Notes on inequality — automation and globalization as the driving forces

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.

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.

9 replies on “Notes on inequality — automation and globalization as the driving forces”

  1. Will has nailed the causalities (globalization, automation) and the casualties (education and health care) pretty well. One problem is that the actors pursuing the former are only moderately sensitive to the latter. Our economic system rewards offshoring and redundancy through the stock market and incentives to business executives. A different set of incentives is needed to distribute revenues to stakeholders beyond investors. To me and others (like Marjorie Kelly), that requires changing the operating rules for public corporations so that there performance is measured by much more than quarterly profits (figures for which are frequently manipulated in self-interested ways). “Benefit Corporations,” recently enabled in Massachusetts are one form of ownership that distributes value more equitably, as are cooperatives, worker-owned enterprises and credit unions. Let’s start by reinstating something like the Glass-Steigal separation between commercial and investment banks, and go on to pressure governments to do as much of their business as possible with local businesses, cooperatives and banks that have a stake in the well-being of our communities.

  2. I don’t see how it is possible, at least in theory, for machines to be responsible for decreasing over-all employment. They wipe out individual jobs, yes, but in wiping out those jobs they release money that has to be given to other humans to be worth anything.
    The total amount being paid to people is not only conserved, but increased. We have been introducing machines into our civilization for a long time, but that hasn’t prevented — indeed has caused — the total number of jobs to increase enormously over the last two centuries.

    It is of course true that automation reorganizes general employment, and if that is all your experts are claiming, no problem.

    1. I disagree that it’s no problem. Sure, we’ll probably hit a new status quo eventually — but would you say that the industrial revolution was “no problem” to the millions of families that suffered for several generations before the economic ship righted itself? I think we’re seeing the beginning of an economic revolution no less in size, and this time we should do something to prevent the tale of two cities.

  3. I should also add that the problem is not in overall wealth. If you look at GDP per capita, it’s higher today than it’s ever been (http://www.wolframalpha.com/input/?i=us+gdp+per+capita). If you look at that adjusted for inflation, then we’re not quite recovered, but pretty darn close (http://www.wolframalpha.com/input/?i=us+gdp+per+capita+adjusted+for+inflation).

    The problem is that much of this wealth is being generated by machines — that is, by capital. That means most of the wealth is going to the owners of those machines, rather than the workers who help operate them. And that’s why, even though GDP per capita is doing well overall, in real terms wages have gone down for most people.

    As a simple example, say you had 10 people in a society, each earning $10. Your GDP is $100, and GDP per capita is $10. Now some technology comes along, so that nine of those people makes $9, and one of them makes $24. GDP is up to $105, GDP per capita is up as well, and yet most people are making less money.

  4. A couple of economists at MIT wrote an interesting book on the matter: Race Against The Machine (ISBN 0984725113). It’s a pretty short read, and I’d recommend it if you’re interested in the topic.

    One criticism I have of it is that I think they miss the scope of the changes that will be necessary. It won’t be enough to rearrange the chairs on the deck; we need to rethink the ship’s design. For instance, one of the driving forces of the current economic system is the push for ever-increasing efficiency. If our problems are caused by what is essentially too much efficiency, maybe we should rethink this as a driving force? We also need to recognize the concentration of wealth, which is only increasing due to technology, and take steps to mitigate it — steps that don’t rely only on taxes, since that also comes with a high risk of failure if the upper economic tier gets hit by a bubble (see http://www.economist.com/node/21540308, esp. paragraphs 4 and 6).

    As mentioned in another thread, I think we’re at the start of an economic revolution on the scale of the industrial revolution. The world eventually recovered from that one — but not before many families suffered hardships, and a few governments toppled (sometimes in very bloody ways). I hope we can do better this time around.

  5. Yes, Yuval, there will be a bubble, because that’s how financial gamblers get richer. And they’ll structure both the boom and the bust so as to make poorer people get knocked down and then have to pick up the pieces. The economic terrorists can only pull things like that off because they are able to influence governments to protect their smart asses. What can be done to blunt their influence?

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