Sunday, November 23, 2014

Inequality by the Click

LONDON – Pope Francis warned in November that “ideologies which defend the absolute autonomy of the marketplace” are driving rapid growth in inequality. Is he right?

In one sense, Francis was clearly wrong: in many cases, inequality between countries is decreasing. The average Chinese household, for example, is now catching up with the average American household (though still with a long way to go).

But such examples do not negate the importance of rising inequality within countries. Both China and the United States are dramatically unequal societies – and are becoming more so.

In the US, the statistics are striking at both ends of the income distribution. The bottom quarter of US households have received almost no increase in real (inflation-adjusted) income for the last 25 years. They are no longer sharing the fruits of their country’s growth. The top 1% of Americans, however, have seen their real incomes almost triple during this period, with their share of national income reaching 20%, a figure not seen since the 1920’s.

In many emerging countries, rapid economic growth has raised living standards to at least some degree for almost everyone, but the share of the rich and ultra-rich is increasing dramatically. Once these countries approach the average income levels of developed economies, and their growth slows to typical rich-country rates, their future may look like America today.

Globalization explains some of the bottom-quarter income stagnation in the US and other developed economies. Competition from lower-paid Chinese workers has driven down US wages. But technological change may be a more fundamental factor – and one with consequences for all countries.

Technological change is the essence of economic growth. We get richer because we figure out how to maintain or increase output with fewer employees, and because innovation creates new products and services. Successful new technologies always cause job losses in some sectors, which are offset by new jobs elsewhere. Tractors destroyed millions of agricultural jobs, for example, but tractor, truck, and car manufacturers created millions of new ones.

But new technologies come in subtly different forms, with inherently different economic consequences. Today’s new technologies may have far more troubling distributional effects than those of the electromechanical age.

Imagine that 30 years ago, someone had discovered a set of magic words enabling us to speak to any friend anywhere in the world – “abracadabra John” and you were talking to John, wherever he was. Provided she secured intellectual-property rights, the inventor would have become the richest person in the world; and her lawyers and those who provided her with luxury goods and services would have become pretty rich, too. But, beyond that, no new jobs would have been created.

Information and communication technology is not costless magic; but it is closer to it than were the innovations of the electromechanical age. The cost of computing hardware collapses over time in line with Moore’s law of relentlessly increasing processing power. And once software has been developed, the marginal cost of copying it is effectively zero.

The consumer benefits of this technology are large relative to its price: the cost of each year’s latest computer, tablet, or smartphone is trivial compared to the cost of a new car in 1950. But the number of jobs created is trivial, too.

In 1979, General Motors employed 850,000 workers. Today, Microsoft employs only 100,000 people worldwide, Google employs 50,000, and Facebook employs just 5,000. These are mere drops in the ocean of the global labor market, replacing very few of the jobs that information technology has automated away.

But increased unemployment is not inevitable. There is no limit to the number of service jobs that we can create in retail, restaurants and catering, hotels, and an enormous variety of personal services. Walmart, for example, employs two million people, and the US Bureau of Labor Statistics forecasts that more than one million additional jobs will be created in America’s leisure and hospitality sector in the next decade.

But the wages that the market will set for these jobs may result in yet greater inequality. And there is no reason to believe that politicians’ all-purpose answer to the problem – “increase workforce skills” – will offset this tendency. However many people learn superior IT skills, Facebook will never need more than a few thousand employees. And access to high-paid jobs is likely to be determined not by absolute skill level, but by relative skill in a winner-take-all world.

At least, however, IT products and services are very cheap, so even the relatively poor can afford them. That might make very unequal societies more stable than many fear. In his recent book Average is Over, the economist Tyler Cowen makes the deliberately provocative argument that while new technology will produce extreme inequality, the relative losers, satiated by computer games and Internet entertainment, and provided with the basics of a minimally acceptable life, will be too docile to revolt.

Cowen may be right; the poor may not rebel. But extreme inequality should still concern us. Beyond a certain point, unequal outcomes inevitably fuel greater inequality of opportunity; and extreme inequality of either outcomes or opportunity can undermine the idea that we should all be equal as citizens, if not in material standard of living.

So Pope Francis was right: despite capitalism’s undoubted success as a system for generating economic growth, we cannot rely on market forces alone to generate desirable social outcomes. All new technologies create opportunities, but free markets will distribute the fruits of some new technologies in dramatically unequal ways. Offsetting such outcomes will be a greater challenge today than it has been in the past.

