Determining Bargaining Power in the Platform Economy: Reinvent Full Transcript

Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster…

…The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.

Fixes for the economy?:

  • A 4 percent inflation target from the Federal Reserve, * Incentivizing businesses to invest in workers,
  • Reinvigorating the idea that technology should be used to augment workers, not replace them.

The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.

Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore…says…

Full Transcript:

Pete Leyden: Hello. I’m Pete Leyden. Today, we have Brad DeLong with us. He is an economics professor here at U.C. Berkeley. He’s also the recently installed chief economist of the Blum Center for Developing Economy.

Pete Leyden: It’s good to have you here.

Brad DeLong: Great to be here.

Pete Leyden: We’re here at this moment with all these folks from the OECD, the economists from the United States here, and the technologists. If you had to think about the kind of moment we’re in right now, how would you characterize where we are as far as the evolution of the global economy and our technologies are? Is there anything special about this moment? Anything critical about it? Any ways you think about this juncture?

Brad DeLong: Let me give you a three-part answer to that: a 50-year horizon answer, a 15-year horizon answer, and then a 0-5-year horizon answer.

Brad DeLong: The 0-5-year horizon answer is: America has been deeply scarred by the financial crisis that started in 2007, the deep recession that followed, and the extraordinarily anemic recovery since. That still leaves us with four million people fewer in the labor force and looking for jobs than we ought to have. We are not sure what all of them are doing. Many are living in their sisters’ basements playing video games. The economy and people’s expectations of how it works have been shocked. How well our society functions is still deeply scarred. We are recovering only slowly, if at all, back to what we used to think was normal. that is the 0-5-year horizon answer.

Brad DeLong: The 50-year horizon answer is: Expect the collapse of the need for people to do a great many tasks that people used to do and are still doing that provide value. In the next 50 years an awful lot of paper-shuffling tasks are going to be taken over by software bots. An awful lot of blue-caller, traditionally male, tasks are going to be taken over by robots. Few occupations will disappear. But many occupations will be transformed. And many will shrink. The income and wealth distribution will be upset—either in a positive or a negative direction. These 50-year horizon processes are what most of us upstairs at this conference are worrying about.

Brad DeLong: Then there’s a 10- to 15-year horizon. How much of this transformation is going to happen in the next 15 years, as opposed to the rest of the next 50? How fast is the 50-year horizon process going to come upon us? Where exactly will be the first sectors and first places in which the coming of—call it the “Rise of the Machines”—the replacement not just of blue-color manufacturing but also construction and transportation and distribution and warehouse workers will be hit by technology, and who? Where and when will a good deal of standard white-color paper-shuffling work start to disappear as expert systems and software bots take it over?

Pete Leyden: In your career, is this about as momentous a time as you’ve seen? Or is that overhyping it?

Brad DeLong: That we are recovering from the macroeconomic catastrophe that started in 2007 has definitely made it very, very fraught. The failure of our Electoral College to deliver us a competent president in 2016 has definitely made it very, very fraught. Our political system was hacked partially by malevolent people, but mostly by time, circumstance, chaos, and disaster. It has been hacked in three ways.

Brad DeLong: The first way it has been hacked is the Electoral College failure; that gave us a president who really is not up to the job in practically any dimension. The second way is that small states hacked the constitution in 1787, so today the 49-seat minority in the senate represents 175 million people, while the 51-seat majority represents 145 million people. The desperately minority congressional government understands it is a minority government. It is acting oddly as a result. Third, the state-level Republican gerrymandering after the 2010 censushas given us House of Representatives is extraordinarily unrepresentative of the median American voter. These have created a time of great political fraughtness. We clearly have a very badly broken political system. That greatly deepens and increased the dangers of managing what I call the 50-year transition. And on top of that is the economic fraughtness left from 2007.

Brad DeLong: The 50-year transition has been going on since Steve Jobs and Steve Wozniak began building personal computers in the garage. It has been going on at a more less constant pace. We see a little bit more about where it’s heading with each passing year. It really has not sped up much. What has made this moment fraught is the political disaster of 2016 and the echoing effects of the economic disaster of 2007.

Pete Leyden: There are three challenges we’ve been wrestling with here. You mentioned one of them—the robots and AI. But there’s this idea that the economy is moving towards more and more independent workers. There’s also this rise of the “platform economy”. How do you think of those other two challenges? How important developments are they? How much do they concern you—or actually encourage you as good thing?

Brad DeLong: The platform economy has a number of dimensions. One is what Hal Varian was talking about at the conference yesterday—the “end of the need for scale”. With Amazon Web Services and with Google anyone with a good idea can launch their website at scale for pennies, providing through the web whatever service or commodity they want to provide. And if demand is there they can scale up as far as they need to using very cheap world class-efficiency systems to support their businesses. You no longer need a large initial lump of capital of any. You just soft launch and look for demand. You use the web and search to attract customers. You use AWS and Google to provide your back end. This should be the cause of an enormous upward surge in entrepreneurship and enterprise, and a great flourishing of creativity. Whether it’s individuals with an extra four hours a week making extra money by driving for Lyft, or whether it’s writers saying, “I don’t want to have to sell books at 20 bucks and get only a $1.50 in royalties. I want to establish my own Patreon and have my fans pay me directly”, or any of a whole bunch of other things.

Brad DeLong: The possibilities for positive human flourishing from the platform economy are immense—if the platforms actually work. Right now we find ourselves in a world in which riders are paying essentially 60% of Uber’s costs. Uber’s investors are paying 40% of Uber’s costs. What happens when the investors begin wanting their money back? Do we find that Uber has enough economies of scale, and scope, and enough of a brand and a first mover advantage, that it’s a profitable business? Or do we find that the business gets taken over by somebody else? What if Google puts a little taxi ride button on every Google Map screen, saying: “We’ll only charge you a $1.50 as a handling fee”? Uber will have charge you considerably more if it wants to repay its investors. Uber may turn out to have done the trail-breaking thing. Uber may suffer the fate of most pioneers—arrows in their back, and face down. Or perhaps the platform economy will not be a good thing. Perhaps it moves bargaining power away from the real producers, who are doing the work, and also away from the customers, and into the hands of that one large company in the middle that controls the information. That’s still up for grabs.

