Effects of New Technologies on Labor

January 4, 2019

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David Autor and Anna Salomons, “Is automation labor share-displacing? Productivity growth, employment, and the labor share.” Brookings Papers on Economic Activity, Spring 2018.

Daron Acemoglu and Pascual Restrepo, “Robots and jobs: Evidence from US Labor Markets.” National Bureau of Economic Research, March 2017.

I have been interested in automation’s effects on the labor force for a long time, especially since reading Martin Ford’s Rise of the Robots. Ford raises the specter of a “jobless future” and a massive welfare system to support the unemployed.

Here I discuss two papers representing some of the most serious economic research on this topic.

The questions

To what extent do new technologies really displace human labor and reduce employment? The potential for them to do so is obvious. The mechanization of farming dramatically reduced the number of farm workers. But we can generalize only with caution. In theory, a particular innovation could either produce the same amount with less labor (as when the demand for a product is inelastic, often the case for agricultural products), or produce a larger amount with the same labor (when demand expands along with lower cost, as with many manufactured goods). An innovation can also save labor on one task, but reallocate that labor to a different task in the same industry.

Even if technological advances reduce the labor needed in one industry, that labor can flow into other industries. Economists have suggested several reasons that could happen. One involves the linkages between industries, as one industry’s productivity affects the economic activity of its suppliers and customers. If the computer industry is turning out millions of low-cost computers, that can create jobs in industries that use computers or supply parts for them. Another reason is that a productive industry affects national output, income and aggregate demand. The wealth created in one industry translates into spending on all sorts of goods and services that require human labor.

The point is that technological innovations have both direct effects on local or industry-specific employment, and also indirect effects on aggregate employment in the economy as a whole. The direct effects are more obvious, which may explain why the general public is more aware of job losses than job gains.

A related question is the effect of technology on wages, and therefore on labor’s share of the economic value added by technological change. Do employers reap most of the benefits of innovation, or are workers able to maintain their share of the rewards as productivity rises? Here too, aggregate results could differ from results in the particular industries or localities experiencing the most innovation.

The historical experience

American history tells a story of painful labor displacement in certain times, places and industries; but also a story of new job creation and widely shared benefits of rising productivity. Looking back on a century of technological change from the vantage point of the mid-20th century, economists did not find negative aggregate effects of technology on employment or on labor’s share of the national income. According to Autor and Salomons:

A long-standing body of literature, starting with research by William Baumol (1967), has considered reallocation mechanisms for employment, showing that labor moves from technologically advancing to technologically lagging sectors if the outputs of these sectors are not close substitutes. Further,…such unbalanced productivity growth across sectors can nevertheless yield a balanced growth path for labor and capital shares. Indeed, one of the central stylized facts of modern macroeconomics, immortalized by Nicholas Kaldor (1961), is that during a century of unprecedented technological advancement in transportation, production, and communication, labor’s share of national income remained roughly constant.

Such findings need to be continually replicated, since they might hold only for an economy in a particular place or time. In the 20th century, the success of labor unions in bargaining for higher wages and shorter work weeks was one thing that protected workers from the possible ill effects of labor-saving technologies.

Recent effects of technological change

Autor and Salomons analyze data for OECD countries for the period 1970-2007. As a measure of technological progress, they use the growth in total factor productivity (TFP) over that period.

They find a direct negative impact of productivity growth on employment within the most affected industries. However, they find two main indirect effects that offset the negative impact for the economy as a whole:

First, rising TFP within supplier industries catalyzes strong, offsetting employment gains among their downstream customer industries; and second, TFP growth in each sector contributes to aggregate growth in real value added and hence rising final demand, which in turn spurs further employment growth across all sectors.

To put it most simply, one industry’s productivity may limit its own demand for labor, but its contribution to the national output and income creates employment opportunities elsewhere.

With regard to labor’s share of the economic benefits, the findings are a little different. Here again, the researchers find a direct negative effect within the industries most affected by technological innovation. But in this case, that effect is not offset, for the most part, by more widespread positive effects.

The association between technological change and labor’s declining share varied by decade. Labor’s share actually rose during the 1970s, declined in the 1980s and 90s, and then fell more sharply in the 2000s. The authors mention the possibility that the newest technologies are especially labor-displacing, but reach no definite conclusion. Another possibility is that non-technological factors such as the political weakness of organized labor are more to blame.

The impact of robotics

Autor and Salomons acknowledge that because they used such a general measure of technological change, they couldn’t assess the impact of robotics specifically. They do cite work by Georg Graetz and Guy Michaels that did not find general negative effects of robots on employment or labor share in countries of the European Union. That’s important, since many European countries have gone farther than we have in adopting robots.

The paper by Acemoglu and Restrepo focuses on the United States for the period 1990-2007. (They deliberately ended in 2007 so that the impact of the Great Recession wouldn’t muddy the waters.)

