The Dull Compulsion of the Economic (#4)

by Dollars and Sense

A series of blog entries by D&S collective member Larry Peterson.

Note: I am currently experiencing some job dislocation, and, being right smack in the middle of the resume-writing, job-searching roller coaster ride, am unable to compose these entries as regularly as I would like. I'm posting an unpublished piece I did last October, which I feel is still of interest, in lieu of a new entry. I hope to be back on schedule by the middle of this month.

Oh, to Be Self-Underemployed...

Britain's Guardian newspaper had a small piece recently on its online version ("Workforce Turns to Self-employment," October 10th, 2006), which reported on a study commissioned by the telecoms company Vodafone. According to the study, 12% of the working population of the UK have set up their own businesses, and another 6% were in the process of doing so. This is truly an impressive statistic, but what really bowled me over was the forecast that followed: the researchers believe the ranks of the self employed may swell by another ten million by 2011! That's close to an astonishing two fifths of the twenty six million working Britons identified by the Office of National Statistics in the UK; and that's in a mere five years' time. Now in an age characterized by the wholesale bastardization of research by corporate and political interests and their well-financed front—organizations, flak machines and "independent" foundations, one hardly needs to be counseled to take prognostications of this nature with a heavy, indeed overwhelming, dose of skepticism. And in this case, the motivation of Vodafone in supporting such a study is so obvious that it can hardly fail to suggest itself: after all, who is supposed to provide these new entrepreneurs with that now indispensable lifeline in setting up a small business, namely, a wireless telecommunications suite, if not the largest (by revenue) mobile telecoms company in the world? But what troubles me is that many people uncritically accept the assumption that self-employment will provide sufficient opportunities for those pushed out of firms due to technological advances, outsourcing and increasing competitive churn in many industries. Given an atmosphere as hostile to labor as the last couple of decades has been, putting one's trust in anything is perhaps not the most appropriate way of looking at labor issues in general; but in this case, the main motivations mentioned by most in the study for going independent, namely the desire to flee the tyranny of the boss or simply to preempt eventual redundancy, could, if somehow acted on en masse, bring about a number of problems that would cause many to pine for the days of wage slavery and the invisible fisticuff known as the threat of the sack. Workers should, in other words, be careful, very careful, of what they wish for.

First and foremost, the central fact surrounding new, particularly small businesses is that large numbers of them will fail rather quickly. One study in the US at the University of Michigan by Hart Posen and a colleague claims that 80% of new small businesses go out of business within five years, and 10% of all firms in the US do so; Business Week ("What's Behind High Small Business Failure Rates," 9.30.99) puts the figure at 64.2% in a ten-year period, and notes that over their lifetimes, some 40% are profitable, 30% break even, and 30% lose money (Business Week also notes that the data are vague and sometimes contradictory in some cases, and indirect in virtually all, inasmuch as privately—held companies are not required to report financial results). This failure rate would surely be too small if anything close to the enormous numbers suggested by the Vodafone study were to enter the market in such a short period of time; many of these people, with no special experience in marketing, administration, management, technology, law or finance—or, rather, all of the above—and with little by way of reliable supplier or financial contacts, would find themselves quickly overwhelmed, regardless of whether or not their business plans had any viability whatsoever—and that's a big if. The mere size of the inrush would be sufficient to guarantee a truly astonishing degree of duplication in regard to output: ten million people are surely not going to colonize ten million durable market niches overnight. The amount of waste and the extent of unanticipated bottlenecks associated with such a shift would almost certainly be monumental. Far be it from me to flirt in public with undesirable economic doctrines like the lump of labor fallacy, but it seems that only a certain amount of pet-groomers, yoga studios and latte bars are needed in most markets.

And then there is the little problem of start-up capital. Both the US and the UK are characterized by extremely high levels of consumer debt and low (in the case of the US, negative) savings. Many of the aspiring entrepreneurs would no doubt commence their independent careers already saddled with considerable debts. This will make lenders reluctant to extend credit lines to them, even assuming that financial products continue to develop which would allow for the repackaging and slicing and dicing of risk levels in a way that would match the demand of a growing number of investors. Some of those unable to tap credit may continue to finance their ventures with expensive consumer debt, after the fashion of those who pay for college or their homes with a credit card, but these people will surely be putting themselves at an extreme disadvantage to those who can attain funds at substantially lower rates of interest or who can invest larger amounts of personal savings into their ventures. Many would have to finance their activities by taking out multiple mortgages (while, in many cases, continuing to operate the business out of the same house). With housing markets in both countries at extremely sensitive points right now, who knows what havoc additional strains of this magnitude could wreak in a few years time? In addition, both the US and the UK are facing potential crises in paying off pensions and providing healthcare to aging (the UK to a greater degree than the US in this regard) populations; and any misallocation of capital to small businesses with high failure rates will surely have knock on effects in these, and other areas of public provision, as well: the corporate taxes likely to be collected from these small ventures will probably not be enough to make up for the deficits that will swell elsewhere in the economy, especially if many of the entrepreneurs end up having to reschedule tax and other payments due to eventual bankruptcy. In addition, entrepreneurs are the very sort of people who tend to delay retirement savings, or, in the case of the US, healthcare spending (though the employment of many of them in healthcare will tend to keep costs in that sector down).