Brad DeLong: Most people who fear that we are, as the extremely sharp Zeyneb Tufekci of Duke University says, “building a dystopia one brick at a time in order to trigger people to click on ads”, greatly fear that individual humans, given our cognitive disabilities, will be no match for the informational middleman organization using deep learning and information to figure out how to trigger and control us. Others are much more optimistic—although not necessarily much more optimistic about the prospects of individual platform pioneers like Uber. They are, however, more optimistic about the prospects of the large companies that have entrenched dominant positions: companies like Apple, Google, and Facebook—not that they are optimistic about any one of them, but rather they are optimistic about the prospects for profits for all of them put together, because what opportunities one of them fumbles another one is likely to recover.

Pete Leyden: They will do well for everybody, or do good for themselves?

Brad DeLong: They will well, and they will do good.

Pete Leyden: Do good. And where do you find that, actually?

Brad DeLong: I’m basically a techno-optimist. It’s hard not to be a techno-optimist in California—especially if you’re an intellectual, a data loving infovore.

Pete Leyden: You think even though there are all these challenges, the platform economy is something we could get behind?

Brad DeLong: Yes.

Pete Leyden: What about speaking as an economist now? This other thread: independent workers playing an increasing role in the economy. There’s a positive way to see that. There are also challenges in that. I’m curious to how you see that challenge.

Brad DeLong: Independent workers have, by their nature, very little bargaining power over what economists call “rents embedded in the system”. Your bargaining power is limited by what you could charge if you walked away from the relationship and went out on your own, and by what your counterparty would have to pay in order to get someone else to step up in your place. You have bargaining power if, when you walk, you disrupt a complex and valuable general production value chain, and your counterparts finds it expensive to figure out how to replace you. You have bargaining power even if there is someone else who could fill your job just as well if and only if it is difficult to find that person. A lot of successful middle-class societies have been based on situations in which relatively low-skill workers have bargaining power and share big time in economic rents, either because there aren’t that many replacements in the area or because they threaten to walk as a group.

Brad DeLong: Yesterday at the conference, ex-governor Jennifer Granholm of Michigan told a heartbreaking story about a town in central Michigan: 8,000 people, of whom 3,000 work edin the refrigerator plant. Those 3,000 workers made a very good living for Michigan at the start of the 2000s—some 35 buck an hour, I think, in wages and benefits. But the refrigerator plant goes. And after it leaves they are lucky to make $12 or $15 an hour. And then all those who worked to satisfy their demands find their markets have halved in value. The refrigerator plant workers’ skills, machines, lifetime of experience bashing metal and operating things that form refrigerator coils—there’s really not much demand for those skills in central Michigan, and they find that they can’t transfer their skills to do anything else of great value. The principal source of their income was sharing in the rents created by the refrigeration value chain: their dominant market positions and imbedded technology. That kind of danger faces a lot of people who become independent workers. And the middleman firm does not have to close. All the middleman firm has to do is say: “I am altering the deal. Pray I do not alter it any further”.

Brad DeLong: On the other hand, an independent worker economy is not bound to be destructive. As long as we have a middle-class society, these are immense amounts of work to be done for one another. And replacing any of us with somebody else will be expensive. Think of the typical job in the economy going from being a manufacturing worker to being a barista at a coffee shop or a teacher at a yoga studio. As long as you have a middle-class society, there’ll be a lot of people who will be willing to pay handsomely for yoga lessons or for a particular espresso beverage brewed exactly the way they like it with a smile, a handshake, and a friendly three-minute conversation about how they’re doing, while the thing brews.

Brad DeLong: On the other hand, if we have plutocracy, in which the only people who have a lot of money are the rich, then the potential customers for the yoga studio won’t be able to pay very much and your fancy expresso drink won’t command very much. The only people who’ll have middle-class lives will be those who control resources that are useful for making things for which rich people have a serious Jones. There’ll be relatively few of those as well. Thus most of it is the shape of what the income distribution will be. That is ultimately a political choice about the distribution of wealth. An unequal distribution of wealth will drive an unequal distribution of income. That will then reproduce itself. And an equal distribution of wealth will drive a more equal distribution of income, which will also reproduce itself.

Pete Leyden: You’ve kind of given—this is probably right that could go this way, could go that way, could be positive, could be negative—I get that and that’s good choices here but…

Brad DeLong: …This is why we economists want not to have just two hands, but a prehensile tail as well…

Pete Leyden: But in that respect, what do you see is the most promising ways forward to kind of deal with this juncture we’re in—tip the balance? What are the things that you’d like to see happen soon here that would evolve this economy in the direction to make it healthy?

Brad DeLong: Am I allowed to say a 4% inflation target from the Federal Reserve? A Federal Reserve that is less focused on keeping inflation very low, more focused on keeping employment high, and more focused on making sure that there’s enough inflation in the system that the Federal Reserve can maintain interest rates at a level at which it will have the power to stabilize the economy? Businesses are not going to want to train their workers unless workers are scarce. Workers tend to be scarce only in what we call a “high-pressure economy.” The first and most important thing would be to change the calculations of those businesses that might be willing to invest in training workers. They need to feel that workers are valuable commodities under their control that they need to boost the value of. It has been totally the case since 2008, and largely the case since 2001, that businesses think there are plenty of workers out there, and we really don’t care about them, because the bottlenecks keeping us from being more profitable are elsewhere. Making labor a serious bottleneck for business so that business focuses on helping workers become more productive and more useful is, I think, the first thing we could do.

Brad DeLong: The second thing would be to repeat what Silicone Valley did in the 1980s and 1990s, that is you’re old enough to remember the coming of the Macintosh computer in 1984…

Pete Leyden: …Indeed…

Brad DeLong: …Apple bought Super Bowl time for a dystopian 1984 TV commercial. It was all about how important the Macintosh computer would be as an engine of freedom. They really believed that the personal computer was an engine of freedom. It allowed you to control and access your own information, rather than having to rely on some human resource or IT department backed by some large mainframe that had lots of data that you weren’t allowed to access and controlled your life. The fear back then was that people would become information serfs: the valuable parts of the enterprise and the value chain would be kept under lock-and-key in the hands of the priests of IT and HR. It was a world in which people would take their draft cards and burn them, in which your information would come on five IBM cards which would all say, “Do not fold, spindle, or mutilate”, and which you would feed into the machine face down, nine-edge first. The vibe was that those cards produced decisions over which you had no control or knowledge. Thus making information technology tools to augment people’s abilities to figure out and maneuver in the world that they were in, rather than information technology being a tool for supervision and control—“you’re 15% less productive at processing claims, so we don’t need you around anymore, and you have no skills or information that can be transferred elsewhere.”