The authors used the definition of robot from the International Federation of Robotics, “an automatically controlled, reprogrammable, and multipurpose [machine].” Over the period in question, robot usage increased from 0.4 to 1.4 per thousand workers. “The automotive industry employs 38 percent of existing industrial robots, followed by the electronics industry (15 percent), plastic and chemicals (10 percent), and metal products (7 percent).”

Adoption of industrial robots has been especially common in Kentucky, Louisiana, Missouri, Tennessee, Texas, Virginia and West Virginia. As Thomas B. Edsall titled his recent New York Times column, “The Robots Have Descended on Trump Country.”

Acemoglu and Restrepo classified localities–technically “commuter zones”–according to their “exposure” to robotics, based on their levels of employment in types of jobs most conducive to robotization.

Their first main finding was a direct negative effect of robotics on employment and wages within commuting zones:

Our estimates imply that between 1990 and 2007 the increase in the stock of robots…reduced the employment to population ratio in a commuting zone with the average US change in robots by 0.38 percentage points, and average wages by 0.71 percent (relative to a commuting zone with no exposure to robots). These numbers…imply that one more robot in a commuting zone reduces employment by about 6 workers.

The workers most likely to be affected are male workers in routine manual occupations, with wages in the lower-to-middle range of the wage distribution

In the aggregate, these local effects are partly offset by “positive spillovers across commuting zones”–positive effects on employment and wages throughout the economy. With these spillovers taken into account, the estimated effects of robotics on employment and on wages are cut almost in half, dropping to 0.20 percent and 0.37 percent respectively.

The authors state their conclusion cautiously, as “the possibility that industrial robots might have a very different impact on labor demand than other (non-automation) technologies.”

Summary

While there is little doubt that new technologies often displace labor in particular industries and localities, the aggregate effects on employment and wages are less consistent.  Historically (late 19th and early 20th centuries), employment and labor share of income held up very well. For developed countries in the period 1970-2007, Autor and Salomons found a mixed picture, with robust employment but declining labor share after 1980. With respect to robotics specifically, Graetz and Michaels did not find declines in employment or labor share in the European Union, but Acemoglu and Restrepo found some decline in both employment and wages in the U.S.

It seems fair to say that the jury is still out on the effects of automation on the labor force. It may be that automation has no inevitable effect, but that it depends on how we as a society choose to deal with it. We shouldn’t assume a world of mass unemployment and widespread government dependency on the basis of recent, preliminary results from one country. Authors such as Thomas Friedman, who are more optimistic than Martin Ford about the long-run effects of new technologies, have yet to be proved wrong.


MMT 7: A Full Employment Proposal

July 11, 2018

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This is the seventh in a series of posts about Modern Monetary Theory, based on the text by Mitchell, Wray and Watts. If you have not seen the earlier posts, I recommend that you start at the beginning.

The goal of full employment

The authors argue for full employment on both economic and ethical grounds. Enabling everyone who wants a job to get one maximizes national economic output, providing more goods and services to distribute. Failing to do so not only hurts unemployed individuals and their families, but does lasting damage to economy and society in general:

Persistently high unemployment not only undermines the current welfare of those affected and slows down the growth rate in the economy below its potential, but also reduces the medium- to longer-term capacity of the economy. The erosion of skills and lack of investment in new capacity means that future productivity growth is likely to be lower than if the economy was maintained at higher rates of activity.

The authors are very critical of the dominant trend in recent economic policy, which is to tolerate unemployment while giving priority to fighting inflation. Policymakers came to accept unemployment rates far above the 2% or lower that was normal in the mid-twentieth century. High unemployment has also been accompanied by underemployment, as many workers have been unable to work as many hours as they would like, and also labor force withdrawals, especially by men. The official unemployment rate does not tell the whole story.

The inflation-fighting part has worked pretty well. Sluggish economic growth and high unemployment weaken the bargaining position of labor and help keep wages down. In turn, low labor costs and weak consumer demand keep firms from raising prices. In general, “the use of unemployment as a tool to suppress price pressures has, based on the OECD experience since the 1990s, been successful.”

The authors are troubled by the injustice of making a minority of the population bear the costs of a weak economy. “Joblessness is usually concentrated among groups that suffer other disadvantages: racial and ethnic minorities, immigrants, younger and older individuals, women (especially female heads of households with children), people with disabilities, and those with lower educational attainment.” I would add that the injustice is compounded if those who do make income gains in this economy are mainly the wealthiest 1%. The benefits of price and currency stability are somewhat more widely shared, but “it is doubtful that a case can be made for their status as a human right on par with the right to work.”

The Job Guaranty

Not all countries experienced high unemployment after the end of the postwar economic boom. Some, such as Norway, did more to insure that everyone who wanted to work could find a job.

