The Technology Trap (part 4)

August 12, 2019

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In the last section of The Technology Trap, Carl Frey looks toward the future, trying to anticipate further impacts of technology on jobs, and suggesting policy measures to ease the transition for affected workers.

Smarter machines

Artificial intelligence is enabling machines to do even more of what humans used to do. “The fundamental difference is that instead of automating tasks by programming a set of instructions, we can now program computers to ‘learn’ from samples of data or ‘experience.’ When the rules of a task are unknown, we can apply statistics and inductive reasoning to let the machine learn by itself.” When a computer beat the world’s best player of the game Go in 2016, it did it not just by following a fixed set of rules, but by inferring its own rules from a series of trials using a large data set.

The range of tasks that smart machines can perform is broadening to include jobs like driving a truck, answering phone calls, picking up and packing products, taking consumer orders and accepting payments.

Still, there remain things that humans do better:

Even if we assume that algorithms at some point will be able to effectively reproduce human social intelligence in basic texts, many jobs center on personal relationships and complex interpersonal communication. Computer programmers consult with managers or clients to clarify intent, identify problems, and suggest changes. Nurses work with patients, families, or communities to design and implement programs to improve overall health. Fund-raisers identify potential donors and build relationships with them. Family therapists counsel clients on unsatisfactory relationships. Astronomers build research collaborations and present their findings in conferences. These tasks are all way beyond the competence of computers.

In 2013, the author and his Oxford colleague Michael Osborne reported on their detailed analysis of tasks and their estimate of the automation possibilities for 702 occupations covering 97% of the American workforce. They found the greatest risk of automation in the occupational categories of office and administrative support, production, transport and logistics, food preparation, and retail jobs. Overall, they classified 47% of jobs as vulnerable to automation.

Other research has yielded somewhat different percentages. But one general principle that has emerged from such research is that a job’s probability of automation varies inversely with the education it requires and the wages it pays. A study by the President’s Council of Economic Advisers found that “83 percent of workers in occupations that paid less than $20 an hour were at high risk of being replaced, while the corresponding figure for workers in occupations that paid more than $40 per hour was only 4 percent.” That could be good news, as long as we can keep expanding the good jobs and help workers acquire the skills they need to do them.

Unemployment, leisure, or new jobs?

Frey describes a “widespread dystopian belief” that technology will create a future of mass unemployment and low wages. Others envision a utopian future in which technology enables us to produce so much so easily that we can work very little and live lives of affluent leisure. Neither mass unemployment nor lives of leisure are evident in today’s society, and Frey doesn’t expect them. Instead people will have jobs for the foreseeable future, both because there remain things people do better than machines, and because people generally choose to take the benefits of high productivity in the form of more goods and services rather than more leisure.

Although new technologies have been replacing more middle-class jobs than they have been creating, Frey suggests that this may be just a “first-order effect.” He believes that the greatest gains in productivity and job creation are yet to come. That reinforces my belief that whether a new technology turns out to be replacing or enabling depends on how we use it in a social context. Replacing existing jobs may happen first because it’s easier than creating new jobs and upgrading skills, which requires some social reorganization. Frey points out that “it took roughly four decades for electricity to appear in the productivity statistics, after the construction of Thomas Edison’s first power station in 1882….[H]arnessing the mysterious force of electricity required a complete reorganization of the factory.” And of society, I would add, considering the changes required to turn workers and their families into affluent consumers of the products coming off the assembly lines.

