Istvan
Gorog
July
2014, Eureka, CA
This
is my third posting in a series on economic issues. Here I draw on my personal
experience to focus on changes in the Digital Information Technology (DIT) age:
in jobs, productivity, globalization and new localization. I argue for communal
action to satisfy communal needs, and to supplement the competitive markets
that well satisfy consumer demands.
Contents
- 1 . Productivity growth
- 2 . A manufacturing case-study
- 3 . Some speculation about what may come in medicine.
- 4 The story of 21st Century tradesmen
- 5 . The changing nature of our high-productivity globalized society
- 6 . What we need to do
- 7 . Postscript
- 8 . Notes
1.
Productivity growth
In my earlier writings (Notes on the Economy… and After
Reading Piketty…), I discuss the replacement of human workers by ever
smarter and more productive machines, the desirability of full employment, and
thus the need to reduce the number of working hours per “full time” employee
and the number of years worked fulltime prior to retirement (i.e. reduce the
legal age for retirement). Some of my readers focused on the disappearance of
jobs and saw my views as real and pessimistic. Others argue that jobs are not
disappearing, only changing. Furthermore, there are ongoing political efforts
and related discussions in the media to extend the number of years worked,
based on the notion that since we live longer, we need to work longer to pay
for the retirement years. This is crazy: as we are today, we can feed, house,
and clothe everybody, but we cannot find jobs for everybody; so why and how
would extension of the retirement age solve our primary problems, which are
growing inequality and unemployment?
Here I want to emphatically state again that I do
not view the replacement of human labor by machines as a pessimistic
development. On the contrary, I welcome the reduction of the necessary human
labor for producing enough to satisfy all our needs. In fact without the
benefits reaped from technological advances, the Earth would not be able to
support the 7 Billion humans today, and even less the over 10 Billion people by
2100 (according to the UN forecasts). But I do call for some changes.
The fundamental attribute that differentiates the
underdeveloped and the developed worlds is the productivity of their respective
societies. Developed countries produce more per capita, they employ more
machines and employ a more educated labor force. In the developed world people
need to work less and produce more than people do in the undeveloped world.
Without machines this would not be the case, there would be no developed world.
In an agrarian underdeveloped society everyone needs to work to secure a
subsistence living. In the developed post-industrial America fewer than half of
the working age people are employed. The participation rate is 63 % and the
total unemployment rate is about 14 %, according to the US Dept. of Labor BLS
U-6 measure. Also, the participation rate has been steadily declining at an
approximately constant rate of about 0.5 % per year. Thus we now have less than
50 % of the working age population enjoying fulltime employment, and the
declining trend continues.
In a few hundred years the developed world moved
from agricultural to post-industrial economy. The Industrial Revolution brought
new knowledge and equipment, allowing most people to move from farms to cities
to work in factories, while those who remained on the farms still produced
enough food for all. As even more knowledge and equipment was developed and deployed,
both agricultural and industrial productivity improved further and the
transition to post-industrial economy occurred; this meant even fewer people in
agriculture, fewer people in manufacturing, and most people engaged in
services. By the end of the 20th Century, we entered the Information
Age. Here again knowledge and equipment improvements bring productivity
improvements requiring fewer people not only for the production of goods (energy,
buildings, food, and manufactured products), but also in traditional services.
At the beginning of the 21st Century, we are only beginning to
experience the impact of the new knowledge and equipment that brought us the
Information Age: Digital Information Technologies (DIT). DIT has already
transformed telecommunication, information processing and storage, machine
control, and robotics; all of these areas are likely to see significant further
development. These developments will bring productivity improvements to
services so that fewer people will be required for many service tasks, e.g.
online order fulfillment from automated warehouses delivered by drones. The
full impact of DIT is yet to come; thus far we only had a taste of the benefits
it is likely to bring.
As productivity improved, people needed to work
progressively less. In the agricultural era, but for the very small elites,
everyone worked all the time. The early industrial era accepted that work
tradition and 7 day workweeks with 10 to 12 hour workday were not uncommon. As
the industrial era matured, by the end of the 19th Century, 6 day
workweeks with 8 hour workdays became standard. As productivity improved
further, not insignificantly as a result of the invention of electric motors
driving power tools that enabled the building of production lines for the
mass-fabrication of consumer products, by the middle of the 20th
Century 5 day workweeks with 8 hour workdays became standard and less than 40 total-hour
workweeks became common. Renormalizing the “Average annual hours worked per
worker” data published by the OECD to a 48 workweek year, in 2012 the typical
workweek was in Mexico 46, in Russia 41, in the US 37, and in Norway 30 hours.