The idea of the Job Guaranty is fundamentally simple. Since full employment is such a social and economic good, the public sector should take up the slack by employing those who cannot find jobs in the private sector.

“Private firms only hire the quantity of labour needed to produce the level of output that is expected to be sold at a profitable price. Government can take a broader view to include promotion of the public interest, including the right to work.”

The Job Guaranty is also known as the “employment buffer stock approach.” A stock of public jobs provides a buffer to protect the economy from a weak private sector.  Government acts to stabilize employment, spending to hire more labor when the private sector is weak, and reducing spending and public employment when it is strong. That would also have a stabilizing effect on national income and consumption.

The authors suggest that the wages paid in the Job Guaranty program would function like a national minimum wage, since they should be low enough to “avoid disturbing the private sector wage structure when the JG is introduced.” It wouldn’t compete with the private sector enough to drive up wages in general. On the other hand, they also want the wages to express “the aspiration of the society in terms of the lowest acceptable standard of living.” They do not discuss how these goals might be in conflict, but advocates of a “living wage” generally regard today’s minimum wage as too low.

Price stability

Proponents of the Job Guaranty expect it to be less inflationary than traditional Keynesian policies, which recommend government spending in general to stimulate the economy. When government increases its general spending, that runs the risk of driving prices up by competing with private firms for labor and other resources. However:

There can be no inflationary pressures arising directly from a policy where the government offers a fixed wage to any labour that is unwanted by other employers. The JG involves the government buying labor off the bottom, in the sense that employment at the minimum wage does not impose pressure on the market-sector wage structure.

Government would not be involved in a bidding war with private companies for labor, since it would only be hiring labor for which there was no other demand.

The benefits would ramify throughout the economy because of the growth in public works, income, and consumer demand. That should stimulate some expansion in the private sector as well, to meet the increased demand. Private firms could get the additional workers they needed by hiring them away from the Job Guaranty program. That would be fine with the government, which would no longer need to employ them. The program simply absorbs unneeded labor until it is needed again, but does nothing to bid up the price of labor. It supplies a boost to aggregate demand only when there is enough unused capacity in the economy to respond to it. So there is no reason to expect either cost-push or demand-pull inflation as a result of the JG itself.

Effects on public deficit and private surplus

The expected economic effects of a Job Guaranty follow from the macroeconomic relationships described earlier.

GNP = C + I + G + CAB  [see MMT 3]

Gross National Product = Consumption + Investment + Government Spending + Current Account Balance

(T – G) + (S – I) + (-CAB) = 0  [see MMT 4]

These three sector financial balances add to zero:

T – G = Government balance of tax revenue minus spending

S – I = Private sector balance of saving minus investment

-CAB = External sector balance expressed as the current account surplus held by trading partners

Let’s start from the present U.S. situation, where financial surpluses in the private sector and the external sector are balanced by a large government deficit.

Let’s hold the external balance constant, so we can concentrate on the effects of a Job Guaranty on the domestic sectors, public and private.

When the Job Guaranty program starts:

  • G rises
  • GNP rises even more than G, because of the consumption multiplier
  • Government deficit rises
  • Private sector surplus rises

We are assuming that the increase in G is not offset by an increase in taxes. That would keep the increase from showing up in disposable income and block the multiplier effect on consumption. Since G rises but T doesn’t, the deficit (T – G) rises.

According to Modern Monetary Theory, the sovereign government can issue currency to spend beyond its revenue, and this public debt is sustainable. The government can also borrow money by issuing more treasury bonds without “crowding out” private borrowing, as is often alleged. That’s because the private surplus must increase in tandem with the public debt in order for the sector balances to offset. The mechanism by which this happens is the effect of Government spending on Saving due to the saving multiplier. Some of each additional dollar of income is saved, so S rises, and the surplus S – I must rise as much as the deficit T – G, other things being equal.

At the end of MMT 4, I expressed some concern that surplus savings not invested in real productive assets could lead to excess speculation and financial instability. This text does not address that possibility, but it makes me nervous about growing public deficits and private surpluses indefinitely.

Hopefully, the Job Guaranty program stimulates the general economy. As aggregate demand rises, the private sector needs to hire away more of the labor in the Job Guaranty program, so the program can be scaled back. But in order to sustain GNP at a high level, another variable in the GNP equation must increase to offset any reduction in government spending. Presumably that would be Investment, since the firms hiring more labor will also be providing more workplaces, equipment and expanded inventories. That leads to this optimistic scenario:

As private sector demand picks up:

  • G falls, but I rises
  • GNP is sustained at full-employment level
  • Government deficit falls
  • Private surplus falls

Private surplus (S – I) falls because of the rise in investment, which absorbs more of the uninvested saving. I also think that when the private sector is strong, it might be a good time to reduce the public deficit and private surplus by raising taxes on the wealthy, but the text does not get into that.

