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Dean Baker: Confusing the Confusion

Dean Baker: Confusing the Confusion

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In a recent piece on Project Syndicate Dean Baker warns us not to be confused between the impact of worsening demographics on labour demand and the horror stories of robots stealing our jobs.

I have to admit there are times when I imagine those at the more extreme end of the latter camp sounding a little like this.

But I think Baker himself confuses two distinct issues in his account. He is right to say that the demographic situation poses a challenge for Western economies as declining shares of the total population will be of working-age and therefore paying into the system to support a growing numbers of retirees. What I am less sure of is whether this need necessarily equates to a labour demand story.

What I mean is this: Why should the growing demands of the elderly on the state necessarily suggest we have a labour shortage rather than a fiscal problem? That is, why should paying for the elderly be assumed to be a problem of too few workers rather than simply (mis)allocation of capital?

Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR), put it as follows:

“The medium- to long-term problem for public finances is predominantly one of healthcare and pensions. To my mind, I actually believe that thinking of those as a fiscal problem is probably the wrong way to start.

We are getting older and richer, which means that we will be spending a lot more on healthcare in 20 years time and that’s what we should be doing. There is no model you can write down of preferences under which that would not be the right thing to do. That has to be paid for and ultimately it has to be paid out of our pockets. And then there’s a choice over whether that funding comes from taxation, private insurance, some sort of social insurance or direct out-of-pocket payments. You have to come up with a system that is both politically acceptable and that has as much equity and efficiency you can achieve.”

Viewing longer life as a bug in the system to be overcome rather than a positive feature to be celebrated is part of the problem. Even economists, who are not overly prone to bouts of unfettered exuberance, should be able to applaud the success of medical science in achieving this feat – rather than decrying its long run impact on government finances.

Baker is pleasantly philosophical on the demographic issue noting “if the benefits of productivity growth are widely shared they will swamp the negative effects of a declining ratio of workers to retirees” as they have done since the early 1960s. I would add that, as Portes says, it is well within the power of governments to adjust the tax rate to reflect demographic changes as well as undertaking structural reforms of state healthcare and pensions to prepare for them. 

On robots, however, I think Baker is plain wrong on what the more sophisticated arguments are for the implications of technological progress on the workforce. It is certainly true that labour saving technology has helped significantly improve productivity and that this has been, in the most part, to the benefit of most people in developed countries.

The shift from factory production-line work to a services-focused economy, for example, can mean both higher wages but also work that requires more cognitive engagement. In that way it has, for many, encouraged the use of fundamentally human skills such as creativity and emotional sensibilities that can enhance both the environment of work itself and the experience of the end customers.

Yet to separate the story of automation from labour’s falling share of output, as Baker attempts to do, seems to me to miss one of the most important trends of recent decades. While the initial productivity boost helped drive the creation of new, high-skilled, better paid jobs it also lead to an increase in low-skilled, low paid services jobs where people are treated much like the robots on the production line.

This trend has become evident in the job creation statistics as shown in MIT’s David Autor’s 2010 paper on The Polarization of Job Opportunities in the U.S. Labor Market:

While the pace of high-skilled job creation easily outstripped those in low-skilled professions between 1979-1999, this trend has inverted since then. Most of these low-skilled jobs involve caring for others such as “food service workers, security guards, janitors and gardeners, cleaners, home health aides, child care workers, hairdressers and beauticians, and recreation occupations” – e.g. jobs where robots as yet cannot compete. 

So unlike Baker I do not believe that the “problem is an institutional structure that systemically redistributes income upward”. Factory-owners, and before them wealthy landowners, relied on labourers to produce the goods and services that they desired or sold. That created a bond of necessity between them, and laid the foundation for the labour union movements that were to come. Due to improvements in automation, however, increasingly today’s producers don’t need an equivalent amount of labour to achieve those ends – and see no reason to redistribute the spoils.

This to me suggests the lack of real wage growth may not simply be a consequence of high unemployment but the chronic undervaluing of “soft” human skills that focus less on products and more on personal interaction. It also indicative of an inability to adequately compensate people for the risks inherent in highly flexible labour markets since the reforms of the 1970s despite the increased efficiency worker flexibility offers. Until policymakers and the wider public learn not to fetishize the production-line jobs for life of the past we may indeed have much to fear from the robots.

Related Reading:

Redistribution and the Hollow Middle Class - Tomas Hirst
The Financialisation of Labour - Frances Coppola
The changing nature of work - Frances Coppola

Update

Baker has responded on Twitter:

"I see Autor's story as more handwaving than evidence: http://emlab.berkeley.edu/users/webfac/moretti/e251_s13/mishel.pdf"

And my response:

"Thanks. Leaving Autor aside for a moment, still think inflation staying restrained with unemp below 5% in 90s suggests our understanding of changes in labour's bargaining power very limited - as Roger Farmer's work suggests: http://www.pieria.co.uk/articles/is_the_natural_rate_of_unemployment_an_out-of-date_concept"


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"As economies mature and become more productive, less capital additions are required for each unit of additional growth."

