64 million new filings. What they got was double the forecast.

The 3.28 million new claims are the worst unemployment report in the history of the statistic which dates back to 1967. By comparison, the largest single increase in claims during the Great Recession was 665,000 in March 2009. The previous record was 695,000 in October 1982.

On Twitter yesterday, the president attacked the “LameStream [sic] Media” for “trying to get me to keep our Country closed as long as possible in the hope that it will be detrimental to my election success.” The president has repeatedly stated his hope that the country can be reopened by Easter, two weeks away, noting that workers are “not going to go walk around hugging and kissing each other in the office when they come back, even though they may feel like it.”

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But medical experts, including White House advisor Dr. Anthony Fauci, say that may be unlikely and that lifting restrictions too quickly could be disastrous.

“You may not want to essentially treat it as just one force for the entire country, but look at flexibility in different areas,” Fauci said earlier this week. “So I think people might get the misinterpretation you’re just going to lift everything up. … That’s not going to happen. It’s going to be looking at the data. And what we don’t have right now that we really do need, is we need to know what’s going on in those areas of the country where there isn’t an obvious outbreak.” 

The Coronavirus relief bill that passed the Senate earlier today, includes an extension in unemployment insurance for the millions of out-of-work Americans. The bill, which now goes to the House, provides for $600 per week for four weeks in addition to normal state unemployment benefits.

The impact of the staggering new numbers of unemployed workers on the election is uncertain at this point. Many will return to work long before the polls open in November, but rolling quarantines and the fallout from the current shutdown will be with us for months. Even if restrictions were lifted immediately, many people would be hesitant to go back into restaurants and stores or to get back onto airliners and cruise ships.

There are a few bright spots in the economy, however. Grocery stores, delivery restaurants, and Amazon are among the businesses that are still hiring. The downside is that many of the people filling these jobs have lost higher-paying positions.

While presidents historically have problems getting re-elected in times of economic distress, Americans realize that it was the Coronavirus and not President Trump that caused the current crisis. It seems likely that the election may become a referendum on President Trump’s handling of both the pandemic and the probable recession that results from it. That track record is still being compiled.

Originally published on the Resurgent

August Jobs Report Yields Disappointing Numbers

The Bureau of Labor Statistics has released the monthly jobs report for August and the hiring numbers for last month are further evidence that the economy is slowing.

In raw numbers, the BLS reported that the economy added 130,000 jobs to nonfarm payrolls and the unemployment rate was unchanged at 3.7 percent. The report notes that 25,000 of the new jobs were temporary census workers hired by the federal government.

Job creation in August was short of expectations and below average for the current year. Economists had predicted a gain of about 158,000 jobs. The August numbers, especially when the temporary census jobs are subtracted, was the worst month for job creation since last February.

Job creation was offset by the loss of 11,000 jobs in retail and 5,000 jobs in the mining industry. There was little change in construction, manufacturing, transportation and warehousing, and leisure and hospitality, industries in which the report notes “job growth in these industries has moderated thus far in 2019 compared with 2018.” Some of the job loss in retail could be attributed to the rise of internet retailers such as Amazon.

In the same report, the BLS revised down the job creation numbers from June and July. In June, businesses created 15,000 fewer jobs than previously reported while July numbers were downgraded by 5,000.

The stock market reacted to report by pulling back a surge that resulted from the news that the US and China will resume trade talks next month. As of this writing, the Dow is up about 82 points for the day.

The primary change in the economy over the last year has been the escalation of the trade war with China. As reported last week in The Resurgent, manufacturing output has decreased to its lowest point since 2009, putting the manufacturing sector in a recession already. This is largely due to decreased demand.

Despite the manufacturing slowdown and declining jobs in retail, consumer confidence remains relatively high. Confidence is above 2016 levels, but it has fallen sharply since the onset of the trade war last year. The addition of President Trump’s new tariffs, with one round of taxes on consumer goods effective Sept. 1 and another due in December, may further erode confidence.

“Household consumption right now is propping up the U.S. economy,” Joe Brusuelas, chief economist for the audit and consulting firm RSM, told NPR. “We’ll see if the uncertainty tax that’s been placed on the economy by trade policy begins to adversely influence consumer attitudes.”