Necessary but not sufficient?

I like the text’s proposal for a Job Guaranty. I accept the authors’ argument that increasing public debt to fund it is not necessarily bad, since public debt is more sustainable than private debt. I would hope, though, that a period of expansionary fiscal policy might get the economy to a place where public deficits and other sector imbalances could actually be reduced.

One potential problem with the optimistic scenario is that investment in new technologies might displace too much labor, throwing millions of workers back into the Job Guaranty program. As private sector demand picks up and the private labor force moves toward full employment, that would strengthen the bargaining power of labor, according to the author’s conflict theory (see MMT 6). Ideally, investment in new technologies would raise worker productivity and justify wage increases. That would be a long overdue boost in productivity, which has been rather stagnant lately. On the other hand, automated and artificially intelligent systems could replace too many workers, especially those with limited education and technical skills. One can imagine a large underclass of otherwise unemployable workers stuck in minimum-wage jobs in the Job Guaranty program.

In order to develop human potential to the fullest, which is one of the text’s goals, government may need to spend on human capital development as well as the Job Guaranty, although the same program would have some effect on both. General spending to promote education, training, health care, and so forth are also needed.

Writers such as Martin Ford in The Rise of the Robots envision a massive welfare system to support people whose labor is no longer needed. I agree with the authors of Modern Monetary Theory and Practice that paying people not to work is a tremendous waste of human resources. “Providing welfare rather than work to those who want to work is not only an admission of defeat (the labour market fails to provide enough jobs), but also wastes resources and generates social costs.”

I accept the fundamental premise of this economics that “the most important resource in any economy is labour.” I want to enable people to do marketable work of some kind, although new technologies could raise productivity to the point where they wouldn’t need to devote many hours to it. I think that goal is best achieved through a balance of public and private investment. I hardly need to point out that little of this is likely until the present regime is history.


MMT 6: Unemployment and inflation

July 9, 2018

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This is the sixth in a series of posts about Modern Monetary Theory, based on the text by Mitchell, Wray and Watts. If you have not seen the earlier posts, I recommend that you start at the beginning.

The Classical dichotomy

Classical economists gave unemployment and inflation distinct explanations. They weren’t relating the two by focusing on questions like how the government can create more jobs without triggering inflation. Economists have called this compartmentalization the “Classical dichotomy.”

In Classical economics, how many workers were employed depended on the supply and demand of labor, reconciled by the price mechanism. The greater the demand for labor, the higher the price (the wage); but the greater the supply of labor, the lower the price. If wages were too high, the supply of workers willing to work would exceed the demand from employers willing to pay that wage; if wages were too low, the demand for workers would exceed the supply of people willing to work. So in any labor market, there was an equilibrium price point where labor supply equaled labor demand, and that’s how much labor would be employed. Any unemployed workers who remained were those who chose not to work at the going rate. The market had spoken, and everything was as it had to be.

How much was produced with the employed labor depended on the productivity of labor, which depended in turn on the technologies in use.

Inflation had its own dynamic. The general price level for goods and services depended on the amount of money in circulation (and how fast it circulated) relative to the actual output of goods and services. Money was just a medium of exchange. If more money was available to spend on a given level of output, then prices must be higher. “The later Classical economists believed that if the supply of money was, for example, doubled, that there would be no impact on the real performance of the economy. All that would happen is that the price level would double.”

The policy implication of the Classical dichotomy was that government, as the issuer of the currency, could control inflation by managing the money supply, but unemployment was a different matter. The level of employment was set by the invisible hand of the market, and government had little to say about it.

Aggregate demand and the unemployment-inflation trade-off

The massive unemployment of the 1930s forced economists to rethink the Classical position. Unemployment had to involve more than a voluntary decision not to work at the prevailing wage. And as for policy, there had to be something we could do about it. All was not as it had to be. The new Keynesian economics saw the problem as a failure of aggregate demand, and government could take action to alleviate it.

Suppose that businesses decide to cut back on investment because they lose confidence that the market can absorb further increases in production. As I covered in MMT 2, investment is one of the independent variables that determine aggregate demand, national output and income. A drop in investment produces an even greater drop in output and income because of multiplier effects. Each $100 billion drop in investment can easily produce a $200 billion drop in GDP and GNI. Firms lay off workers, unemployment soars, and consumers have less money to spend, encouraging still more cutbacks in investment.

In that situation, lower incomes also mean that the government is collecting less in taxes. That softens the blow for households, but it may encourage governments to cut spending to keep their budgets balanced. That government austerity makes matters worse, since government spending has its own multiplier effect on national income and output. Keynesian theory recommends the opposite policy. Government should increase spending in hard times in order to increase aggregate demand and get the country back to work.