To summarize, in the free markets driven competitive
economy, productivity improvements allow that fewer of us working fewer hours are
able to produce more than we can all consume. I do not fear the coming of the
robots, I welcome them. I believe that further reduction in working hours is
overdue. Why should we stop now in sharing the benefits of these improvements?
It is far better for more people to work fewer hours then for fewer to work
more hours. The DIT era produces new wealth, but not new jobs in corresponding
numbers (Note 1). Some argue that enough new jobs are created to fill all the
employment needs of all those who wish to work and pursue the proper
opportunities (Note2). Indeed, as old jobs disappear, new jobs are created, but
net-net the number of available job opportunities per person is shrinking, as
clearly demonstrated by all the available statistics.
As human labor is being replaced by ever smarter machines,
greater and greater share of the national income goes to owners of capital and
to those highly skilled in areas in demand. Thus the owners of physical and
intellectual capital accumulate more and more wealth at the expense of the
rest. This leads to growing inequality that ultimately could lead to the
breakdown of our free enterprise democratic society. Also, there are growing
needs in “communal” areas not adequately addressed by competitive free markets.
In the following first I will describe a specific
manufacturing case that illustrates some key interplaying elements of
globalization, mechanization, and technology change. Next I will discuss how
even highly skilled professionals may find themselves replaced by machines. Then
I discuss individual success stories in the DIT age: how individuals with the
right skill mix and innate abilities reinvent themselves and adapt to the new rapidly
changing economic environment. Following that I will talk about specific
communal areas that need to take a greater share of the economy and that also
offer the new employment opportunities as old ones disappear. In the concluding
sections I present what I think we need to do to secure the future of our
American democracy and build a more just society.
2.
A manufacturing case study
In 2001 a new factory opened in Mexicali, Mexico.
The Headquarters of the company that owned the plant was in a European capital
and the company was listed both on a European stock exchange and also on the
New York Stock exchange. The factory produced a major electronic component used
in consumer electronics products. The production lines and processing equipment
were moved to Mexico from the US North East. The US factory that previously produced
this product was shut down after it had operated very profitably for over
thirty years, during most of this time under American ownership. The product
itself and the related manufacturing technologies were all invented, developed,
and designed in US industrial research and development facilities. The
customers for the product were other manufacturers, known in the trade as OEMs
(original equipment manufacturers), who manufactured equipment sold to
consumers. The Mexicali plant produced several million units and generated
several hundred million dollars of revenue per year. The principal
justification for moving the production facility from the original North
Eastern location was that many of the OEM customers were located in Mexicali
and thus the move offered significant transportation cost savings. Labor costs
were also significantly lower; the prevailing hourly wages of production line
workers in Mexicali were under $2.50 and about $16 in the North East, however
the direct labor cost of the product was only a small fraction of its total
cost. Similar products produced at a US Midwestern location had direct labor
contents between 4% and 5.5% of the total cost, dependent on the maturity of
the product.
The foregoing story could be a prototype business
school case study for globalization and the resulting migration of
manufacturing to low wage countries. There is yet another important element
missing from the above description of the actual events. As indicated above, labor
costs were a small fraction of the product cost, thus the cost savings that
accrued from moving the plant to a low wage area was not significant.
Furthermore, when the production equipment was relocated to Mexicali it was
updated, principally augmented with additional robotic automation. Thus, in
fact the labor content, as expressed in labor time per unit of production, was
reduced as production was moved to low wage Mexico. One may ask why would one
want to invest in more automation then? Clearly not to save on labor costs? The
short answer is: quality. It is well known that in the cost structures of mature
consumer durables the cost of quality can be a very significant component; in
fact, frequently improving quality is the most significant opportunity for cost
reduction. In the above cited example at the Midwestern plant the cost of quality
was about twice the cost of the direct labor content, and it exceeded the total
cost of capital employed (per unit allocated costs for tooling and
depreciation).
