Notes on inequality — automation and globalization as the driving forces (9 Responses)

There is strong consensus across the spectrum of political economists on the causes of the rising inequality within the 99% and the generally weak income growth for most working Americans  — American workers  have experienced intensified competition from machines and from low-wage workers in developing countries.  There is no consensus over how to explain the stunning rise in top incomes, but even at that level, globalization and automation may be central.

In Wisconsin, in late October, the President said:

“[L]let’s face it – the middle class was getting hammered long before the financial crisis hit.  Technology made us more productive, but it also made a lot of good jobs obsolete.  Global trade brought us cheaper products, but it also allowed companies to hire in low-wage countries.”  (Click here for the President’s chief economist’s speech on inequality.)

Paul Ryan’s House Budget Committee, commenting on the CBO’s inequality report in 2011, made a consistent statement:

Technology and trade are obviously two economic forces that have contributed to dislocations and relative wage inequalities in recent decades.

Paul Krugman, whose early work lead to low estimates of the impact of offshoring, recognized in 2008:

. . . the rapid rise in manufactures imports from developing countries probably is, indeed, a force for growing inequality . . .

It is also clear that we are in the middle of a long difficult period.  The progressive Economic Policy Institute lamented after the 2012 election:

With no new substantial source of stimulus, our trajectory is toward a further erosion of living standards for the majority of Americans. Off-shoring and automation will continue to shed jobs with no offsetting increase in the demand for labor.  (Click here for more on EPI’s dim view of globalization.)

A columnist for the Economist writes:

America’s current employment woes stem from a precipitous and permanent change caused by not too little technological progress, but too much. The evidence is irrefutable that computerised automation, networks and artificial intelligence (AI)—including machine-learning, language-translation, and speech- and pattern-recognition software—are beginning to render many jobs simply obsolete.

Clinton administration economist Alan Blinder said in 2006:

We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering. . . .  [C]onstant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of “impersonal services” — that is, services that can be delivered electronically over long distances with little or no degradation in quality.

Blinder makes the point that while the first impact of automation and globalization may have been on lower-skilled workers, higher-skilled, more-educated workers will not be immune from competition in the future.

The critical divide in the future may instead be between those types of work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not. And this unconventional divide does not correspond well to traditional distinctions between jobs that require high levels of education and jobs that do not.

The Atlantic’s business editor, Derek Thompson, explains middle class decline in roughly the same way, but adds a third factor to the picture:

 When I write about income stagnation apart from the Great Recession, I typically rely on a trio of explanations: Globalization, technology, and health care. . . .

When he refers to health care as a cause for squeeze on the middle class, he means the rising cost of health care and the downward pressure it has placed on money wages.  But in a sense, this is really the flip side of globalization — health care and education sectors have so far been relatively hard to offshore or automate.  He continues:

[T]he vast majority . . .  of job creation now happens in so-called nontradable sectors — those that exist outside of the global supply chain — that are often low-profit-margin businesses, like a hospital, or else not even businesses at all, like a school or mayor’s office.

As many kinds of jobs have disappeared and incomes of low and moderate income workers have been squeezed, the health care and education sectors have continued to expand. Rising costs of health care, schools and higher education contribute further to the squeeze felt by those outside those sectors.  He doesn’t mean to point a finger:

I’m not asking somebody to start an Occupy Aetna movement. Instead, I’m saying that some crises have culprits without faces or corporate logos.

Nor does Thompson view middle-class income stagnation as primary a political problem.

As jobs return, incomes will rise, but middle class salaries will continue to fall behind their historical rate of growth. This wage gap isn’t Obama’s fault, and it wouldn’t be a President Romney’s fault, either. It’s globalization, and automation, and rising health care costs, and labor’s decline matching the fall of U.S. manufacturing, and a lot of other trends you have heard of, and are easily considered opaque, because they have no easy solution.

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    Will Brownsberger
    State Senator
    2d Suffolk and Middlesex District