Agreed. At this point it seems that investment spending on additional capital is not needed by the system. Investment spending like all spending results in existing deposits circulating or new deposits being created (via the credit creation process). When households receive existing deposits or new deposits during this process, this increases their nominal income. To certain businesses this results in an increase in profits.

"Consumption demand is increasingly the constraint on growth."

Consumption requires means of payment (bank deposits). Therefore I think the lack of bank deposits being received by the household sector is more the problem. For the majority, there are only two ways of receiving deposits, deposit distributions made by their employers in the form of income and or to accept a new liability (loan to bank).

Furthermore, individual financial instability makes it rational for individuals to hoard deposits or set spending limits in the event that something happens in their personal lives. Considering from the reports I've read, many households live paycheck to paycheck. Any negative disruption would dramatically impact their well being.

Therefore, the desire to consume at a greater level may be there but either the additional means of payment are not or other psychological factors are superseding this desire.

"But the natural dynamics of the system drive income distribution in the other direction.

Solution: "redistribution" programs, from welfare to education to EITC to minimum wage to universal health care. They make everyone richer in the long run."

In order to not mire the solution in complexity by creating too many programs designed to do the same thing, wouldn't it be preferable to do away with them and introduce a new channel for which new deposits can be distributed to everyone in a way that does not depend on income or bank credit?

If such a channel existed where individuals were to receive deposits in order to spend, than indeed society could be made better off as a whole. First, financial instability at the individual level could be greatly reduced especially during times of macro disruptions/recessions. Secondly, such a program would decentralize spending decisions by spreading them out at the individual level. These decisions would cause production and the structure of the economy as a whole to reflect the needs of a wider base.

See this Ted talk
http://www.youtube.com/watch?v=bBx2Y5HhplI

Also, wouldn't it be more politically feasible if such a program were not termed redistribution. Redistribution suggests that existing deposits need to be taxed away from one individual in order to provide it to another. In reality, what is needed are a way of distributing new deposits to a wider base of individuals. Taxation in this sense would only be needed as a response to inflationary effects that may occur if the price level rises undesirably. It seems that this would not necessarily be the outcome as total output may increase before the price level does.

"to separate the story of automation from labour’s falling share of output, as Baker attempts to do, seems to me to miss one of the most important trends of recent decades"

I agree but would go farther. It's missing something fundamental about economic development.

As economies mature and become more productive, less capital additions are required for each unit of additional growth. Consumption demand is increasingly the constraint on growth. So a larger share of GDP (income) needs to go to labor to maintain continued growth.

But the natural dynamics of the system drive income distribution in the other direction.

Solution: "redistribution" programs, from welfare to education to EITC to minimum wage to universal health care. They make everyone richer in the long run.

Ed Lambert has developed a damned interesting formal model of this effect:

http://effectivedemand.typepad.com/ed/2013/04/when-labor-share-does-not-rise-in-the-growth-model.html

"What I'm saying is that we still think of careers as taking a job, climbing the ladder and getting a salary top-up year on year. This is increasingly not the case for many."

Wouldn't you say this is a perception and cultural issue? What do you think of this?
http://www.youtube.com/watch?v=qVkAGTJq_-Q

"What appears to be happening is that owners of capital are becoming less and less willing to commit capital to full-time workers when the demand outlook is unclear, and that becomes something of a chicken and egg problem. "

This can be solved with a mechanism that can reacts to declining (deficient) demand quickly and smoothly. The demand outlook is unclear as effective demand (spending) is uncertain as wages (option #1) decline. This results in corporations reducing their spending on both capital or employment, which makes this condition worse. The chicken and egg problem as you describe. Households want to increase their spending and corporations would want them to. Households just do not have the means unless options #2 and #3 are available and working properly.

"I think you miss my point on undervaluing soft skills."
"chronic undervaluing of “soft” human skills that focus less on products and more on personal interaction"

Option #3 solves this as increased spending overall results in greater expenditure on soft skills which raises the practitioner's income. As we live in a world of financial insecurity for many if not most, this type of spending (on say haircuts, child care, home health aids, gardeners) is most easily cut. Focusing on products is a function of needing those goods to live before one can direct spending on soft skills. If a person needs goods that come for a complex production process, it is nearly impossible for that person to produce that good on their own (or go without). However, it is easier for someone to crudely replicate soft skills themselves (cutting ones own hair! ehh). Therefore, it seems like a case can be made that soft skills are undervalued partially becomes of individual financial instability. #3 solves this if #1 and #2 fall short of the economy's needs. If one is worried about their livelihood or wage, cutting one's hair can be quite rational. Therefore the insurance of #3 can change expectations.