The cost of quality includes the costs of reworks,
rejects, and recalls; assuming that all environmental, regulatory, or safety
issues are properly addressed. The cost of quality is basically the cost of
defectives, products that do not conform to specifications. Defectives are the
result of mistakes. Properly designed and maintained machines do not make
mistakes, humans do. A long time ago it was well established that on production
lines with many repetitive operations, human operators made many mistakes,
while well maintained automated lines produce rejects only as a result of
defective incoming materials. Wherever mechanization of the line was feasible,
improved quality justified the elimination of human operators. With advances in
flexible automation, which combines the precision dexterity of robots with
sensory inputs, mechanization of many operations not only in goods production,
but also in a broad range of activities in the construction and services
industries, is being progressively introduced. Typically, both labor savings
and quality improvements result from automation.
The Mexicali production lines discussed above, now in
2014 are no longer in operation. Technology change replaced its products by new
devices that deliver the same function better at lower cost. These new devices
are now all produced in Asia (mostly in China, Korea, and Taiwan), on fully
automated lines. In fact, technologically it would be impossible to produce
these improved products on manual production lines. A further note of interest:
the base technology for these new products was invented in the USA, but the
product technology and the related manufacturing processes were all developed
by Asian companies. Thus, even though all jobs related to these products disappeared
from the US, we cannot say that these jobs were exported; rather in this case
Asia took the lead from the USA and beat the USA to the market. Low cost
off-shore labor plays no direct role in this new reality; indirectly yes, the
Asian electronics manufacturers got their start because of the low cost labor
they offered, and because one American giant once upon a time, RCA, did not
consider foreign markets important and therefore proactively licensed its
technology in Asia. But now Asian electronics manufacturers no longer enjoy
significant advantage from wage differentials, nor do they benefit from
shortsightedness of American corporations, and in the future they will do even
less so. Now it is an open field, where the Asians are ahead. We need to stop
crying about job exports and start thinking about what all these changes mean
and how to make best use of what we have.
3.
Some speculation about what may come in medicine
What is next? A good candidate for significant
automation within the next few decades is the healthcare industry. This
industry is growing: as technology reduced the cost of most basic living
necessities, people and societies spend more and more on healthcare. For it,
demand is never ending and market saturation is only cost dependent.
Operationally healthcare is: data gathering (administrative and diagnostic),
data storage and analysis, and corrective/healing procedures
(feedback/advice/counseling, drug administration, physical therapy, and
surgery). While I do not anticipate total replacement of human care providers
by intelligent machines, I do expect that in major segments of the healthcare
industry computerization and robotics will replace and augment physicians,
nurses, and administrators. I expect primary impact of automation in data
storage and analysis. Also I expect many diagnostic procedures to be automated,
not only the searching of data bases for diagnostic clues, but also including
diagnostic procedures, for example, X-ray image analysis. The least impact I
expect in some segments of healing procedures, in particular counseling and
physical therapy are likely to remain primarily human provided. Some other
procedures are likely to be strongly impacted, in particular surgery.
Robotic-assisted surgery is already a reality and it is proven to be more
precise and less invasive than traditional “manual” surgery; it overcomes the
limitations of human manual dexterity.
According to
the CDC FASTSTATS, in the US over 50 million inpatient surgeries are performed
per year, including, for example, over 300 thousand total hip and over 700
thousand total knee replacements. The annual cost of inpatient surgeries is
close to a trillion dollars out of a total US annual health bill of close to $4
trillion. Each basic type of surgery represents a multi-billion dollar annual
market. Clearly the technology is available, the benefits are established, and
the markets are huge; with such opportunities the possible resistance of special
interest groups may only slow down the adaptation of advanced robotics in medicine,
but the switch in many areas of the practice to robots from humans seems
inevitable.
4.
The story of 21st Century tradesmen
While the overall job market has been shrinking,
jobs are still available for those with the needed skills. But what the needed
skills are is continually changing, thus to acquire a useful skill for a trade
in demand is insufficient for lifetime security. The ability to update one’s
skill several times and change trades is a very useful, and most likely an essential
trait required for continuous employability.
