Arnold Kling  

Footnote of the Day

Russ Roberts on Aggregate Dema... Ed Yardeni's Proposal for the ...

Is at the end of this paragraph, from Eric Brynjolfsson and Andrew McAfee (BM), Race Against the Machine:

When SBTC [skill-biased technological change] increases the incomes of high-skill workers and decreases incomes and employment for low-skill workers, the net effect may be a fall in overall demand. High-skill workers, given extra income, may choose to increase their leisure and savings rather than work extra hours. Meanwhile, low-skill workers lose their jobs, go on disability, or otherwise drop out of the labor force. Both groups work less than before, so overall output falls.

The footnote has a link which takes you here.

Further down in this post, I will have more excerpts from their new e-book. First, I want to point out that Jess Bailey, Joe Coward, and Matthew Whitaker find that in all ten countries they study that median income has been increasing at a slower rate than output. So it is not just in the United States.

BM write,

The root of our problems is not that we're in a Great Recession, or a Great Stagnation, but rather that we are in the early throes of a Great Restructuring.

Really, there are only minor differences between BM and myself. One difference is that they still think in terms of aggregate demand, while I am trying to avoid that concept when I talk about PSST.

One of the arguments against what I call the Recalculation Story is that employment has fallen in a broad array of industries. BM have a simple explanation for that. The information technology revolution has affected a broad array of industries.

Why is this happening now, seemingly suddenly? BM argue that we have passed the inflection point in a nonlinear process (they talk about being on the second half of the chessboard, for those of you familiar with that metaphor). Think of an S curve, where we have just gotten onto the steep part.

BM would argue that computers have been displacing humans at an accelerating rate for more than a decade, with the housing bubble serving to mask the process.

The book is a bit short on empirical evidence, but there is this:

During the Great Recession, nearly 1 in 12 people working in sales in America lost their job, accelerating a trend that had begun long before. In 1995, for example, 2.08 people were employed in "sales and related" occupations for every $1 million of real GDP generated that year. By 2002...that number had fallen to 1.79, a decline of nearly 14 percent.

Good-bye, sales clerk. Hello, one-click ordering.

BM suggest that the gains from technology may be understated.

free digital goods like Facebook, Wikipedia, and YouTube are essentially invisible to productivity statistics.

BM argue that information technology speeds the innovation process, because changes are embedded in software.

Each time CVS makes an improvement, it is propagated across 4,000 stores nationwide, amplifying its value.

BM point out that corporate profits as a share of GDP are at 50-year highs. This strikes me as remarkable, for two reasons. First, for most of the post-war period, profits were procyclical. You would not expect to see the profit share recover until the economy is much closer to full employment. I would argue that this high profit share is evidence that what is going on is restructuring, rather than a drop in aggregate demand. In a classic demand recession, idle plants reduce firms' profits, which recover when demand picks up again.

The other reason that it is remarkable is that I thought that an improvement in profits would be sufficient to bring about a more rapid recovery. I figured that as firms accrued profits, they would become more willing to hire more Garett Jones workers in order to build organizational capital. The continued reluctance to hire is getting more and more difficult to explain, except along Great Restructuring lines.

BM express surprise that there are not more businesses being started. The availability of "off-the-shelf" infrastructure for constructing web sites, dealing with legal and accounting issues, and so forth, should mean that

there has never been a better time to be a talented entrepreneur.

Unfortunately, I would argue, it turns out that there is the Jaron Lanier problem. It is easy to be an entrepreneur, but that makes entrepreneurship highly competitive. The big benefits of entrepreneurial activity accrue not to the developers of apps and small online stores, but instead go to the platform providers, like Apple, Google, and Amazon.

BM talk about opportunities for improving education, by

unbundling of instruction, evaluation, and certification, which encourages educational systems to be based more on delivering genuine, measurable results and less on simply signaling selection, effort, and prestige.

It sounds like they buy into A Means A.

They have a chapter that offers an obligatory "what can we do" litany, consisting of 19 steps. Most readers of this blog will gag on their suggestions to raise teacher pay and invest more in infrastructure. These same readers will applaud suggestions for reducing barriers to business creation and to decouple health benefits from employment. Another applause-winner is

Reduce the large implicit and explicit subsidies in financial services.

Overall, I would say that there are many more good suggestions than clunkers in their policy chapter.

My standard practice with my Kindle is to download a sample of a book before buying it. Given the price of this one ($3.99) and the quality of the authors, I decided to save the mental transaction costs and simply buy the book without reading a sample first. I was not disappointed.