Public policy

In the end, Frey remains optimistic about technology, but concerned about the divisions between current winners and losers and their immediate effects on society. Mitigating those effects is the main challenge for public policy. Among his recommendations:

  • Investments in education, especially early childhood education to offset the disadvantages of children from low-income, low-education families; such education pays for itself in better health outcomes, higher productivity and reduced crime
  • Wage insurance, especially for middle-aged workers who lose good jobs
  • Expanded tax credits to supplement low wages
  • Easing of licensing requirements that make it too difficult to move into new occupations
  • Vouchers to pay for moving to areas with better job opportunities
  • More affordable housing in thriving communities, supported by an easing of zoning restrictions like minimum lot sizes

I see a role for government not only in helping disadvantaged workers, but in creating economic demand for the good jobs they need. If the manufacturing sector is no longer expanding, and if the low-wage service sector is most vulnerable to the next wave of automation, then that leaves the skilled services as the most likely frontier of job creation. But skilled services like education, health care, counseling, mental health services and quality child care are also what people need to enhance their human capital and qualify for good jobs. Public investment in those services pays off in two ways–better jobs and more qualified workers to do them. It also strengthens democracy because successful workers are more politically active and less alienated.

Why public investment rather than private investment? Because the families most in need of such services often cannot afford them. And because employers have only limited incentive to develop the human capital of their own workers. Employers own the machines they buy, but not the workers they hire. The workers can take their enhanced human capital and go to work for someone else. For that reason, human capital is a public good that cannot be entirely privatized. A healthy, well-educated population is good for all of us. So, of course, are other public goods like a solid infrastructure and renewable energy.

But can the country afford new investments in health or education? If the government seems tapped out, it’s not because the country is poorer than it used to be, but because the wealth and income are so unevenly distributed, and those who have them support such low taxes on themselves. From the Reagan administration on, the tax cuts were supposed to stimulate the economy from the top down, by making more money available for private investment. The results have been disappointing, with slower economic growth than in the mid-twentieth century, when taxes were higher. Now we should consider the possibility that we can grow the economy faster with high domestic spending than with low taxes, if the spending is concentrated on human capital development and needed public goods. In order to make human services affordable for consumers and for the taxpayers, they need to be cost-effective. Providers will need to apply new technologies not to replace labor–which would defeat the purpose of creating jobs–but to enable labor to serve clients as efficiently as possible. In the predominantly service economy, a productivity revolution in skilled services is the key to fulfilling the positive potential of information technology.

Advocates of new government spending have their work cut out for them to mobilize public support. They need to convince the less educated half of the population that they will receive more benefits than costs, since their incomes are too low to be targeted for tax increases. If they can also convince the more educated middle class to vote in the public interest, they can achieve a democratic majority. As Frey says, “Redistributive taxing and spending depend on whether the middle-income voters feel an affinity with people with lower incomes.”

Although my interpretations and policy preferences differ from Frey’s in a few respects, I found this book enormously helpful in thinking through the relationship between technology and employment. I highly recommend it.

The Clash of Economic Ideas (part 2)

May 15, 2013

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Chapter 5 of Lawrence White’s book is devoted to “The Great Depression and Keynes’s General Theory.” I will also incorporate some ideas from later chapters that are relevant to Keynesian economics.

Keynes and Hayek disagreed fundamentally over the ability of the market economy to sustain full employment and economic growth without deliberate government stimulus. Hayek believed that the income generated by economic production would automatically stimulate further production, because the income would either support consumption or new investment. Either consumer goods or capital goods would be produced. Keynes, on the other hand, did not believe that income that people saved rather than consumed would necessarily support new investment. An increase in what he called the “propensity to save” might just reduce consumption without increasing investment, resulting in a lack of “aggregate demand” and a reduction in production and employment. Some Keynesians would say that a big reason for an excess of saving and a lack of demand is an income distribution favoring rich savers over lower-income spenders, but that argument was not essential to Keynes’s original theory. His point was simply that production didn’t necessarily create the demand needed to generate further production.

Keynes understood the Great Depression as a vicious circle of low demand and low production, with no short-run market solution. Hayek saw economic slumps as self-correcting as long as central banks properly managed the money supply. “Despite the reservations and objections of orthodox (often older) economists, Keynes’s theory quickly caught on among younger economists and completely eclipsed Hayek’s theory.” Keynesian theory dominated economic thought in Great Britain and the United States until the 1970s.