I recently met a young man who was trained as a
welder. He attended some classes in a trade-oriented junior college and became
a certified welder. He specialized in building construction, welding
steel-frames. With a construction boom in his area, he found employment easily
and enjoyed a well-paying job as an expert welder. Then one day his boss called
him into his office, told him that the company is now switching to robotic
welding and offered him the choice of either being sent to school to learn the
skill to become a programmer of robotic-welders, or being laid off. He chose
the school and became a robot programmer. After a while the need for robot programmers
in the construction company where he worked became less acute. More people
acquired the skill of programming robotic-welders, and also fewer of these
people were required to operate the same number of robots because the tools to
program were improved and with experience the programmers became more
proficient. Feeling less appreciated and becoming restless, the certified
welder turned programmer looked around and found new opportunities based on his
programming skill. He moved to new places and found new jobs. When we met he
was working at a printing company, sitting at a computer and setting up basic
printing tasks for electronic printing. – As long as he retains his adaptive
ability, his interest in learning, and his willingness to move onto new areas,
I expect that he will be able to lead a productive life and find employment. Of
course this will not be lifetime employment in one trade, but a series of new
jobs in newly learned trades. Also, his good luck that in the process of switching his trade from
expert welder he acquired computer skills, makes finding new jobs for him in
the DIT age much easier.
Some time ago I befriended a middle aged man. He was
borne into a blue collar family in Washington DC. He trained as a car mechanic
and was quite successful in his trade. One day physics caught his attention and
he decided to find out more about it and signed up for a physics class at a
local junior college. He did rather well, got excellent grades and found
physics his new overwhelming interest. He also noticed that the demand for
mechanics at gas stations and independent repair shops was decreasing; new cars
with precision machined and electronically controlled engines required less and
more software based maintenance that was increasingly done by the dealers. He pursued further studies in physics, got
financial aid and fellowships, eventually went to graduate school at MIT, where
he earned a PhD. After a brief employment period with a start-up that failed,
he formed his own tech company, obtained Federal government R&D contracts
and some state subsidies, and achieved a satisfactory success as the
entrepreneur president of his own company.
These are wonderful success stories. But are they
representative of what can be expected of the average person? I doubt it.
5.
The changing nature of our high-productivity globalized society
In our globalized economy it is convenient to divide
a nation’s economic activity into tradable and non-tradable segments, i.e.,
grouping together all activities can that can be executed remotely and their
results imported, versus those that must be done locally. Much of goods
production, agriculture and manufacturing, are tradable activities. An extreme
example of a non-tradable activity is first aid. While this division does not
separate entire industries into one or the other segment, nor is the assignment
of an activity permanent (Note 3), it provides a convenient framework for
analysis. In general, as an activity moves from non-tradable to tradable, which
may or may not be the result of technology changes, the consequence is that
jobs are lost locally; they are exported. Services tend to fall into the
non-tradable segment and in developed countries in the DIT era, services
represent the dominant economic activity; thus the non-tradable segment
produces more than two-thirds of the US GDP. At the same time, much of the GDP
growth now comes from the tradable segment, while the job growth comes from the
non-tradable segment (Note 4). Productivity growth, as measured by value added
per employee, has been faster in the tradable segment, where it exceeds the
non-tradable by more than 50%.
In the last half-century technology changes tended
to move economic activities from the non-tradable to the tradable segment. For
example, the invention and broad utilization of container shipping reduced long
distance transportation costs so that low wage producers located in faraway
places could offer their goods cost effectively anywhere; the invention of low
cost communications and computerized record keeping allowed many on-line and/or
telephone based customer services to be moved off shore . But this is no longer
a one way street in the new DIT age. With the arrival of smart machines, low
cost labor is not likely to remain the determining factor in decisions where to
manufacture (Note 5).
Given the well-established problem of global warming,
caused by the rising atmospheric carbon-dioxide level, and the connection
between the burning of fossil fuels and the rising atmospheric carbon-dioxide
level, it is likely that sooner or later high (maybe even by design
prohibitively high) carbon taxes and
various other restraints will significantly increase fossil fuel prices. Today
all long distance transportation uses fossil fuels for energy. Renewable
energy, principally solar PV and wind, are promising sources for cost effective
and environmentally friendly replacement of fossil fuels, but only in static
“connectible” applications. While some progress is being made in energy storage
that increases the range of plug-in vehicles from tens of miles to a hundreds
of miles, thus far there is no indication whatsoever that plug-in container
shipping could become a reality in the 21st Century. Thus
transportation costs can be expected to rise significantly, while smart
machines are practically eliminating the cost of labor as a significant
component in the cost of goods sold. These factors are likely to lead to a new
21st Century DIT era trend of “localization” of goods production, as
opposed to the 20th Century “globalization” that was driven by
relatively low transportation cost and high labor content in the cost of goods
sold.