Brad DeLong: The idea of Apple Macintosh 1984 was of information technology as a way of augmenting human intelligence and boosting productivity—rather than information technology as a way that we can substitute capital for labor, and getting these annoying workers out of the factory or office while still producing as much. That was a key and a revolutionary social goal of Silicon Valley as it existed in the 1980s and 1990s, from the coming of the personal computer to the flourishing of the internet. In some sense, Silicon Valley has to figure out how to do this again. Organizations like, say, Berkeley’s engineering school have to help. Large companies tend to be much more interested in figuring out how to use information technology to shed annoying and expensive workers, rather than how to give those annoying and expensive workers more control over their lives.

Pete Leyden: Well, that’s fascinating. It’s a big challenge to the tech world as well as a challenge to policy makers. I wish we had more time to kind of go deeper into many, many possible solutions there. But just to wind up here, big challenges, possible big solutions shift, how confident are you that we’re going to manage this transition here? Whether it’s the five-year, the 15-year transition, how confident are you going to do it and how worried are you?

Brad DeLong: I would say I’m not confident at all.I would say that our income and wealth distribution now has managed to tilt itself in a bad way. If you want the economy to pay attention to you, you better have money. And the money is too concentrated now. If you want the polity to pay attention to you, you better have a movement. Yet somehow it seems that the age of the internet and of the decline of manufacturing has made it harder rather than easier to create durable social movements. At the same time it has made it much easier to create the appearance of a social movement via software bots controlled by some server in the Former Yugoslav Republic of Macedonia. And that crowds the information flow. What is the cartoon? “1980: my incandescent light bulb produces ten times as much heat as light. 2017: my LED light bulb has been taken over and is now running a button out of 50,000 Twitter followers controlled via a server on another continent.” That that seems to be the world we’re moving into. It’s not terribly a reassuring one.

Pete Leyden: Well, that’s a good place to end. At least that’s a sobering thought, and thanks so much for joining us here and giving us your thoughts.

Brad DeLong: You’re very welcome. It’s a great pleasure. Bring me back again.

Pete Leyden: I will.

Reinvent: Determining Bargaining Power in the Platform Economy

Reinvent: Determining Bargaining Power in the Platform Economy: Our political system has been hacked by time, circumstance, chaos, and disaster…

…The failings of the electoral college, the fact that small states hacked the constitution in 1787, so we now have a world in which the minority in the Senate represents 175 million people, while the majority represents 145 million people, and the gerrymandering after the 2010 census are primary examples of this dysfunction.

Fixes for the economy?:

  • A 4 percent inflation target from the Federal Reserve, * Incentivizing businesses to invest in workers,
  • Reinvigorating the idea that technology should be used to augment workers, not replace them.

The possibilities for positive human flourishing from the platform economy are immense, provided the platforms actually work. Uber’s investors are currently paying 40 percent of Uber’s costs. What happens when these investors start wanting their money back? The platform economy moves bargaining power away from the service providers and from the customers, and into the hands of the platforms. This is a problem for both consumers and independent workers. What bargaining power workers will have will be correlated to the time and resources devoted to training them: when you walk, you disrupt a general production value chain, and it is expensive to figure out how to replace you, even if there’s someone else who certainly could do the job just as well. But if it is not very expensive, you have little power.

Nevertheless, here in California it is hard not to be a techno-optimist—especially if you are an curious infovore…says….”

Information Technology and the Future of Society (Hoisted from 2001)

Hoisted from 2001: Information Technology and the Future of Society (My Bekeley CITRIS Kickoff Talk) For perhaps 9000 years after the beginnings of agriculture the overwhelming proportion of human work lives were spent making things: growing crops, shearing sheep, spinning yarn, weaving cloth, throwing pots, cutting down trees, copying books, and so on, and so forth.

Technology did improve enormously over those 9000 years: contrast the clothes-making technology at the disposal of Henry VIII of England with that of Rameses II of Egypt three thousand years before; contrast the triple-crop paddy-irrigated rice- and water-control-based agriculture of the Yangtze Delta in eighteenth-century China with the scratch-the-soil-with-a-hoe agriculture of two thousand years before.

But as Thomas Robert Malthus first wrote in the 1790s, rising populations had put enough pressure on scarce natural resources to offset the benefits of better technology and keep living standards nearly constant for the people if not for the elite: American President Thomas Jefferson in 1803 A.D. certainly enjoyed a higher standard of living than Roman Consul Marcus Tullius Cicero in 63 B.C. But did Jefferson’s slaves enjoy a higher standard of living than Cicero’s? A large amount of archeological evidence has not yet found significant differences.

For the past two hundred and fifty years, since the start of the Industrial Revolution, the productivity of those workers who make things has exploded. Hand-spinners in the eighteenth century took 50,000 hours–20 full work-years–to spin 100 lbs of cotton into thread (Freeman and Louca (2001), and spinning of one sort or another took up perhaps 5% of total labor-time. Today it takes 40 work hours to spin 100 lbs. of cotton: a more than thousand-fold amplification of productivity in this one task.

As our productivity at growing crops and making things has exploded, demand for the things we make has grown too, but not fast enough to keep the crop-growing, food-cooking, mineral-extracting, clothes-making, box-carrying, and other goods-producing share of our economy’s labor force from falling. Today those who in any earlier age would be classified as “production workers”–and would have been the overwhelming majority of the labor force–are perhaps 20% of our economy, and the bulk of them are better characterized as machine-watchers and machine-fixers. According to Stanford’s Robert Hall, as early as 1980 there were twice as many salesmen in Ford-selling auto dealerships as there were assembly-line workers employed by Ford Motor Company.