"I see no reason why those who want to work shouldn't continue to be allowed to in the future - but we have to acknowledge that the nature of work is changing."

Agreed. If the system can remove individual financial instability, then people will have the option to work productively even if it does not pay a wage high enough to achieve a basic living. Furthermore, if mundane terrible jobs need to still be performed, the employer would need to fully compensate the worker for their time by paying them a wage high enough to entice them to perform a task which they won't. In an era of individual financial instability, people are made to work at horrible jobs that even employers wouldn't want to perform at wages that are barely at subsistence levels.

Also if work is more of a "free agent" model where individuals develop and sell skills to many employers across time, than the link between corporations and social insurance would need to also be severed. Ultimately, the only form of true social insurance for individuals is through the collective balance sheet which is the government's (collective us). In an era of financial instability and low demand, the incentive is too strong for firms to reduce the social insurance ("benefits") they provide their workers. This only makes the condition worse. If option #3 is fully functional, than there is no need for firms to supply workers with social insurance.

"That's why automation IS a problem. Normal economic activity favours its use but hurts the larger economy by reducing the number of people with incomes to spend. Robots and machines do not spend money."

First, as a society we should desire that corporations/business continue to find ways of reducing the need for labor time while increasing their productive capacity. This becomes problematic on the monetary side, but there are solutions.

At the moment, household receive deposits in which to spend through:
1. Income/wages
2. Bank credit and new deposit creation
3. Direct transfer from a macro entity, the government (which supposed to represent the unified whole which is "us").

If the first channel is facing downward pressure due to reduced employment in high wage earning work relative to low paying work as technology improves, than an individual/household is left with options #2 and #3.

#2 becomes problematic considering that this will result in rising private debt as wages face downward pressure (for the same reasons mentioned above). This will either lead to banks not lending to the degree needed by the individuals or the system as a whole. Or if they do lend, as long as wages decline for the borrower, the bank is at risk due to loan repayment.

#3 Direct transfers to individuals/ households are what remains. As long as the use of #1 and #2 are in decline or slow, a well constructed direct transfer system will not lead to increased inflationary pressure. The system would work to replace #1 and #2 as long as those conditions hold. If #1 and #2 are on the rise option #3 would be scaled back. Therefore #3 would respond to the needs of the economy.

In this context problem related to financial insecurity are more easily solved for a diversity of age groups.

Furthermore, options #3 actually incentivizes the displacement of current work by automation and technological advancement as the transfers become larger as this occurs. Option #3 is linked to both productivity and increased Time for individuals.

This time affords us the ability to think up new ways to advance our societies which a long work day at a factory line cannot. The direct transfer system also decentralizes and localizes economic decision making so that the production is more in line with the needs of broader society.

Tomas Hirst

Hi Anton,

I think you miss my point on undervaluing soft skills. What I'm saying is that we still think of careers as taking a job, climbing the ladder and getting a salary top-up year on year. This is increasingly not the case for many. They may have multiple jobs, many of which can be temporary, or can have a full-time jobs but little job security. Under these conditions trying to tighten labour market regulations could actually result in them either losing income or the job itself - so the legal system is probably the wrong way to look.

It is possible that the advent of new technology could reduce overall labour demand in an economy - but I'm sceptical. What appears to be happening is that owners of capital are becoming less and less willing to commit capital to full-time workers when the demand outlook is unclear, and that becomes something of a chicken and egg problem. Added to this, output per worker in a factory is much easier to measure than the output of a nurse, a janitor etc. so the traditional metrics of productivity are also of limited value to prospective employers.

I see no reason why those who want to work shouldn't continue to be allowed to in the future - but we have to acknowledge that the nature of work is changing.

"This to me suggests the lack of real wage growth may not simply be a consequence of high unemployment but the chronic undervaluing of “soft” human skills that focus less on products and more on personal interaction"

This sentiment suggests that some rather nasty person is under valuing something (soft skills) and *should* pay more for them. But life is not like that - there is no *authority* that is going to *enact a law* to value soft skills.

Automation and tech is definitely a problem because which factory owner is going to refuse to make his factory more efficient? Which business would rather employ tricky, litigious humans when they could use a cheap machine to do the same job only better?

That's why automation IS a problem. Normal economic activity favours its use but hurts the larger economy by reducing the number of people with incomes to spend. Robots and machines do not spend money.

I do not believe in infinite employment - that we could all entertain each other or make each other pizzas because in practice we wouldn't do that.

So tech and automation has no old-fashioned austrian/hayek type solution and really does need a new economics.

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