The same sort of thing can be said about training: many workers look to their employers to provide, if not lifelong employment anymore, at least the training requisite to keep them up to snuff when their period of employment with a specific employer is over. But self—employed workers will be required to finance and implement all training schemes by themselves (there may be tax advantages). Many will no doubt postpone investment in this area as well, if only because the demands on their time will tend to be so great that they will simply not have the luxury to upgrade their skills in a consistent way; this is all the more so when one considers that many of them will have family and other commitments (conflicts of this sort will no doubt tend to have negative effects on operations as well). And though there is a kind of unique learning—by—doing that characterizes entrepreneurial activity, much of this is of a decidedly vague quality, or is simply difficult to transfer to other activities if the venture doesn't last long. Compared to the cumulative learning that established firms offer their employees, utilizing more widespread technologies and over longer periods of time, generic self-employment must, ceteris paribus, reduce returns on "human capital."

What about the macro effects? Wouldn't such a surge of entrepreneurial vigor simply shake the rest of the economy into the stratosphere? Here one needs to be reminded that the paltry levels of capital brought to the table by the entrepreneurial reserve army will ensure that the new ventures will be overwhelmingly concentrated in services, and less—capital intensive ones at that. And while the medium—term outlook, given the fact that societies are aging, suggests the emergence of some large and sustainable pockets of growing demand (not to mention supply: many older workers will be among those who choose or simply have to try to make a go of it on their own), the fact remains that services, relatively protected from competition (you can't source your barman, nurse or teacher from distant markets, nor would you want to, to use simple cases), and insulated from pressure to economize (most people want the job done right, if not special treatment: you don't want your waitress to serve so many tables that you don't get your meal while it's hot, again using a simple case), are less able to realize productivity gains than manufacturing or IT intensive services. And the more we substitute such services for manufacturing and even more capital intensive services, productivity—and hence average living standards—will tend to stagnate or even decline. IT widening-and even deepening—throughout the economy will no doubt serve as a countervailing force here, as will the considerably longer hours put in by the new entrepreneurs; but considering that the new entrepreneurs will be hard pressed to devote the requisite funds or time to successful uptake, real productivity gains will, quite probably, retain the relative evasiveness they always have had with regard to services in general.

Indeed, other possible ramifications of such a huge shift in the workforce as that envisioned by the Vodafone researchers, from sunk cost losses involved in the exodus from large companies to property market dynamics in an environment of reduced demand for commercial property (especially of the downtown variety), and on to issues of congestion and even environmental degradation (one assumes a large number of the new entrepreneurs will require their own, decidedly large vehicles, especially if the competition turns out to be as endless as the Vodafone study suggests) in formerly strictly residential areas (and then there's the awkward issue of crime), can be seen to sketch a rather frightening picture, indeed. Fuel prices could turn even more volatile, and the entire delivery system for fuel and other essential commodities might have to be substantially reconfigured. And, all the while, the ultimate irony would probably remain: successful small ventures would continue to be bought up by established companies and either integrated in order to take advantage of the economies of scale and scope that small firms simply can't capitalize on, or simply put out of business to reduce the threat they pose.

The biggest wild card of all, though, would undoubtedly be the labor market itself. And here speculative trajectories regarding the impact of an historic surge towards self—employment go all over the place. Job vacancies in established firms would presumably swell, raising—finally—the cost of labor to a point, unseen for some time now, at which it consistently approaches its true cost, or productivity levels. But will this then induce firms to substitute capital for labor as unit labor costs rise? Will they redouble their outsourcing efforts? Or will they prefer to subcontract to some of their old employees, and rely on attrition to pad the bottom line until capital and organizational restructuring efforts bear fruit? The fact that firms have so many more options when faced with such deliberations even now is reason enough to be skeptical of seeing a silver lining in this kind of scenario. But it doesn't take too much imagination to render even this more labor—friendly picture threatening again. Assume companies choose to hire in large numbers: they may succeed in luring back some experienced workers who, attracted by the increase in pay (and remember: the monetary authorities-especially here in the US— tend to become very jittery at the thought of rapid real wage increases), can succeed in liquidating their businesses quickly, efficiently and painlessly. But many, many others would be so tied down, especially if they were using home equity to finance their ventures, or as collateral against them, that a quick move back would simply be impossible. That being the case, established firms will find themselves desperate to hire much less experienced or even qualified workers; productivity levels would continue to level out; and training costs would soar. In macro terms, foreigners financing our deficits (I'm assuming that will be one of the variables that doesn't change very much) will be more reluctant to do so: after all, our famed productivity levels are what most mainstream economists point to when attempting to explain how these deficits can be run up to such levels in the first place. If these become threatened, even to a relatively small degree, the fact that we continue to increase our deficits will shrink potential returns on US—and even UK—assets, and many foreign investors, some with a lot of infrastructure building to be done at home, may finally decide to go elsewhere. Of course, there is the option of recruiting immigrant labor, particularly of the highly qualified variety, but that remains a political minefield. And birthrates in the US, even, aren't sufficient to keep up with the kind of shift the Vodafone researchers are talking about.