Stimulating the economy with government spending makes the most sense when an economy is suffering from underutilized capacity, as it was during the Great Depression. Once the economy has moved closer to full employment, continued stimulus runs the risk of pushing aggregate demand so high that it presses against a limited supply. That would push prices up, creating “demand-pull inflation.” (In the MMT interpretation, supply can respond to demand and keep prices stable until the economy nears full productive capacity. In graphic terms, the supply curve is seen as pretty flat until prices turn sharply up when that point is reached.)

The policy implication here is that unemployment and inflation are inversely related. Too little aggregate demand creates unemployment, but too much aggregate demand creates inflation. This trade-off was quantified by the introduction of the “Phillips curve” in the 1950s. Policymakers hoped to find a happy medium with neither too much inflation nor too much unemployment.

Stagflation and the monetarist response

In the 1970s, the inverse relationship between unemployment and inflation seemed to break down. The economy experienced both high unemployment and inflation at the same time, a condition that came to be called “stagflation.”

University of Chicago economists under the leadership of Milton Friedman proposed an explanation. He argued that if the government, in its efforts to promote full employment, overstimulated demand, the resulting inflation could end up increasing unemployment as well.

First, he claimed that there is a natural rate of unemployment, which is determined by the underlying structure of the labour market and the rate of capital formation and productivity growth. He believed that the economy always tends back to that level of unemployment even if the government attempts to use fiscal and monetary policy expansion to reduce unemployment.

What would bring unemployment back to its “natural level” was the inflation expectations of workers. Once they came to expect that inflation would keep eroding their purchasing power, they would become less willing to work at the prevailing wage level. This is reminiscent of the Classical idea that unemployment is a personal choice.

Friedman was influential in getting economists to give up fighting unemployment and focus their attention solely on fighting inflation through tight monetary policy.  A certain level of unemployment is natural and government shouldn’t try to change it.

[The] post World War II [Keynesian] consensus was steadily eroded away over the next 40 odd years….Mainstream macroeconomics reverted back to the pre-Keynesian notions of voluntary unemployment and effectively abandoned the concept of true full employment.

A conflict theory of inflation

Modern Monetary Theorists are more in tune with Keynes than with Friedman. As they see it, when government makes fighting inflation the centerpiece of its economic policy, it overlooks policy options that really could reduce unemployment. In effect, it also sides against labor in the class struggle and impedes the efforts of labor to achieve high employment and good wages.

MMT proposes a conflict theory of inflation. Keynes recognized that inflation could be triggered by rising costs as well as rising aggregate demand. MMT acknowledges this “cost-push” inflation and incorporates it into its conflict theory. Increased costs could come from the wage demands of workers, or from the cost of other resources used in production.

Inflation is “the product of distributional struggle over real income shares, reflecting the relative bargaining strength of workers and employers.” Workers want a big enough share of income to maintain or increase their purchasing power. Firms want a big enough share of revenue to cover their costs, including labor costs, and to make enough profit to satisfy their owners or shareholders.

If both sides feel they are benefiting from the shares they have, inflation is avoidable:

If the desired real output shares of the workers and firms is [sic] consistent with the available real output desired, then there is no incompatibility and there will be no inflationary pressures. The available real output would be distributed each period in the form of wages and profits, which satisfy the respective claimants.

If, on the other hand, either side wants to increase its income faster than general economic growth justifies, that cuts into the other’s share of the income. If workers demand wage increases not justified by higher productivity, employers will resist those demands, or else try to pass the costs onto their customers through price increases. General price increases can offset wage increases, leaving workers no better off than before. Price increases that are not matched by wage gains reduce the worker’s share of national income. Inflationary spirals of wages and prices can be initiated from either side. Remember that we are thinking in the aggregate. What matters is what firms and workers are fighting for and getting in the economy as a whole, not just in any one company.

Changes in the relative bargaining power of business and labor may trigger these struggles as well as determine the outcomes. In the early twentieth century, workers responded to the concentration of power in large firms by forming unions to bargain with those firms collectively. “When employers are dealing with workers individually, they have more power than when they are dealing with one bargaining unit (trade unit), which represents all workers in their workplace.” Organized labor made wage gains, but not without a struggle.

Another thing that strengthens labor’s bargaining power is an economy operating at high capacity and employing a lot of labor. Workers can then press their demands for higher wages with less fear of being laid off or replaced. During the postwar economic boom, highly unionized workers were able to obtain a larger share of the national income than they had gotten before, or they have gotten since.

Raw material price shocks such as the 1970s jump in oil prices can both slow the economy and intensify workplace conflict. Workers paying higher gas prices push harder for higher wages. Businesses facing higher costs of production raise prices. If the price shock both slows the economy and generates wage-price spirals, the result is stagflation.

