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Pity useless men

Mar 7th 2011, 17:02 by R.A. | WASHINGTON

PAUL KRUGMAN has set the agenda for the blogging world today with a post (actually published on Saturday, but not all economics bloggers write on weekends) called Falling demand for brains? and charmingly illustrated with zombies. Mr Krugman begins by linking to an old and excellent piece of his, written from the perspective of 2096 and built around the conceit, "that information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing". He then writes:

So here’s the question: is it starting to happen?

Today’s Times has an interesting and, if you think about it, fairly scary report about how software is replacing the teams of lawyers who used to do document research. And then there’s Watson, of course, who — which? — can beat almost everyone except my Congressman at Jeopardy.

Getting a bit more serious, Larry Mishel wrote recently about the overselling of education, pointing out that the college wage premium, after rising sharply in the 80s and 90s, has stagnated lately...

In my mind this raises several questions. One is whether emphasizing education — even aside from the fact that the big rise in inequality has taken place among the highly educated — is, in effect, fighting the last war. Another is how we have a decent society if and when even highly educated workers can’t command a middle-class income.

Ezra Klein has a related worry:

How do you keep morale up in an economy when more people are simply less necessary than they used to be?

Are people less necessary to the operation of the economy than they used to be? I don't think so. As far as I know, people currently represent 100% of final demand; machines aren't yet out there purchasing goods for their own consumption. Without people there is no economy. That's as true as it's always been.

The problem is that people are less necessary on the supply side but as important as ever on the demand side. How could this happen?

There are several potential explanations, but let me return to Mr Krugman's archives. In an old Slate piece, he took apart William Greider's argument that manufacturing productivity growth would lead to rising unemployment. Nonsense, replied Mr Krugman. This should almost never happen. Almost never:

But wait--what entitles me to assume that consumer demand will rise enough to absorb all the additional production? One good answer is: Why not? If production were to double, and all that production were to be sold, then total income would double too; so why wouldn't consumption double? That is, why should there be a shortfall in consumption merely because the economy produces more?

Here again, however, there is a deeper answer. It is possible for economies to suffer from an overall inadequacy of demand--recessions do happen. However, such slumps are essentially monetary--they come about because people try in the aggregate to hold more cash than there actually is in circulation. (That insight is the essence of Keynesian economics.) And they can usually be cured by issuing more money--full stop, end of story. An overall excess of production capacity (compared to what?) has nothing at all to do with it.

At present, Mr Krugman seems to argue a different case. He suggests that worker bargaining power has fallen in recent decades, and this has led to stagnating wages for ordinary workers. But why should this lead to a mismatch between supply and demand? We can assume that richer earners have a lower marginal propensity to consume, such that transferring money from rich to poor produces more consumption. But as Tyler Cowen points out, this should ultimately exacerbate the supply-side problem:

Trade unions, even if they could become strong again (which is hard to see), would likely accelerate this process of substituting capital for labor, rather than counteracting it.  A one-time union wage premium, even if it does not come at the expense of other workers, will put only a small dent in the long-term trend.

But what about the monetary argument Mr Krugman makes? What if the problem is simply that monetary policy has been too tight, and this has steadily eroded the demand side of the equation? Scott Sumner nods in this direction. In a recent post he compared recent recoveries to the v-shaped employment comeback in the early 1980s. There's no real mystery to the joblessness of recent expansions, he says: they're directly related to slower nominal and real growth rates. Over a similar time frame, the labour force participation rate plateaued and then fell in America (and the rate for those under 55 fell even more). As David Leonhardt documented last week, median wages for male workers have been falling sharply over the past few decades, largely because the share of men earning no income at all has risen.

This argument has another advantage over the bargaining power explanation—it makes sense across the rich world. Tyler Cowen frequently points out that a "squash-the-middle" explanation for stagnating wages in America runs aground when one realises that other rich world countries—including some with far more union-friendly governments—experienced similar slowdowns over similar time frames. But one can make a strong case that monetary policy has been systematically too tight in America, Europe, and Japan.

Mr Leonhardt also does a nice job showing that labour market pain hasn't been focused on all middle-skill or middle-wage workers. Those who have kept their jobs during the latest recession, for instance, have done all right. College graduates have continued to earn pay increases, despite the broader economic pain.

So perhaps the story here is not that we've reached some point where technological improvement condemns a growing rank of workers to uselessness. Perhaps the story is that firms use recessions to realise productivity gains and get rid of surplus workers. And in recent recoveries, central banks have allowed growth to recover to trend, but have not permitted a strong period of catch-up growth of the sort that would facilitate re-employment of cast-aside workers. Instead, those workers linger on the fringe of the workforce until they become essentially unemployable.

Maybe that's not it at all. But there is a consistency to the data that's suggestive. And if this is the case, then a sub-2% inflation target is costlier than is widely believed, given the apparent reluctance of central bankers to take extraordinary action when rates get near zero.