Comments and Sharing

COMMENTS (6 to date)
Becky Hargrove writes:

Re: greater availability and improvements of off the shelf infrastructure. I am reminded of the early nineties when really great music synthesizers became available for the musician. While the new keyboards were fun and easy to use, the audience expectations of the individual performer immediately rose into the stratosphere.

Eric writes:

Saw this article linked by Jeff Jarvis on his Google+ profile. The thing that gets me is that the income disparity with regards to labor employees versus skilled employees, or those who lost their jobs because of "skills-based technical change," is something well known to economists and international business leaders since the 1970s. It's mostly (not completely) due to standard factor-price-equalization due to a switch from labor-intensive goods to capital-intensive goods; and the factor-price ratio between foreign manufacturers and US-based manufacturers. The skills/quality gap that pushed the US forward in our own labor-intensive sectors has eroded as more countries with less labor-costs increase their skills offerings.

It's never discussed really in depth, and seems like something that can be anticipated (unlike, say, the loss of labor-based jobs in Oregon due to environmental policy changes in the 1970s).

paul writes:

I just bought it and it was down to $2.99

Bryan Willman writes:

It's important to realize that while digital information systems have been advancing at a rapid pace since at least the 1960s, the application has been uneven and at times retrograde. (A paper salesman once told me that the greatest ever uptick in paper consumption was due to the arrival of computers...)

For example, going from a system in which phone orders are punched onto cards and fed into a batch job that shipped everything the next day, to a system where the same order was typed into a terminal, didn't really change things much.

Changing to a system where the customer types the order directly into your web ordering system, changes things a lot.

Changing to a system where the customer's inventory system sends the order to the seller's inventory system without a human on either side being involved, changes things even more.

These last two stages are much more about organizational and cultural issues than about technology per se. And my perception is that those cultural and organizational changes have accelerated quite a lot in the last 10 years.
In fact, it's continued apace in the last few months, as both my water district and one of my banks will finally allow "paperless" billing/statements. (Though their systems produce .pdf images of the paper they would have sent.)

One central feature of the current restructuring is the removal of people from data paths between computers.

An employement problem that arises from this is that while jobs for decision makers remain, jobs for people who do mundane clerical execution of those decisions will become fewer and fewer.

Joe Cushing writes:

I feel like we are moments away from 90% of all real estate agents being out of a job. Right now it costs 6% of your real estate sale's price to gain access to the most valuable thing agents have--exclusive access to a network. Networks are very powerful. Many people who don't like Facebook, are members anyway because that's where the network is. 6% is a powerful incentive to try other networks though. If people can jump from Myspace to Facebook, they can jump from paying real estate agents to a free online network. I believe it will happen. It's a matter of when, not if. Agents will still be around to do paperwork and show properties but the network premium will be gone.

Steve Roth writes:

I don't think that PSST and aggregate-demand thinking are really at odds here -- are actually complementary -- if you factor in the inherent limits of human cognitive capacity -- especially considering the left side of the bell curve -- and advanced countries' position on the "knowledge" end of a global economy.

"Think of an S curve, where we have just gotten onto the steep part."

Robin Hanson drew that curve for us, in his powerpoint presentation here:

Here's the graphic:

When I suggested here:

That we might well have arrived at that new place in the curve, Robin commented, "No we haven’t reached a flat plateau yet."

Other questions I asked, which rhetorically suggest that the structural-change and aggregate demand explanations are both true, but with inherent limits on each -- cognitive capacity for structural change, and marginal utility of goods for aggregate demand:

Re: your much-less-than-satisfying answer to the question about Germany’s success (highly industrialized, but with major social programs): is it possible that in order to maintain demand for ever-more-efficient productive capacity, government redistribution is a necessity? No–not at 1,000 times some imagined level, but somehow relative to per-capita shares of production?

Given that individual utility functions (as measured by “happiness”) seem to flat-line at about $15K in annual income in developing countries, about $60K in the U.S. (yes, iffy stuff, but the threshold/flat-line seems likely at some level), can the demand from a small cadre of owners–who don’t “value” most goods very highly–provide the demand necessary to keep the economic log rolling?

Could the absence of this widespread demand -- making it difficult for capital to find productive investments that pay a good return -- explain the massive increase in “casino investing” over recent decades? A desperate search for returns in a world where demand does not reward valuable production?

Could this situation also explain the downward pressure on secondary-education budgets? A vague sense of (impending) declining returns to education?

Could it also explain the rapidly increasing lengths of “jobless recoveries” since the 70s?

Is it possible that the current…difficulties are like a wave crashing on that plateau?

IOW, because of the limits of human capability, could the Luddites (finally) be right? Even a stopped clock…

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