Today education and health care are for all
practical purposes non-tradable economic activities. Will they necessarily
remain so in the 21st Century? As I discussed in my earlier
writings, intellectual capital is an important driver of economic activity (possibly
even more, important than physical capital). Intellectual capital is held by
individuals; it is accrued through education; its rent is collected through
payments received for services rendered. Teaching requires the deployment of
intellectual capital to create new intellectual capital. Some teaching may occur
via “massive online courses” (MOCs) through which one superstar (who no doubt will
be supercompensated) will reach millions of students, thereby reducing the cost
per student (Note 6). In the DIT era there is also another way. Highly trained
individuals hold the same intellectual capital in low wage countries as
similarly trained individuals do in high wage countries, but in low wage
countries the cost of accrual is lower and the rent charged are lower. With
audio-visual interactive aids like Skype, small groups and even individuals
could receive more customized teaching than MOCs can provide. Thus some
teaching may move from the non-tradable to the tradable sector, leading to job
exportation, i.e. teacher job losses. Similarly, the health care industry, where
individual treatments dominate the costs, may also move some activities
off-shore: in addition to robotic surgery, remote sensing and interactive
tele-consultation may allow remote delivery of diagnostic services and reduce costs. Thus
part of health care may also move from the non-tradable to the tradable
segment, resulting in both cost reduction and job losses.
New technology is always deployed to increase
productivity and/or introduce new products and/or new services; these are
highly desirable outcomes. At the same time, no one’s job is “safe” from the
impact of technology; technology’s impact may result in creating new jobs and
eliminating old jobs. However, as pointed out above, now in the DIT age the net
effect of new technology is job elimination. To serve the available demand, productivity
is improving faster than is the creation of new products and services.
The relentless productivity growth and the invention
of new products and services are driven by the competitive market served by
profit motivated private enterprises. In fact, these developments are the
manifestations of the success of Capitalism. But not all needs of human society
are now, nor should ever be served entirely by for profit commercial
competitors. These exceptions address fundamental rights and communal needs. They
must be addressed in a communal manner, supported by communal funding. A short
list of such activities includes:
1. National
defense
2. Public
safety and security
3. Infrastructure
4. Health
and welfare
5. Education
6. Environmental
protection
7. Renewable
energy
8. Fundamental
research
9. Arts
Some of these, maybe all of these communal areas can
be partially served by private enterprise, but all need government financial
support and oversight. For example, certain functions in support of national
defense can be best provided by private enterprise under competitive bidding,
but private contractors have no place on the battle field, nor should atomic
bombs be developed as proprietary technologies and sold on the open free market
by competing global enterprises. Technically, infrastructure maintenance and
expansion are fully within the capability of private industry, but it is
recognized by the leaders of the relevant industries that here government
involvement is required (Note 7). A for-profit national healthcare system is
wrong, just like a for-profit national defense system would be unacceptable.
Private enterprise could be supporting health and welfare services, but it
should not be the primary responsible provider. To address climate change, new
public-private partnership is required, as now recognized even by some of the
leading figures on Wall Street (Note 8). Historically and to this date, the oil
industry benefits from government subsidies (including going to war to defend
its interests); renewable sources of energy need to be developed, both in
response to the global human need to reduce global warming and in the interest
of long term national security; full development and implementation of
renewable energy without government involvement is inconceivable. From the
beginning of the development of modern agriculture through the invention of the
internet, government played a crucial funding and leading role in R&D;
fundamental research remains a public need that private enterprise is ill
suited to undertake.
The market economy has been very successful in
serving consumer needs, but serving communal needs is primarily the function of
government. It is not only conceivable, but also highly likely that in the
future for-profit enterprises operating in the private sector will design,
install, operate, and own the smart machines producing all the goods that fill
the consumer needs and the taxes on the profits on these very high productivity
private enterprise activities will pay for those activities that fill communal needs
and where most people will be employed.
No doubt, many communal activities in the DIT era
also will benefit from the deployment of smart machines, resulting in
productivity improvement and reduced labor requirements. However, in the recent
past and in the foreseeable future, the communal activities have been and will
be the job creators. As I discussed above, new DIT age enterprises are wealth
creators and not job creators. Investing part of this wealth in communal
activities to benefit all is clearly necessary. Also such investments will create
some jobs. These jobs are necessary to supplement what otherwise would need to be
all transfer payments to accomplish the growing need for redistribution of
income and wealth. Contrary to the belief of some, government involvement is
already a significant beneficial contributor to the economy (Notes 9 and 10),
and in the future it will be even more importantly so.
