In the Globe and Mail (Monday, 26 July 2010, pp A1, A8) Douglas Saunders writes about Birmingham, England and the current economic conditions there. His way in to the story is through a small manufacturer, The Acme Whistle Works, which he describes as "an anachronism: a bustling, noisy Victorian factory" . Saunders reports that although employment at the factory is only 68 people, it is the district's second-largest employer. The current international economic crisis has hit Britain's industrial cities even harder than the rest of the county (currently, unemployment in Birmingham is running at about 10.8% overall and 15.4% for men (at least officially. Actual unemployment usually runs much higher than the official statistics)).
The reason for this is fairly straightforward, and something I've written and talked about before: the hollowing of the economy by exporting manufacturing jobs overseas. At the end of 2008, as the international monetary system came within a whisker of crashing (a situation not yet avoided--see Spain and Greece), there was an outburst of anger over the bailout of the North American auto sector. I argued then that bailing out the auto sector was a very good idea--without the jobs connected to auto-making (well-paid, unionized jobs) it might well crash the Central Canadian economy and, by extension. the national economy as well. Stephen Harper held his nose and approved the bailout. This was the right thing to do; the loans provided a needed boost of confidence in both the manufacturing and financial sectors, and GM has apparently already paid off their line of credit with the Canadian government.
Douglas Saunders, in his report in the G&M, describes what happened in the manufacturing centre of Birmingham: the removal of government support for the manufacturing sector (not only financial support, but political support; where there were no trade missions selling British products abroad, but also a campaign suggesting that manufacturing had no future in England, which had the effect of removing private sector financial interest in manufacturing), and the expansion of government support for knowledge, finance, and service industry at the expense of manufacturing (replacing rather than supporting the sector). The Labour governments of the day under Blair and Brown poured billions of pounds into "urban rehabilitation," kick-starting the New Economy in places like Birmingham.
There was a problem with the New Economy, but for 15 years the boom times papered it over. The benefits of the New Economy don't spread through society like the benefits from a maker economy do. To quote Doug Saunders: "Eighty-five per cent of the employment created during that recovery took the form of government jobs, jobs in privatized, former government sectors, or jobs in the service industries that provided for government. At its heart, Birmingham didn't have an economy of its own--its boom was mostly just poor service jobs and government spending."
Manufacturing jobs, particularly unionized ones, move working-class people into middle-class tax brackets, and spark a propagating wave of consumer spending and wealth creation. Service jobs don't. Service jobs are a race to the bottom, halted only by minimum wage laws. That's why the "Asian Tigers" went after the manufacturing sector--it generates wealth. Knowledge and financial services also generate wealth, but for a much smaller portion of society, and when combined with a decline in manufacturing and a rise in outsourcing, exports the broad wealth creation as well.
It's all well and good to talk about upgrading the workforce to participate in the "New Economy." But it overlooks the fact that so much of the workforce is male and (at best) high school educated. A quick scan of YouTube shows that these people aren't stupid--building a pulse jet and attaching it to a go-kart or kayak may be insane, but you can't be stupid when you do it. But what we are is monkeys, and as such, we like to muck about with our hands. We make things. Things from sticks to pull termites out of their nest so we can eat them, to backyard, Volkswagen-launching trebuchets with no purpose at all except to throw cars around.
But with the export of manufacturing to progressively lower-waged countries, no one has yet explained to me where the new broad-spectrum wealth creation is supposed to come from. If I design something cool, I'll send it off to be manufactured in a low-waged economy, and then it will be shipped back here for people to buy. But that generates wealth for me, but not a lot for the rest of my fellow citizens. Retail sales of the whatever generate wealth at the top and minimum wages at the bottom. I hire a maid and a nanny, I don't pay manufacturing job wages, I import low wage help from overseas. Nowhere in that system is there a middle class--there are only the rich and the poor and a small group of hard-core hustlers who want to become rich.
Yet it is the nation of shopkeepers and small businesses (remember, in Canada small business is rated at under one million a year in sales) that generate a middle class, and its a middle class that generates demand for middle and higher margin items.