According to Keynesian economics, government spending in excess of taxes could increase aggregate demand and stimulate the economy. Only if the economy were already operating at full employment would that spending merely replace other kinds of spending with no net gain in aggregate demand and national output. At less than full employment, government spending would lead to a net gain in GDP (the size of which could be expressed by the “multiplier” ΔY/ΔG–the ratio of the change in GDP to the change in government spending). Keynesians rejected the classical economic view that running a deficit is as foolish for a nation as it is for a household. Otto Eckstein argued that a national debt is different from a household debt because “we owe it to ourselves.” In theory, we can repay it out of the larger income that deficit spending generates. This argument was more convincing before other countries began financing a large portion of our debt.

Critics of Keynesian economics such as James M. Buchanan argued that government spending had to burden either current or future taxpayers, and that the theory encouraged fiscal irresponsibility: “Keynesian economics has turned the politicians loose; it has destroyed the effective constraint on politicians’ ordinary appetites. Armed with the Keynesian messages, politicians can spend and spend without the apparent necessity to tax.”

Keynesian economist Paul Samuelson provided an additional rationale for government spending in his theory of “public goods.” As described by White, “the theory…views government as a faithful agent hired by the citizenry to provide desired goods and services having characteristics such that the market economy provides too little of them.” This elaborated on an idea already present in the writings of classical and neoclassical economists. Private entrepreneurs may not find it in their self-interest to produce something even if the public values it enough to pay for it. For example, they may not be able to make a profit financing basic research or general intellectual activity (as opposed to applied research to develop specific products), and yet the public may well wish to finance universities with their tax dollars. The problem for the entrepreneur is to “capture all of the potential gains from production and trade,” which is hard to do for ideas that spread freely. The failure to do so is a type of market failure known as a “Pareto inefficiency,” named for the Italian economic Vilfredo Pareto. Arthur Pigou related the problem to the concept of externality discussed in the previous post. Just as markets sometimes reward individuals for doing things that have negative externalities (social costs), they also fail to reward individuals for doing things that have positive externalities (social benefits). Public goods theory says that the government has a responsibility to discourage the first type of behavior and promote the second.

Critics of public goods theory have tried to show how goods and services that are commonly regarded as public could conceivably be provided by markets under the right conditions. In 1960, Ronald Coase argued that externality problems are often property rights problems, and the solution is often to expand the rights of producers to make sure they profit from socially useful activity. In the classic case he studied, radio broadcasting could become a profitable activity only when broadcasters owned the frequencies on which they broadcast so they were free of interference. The argument can be extended to justify many forms of privatization. On the other hand, some goods seem irrevocably public. Maintaining a favorable global climate requires public action, since no business can own the climate enough to have a profit motive to protect it.

Non-Keynesian economists, especially James M. Buchanan and Gordon Tullock, have tried to counter public goods theory with “public choice” theory. It questions the very idea that government spending can work for the benefit of all. What is more likely to happen is that:

 …[I]ndividuals can use the powers of government for special-interest programs, or “rent-seeking,” gaining benefits for some at the expense of others….On an issue where the taxpaying majority is poorly organized, a well-organized special interest group may use plausible arguments (and campaign contributions) to persuade legislators to grant it monopolistic privileges or to tax the general public for the group’s benefit.

This is reminiscent of Adam Smith’s criticism of mercantilist government, favoring some economic interests over others instead of letting the market decide what’s best. Of course, a public goods theorist would question the assumption that what is most profitable is really best for society.

White concludes his treatment of public choice theory with the observation, “By rebuilding the intellectual case for the limited-government constitutionalism of the American founders, Buchanan and Tullock might today be called patron saints of the constitutionalist wing of the Tea Party movement.” This remark dramatizes the close association between economics and politics. Is the Tea Party trying to restore limited government and economic freedom, or is it trying to render government too impotent to stand up to powerful private interests and carry out needed economic reforms?