6.
What we need to do
That we have a growing inequality has been well
demonstrated and much discussed (see Notes 11and 12). That we have enough to
take care of all, I have discussed in my previous blog postings. Above I have
argued that the two key tasks to undertake are the reduction of working hours
and the increase in communal activity investments. Given our highly divided and
ideology driven society, how do we go about accomplishing these tasks?
First let’s follow the “20:20:60 rule”; whereby in
politics as well as in sales, 20 % of the people “will buy it” and 20 % will
not no matter what, thus we need to work on the remaining 60 %. Those who are
convinced anti-government ideologues will object to any suggestion involving
increased taxes, transfer payments, and communal investments as unacceptable
socialism, and for them the US Constitution as written in the 18th
Century needs neither interpretation, nor updates. Then there are also those
who will put their entrenched self-interests that my conflict with what needs
to be done ahead of the interests of the rest of society. For example some
super-rich with oil wealth will spare no money and effort to oppose
environmental regulations and government incentives supporting the development
of renewable clean sources of energy, while with equal vigor they will protect
government subsidies for fossil fuels. While such groups must be recognized as well
organized significant opponents of any and all progressive social, political,
and economic agenda, they also need to be recognized as inconvincible. Let’s
forget them, focus on the rest and let’s start at the beginning.
The American Declaration of Independence in 1776 announced
a set of basic rights, but when the UN General Assembly in 1948 adopted The
Universal Human Rights it added some rights to what was in the American
original. Specifically, in Article 25 it asserts that basic human rights include
access to healthcare, social services, and unemployment support (Note 12); in
Article 26 it adds free basic education and accessibility to all education
based on merit (Note 13). The UN Universal
Declaration of Human Rights is generally agreed to be the foundation of
international human rights law and the USA is one of the original signatories.
Is it not now time
again to amend the US constitution? Would
it not be appropriate in the DIT age to add the rights to health care and
education to the right to bear arms? No doubt all sane people would agree, but
sane behavior is not a hallmark of the practice of politics. While a
constitutional amendment would be most desirable, laws and regulations based on
simple majority in Congress and executive orders coming from the President are
more likely practical avenues for achieving what needs to be done.
We need to recognize
that machines are replacing progressively more and more people in the work
force and view this not as a pessimistic undesirable historical outcome of
human shortsightedness, but as a desirable outcome of human ingenuity. In the
DIT age we can all live longer, work less, and have more leisure time. To
achieve this we need to implement a new social contract whereby the necessity
for collaboration of communal and private interests is explicitly recognized.
During much of the 20th Century the social contract in the USA was
based on two factual notions that that no longer hold (Note 15). Fact one:
American companies no longer depend on American consumers, and vice versa,
globalization has changed that. Fact two: Communism is no longer feared as a
possible alternative to Capitalism; the Soviet Union is gone and in China we now
have a new economic system best described as state-capitalism that breeds
billionaires. The old social contract gave rise to a strong middle class and general
social wellbeing. This contract is now gone; the majority is now being left
behind and a general sense of discontent is growing.
The balance between
capital and labor has also changed. It used to be maintained by negotiations between
powerful labor unions and capitalists. Now as smart machines replace people,
labor unions have lost much ground. But now capital has increasingly two forms,
physical capital and intellectual capital. While conventional measures of
national wealth only consider physical capital, intellectual capital is now just
as, if not more, important and its value is comparable to that of physical
capital (Note 10). The industrial age was both based on and also created much
of the physical capital. Similarly, the DIT age is based and has also created
much of the intellectual capital. Physical capital is both “rentable” and
transferrable. Intellectual capital is “rentable” but not transferrable, must
be continuously regenerated through education, and is the most important
national asset. Unlike physical capital, everyone with access to education can
acquire intellectual capital purely according to individual capability, thus it
is the principal tool for social mobility in the DIT age. Its economic value
for the nation and for individuals cannot be overstated; I briefly wrote about
it in my previous blog posting (Note 16) and for a good discussion about its measuring
its value see the reference in Note 10.