The Wall Street Journal points out that, while the contraction in manufacturing due to the trade war is problematic, the bigger concern is the services sector that includes retail. If hiring slows enough to raise the unemployment rate, consumers could slow their spending and the economy could slow further as a result. Trade uncertainty and the possibility that businesses could slow their investments is yet another threat.

President Trump has pressed the Fed to decrease interest rates and the August jobs report will likely support the need for an interest rate cut, but a lower interest rate is not the answer to what ails the economy. It is the trade war that has led to what seems to be a global manufacturing slowdown and things are likely to continue to get worse until the trade uncertainty is resolved.

Originally published on The Resurgent

Carrier to automate and eliminate jobs

The Carrier deal in which Donald Trump negotiated with United Technologies to keep the company from moving jobs to Mexico continues to unravel. One of the terms of the deal was that Carrier would invest $16 million in its Indiana facility, but now it appears that much of that investment will involve automation that will ultimately cost many workers their jobs.

Trump had claimed that the deal would save “over 1,100” jobs in Indiana. Union leaders and Carrier had previously said that only about 730 manufacturing jobs would stay in the US as a result of the deal. Now it appears that many of those jobs have been saved only temporarily.

CNN Money reports that Greg Hayes, CEO of Carrier’s parent company, says that automating the plant is needed to keep it profitable. “We're going to...automate to drive the cost down so that we can continue to be competitive," Hayes said. "Is it as cheap as moving to Mexico with lower cost labor? No. But we will make that plant competitive just because we'll make the capital investments there. But what that ultimately means is there will be fewer jobs.”

Hayes had previously talked about the reasons for moving Carrier’s operations to Mexico on “Mad Money with Jim Cramer.” “We have a very talented workforce in Mexico,” he said. “Wages are obviously significantly lower. About 80% lower on average. But absenteeism runs about 1%. Turnover runs about 2%. Very, very dedicated workforce.” Mexican workers make about $3 per hour while Carrier’s US employees can earn more than $20 per hour.

“Automation means less people," Hayes said on CNN. "I think we'll have a reduction of workforce at some point in time once they get all the automation in and up and running." At this point, there is no indication of how many jobs will be lost when the plant automates.

Trump’s difficulties with Carrier underscore the harsh reality of the high tech economy. The biggest threat to manufacturing jobs doesn’t come from foreign workers, but from new technology and robots.

During the campaign, Trump frequently complained that “We don’t make anything anymore.” In reality, manufacturing is still the largest sector of the US economy according to Market Watch. China took the lead in manufacturing in 2010, but the US is still the second largest manufacturer in the world. US manufacturing output is near its all-time high.

The problem is that, while manufacturing remains strong, many manufacturing jobs, like those at Carrier, have disappeared. CNN reported that the US has lost 5 million manufacturing jobs since 2000. Some of these jobs were exported to other countries, but many were also lost to automation.

FiveThirtyEight described how rising wages and costs in China have inspired some companies to move their factories back to the US. The factories come back and contribute to the soaring US manufacturing output, but most of the jobs do not.

As the unemployment rate has fallen, many displaced manufacturing workers have shifted into other jobs. In the 1800s, American workers shifted from agricultural jobs to manufacturing jobs. Now another shift is underway from manufacturing to jobs in healthcare, construction and retail.  

Manufacturing jobs won’t totally disappear, but they will be focused into areas where the US has a competitive advantage. Writing in the Wall Street Journal, Greg Ip points out that it wouldn’t make financial sense to keep Carrier’s furnace production in the US. The low tech product can be made more cheaply in Mexico or by robots. If Carrier persisted in using expensive Indiana labor to make these products, the company could eventually go out of business and the factory would close completely.

In contrast, another United Technologies company, Pratt & Whitney, builds high tech jet engines. The skilled labor required in manufacturing these jet engines cannot easily be farmed out to less developed countries or automated. In fact, Pratt plans to add 8,000 jobs in Connecticut over the next few years and, even before the Trump deal, UTEC had planned to offer retraining and new jobs with its aerospace companies to displaced Carrier workers.

The economy is changing and American companies have to be willing to change with it or perish. There is no way to put the genie of automation back into the bottle.

 Originally published on The Resurgent