When the Federal Reserve raised interest rates to fight inflation in the 1980s, that raised the cost of borrowing for businesses seeking to expand. That kept the economy operating in low gear, and also increased the resistance of employers to wage increases. The slow economy made workers more vulnerable to layoffs and weakened their bargaining power.

Inflation has been more-or-less under control since then, but workers have faced a perfect storm of sluggish economic growth, competition from cheap foreign labor, declining manufacturing industries, plunging union membership, chronically high unemployment, stagnating real wages, and a declining share of the national wealth and income.

MMT hopes to do better, by identifying a policy that can boost economic growth and achieve full employment, but still keep inflation in check.

Continued


Kids These Days

January 31, 2018

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Malcolm Harris. Kids These Days: Human Capital and the Making of Millennials. New York: Little, Brown and Company, 2017.

This is an unusual book, a portrait of a particular generation’s experience, interpreted in the context of a changing capitalist society. I found it reminiscent of Paul Goodman’s Growing Up Absurd from the 1950s, a book that resonated with many young Baby Boomers. Here the focus is on the Millennial generation, who were born between 1980 and 2000 and make up today’s young adults 18 to 38. Malcolm Harris himself is one of them.

Here he describes the book’s goal:

The only way to understand who we are as a generation is to look at where we come from, and the social and economic conditions under which we’ve become ourselves. What I’m attempting in this book is an analysis of the major structures and institutions that have influenced the development of young Americans over the past thirty to forty years.

Harris is not a social scientist, but just a “committed leftist and a gifted polemicist with a smart-aleck bent,” according to one reviewer. He provides no deep analysis of capitalism, but makes a broad claim that the frenetic quest for profits is now bringing society to some kind of breaking point:

Lately, this system has started to hyperventilate: It’s desperate to find anything that hasn’t yet been reengineered to maximize profit, and then it makes those changes as quickly as possible. The rate of change is visibly unsustainable. The profiteers call this process “disruption,” while commentators on the left generally call it “neoliberalism” or “late capitalism.” Millennials know it better as “the world,” or “America,” or “Everything.” And Everything sucks.

The burden of this supercharged capitalism is falling most heavily on Millennials. They will either by crushed by it, as America becomes some sort of fascist dystopia, or else lead a revolution against it. Harris sees little middle ground.

Human capital and hypercompetition

For Harris, the key to understanding what is happening to the younger generation is the idea of human capital. “We need to think about young people the way industry and the government already do: as investments, productive machinery, ‘human capital’.” Human capital is the economic value placed on the capacity for future work. New technologies can reduce that value by making existing capacities obsolete, most obviously when manual labor is replaced by machinery. But future workers can enhance their value by acquiring new capacities, enabling them to master technologies or provide some essential human input. This puts young people under pressure to become one of the value-enhanced winners instead of the devalued losers.

Isn’t this just the same old competition for success that has been a hallmark of modern society? Harris obviously sees it as more than that. As the development of human capital has become more extensive and more costly, paying for it has become a systemic problem. Society is currently organized in such a way that the benefits of human capital formation go primarily to capitalist organizations and their shareholders, while the costs fall primarily on individuals and their families. Investment in human capital is good for society, but it is risky for individual employers, since they do not normally own their workers and their future labor. Workers can leave and take their newly acquired human capital with them. So employers find it more profitable to hire workers who are already capable–or nearly capable–of doing the job; or just replace workers with robots, whose future labor they do own.

The intensified competition for good jobs becomes more than an individual competition to demonstrate merit. It is a competition among families to raise the most accomplished children they can, with the most expensive educations and all the trimmings–the music lessons, science projects, field trips, SAT prep classes, and so forth. Families of limited means are at a big disadvantage.

The paradox of productivity

In theory, the higher productivity resulting from new technologies and skills could lead to higher wages and/or more leisure. If people are more productive, why shouldn’t they enjoy a higher standard of living? And why shouldn’t the most tech-savvy generation be on its way to the highest standard of living of all? There’s little sign of that so far. “As it turns out, just because you can produce an unprecedented amount of value doesn’t necessarily mean you can feed yourself under twenty-first-century American capitalism.”

The problem goes to the heart of the capitalist system. Producing more per hour doesn’t translate into higher pay per hour if the extra output and its economic value belong solely to the employer. In that case the employer gets the benefits, in the form of higher revenues and lower labor cost per unit of output.

On the one hand, every kid is supposed to spend their childhood readying themselves for a good job in the skills-based information economy. On the other hand, improvements in productive technology mean an overall decrease in labor costs. That means workers get paid a smaller portion of the value they create as their productivity increases. In aggregate, this operates like a bait and switch: Employers convince kids and their families to invest in training by holding out the promise of good jobs, while firms use this very same training to reduce labor costs.