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Sherbrooke wrote:
Mar 7th 2011 5:31 GMT

I think the problem here is that in modern economy keeping the rates low don't necessarily transform into more jobs. Instead, it seem to fuel property bubbles. I'm not sure that pricing well-paid workers out of the property market is an adequate price to pay.

In my view, now we came to a situation when asset-backed bonds and business loans live in different markets. Even in emerging markets, as it is evident from, say, Eastern Europe, it is much easier to get financing for the factory buildings than for machinery that is located there. Thus, I think, changing interest rate in British system doesn't really work as advertised: there needs to be some differentiation between the effective rates for real economy and asset-backed economy. It can either come from property market restrictions or special funding institutions for corporate lending, but having a slightly higher inflation target won't change much.

LexHumana wrote:
Mar 7th 2011 5:37 GMT

Speaking as a lawyer who had to do that kind of trained-moneky-work right out of law school, I can confidently say that replacing lawyers for document-processing software would not be something I would describe as "reducing the demand for highly educated workers". Document processing doesn't require highly educated workers -- it requires an army of warm-bodies that are intelligent enough to read English and can put a Post-It on a document that might be relevant to a case (erring on the side of over-inclusiveness). Law firms use lawyers and paralegals to do this because they can charge usurious sums to do so, but they could just as easily hire a bunch of college kids and pay them in beer and pizza for the same results (they won't ever admit that of course). The resulting smaller subset of flagged documents may have to be looked at by lawyers, but the initial vetting process is pretty mechanical and brainless.

It is a good thing that someone has developed software to do what a bunch of bored college kids could have done. It will free up lawyers to actually do legal work, and it will save their clients millions in unnecessary legal fees.

Mar 7th 2011 5:37 GMT

Wow. I didn't believe in re-incarnation until now. Ned Ludd is alive and well!

Wealthy societies like the US are already changing in ways that good economists had predicted. The law of diminishing marginal utility still works, just like gravity. As we have become wealthier we are using smaller portions of our income for stuff and more for leisure and education.

As we become wealthier through greater use of technology, we will still demand brains, but for differing purposes. We will need fewer brains in manufacturing and to produce stuff, and more brains in philosophy, theology, history, entertainment, art, etc.

What's wrong with that?

OneAegis wrote:
Mar 7th 2011 6:05 GMT

I would say that that wealth gap requires more than a non sequitur about trade unions. In 1976 the bottom 99% of America owned 80% of the wealth in the nation. Ever since then that has declined, to 65% in 2007. That is a huge amount of wealth going to a very small number of people, and I would imagine would have very significant effects on an economy.

In fact, I would say over the same period the effects of this...shift, shall we call it, have been put off due to expanded credit usage. Witness the huge rise in personal and government debt over the mentioned timeframe. Now that the credit fount has dried up, we're finally face to face with the economy we have built - of the rich, for the rich, by the rich. And if you don't like it, you're just plain un-American.

Mar 7th 2011 6:17 GMT

@fundamentalist

philosophy, history, entertainment etc. all have one thing in common, though they are fun, they're not something that you get paid for unless you are exceptionally lucky or talented.

http://www.youtube.com/watch?v=h2OfQdYrHRs

This is a translator application, that comes about as close to magic as anything I've ever seen. Coupled with things like Watson, it's not unreasonable to assume that electronic translation will become cheaper and better than its human counterpart for most of its current uses within the next ten to 15 years. Forget Indian call centers, people on opposite ends of the phone won't even need to speak the same language, a computer will be capable of translating between them in real time.

Speaking a second language suddenly becomes a lot less valuable. Call centers are moved out of India to a place even poorer because the people now don't have to speak English. 5 years their little call center has disappeared altogether as computers get sophisticated enough to hold conversation, making humans unnecessary or at least not necessary enough to pay them a living wage.

As they said in Office Space, "What would you say ya do here?" The corollary being someone has to be willing to pay you to do it.

So... wrote:
Mar 7th 2011 6:53 GMT

Lex' comment:

"... It will free up lawyers to actually do legal work, and it will save their clients millions in unnecessary legal fees."

Now that's a frightening scenario: unleash the lawyers!

Mar 7th 2011 7:18 GMT

OneAegis, I heard a story on NPR the other day that said the percentage of hispanics in most cities has doubled in the time period. We have had a huge influx of poor people that distorts the bottom end of the equality measures. That's a good thing.

The bad thing is that since 1973 the inflationary policies of the fed have hurt median wages while boosting the income from assets, such as stocks. That's a bad thing, but nothing we can fix until mainstream econ learns better monetary theory.

rewt66 wrote:
Mar 7th 2011 8:07 GMT

fundamentalist:

" We have had a huge influx of poor people that distorts the bottom end of the equality measures. That's a good thing."

I'm not saying that you're wrong, merely that I don't understand. Why is that a good thing?