We need to revisit
our basic social and economic agenda and align it with the realities of our
times. To this end: 1) recognize the benefits of private/public partnership and
the need for increased communal action, instead of viewing government as an
undesirable constraint on individual liberty; 2) make merit-based free access
to education available to all at all levels, not only through secondary school;
3) reduce the legal full-time working hours to increase labor force
participation, recognizing that it is better for more to work less than for
fewer to work more; 4) significantly increase the investment of public funds
and incentivize increased private investments in areas addressing communal needs; 5) increase taxes and the progressivity of
taxes (possibly tax not only income but wealth as well), recognizing that the
benefits delivered by smart machines should be shared by all and not only by a
few lucky ones among us.
Unless we recognize
the urgent need to update our thinking and act accordingly, we can expect
potentially disruptive social tensions to develop within the next few decades,
and then our American democracy based capitalism may not survive into the 22nd
Century.
7.
Postscript
In my writing here I have focused on changes in
work, driven by technology advances, and on how to cope with these changes. Coping
leads to necessary adjustments to our political economic systems, which
unavoidably involve rebalancing the growing inequality. There is a general
agreement among political scientists and economists that wealth and income
inequalities are not the consequence of any fundamental free market law, but
the result of political machinations of our democratic system of government by
special interest groups (Note 17). Even though the basic facts of the growing
inequality have been published by several authors, as Piketty’s book became a
best seller in 2014, “ inequality”
became the subject of much discussed and highly polarized public and
private debates. American winners of Nobel Prizes in Economics praise it, right
wing pundits on the payrolls of the likes of the American Enterprise Institute
or the Cato Institute try to discredit it, based on claims of errors that they
try to prove through parsing of some of the numerical details published in the
book and in its on-line quantitative Appendix. The official publication date of
the book was March 10, 2014 and the response was immediate. The first public
endorsement was by Nobel laureate and Princeton professor Paul Krugman in The
NY Times Opinion pages on March 23, 2014; on the following day, on March 24,
2014, James Pethokoukis of the American Enterprise Institute warned in a blog
in the National Review Online that
Piketty’s book, “if unchallenged, will spread among the clerisy and reshape the
political economic landscape”. Arguments aside, the reality of growing
inequality is well established in published statistics by the US Government and
the basic arguments against its desirability were presented long before 2014.
The fact that this book became such a much discussed best seller now is an
indication that there is a growing recognition of the problem and of the need
for change. To paraphrase Hacker and Pierson (Note 17), the last thirty years
have shown that our less modern and less efficient government system is not
able to fend off encroachment by the highly efficient and modern private
interest organizations. Maybe the very debate surrounding this book is an
indication that the American public is ready for a change: to ask government to
act for the communal interest and not against it.
Public debates on inequality and on global warming
have strong similarities. There are those who deny the facts; then there are
those who accept the facts, but deny the
need for action (some argue that the fix is worse than the problem, others that
yes it is so but it is not a problem); finally there is a growing majority that accepts the facts
and wants to do something about it, but whose will has not yet overcome
Congressional opposition fuelled by $9 billion per year lobbying spending (Note
18), by the over $1.2 billion special interests spending on voter influence in
the last national election cycle (Note 19), and by self-enriching musical
chairs offered to ex-congressmen by the lobbying industry (Note20). In any
case, as pointed out above, we need to apply the “20:20:60 rule” and proceed.
8.
Notes
Note
1
There
are several measures one could use to estimate how a corporation contributes to
the Nation’s economy. For example one could count the number of employees per
invested dollar, or value added by employee, or the market cap per employee.
The market cap per employee is a relatively easy number to get for public
corporations: stock market reports keep track of the market cap and financial
reports show the number of employees. Also, comparing the market cap per
employee of different companies gives a direct measure of their contribution to
wealth versus job creation: a company
with high market cap per employee creates more wealth than jobs in comparison
to a company with low market cap per employee. Obviously, the market cap
fluctuates as the share prices vary, nevertheless it can be used to obtain
rough estimates. Companies in the old manufacturing industries, e.g., Kaiser
Aluminum, Ford, GE, IBM, typically have market caps under $1 million per
employee. New DIT era companies are valued much higher: Google over $5 million,
Facebook over $30 million, WhatsUp (a Facebook acquisition) over $300 million
per employee. As a point of reference, if we use $77 Trillion as the total
wealth in (or the effective market cap of) the United States where we have
about 150 million people employed, then we have a national average market cap
of about $0.5 million per employee. If we make a further adjustment for
assigning about 40% of the national
wealth to real estate (see: Thomas Piketty, “CAPITAL in the Twenty-First
Century”, The Belknap Press of Harvard University Press, 2014, Fig. 4.10, p.