So what are the rest of us–the other 80%–doing? In a sense, we all–from U.C. professors to chief technical officers to xerox operators, Ford Salesmen, cashiers, and parking-lot attendants–are and have long been information workers: people whose jobs are, if we examine them closely, largely concerned with determining what exactly the goods-producing sectors should make, how it should be made, where it should go, and to whom it should be distributed–and that is leaving aside the large chunk of our economy that is symbolic communication as an end in itself.

Today we see–not yet sharply, not yet clearly, but no longer dimly–the prospect that the ongoing technological revolutions in data processing and data communications will do for the “information” sectors of the economy something like what the Industrial Revolution did for goods-producing sectors like cotton spinning. As Steve Cohen over in the City Planning department here likes to say, you are now building the equivalent of the industrial-age tools for shaping and handling matter, but you are building tools for thought (Cohen, DeLong, and Zysman (2001)). And if we can figure out how to make these tools for thought fulfill their promise, they should produce a quantum jump in our technological power, economic productivity, and–we hope–quality of life of as many energy levels as the jump of the Industrial Revolution itself.

But there are major problems of social engineering and organizational design that stand in our way. A century or so ago, at the height of the Industrial Revolution, the market economy turned out to have an extraordinarily good fit with the developing industrial technologies of goods-making. It provided a framework of social organization that was extraordinarily effective in providing people with incentives to carry on activities that generated rapid technological development, capital accumulation, and economic growth.

An effective form of social organization faces decision makers with incentives that mirror the impacts of their actions on society as a whole.

Because the goods produced by industrial technologies were rival–that is, could only be of use to one person at one time–each person’s use of such a good diminished the supply available to the rest of society. Thus it made sense from the viewpoint of efficient distribution to require that users pay a price–diminish their ability to acquire and use other resources–for commodities. And those prices paid then gave producing organizations the resources to carry on and expand their activities.

Because the goods produced were excludable–that is, it was by-and-large straightforward to limit control over use to those authorized–it was easy and straightforward to push decision-making outward from the clueless bureaucratic center to the periphery where people on the ground might actually have a good sense of the situation, and of what should be done.

These three advantages–earmarking additional resources for successful and efficient production organizations, providing users with incentives for economically-efficient distribution, and decentralization of decision-making to where the knowledge was likely to be–were delivered by accident by the trade-and-market economic structure of Adam Smith.

But now as we try to realize the technological promise of information technologies, the old forms of economic organization no longer have a natural fit with the requirements of technological development and economic growth. Once an “information good” has been produced, sharing it with another person doesn’t reduce the rest of society’s resources and opportunities. So there is no efficient-distribution reason to charge a price for it.

But where then does the flow of signals to assess which production organizations are efficient come from?

In an earlier age we would be more inclined to rely on government funding, but these days we have a keen awareness of the advantages in applied development at least of semi-Darwinian competitive mechanisms, where investigators are responsible to investors seeking profits and not to committees seeking whatever committees seek.

Moreover, it is only with difficulty that information goods are excludable. But if their use can’t be restricted to authorized users, then the entire market-as-a-social-calculating-and-signalling mechanism simply breaks down. Unfortunately, attempts to make information goods “excludable” by various forms of use protection waste valuable time and energy: I shudder at the memory of having spent two hours on hold during three phone calls, and having spent another two hours of my time rebooting and reading installation error messages the last time I tried to upgrade one of the Adobe programs–GoLive–on this laptop. I doubt I’ll ever be able to face the prospect of buying another Adobe program again.

Two things, however, are clear. First, caught between “government failures” in applied research and the ever-larger “market failures” that will be created as the characteristics of information-age goods clash with the requirements for market efficiency, intermediate forms of organization–like large publicly-funded research universities–need to play an even larger role in research and development in the future than they have in the past.

Projects like CITRIS promise the benefits of government research–the wide distribution of knowledge and the acceleration of cumulative research–and the benefits of private entrepreneurship–the willingness to take risks and investigate large numbers of potential development projects rather than just those that have won the stamp of approval of a single central committee. It is the task of chancellors and deans, of course, to make sure that projects like CITRIS don’t wind up producing the drawbacks of both forms of organization: the strangulation by bureaucratic red-tape and committee infighting of government, combined with the restrictions on the distribution of information and the use of products that make a large share of private-sector development work duplicative of what has already been done.

Second, realizing the promise of the Societal-Scale Information Systems that are the Holy Grails of this quest will turn out to be a problem of social engineering as well as computer science. I have long wondered just why it was that the first half of the 1980s were the era of the IBM PC rather than of the DEC VAX–when the hardware cost of a VAX was, as best as I can guess, no more than 1/5 that of the equivalent number of 8086 machines, and when thanks largely to Berkeley UNIX there was no comparison at all in software. The answer lies somewhere in social engineering–that somehow paying out five times as much for inferior software was worth not having to wrestle with established MIS bureaucracies. But what the answer is I am not sure.

So let me turn this into a sales pitch for the social scientists at Berkeley interested in information technology–from Manuel Castells in sociology to Pam Samuelson and Mark Lemley at the law school to John Zysman and Steve Weber in political science to Hal Varian and his simians to Suzanne Scotchmer at public policy to the industrial organization and antitrust barons of the business school and the economics department–Glenn Woroch, Rich Gilbert, Dan Rubinfeld, Mike Katz, Carl Shapiro–and a host of others. I do not know of a place with a more vibrant and smarter community of scholars interested in the social engineering aspects of information technology.

And I do not know of a better place than this to assemble the resources to build the Societal-Scale Information Systems that can make information technologies realize their promise.

Shaken and Stirred: Weekend Reading: Hoisted from 2005

Stephen Cohen and Brad DeLong (2005): Shaken and Stirred The United States is about to experience economic upheaval on a scale unseen for generations. Will social harmony be a casualty?

It has become conventional wisdom that class politics has no legs in the United States today—and for good reason. Regardless of actual circumstance, an overwhelming majority of Americans view themselves as middle-class. Very few have any bone to pick with the rich, perhaps because most believe they will become rich—or at least richer—someday. To be sure, the issues of jobs and wages inevitably make their way into our political campaigns—to a greater or lesser extent depending on where we are in the business cycle. But they seldom divide us as much as simply circle in and out of our political life. Lately anxiety about the economy has been palpable, but for the most part it has not evolved into anger or found specific scapegoats.

Economic insecurity could well divide us in the future, however.