We may wonder why competition among employers for good workers doesn’t force them to raise wages. It does, but mainly in specialized occupations where needed skills are actually in short supply. What is remarkable is how little wages have risen in recent decades, even for college graduates. “Wages for college-educated workers outside of the inflated finance industry have stagnated or diminished, with real wages for young graduates down 8.5 percent between 2000 and 2012.” What seems to be working in favor of employers is a system that delivers a large enough supply of human capital to hold wages down, while making families bear the costs of developing that capital.

Harris notes that men and women have experienced this situation differently. “Median wages for men (50th percentile) have remained stagnant, at nearly $18 per hour, while median wages for women have increased from $11.28 in 1973 to $14.55 in 2009.” Women’s improvement in labor force participation and wages is a mixed blessing. Putting wives as well as husbands into the labor force is one way for families to try and get ahead. But it places the burden on families to work harder instead of on employers to pay better. “All work becomes more like women’s work: workers working more for less pay. We can see why corporations have adapted to the idea of women in the labor force.”

To summarize:

Technological development leads to increased worker productivity, declining labor costs, more competition, a shift in the costs of human capital development onto individual competitors, and increased productivity all over again. Millennials are the historical embodiment of this cycle run amok….

Education: The labor of enhancing one’s labor

One of my graduate school professors used to say that the social function of higher education was not to produce and disseminate knowledge, but to keep young people out of the labor force so they could serve the economy as needed consumers rather than unneeded producers. Maybe that made sense at a time when people were enjoying the new prosperity and leisure of the post-Depression, postwar era. Having recently achieved good wages and a shorter work week, unions weren’t eager to see a horde of young people enter the labor force and drive wages and working conditions down.

Harris’s take on youth and education is very different, and probably more relevant to our times. Not only are a large percentage of young people in the labor force already–70% of college students, for example–but they are working very hard at their own human capital development, primarily for the benefit of their future employers. As a result of the economic conditions described, “Every child is a capital project.”

…It’s cheaper than it used to be to hire most workers, and extraordinarily hard to find the kind of well-paying and stable jobs that can provide the basis for a comfortable life. The arms race that results pits kids and their families against each other in an ever-escalating battle for a competitive edge, in which adults try to stuff kids full of work now in the hope that it might serve as a life jacket when they’re older.

In theory, new information technologies ought to make it easier to learn. My generation could have saved many hours digging for information in the library if we could have accessed a whole world of knowledge on a laptop (not to mention the time we could have saved on a term paper if we had word processing). Paradoxically, Harris reports that American children spend more time in school, more time on homework, and less time on unsupervised play than they used to. And they are producing a lot: “Nongrade measures of educational output–like students taking Advanced Placement classes or tests, or kids applying to college–have trended upward….” Grades have risen too, and Harris is not so quick to dismiss that as mere grade inflation.

A government study reported that “the number of applicants to four-year colleges and universities has doubled since the early 1970s, [but] available slots have changed little.” That form of intensified competition allows schools to raise tuition and fees dramatically. Only part of this increase is due to reduced public funding, since the increase by private schools is almost as great. The additional revenue has not gone into instruction; on the contrary, the ample supply of graduates seeking academic employment has allowed colleges to hire more lower-paid, part-time and temporary teachers. Instead it goes mainly toward administrative salaries or amenities to attract well-heeled students.

What this all amounts to is a clear tendency for both public and private colleges to behave like businesses, passing off a lower-quality product at a higher price by tacking on highly leveraged shiny extras unrelated to the core educational mission. Stadium skyboxes, flat-screen monitors, marble floors, and hors d’oeuvres for the alumni association. Consultants of all flavors and salaried employees to make sure it’s all efficient. Competition hasn’t improved the quality of higher education, it has made colleges more like sleepaway camps or expensive resorts.

Because they are defined as students rather than real workers, students can be made to work very hard for someone else’s profit. College sports generate substantial revenue, but not for the athletes, who regularly spend thirty to forty hours a week on their sports without being paid. Many students try to enhance their credentials with unpaid internships, although research has found no more than a slight impact on job offers.

Even the time spent on social media can be seen as exploitable unpaid labor. “These technologies promise (and often deliver) connectivity, efficiency, convenience, productivity, and joy to individual users….” Older adults may see them as a frivolous form of leisure. But they are also a way that young people self-publish their creative work and build an audience for it. That also generates profits for others, most obviously for the big companies that run the sites, but also for record producers that are spared the costs and risks of developing talent themselves. They can wait and see who is becoming popular, and only then offer a recording contract.

Not only do students get little immediate reward for their hard work, but most of them have to borrow against their future earnings to finance their higher education. They have to indenture themselves to obtain an enhancement in earning power that may or may not materialize. If their schools educate them poorly–and some for-profit schools seem to make that part of their business model–borrowers are still on the hook for the money. Excessive debt is one of the reasons why today’s young adults have relatively low net worth, not just in comparison to today’s older adults, but also in comparison to young adults of an earlier time. Between 1983 and 2010, net worth dropped 21% for the 29-37 age group.