To me, though, the most disturbing thing about this kind of shift, and of the fact that people don't tend to view it as the disaster it could well become, consists of something else altogether. One of the most underappreciated aspects of the expansion of an already services—saturated economy involves the differential benefit accruing to different classes from the services themselves. Many services will be designed at least to some degree with an eye towards expanding or maximizing sales to those who can afford to pay more, especially given advances in transportation and communications that make access to them relatively costless and friction-free. But with intense and growing competition, it will be increasingly difficult for small entrepreneurs to retain their choice customers without having to pander to them to a debilitating degree. So consumer surpluses will tend to grow for those who have already attained high incomes, asset—ownership and job security, while remuneration to hard-pressed entrepreneurs will be subject to the operation of a considerable and ongoing check. Under such conditions, many of the latter, especially those who provide the wealthy with childcare, healthcare provision and elder-care, private transportation, education, research, security, entertainment, fitness training, construction, maintenance and cleaning are effectively giving the privileged the means to increase their already considerable competitive advantages over everyone else (at the same time as public provision of many of these types of services is curtailed, or, in the case of many immigrants, even denied). In a sick historical twist, many of us are, like our forebears in late Victorian and Edwardian England, finding ourselves undergoing a kind of deindustrial enclosure which results in masses being recruited into an altogether obscenely large contingent of what can only be seen as glorified domestic servants. And while the aristocrats of that period didn't work, many of our present-day service workers cater to the best educated and most productive workers in the economy (never mind their hyper—achieving, super-privileged kids). For such workers to provide the means whereby competitive advantage of the super-wealthy can be expanded is insane: do such workers really want to form the backbone of an economy that is in this sense more regressive than that of Victorian England?

And yet, economists, policymakers and ordinary people persist in thinking that the switch to services, especially self—employed ones, constitutes a kind of improvement in the condition of labor, if not a kind of cabin upgrade in the journey from the realm of necessity to the realm of freedom. Indeed, certain economists, like Princeton's Alan Blinder (see his "Offshoring: the Next Industrial Revolution" in the March/April edition of Foreign Affairs), have seemingly resorted to the Malthusian idea that spending by the wealthy on luxuries is the only means to avoid glutted labor markets in the current configuration of the economy. But workers must be careful to see the glorification of services as part of the general assault on labor; this is no innocent fairy tale about the future like the paperless office: it is part and parcel of the war on labor that has been fought with such tenacity and effectiveness for a generation. And masses of people forced to assume the designation of being "self employed" while lacking meaningful or reliable access to capital would constitute a suitably absurd backdrop for yet another big battle in this struggle. The world may, in certain ways, and to certain people, look to be flat, as Thomas Friedman thinks; but you simply can't have a new class of capitalists characterized precisely by their lack of significant amounts of capital (especially given the huge and widening income disparities that have characterized the last decade, not to mention, in the US, the differential effects of the Bush tax cuts); and workers should perhaps concentrate on organizing to protect their present jobs and living standards, rather than engaging-enabled by far-fetched studies like Vodafone's or not-in fantasies of self-ownership.

But, hey, maybe history will prove to be, as she tends to do, more cruelly playful: The New York Times (unfortunately, this option is not available to our godless UK counterparts) has recently dedicated a series of articles to documenting ways in which religious professionals and organizations take advantage of loopholes in the tax code to realize savings unavailable to everyone else, even to persons engaged in essentially the same pursuits. One of these allows ordained clergy an exemption from housing payments. Perhaps one way to postpone the class war would be for all the new entrepreneurs to become clergy in some religion (many charge a nominal fee, maybe a dollar, to partake in holy orders) and monetize the tax exemption to fund their entrepreneurial activities. Now there's an access to capital even the financiers haven't thought of: faith-based fraud for the masses, rather than confined to the Republican Party elite! 

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7/02/2007 10:29:00 AM