We are on the cusp of an economic era whose challenges will be unfamiliar to most Americans of working age. It is likely to erode the psychological pillars on which class unity has rested in this country: personal economic stability for the middle class, and the promise of at least some upward mobility for most Americans. The most likely division—besides that between the truly rich and the truly poor—will be between those in the middle class who are able (through agility or luck) to manage economic risk and those who find themselves helpless before the economic pressures of a new age.

Once upon a time, or so it is said, America was a place with lots of upward but little downward mobility. In the really old, pre—Civil War days you could start out splitting rails, head west, make a success of yourself on the frontier, and perhaps even wind up as president. In the relatively recent, post—World War II expansion you could do well by landing a blue-collar job in a unionized manufacturing industry or a white-collar job at a large, stable American corporation such as IBM, AT&T, or General Electric—which offered job security, high salaries, and long, steady career ladders.

There was always as much mythology as truth to this image of America. Lighting out for the Territory was expensive. Covered wagons did not come cheap. More generally, although many terms could be used to describe economic life in the nineteenth and early twentieth centuries, “stable” and “secure” are not among them.

But there was considerable truth to the image as well, particularly after World War II.

Regardless of education level or family background, many Americans who valued stability and security really did have the chance to grasp it; jobs with “a future”—that is, with steadily rising wages and solid retirement plans—were plentiful. And even for many of those who were fired, the economic risks were fairly low: the unemployment rate for married men during the 1960s averaged 2.7 percent, and finding a new job was a relatively simple matter. During the first decades following World War II, to the astonishment of interviewing sociologists, a majority of Americans began to define themselves as middle-class.

This immediate post—World War II period stands as a reference point in our popular economic history—a gold standard for rapid growth and shared prosperity, albeit among the limited community of white males. It lingers in our national memory, and remains an important source of confidence in the unity of our culture and the awesome power of our economy. But although it engendered our current economic expectations, our sense of “the way things ought to be,” in reality the postwar era was probably an aberration, a confluence of events never before seen in our history and unlikely to be seen again.

Most obviously, it was an era defined by the isolation of America’s continental market from the devastation of World War II. In the early postwar decades foreign competition exerted virtually no pressure on our economy. (In 1965, for example, imports of automobiles and auto parts came to less than $1 billion—about a fortieth of what they are today, after adjusting for inflation.) At the same time, domestic manufacturers benefited from an enormous pent-up demand for mass-produced goods: cars, washing machines, commercial aircraft, refrigerators, lawn mowers, television sets, and so on. New highways gave rise to new suburbs, and to a resulting construction boom.

These economic conditions, along with successful federal efforts to maintain full employment through loose monetary policy, created an environment exceptionally friendly to workers. With little foreign competition on the one hand and a very tight labor market on the other, American firms were willing and able to offer workers strong incentives—such as pensions and first-rate health insurance—in order to attract and retain them. (Generous tax breaks from the federal government encouraged the roll-out of these benefits.)

Meanwhile, the Great Depression had given rise to a system of government programs and policies that came into full force and maturity only after World War II—among them Social Security, unemployment insurance, welfare, and high marginal tax rates. The rise of communism abroad could only have strengthened commitment to workers’ welfare, as a means of demonstrating that the American capitalist system offered a humane alternative.

Thus favorable macroeconomic circumstances, the absence of foreign competition, and a historically unique political dynamic all combined to allow postwar America many of the benefits of social democracy without the costs. The economy did not stagger under the weight of ample benefits and high taxes. Americans—at least white male Americans—did not have to worry about tradeoffs between security and opportunity, because the United States offered both. And it seemed that this was the natural order of things.

In addition, new technologies and consumption patterns were shifting the U.S. economy’s center of gravity from skilled, unionized, mass-production industry—which fashions products from expensive materials and capital-intensive machinery—to services and retailing, where barriers to the entry of competitors are lower, labor costs more significant, and competitive advantage more reliant on squeezing those labor costs.

The nation’s largest private-sector employer today, of course, is not General Motors or Ford but Wal-Mart. Wal-Mart is in many ways a fine company, but its strategic goals and constraints are quite different from those of the manufacturers of the 1960s. Between them the automakers and the UAW offered workers a fairly robust “social contract”: pensions, good health care, high wages, long-term job security.

Wal-Mart makes no such offer.

By the early 1990s the nature of unemployment had changed as well. As Erica Groshen and Simon Potter, of the New York Federal Reserve, point out, temporary layoffs have become less common. Instead companies under constant competitive pressure are more frequently making layoffs permanent—using advances in technology to eliminate some types of jobs altogether.

At the same time, the rising cost of health care and the falling rate of health insurance have left families much more economically vulnerable in the event of a serious accident or illness. Many Americans today are one lost job and one medical emergency away from bankruptcy.

We do not want to overstate how bad things are. Not even white males would be better off in the economy of the 1960s, when median real household incomes were only about two thirds of what they are today, and much of the medical care that we now fear we cannot afford was unavailable at any price. In a sense we’ve merely returned to a more natural economic state, in which jobs are not always secure and progress is not always assured. And we’ve done so while improving the opportunities and lifestyles available to most Americans. So far, in other words, we’ve adapted reasonably well to increased risk and reduced security. But we’re not at the end of economic history—and the history that will be made in the coming decades is likely to be substantially more turbulent than what we’ve seen in recent years.

Although the impact of globalization on American jobs has been overhyped in the past, its impact in the future will be hard to exaggerate. Last spring saw a short political boomlet of worry over the offshoring of white-collar jobs to India, China, and elsewhere. In the next few years these issues will be raised at the political level once again—and loudly.

The basic storyline is simple enough: what formerly could not be imported now can be. A compelling parallel can be drawn to the latter half of the nineteenth century, when the steel-hulled oceangoing steamship and the submarine telegraph cable revolutionized international trade. Companies could now use the telegraph to tell their agents in distant ports what goods to ship; moreover, powerful steamships made it practical to export not only precious goods (such as rare porcelains, spices, and tobacco) but also staple agricultural and manufactured products: grain, hides, meat, wool, furniture, and machines (which would eventually include motor vehicles, computers, and consumer electronics).