Overall, Malcolm Harris finds that the pressure to develop their own human capital has forced Millennials to compete harder for a limited supply of rewards. What they get for their harder work is the mere promise of a higher standard of living–someday. So far at least, someday has not arrived.

Continued


Viking Economics (part 2)

June 26, 2017

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How did the Nordic countries, which are in many ways similar to other developed countries, arrive at their unusual blend of economic equality and prosperity? Lakey tries to answer that question with a narrative featuring some of the key events and personalities, but he does not attempt any serious comparative analysis of countries to sort out causes and effects.

One thing that is clear is that the Great Depression of the 1930s was a significant turning point, as it was in the United States. Strong pro-labor parties succeeded in moving politics to the left and gradually building mass support for egalitarian policies. For some reason, those policies went further in the Nordic countries, perhaps because those countries were economically weaker to begin with and more vulnerable to economic downturns. Once a distinctive Nordic model became established, it was able to weather some counterattacks from more conservative elements, as well as financial crises that forced governments to make tough political choices.

From conflict to consensus in Norway and Sweden

Lakey emphasizes that the more egalitarian Nordic model did not emerge without a struggle. He describes the countries a century ago as having huge wealth gaps and politically dominant elites.

In Norway, the early twentieth century was a period of trade union organization, formation of cooperatives, and rising nationalism. Norway dissolved its union with Sweden in 1905. The Norwegian Labor Party flirted with radicalism, joining the Communist International in 1918. Five years later, however, the movement split over the communist issue. Some workers left to form the Communist Party of Norway, but the Norwegian Labor Party became more dominant by attracting many farmworkers, small farmers and students as well as politically moderate workers.

During the Depression, some business owners and right-wing politicians supported violent measures to suppress the labor movement, but the movement proved too popular for them. In 1935, owners and labor leaders forged the “Basic Agreement” recognizing the rights of both capital and labor. “Labor leaders agreed that the owners could continue to own and guide their firms. Labor expected that their political instrument, the Labor Party, would restrict owners through government regulation and control the overall direction of the economy.”

For the next three decades, labor dominated politics. By the time the Conservatives got a change to govern, the basic elements of the Nordic model were established, with policies to promote full employment, regulate markets, and provide universal benefits paid for by taxpayers.

Similarly in Sweden, a violent government crackdown on striking workers in 1931 led to the fall of the government and the election of the labor-based Social Democrats. “Swedish voters reelected the Social Democrats to lead their society almost without a break until 1976, by which time the Nordic model was firmly established.”

Counter-movements and financial crises

In the 1980s, around the same time that Ronald Reagan and Margaret Thatcher were promoting tax cuts, reductions in government spending, and financial deregulation, similar policies were tried in Nordic countries. The failure of the Labor government to curb “stagflation,” a period of high unemployment and inflation, helped the Norwegian Conservative Party take control. In Sweden, the Social Democrats continued to govern, but also adopted some conservative measures to limit the power of government.

Lakey sees a direct link between financial deregulation in the 1980s and financial crisis in the 1990s. Banks had more freedom to make riskier and more speculative investments, often resulting in asset bubbles with prices reaching unsustainable levels. When the bubbles burst and banks experienced massive losses, Nordic governments moved to re-regulate banks and protect depositors, but not to bail out the banks and their shareholders. Both Norway and Sweden nationalized some of the largest banks, at least temporarily. By the time of the 2008 financial crisis, both countries were in a relatively strong position to handle it. “By 2011, the Washington Post was calling Sweden ‘the rock star of the recovery,’ with a growth rate twice that of the United States, much less unemployment, and a strong currency.”

The story in Iceland is different because it was less an exemplar of the egalitarian Nordic model than Norway or Sweden. Its labor-based political party, the Social Democratic Alliance, had always been a minority party, and the government spent less on health and education. Iceland did have collective ownership of major banks, through government and cooperatives, but they moved toward financial deregulation and privatization in the late 1990s. “The now-private banks leveraged their capital base [that is, used it to borrow and speculate] to buy up assets worth several times Iceland’s gross national product.” When the crash came in 2008, the entire banking sector collapsed, taking the country’s currency with it. The political result was Iceland’s first left-wing government, a coalition of the Social Democratic Alliance and the Left Green Movement. Although Iceland needed assistance from the International Monetary Fund and other countries, the new government resisted IMF demands for austerity, insisting on a deal that protected workers, homeowners and depositors while letting banks fail. Lakey describes the Icelandic recovery as an economic success, getting unemployment down to 3.2% by 2015.

Having come through a time of political and financial upheaval with their social democratic principles largely intact, Nordic countries may now be in a good position to tackle the challenges of the global, high-tech economy.

Continued