160) the national average market cap in the USA is less than $0.3 million per
employee.
Note
2 See
Steve Rattner,”Fear Not the Coming of the Robots”, NY Times, Sunday, June 22,
2014, p. SR 4. While this article shares my view on the benefits of
productivity improvements derived from technology advances, it denies the
net-net shrinkage of employment opportunities. It shows a bar graph of jobs
eliminated and created that seems to claim how the jobs added for highly trained lawyers, physicians, computer
systems managers can replace the jobs lost by carpenters, switchboard
operators, typists, etc. It blames globalization for lack of income and jobs
growth. Interestingly, at the end it recognizes that, even though in his view new
jobs could be there for all, he also notes that everybody may not be trainable,
and therefore “more robust social welfare programs” are needed.
Note
3 Health
care historically was a local, thus non-tradable activity; recently medical tourism
associated with elective procedures, remote consultation and computer assisted
surgery could be tradable activities. Agriculture in general is in the tradable
area and much of our food is imported; but fruits, vegetables, meats and wines,
advertised as “locally produced organic”, obviously must come from the
non-tradable segment.
Note
5 Michael Spence, May 22, 2014, https://www.project-syndicate.org/commentary/michael-spence-describes-an-era-in-which-developing-countries-can-no-longer-rely-on-vast-numbers-of-cheap-workers
Note
6 The
Economist, June 28th 2014, pp. 20-22 (Briefing, The Future of universities,
The digital degree)
Note
7 ibid. pp. 23-24 (United States, America’s
crumbling infrastructure, Bridging the gap)
Note
8 RISKY BUSINESS The Economic Risks of Climate
Change in the United States, June 2014,
A CLIMATE RISK ASSESSMENT FOR THE UNITED STATES http://riskybusiness.org/uploads/files/RiskyBusiness_PrintedReport_FINAL_WEB_OPTIMIZED.pdf
Note
9 Lew Daly, “Our Mismeasured Economy”, NY
Times, July 7, 2014, p. A17
Note
11 From
various US Census, US BEA, and other online accessible sources, in round
numbers: US GDP(2013) $16 Trillion and top 1 % earns135, top 10 % earns 34 % of
it; US Wealth(2013) $77 Trillion and top 0.1 % owns 22 %, top 1 % owns 40 %,
top 10 % owns 75 % of it
Note
12 The great Divide, Joseph E. Stiglitz,
Inequality is not Inevitable, NY Times, June 29, 2014, SundayReview, p.SR 1;
also see: http://opinionator.blogs.nytimes.com/category/the-great-divide/
Note 13
The Universal Declaration of Human Rights, Article 25 (1):
“Everyone has the right to a standard of living adequate for the health and
well-being of himself and of his family, including food, clothing, housing and
medical care and necessary social services, and the right to security in the
event of unemployment, sickness, disability, widowhood, old age or other lack
of livelihood in circumstances beyond his control.”
http://www.un.org/en/documents/udhr/
Note
14 The Universal Declaration of Human
Rights, Article 26 (1): “Everyone has the right to
education. Education shall be free, at least in the elementary and fundamental
stages. Elementary education shall be compulsory. Technical and professional
education shall be made generally available and higher education shall be
equally accessible to all on the basis of merit.” http://www.un.org/en/documents/udhr/
Note
15 James Surowiecki, Moaning Mogul, The
Financial Page, The New Yorker, July 7& 14, 2014, p.36
Note 17 See for example: Jacob S. Hacker
and Paul Pierson, “Winner-Take-All Politics”, Simon & Schuster, 2010;
Joseph E. Stiglitz, “The Price if Inequality”, W. W. Norton & Company,
2012;Thomas Piketty, “Capital in the Twenty-First Century”, The Belknap Press
of Harvard University Press, 2014.
Note 18 Lee Fang, February 19, 2014, http://www.thenation.com/article/178460/shadow-lobbying-complex.
Note 19 2012 Election Cycle, all types of fund raising, https://www.opensecrets.org/outsidespending/summ.php?disp=O.
Note 20 Mark Leibovich, “Eric Cantor is on the Market”, NY Times Magazine, July
20, 2014, p. 12.