First in a great rush, and then at a somewhat more measured pace, industrial and agricultural workers the world over began to lose their jobs to more-efficient foreign competitors. Illinois could grow wheat more cheaply than Prussia could grow rye. Malaysia could grow rubber more cheaply than Brazil. Of course, displaced workers could generally find new jobs, sometimes better ones. And consumers benefited greatly from lower prices. But that did little to dim the spectacle of immediate dislocation. The expansion of international trade ushered in a century-long storm—though many Americans (perhaps owing to the anomalous calm following World War II) seem to remember only the recent gusts that have buffeted our heavy industries.

The transformation taking place today will have just as great an effect on the world economy. The transoceanic fiber-optic cable, the communications satellite, and the Internet are making much white-collar service work as tradable as anything else. Broadband cables and satellites can connect India or China or Bulgaria to the United States instantly, seamlessly—and almost without cost. A huge new swath of American jobs is beginning to become vulnerable to foreign competition.

When the offshoring of services truly hits (and it will stretch out over several decades), it is likely to deliver a much greater shock to the U.S. economy than the offshoring of manufacturing did. There are several reasons for this. First, in the 1970s Americans’ incomes exceeded those of the Japanese by a ratio of about two to one. The ratio of American to Indian incomes today is more than ten to one. Economists will point out that the gains from trade will thereby be that much greater for the U.S. economy as a whole—and they’ll be right. Indeed, more and greater openness will expand opportunities and raise incomes for some Americans, producing many highly visible winners. At the same time, the potential pay cuts for workers who lose out in rich countries will also be that much greater.

Second, the coming global trade in services will potentially affect a much larger proportion of the U.S. labor force. Even at its height manufacturing constituted only 28 percent of all non-farm employment, and large sectors of manufacturing (food processing, for example) are closely tied to sources of supply and thus immovable. Service jobs constitute 83 percent of non-farm employment in the U.S. economy today, and every job that is (or could be) defined largely by the use of computers and telephones will be vulnerable.

Third, the impact of foreign competition will be borne much more directly by American workers than by their employers. In the 1970s and 1980s foreign imports threatened U.S. companies and workers equally. The CEOs at GM and Ford were on the same “side” as the men and women who worked on the factory floor. The coming wave of economic dislocation will look very different: it will be something that American CEOs do to their own workers.

Not that they’ll necessarily have much choice; offshoring will in many cases be necessary if American businesses are to remain competitive. Remember H. Ross Perot’s “giant sucking sound”? In the early 1990s no one spoke out more strongly against the prospect of job loss caused by foreign competition. Yet on February 7 of last year the Times of India reported that Perot Systems was going to double its employment in Asia from 3,500 to 7,000—nearly half its total worldwide employment. If the economic logic of foreign outsourcing is so overwhelming that Ross Perot can’t resist it, what American CEO will be able to?

None of this is to say that we face a future of permanent widespread unemployment. It is a truth universally acknowledged (except in campaign seasons) that the rate of employment in the United States is set not by levels of imports and exports but, primarily, by whether the Federal Reserve’s monetary policy manages to settle aggregate demand in that sweet spot where neither unemployment nor inflation is too high.

Moreover, during the course of any single year or business cycle the effects of globalization on the U.S. labor market are small. Forrester Research has estimated that by 2018 some 3.3 million jobs in business processes are likely to go offshore. That’s a little more than 18,000 a month—not a huge number in an economy of 140 million jobs.

But—and this is a very big “but”—even though imports and offshoring do not determine the number of U.S. jobs over time, they do powerfully influence the long-run level and distribution of real wages. Eventually the offshoring of service jobs will exert a strong downward pressure on wages and benefits in jobs that stay onshore, just as the offshoring of manufacturing jobs did in the 1980s. Essentially, the pool of workers competing for many service jobs will be increased by, say, several million English-speaking college graduates in India, who will work for a tenth to a fifth of a typical American salary.

In many cases the jobs in question are held by Americans unaccustomed to layoffs or reduced incomes. Often they are high-paying white-collar jobs. The people who hold them may believe that they are on top because they deserve to be: they are smart and industrious; they worked hard in school while others screwed around; they have been diligent and successful in their careers. These people are likely to become very angry when unexpectedly threatened by substantial downward mobility.

How will the country respond when a broad new array of classes and professions are exposed to downward mobility—particularly as others benefit from new opportunities? Will existing class fissures be exacerbated? What new ones might be created?

Winners and losers are unlikely to sort cleanly. People of similar background and training may see their fortunes diverge greatly depending on subspecialty, or on the presence or absence of some idiosyncratic ability that is hard to replicate. But one can make a few predictions. First, the new environment is likely to pit those who are most flexible—most able to shift jobs or careers, most able to absorb unexpected blows, best positioned to benefit from unforeseen opportunities—against those who are less so. The contours of such a divide seem predictable: young versus old, generalist versus specialist, people with savings versus those who depend on their next paycheck.

A second (and overlapping) split might open between those who are highly educated and possess complex skills and those who are merely well educated and skilled. An MIT education may still be hard to imitate abroad. Can the same be said of a finance degree from a state college?

Third, a divide may occur between those—whatever their education or income level—who by disposition can tolerate unexpected income swings across a lifetime and those who abhor uncertainty.

The last group is probably large. The dissatisfaction resulting from falling wages is usually greater than the satisfaction resulting from rising wages. People are not wrong to be risk-averse; for middle-class Americans, just as for portfolio managers, life consists largely of trying to manage risk. This, the Yale political scientist Jacob Hacker thinks, is the source of middle-class Americans’ unease with the current state of the economy—perhaps the primordial form of a sharper discontent to come. “Voters say the economy isn’t getting better because, as far as they’re concerned, it’s not,” Hacker writes. “And perhaps the best explanation for this perception is that Americans are facing rising economic insecurity even as basic economic statistics improve.”

The median annual household income twenty years ago was about $38,000 in today’s dollars. Today it is about $43,000—13 percent higher. Yet, at least in Hacker’s analysis, Americans typically feel that increasing risk and rising inequality have hurt them at least as much as increasing income has helped. Yes, if they are middle-class, they have higher real incomes and living standards than their parents; but the incomes are known to be insecure, and the prosperity is felt to be fragile.