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    1. CommentedJames Goodman

      The technology boogeyman keeps on popping up as a big cause of increasing inequality, but innovative technology has driven increasing productive efficiency over the centuries. Sure, it may have an ongoing contribution to some inequality as less efficient producers make way for more efficient producers, but that is the evolutionary process of real growth.

      So what “free market” forces are mostly driving inequality then? Financial deregulation, that’s what - not increasing efficiency in production processes. Talk of technology-driven inequality is mostly smoke-and-mirrors.

      For example, analysis by Lin & Tomaskovic-Devey (link 1) shows that “net of conventional explanations, including declining unionization, globalization, technological change, and capital investment, the effects of financialization are substantial on all three dimensions of increased inequality”. In US corporations between 1970 and 2008, financialization accounts for more than half of the decline in labor’s share of income, 10% of the increase in executive pay, and 15% of the growth in earnings dispersion among workers at the industry level (Lin & Tomaskovic-Devey, 2011).

    2. CommentedBruce Steinback

      Um, Mr. Nelson, fracking requires a huge amount of water. Perhaps you haven't been following the news, but that is something very scarce these days here in California, very good reason for us to pass if only for that.

      But don't feel too bad for 'poor' California. Despite 'regulation upon regulation' Silicon Valley is downright booming (with well paid permanent jobs, unlike fracking), and the rest of the state is recovering from the recession nicely, thank you.

      But getting back to the article at hand, thank you Mr. Turner for putting eloquently what I've been fearing for a while. Alas, the future of leisure predicted in the 60s by the Jetsons has not come to pass. But what then can be our salvation? It would have been great if the article could have suggested something concrete, but then again I don't have any obvious solutions handy either.

    3. CommentedRaghuraman MV

      Probably,the fruits of new technology need to be "picked" by the State and the markets at large to create innovative public risk management strategies and also to be leveraged for reskilling of people.With new tech emerging all the time, training and reskilling ecomes a priority.In a globalised environment, there is so much to be done by the State to support and redistribute the fruits of the capitalism for effective reskilling.

    4. CommentedJason Gower

      Of course many people are impacted by the evolution of technology as the author points out and these changes have most clearly caused a structural change in global labor markets. The bigger question is what kind of re-training and education programs could/should we be investing in to provide the jobless with the skills they need to be productive again. Until that happens then many of these workers will remain jobless and a drag on, rather than a boon to our economies. It is about Policy and the incentives that it creates (or doesn't).

    5. CommentedRobert McMahon

      China doesn't believe in the absolute autonomy of the marketplace though, so I don't see why that should be an example of closing wealth inequality in relation to Pope Francis's critique, which I believe to be correct. This, as far as I'm aware, is true of most of the emerging economies, which seem to maintain enough autonomy to work within international markets while also balancing the protection of their citizens from the worst of economic inequality against economic growth.

      However, I agree that technological change is systematically excluding people from the economy and governments need to do more to protect their citizens from that impact. Please don't use Walmart as an example for anything though: the inequality, especially on a global scale, that it is designed to perpetuate is an atrocity. The poor in one country cannot help but to support abusive policies of a country with even poorer citizens, as they are priced out of an alternative.

    6. CommentedCarmen Iorga

      Does it take a high profile economist and 900 words to tell us that technology advent brings painful changes in workforce structure? Where is the solution? And the proposal that extremely unequal societies are stable is more of a moral stand than a historical truth.

    7. CommentedJoshua Ioji Konov

      The conclusions are punctual: the rising Productivity prompted by the technological improvements supplemented by the Globalization and the Chinese Industrialization are issues with which the modern days Economics may reduce over all poverty but in its fundamentals will lead to higher inequality and finally markets imbalances that only can bring bubbles and slow growth.

    8. CommentedMike Nelson

      Government erects barriers to small business formation and growth by forcing compliance with an ever increasing burden of bureaucratic regulation, oversight, and paperwork. The effect is to reduce job formation. It is a major contributor to the problem of non-existent income growth in low-wage areas of the economy. A great example is the boom in job growth in shale hydrocarbon development in North Dakota and Texas where the regulatory burden is low. Where the burden is high, as in Federal lands and in California, job growth is very low even though shale reserves are present. By its nature, government is an impediment to income growth unless it purposely gets out of the way of the private sector.

        CommentedJason Gower

        Mike, I have no interest in getting into an ideological debate as I believe there are good examples for and against your comment. I will however mention the fact that the shale boom in Texas and South Dakota have every bit to do with the Bakken, Barnett and Eagle shale formations located in these states. There are no shale reserves in California or really anywhere else in the U.S. (aside from the Marcellus shale that stretches across several states on the east coast) that come anywhere close to these.