From one viewpoint, economic risk is the flip side of flexibility, entrepreneurship, and innovation—the very things America does best. In the 1980s, when Americans worried about whether the social organization in Japan’s export-manufacturing sector (morning calisthenics, the company song, consensus, lifetime employment, and so on) might offer a better way of doing business, The Atlantic’s national correspondent James Fallows answered with a resounding no. What Americans needed, he argued, was to become “more like us” (the title of his book on the subject), not more like them: America’s competitive advantage was rooted in disorder, constant change, flexibility, mobility, and entrepreneurial zeal.

In 1991 Robert Reich, about to become Bill Clinton’s first secretary of labor, looked at the tremendous expansion of manufacturing and other export-related employment elsewhere in the world and came to a similar conclusion. How, he wondered in his book The Work of Nations, could Americans preserve and accelerate economic growth if the market position and efficiency advantages of America’s largest firms came under threat? He, too, concluded that we needed to shift our focus away from old-style stable mass-production employment to high-knowledge, high-tech, high-entrepreneurship fields. Workers, he argued, should expect to go back to school to learn new skills for new industries.

But embracing change and uncertainty in this way does not come naturally, in the United States or anywhere else, and the pollsters and media-affairs people of the Clinton administration soon told Robert Reich to be quiet: people did not like to hear their government telling them that their jobs were going to vanish.

Economists rightly say that the rising wave of trade-driven service globalization will, like the last waves of trade-driven manufacturing globalization, benefit Americans and foreigners alike. At home more will be won than lost. Fears that expanding trade will destroy jobs and disrupt the economy also need to be counterbalanced by the knowledge that reducing trade—or even failing to expand it—would reduce national wealth potential, destroy future jobs, and ultimately disrupt the economy even more. The social problems of a stagnant economy are far greater than those of a dynamic one.

But economists too readily dismiss concerns about those who lose out, saying merely that they can be compensated. In practice they seldom are. The United States simply does not make the investments needed to turn economic change into a win-win process—investments in retraining and rebuilding that would transfer some of the gains from the winners to the losers (who’ve done nothing personally to merit their loss). In the late 1970s and the 1980s little money was spent on Flint and Detroit in particular, and Michigan in general, to cushion the economic impact as Toyotas and Hondas came to America’s shores. Producers in Japan and car buyers in Boston and San Francisco pocketed the gains, while producers in the Midwest absorbed the losses. As the Princeton economist and New York Times columnist Paul Krugman puts it, free trade is a salable policy only if accompanied by a well-built social safety net and confidence in full employment. But our safety net is full of holes.

Some companies have traditionally provided many of our social services, particularly in the form of health insurance and retirement support. Those companies will not continue to sustain that burden in the future. At the same time, our limited system of government benefits will not be adequate to the changes that we’ll face—leaving aside the possibility that it may be weakened or removed completely, as some politicians propose. That system was designed to protect the poor and the aged, and to tide the rest of us over in case of (temporary) job loss. What we need now is far more career-transition assistance for the middle class, and perhaps more government funding and (surely) portability for the benefits—notably health care—that the private sector increasingly fails to provide. America’s economy will need flexibility in order to compete, but we can provide this protection without sacrificing our flexibility.

Because we are facing an economic transformation that will hit not over the course of a few years but over the course of the next generation, we have time to do what needs to be done. We will need all this time, because the approaching economic shock will be greater in magnitude than anything in recent historical memory.


Thanks to Louis Johnston for reminding me of this this morning…

Artificial Intelligence and Artificial Problems

Over at Project Syndicate: Former U.S. Treasury Secretary Larry Summers is fencing with current U.S. Treasury Secretary Steve Mnuchin about “artificial intelligence”–AI–and related topics.

Most of their differences are differences of emphasis.

Mnuchin is drawing the issue narrowly: the particular technologies called “Artificial Intelligence taking over American jobs”. And he is, at least as I read him, is elliptically criticizing high stock market values for “unicorns”: companies with valuations above a billion dollars and yet no past record or clear future path to producing revenues to justify such valuations. **Read MOAR Over at Project Syndicate

Measuring Productivity Growth: No Longer So Live at Project Syndicate

Measuring Productivity Growth: The world’s population today is about 20 times richer than it was back during the long Agrarian Age from 7000 BC to 1500, during which limited resources, slow technological advance, and Malthusian pressures kept the overwhelming proportion of human populations at near-“subsistence”–incomes of less than $1.50 per person per day. Today only 1/15 of the world’s population is that poor. And today if we were to take the total money value of what we produce and use it to buy what people receiving less than $1.50/day buy, at current prices the value of global output would be $30/day per person. That is our roughly $80 trillion of annual global income today.

We cannot but greatly lament the enormously unequal distribution of the fruits of our global productivity. But that we today are such a wealthy global society would strike our predecessors from 7000 BC to 1500 dumb.

Moreover, most of what we make and consume today is not what our near-“subsistence” era predecessors. What good to any of us would 40,000 kcal/day in basic grains be? Most of what we make and consume today are goods and services with analogues back in the Agrarian Age that were absurdly expensive. Could Tiberius Claudius Nero eat strawberries and cream in January? No. For one thing, we think the idea of combining strawberries and cream was un-thought of before the cooks of the sixteenth-century Tudor dynasty courtier Thomas Cardinal Wolsey. There was one and only one person who could see a bloody audio-visual drama about witches in his house in the year 1606. He was named James Steuart, he was king of England and Scotland, and he had William Shakespeare and Shakespeare’s acting company on retainer. Yet today more than 4 billion people with their smartphones, tablets, and televisions live, in this dimension at least, better than kings. Nathan Meyer Rothschild, richest man in the early nineteenth century, died in his fifties of an infected abscess. He would have given the bulk of his wealth for one dose of modern antibiotics. He could not.

Thus when we say that the typical person in the world today is twenty times as well-off, materially, as his or her Agrarian-Age predecessor, we are saying something misleading. The typical person with today’s income would be twenty times as well off if he or she were restricted to only purchase and consume goods and services broadly available back in the Agrarian Age. But our additional range of choice–that we today know how to make more things and more types of things–gives an additional boost to our wealth today.

Now the statisticians at the U.S. Department of Commerce’s Bureau of Economic Analysis and at its sister agencies around the globe by and large cannot measure this “variety” boost to our productivity. They do try. But for the most part they fail. Thus the standard estimates of labor productivity growth in the North Atlantic–1%/year on average from 1800 to 1870, 2%/year on average from 1870-1970, 1.5%/year since and possibly slowing further in the past decade–are for the most parts estimates of how much better we have gotten at making the necessities of the world’s poor, not of how much life has been potentially enriched by higher productivity.

A good deal of this enrichment-via-increasingv-variety is truly game-changing innovations: things that transform human life. Flush toilets, automobiles, electric power, long-distance communications, modern information processing, and so forth. To provide even roughly the same capabilities in earlier eras would have been–was–absurdly, ludicrously, insanely expensive and rare. A political aristocrat in the late Roman Empire might purchase a nomenclator–a slave whose job it was to memorize names and faces and whisper to you what was the name of the person you were about to greet. Is having a smart phone more like having more like 10 or 100 or 1000 nomenclator-like assistants following you around?

Whenever we start to try to think about what opportunities economic growth will open up for humanity in the future, we need first to look back and reflect on what economic growth has done and the past. Yet I, at least, find myself stymied even in my attempt to measure how much economic growth there has been in the North Atlantic over the past 200 years. Yes, I am confident that there has been much more than 30-fold’s worth of economic growth. But how much more? And what does that mean? For that I feel I need a philosopher, to tell me who we were, who we are, and who are successors should want to be.


Brookings Productivity Festival on Friday

Real Gross Domestic Product FRED St Louis Fed

The current discussion of “slow growth in measured productivity” here in the U.S. seems to suffer from a great deal of confusion. From my perspective, there are six things going on:

  1. Since the 1920s, the rise of non-Smithian information goods…
  2. Since 1973, the productivity slowdown…
  3. Since 1995, the semiconductor-driven infotech speedup…
  4. Since 2004, Moore’s Law hitting the wall…
  5. Since 2008, what we will soon be calling “The Longer Depression”…
  6. And, remember, policy changes to speed productivity growth may well be nearly orthogonal to all of the above save (5)…

To talk about the cause of “slow growth in measured productivity” as if it is just one, not five, things causes confusion. To identify one or a small number of causes of a single thing that is “slow growth in measured productivity” causes great confusion. And then to insist that the best policy move is to undo that one or small number of thing causes even greater confusion…

The productivity puzzle: How can we speed up the growth of the economy? Friday, September 9, 2016, 9:30 – 11:00 am, Falk Auditorium: The Brookings Institution:

After nearly a decade of strong productivity growth starting in the mid-1990s, productivity growth has slowed down over the most recent decade. Output per hour worked in the U.S. business sector has grown at only 1.3 percent per year from 2004 to 2015, and growth was even slower from 2010 to 2015 at just 0.5 percent a year. These rates are only half or less of the pace of growth achieved in the past.

The United States is not alone in facing this problem, as all of the major advanced economies have also seen slow productivity growth. This slow growth has been a major cause of weak overall GDP growth, stagnation in real wages and household incomes, and it strongly impacts government revenues and the deficit.

On September 9, 2016 the Initiative on Business and Public Policy and the Hutchins Center on Fiscal and Monetary Policy at Brookings will host a forum on the policy implications of the growth slowdown. Senior Fellow Martin Baily will present an overview paper on the causes of the slowdown, followed by a panel discussion on the most effective policies to enhance productivity performance. After the panel discussion, panelists will take questions from the audience. The event will be webcast live.

Join the conversation on Twitter at #Productivity

Welcome: Louise Seiner

Paper: Martin Baily

Panel: Moderator: David Wessel

  • Jonathan Baker
  • Robert Barro
  • J. Bradford DeLong
  • Bronwyn Hall

Must-Read: Ben Thompson: Building Infrastructure

Must-Read: Ben Thompson: Building Infrastructure: “I think the best way to think about physical retail going forward…

…is to start with what Bezos said about Amazon’s own initial foray:

The store is very different from any bookstore that you have gone into. It has a very small selection, very highly curated, only about 5,000 titles and they’re all face out on the shelves, and they’re picked based on the data that we have at Amazon from the website. If you come to the Amazon physical bookstore with a specific title in mind that you want to buy there’s a very good chance because we have such a curated selection that you’ll be disappointed. But why would we build a store that’s designed to — if you already know what book you want to buy we already have this thing called that’s very very good at satisfying that need, and so this is about satisfying a completely different need. It’s about browsing and discovery and having a really fun space to wander around in….

Because the design of the store starts with the assumption that exists, it can be totally optimized for, in Bezos’ words, ‘browsing and discovery and having a really fun space’ with little space wasted on holding inventory…. Physical retail has its benefits… the ones Bezos listed… demonstrating highly experiential and differentiated products. What will be critical, though, are business models and cost structures that start with the presumption of the Internet and its associated business models, and that is why Gap and the other merchants who built businesses around geographic limitations are (like newspapers before them) very much in trouble….

The other Bezos quote I promised you….

When I started Amazon all of the heavy lifting infrastructure to support Amazon was already in place. We did not have to invent a remote payment system. It was already there. It was called the credit card…. We did not have to invent transportation, local transportation, the last mile. There was this thing called U.S. Postal Service and UPS which was not invented for e-commerce but if we had had to deploy last mile transportation 20 years ago it would have cost hundreds of billions of dollars of capital. It would have been impossible for a company like Amazon to even conceive of doing that. Same thing deploying computer infrastructure…. And how did the Internet grow so fast? Even there the heavy lifting infrastructure had already been done for another purpose which was the long-distance phone network….

AWS and… Stripe… are building a new layer that enables entrepreneurism…. This new layer is about ongoing usage: AWS and Stripe’s value to entrepreneurs is less about reducing costs than it is controlling them on one side and enabling significantly more focus and specialization on the other…. The way organizations build, deploy and scale modern applications has fundamentally changed. Organizations must continuously bring new applications and features to market… rapid innovation…. freely experiment, quickly prototype and rapidly deploy new applications that are massively scalable…. Twilio, Stripe, and even AWS are bets on the idea that Software is Eating the World to the extent that mucking around with global communications networks is not worth whatever slight cost savings you might gain from forgoing Twilio’s margins — that your developers’ time is better spent building differentiation than it is redoing what Twilio has already done…