OneAegis wrote:
Mar 7th 2011 8:28 GMT

fundamentalist -

It isn't just the bottom has grown bigger - ALL groups under the bottom 1% have lost wealth to the top.

rewt66 wrote:
Mar 7th 2011 8:40 GMT

OneAegis:

Lost absolute wealth, or lost relative wealth?

That is: If my slice of the population has the same real wealth that we had 30 years ago, and the top 1% has in the meantime gotten insanely wealthy, we feel bad, and we resent it, but we are not actually poorer.

Note well: I am NOT saying that such a situation is fair. I am merely questioning whether the bottom 99% have in fact lost in absolute terms.

Mar 7th 2011 10:59 GMT

rewt66, I just think that immigration is good for the US. It's clearly good for the poor people.

And you're right: absolute wealth for all groups has grown quite a bit even though the relative wealth has not.

Oneaegis, It's hard to say, but more immigrants may be keeping wages down in the lower end, but the main culprit for keep middle income down as a percent of total is inflation because those in the middle get almost all income from wages, which never keeps up with price inflation. Meanwhile, the wealthy have many ways to protect themselves from inflation and those in financial services even benefit from it.

Mar 7th 2011 11:07 GMT

PS, something never considered in these kinds of studies is the fact that wages tend to vary with the cost of living across geographical areas.

Now if the analyst deflates nominal prices using one gdp deflator for all states, he will not deflate incomes in high cost states, like CA of NY, enough because the deflator will be an average for the whole country, and he will deflate incomes too much in low cost states, like TX. Because of the large populations in the high cost states, those higher incomes will boost the numbers in the high end of the spectrum while the low cost states will overweight the bottom end.

Until analysts adjust the values of incomes and assets for the cost of living in each state, these results are going to overstate the extremes.

bampbs wrote:
Mar 7th 2011 11:40 GMT

Aren't we already supposed to be in the future when robots do everything except have fun, and we take care of that ?

The sudden and deep loss of jobs had nothing to do with rational considerations of forcing higher productivity from employees. It was a panic, utter terror that consumption was going to vanish as the financial system and then the economy went down. As time passed, employers have been able to take advantage of employees fear and pile the work on. But the fear is subsiding.

ShaunP wrote:
Mar 8th 2011 12:24 GMT

I don't get the whole "employment growth is weak because monetary policy is not loose enough" argument. It's all demand. Loose monetary policy wouldn't change any of that. You have a large generation of workers whom are underfunded and drastically uncertain going into retirement, so demand is weak for just about evverything as consumers hunker down and try to save more. I am not sure how loser monetary policy will help this, especially in the face of rising commodity prices and declining wage growth. Stagflation is what will be the end of this.

Second, why make credit cheaper for banks when consumers don't want anything to do with it. All they are going to do is just play the carry trade game until someone tells them to stop, or speculate on whatever offers the best ROI up front.

Meanwhile, I finished an MBA in August, was laid off in 2009 and have been stuck in a dead end job at $11 an hour for almost a year and a half. (I have gone way back in earnings and now have a whole bunch of student loan debt, because I thought it would be the right call in 2008 when it was starting to get bad.) If I get a call back for an interview then it feels like a kill or be killed battle royale to land a job that even pays somewhat decent. Across the table from me is either a babyboomer holding on for dear life, or some snotty kid around my age whom thinks he is supernatural because he survived and I didn't.

The American economy is a giant, cruel, joke...or at least that's how it seems to me. (I hate that I feel that way, but it's inescapable.)

Mar 8th 2011 2:12 GMT

Avent- Funny reading this just after I read a piece from David Beckworth strongly arguing that Fed policy has been too loose for much of the last economic recovery era.

http://macromarketmusings.blogspot.com/2011/02/four-questions-for-ben-be...

I think at least one of you is wrong. Beckworth may be right that propping up prices in face of a positive supply shock is financially destabilizes, which seems to be his hypothesis. But you are certainly right that wage stickiness (and debt service)make deflation a tough pill, bound to lead to elevated unemployment and financial displacement. Perhaps there no easy monetary fixes after all.

LexHumana wrote:
Mar 8th 2011 6:07 GMT

OneAegis wrote: Mar 7th 2011 8:28 GMT
"It isn't just the bottom has grown bigger - ALL groups under the bottom 1% have lost wealth to the top."

This is not a correct statement. This would only be true if the economic pie was not growing, which would mean that growth in wealth of one group would have to come at the expense of another group. However, in real life the growth of wealth is not a zero-sum game. As the nation has gotten wealthier as a whole, the top 1% may be enjoying a disproportionately large gain, but that does not mean that the other 99% are experiencing any sort of loss. The rich are not necessarily getting richer by impoverishing the poor more.

My Lord wrote:
Mar 8th 2011 8:37 GMT

Lex, it depends on which beginning and ending years you use, but at least the bottom 80% have been getting worse off. This is why the median has been doing so badly the last 30 years. It was slightly ahead before the great recession and is now behind. This is Tyler's Great Stagnation.

Yes, low inflation has great costs which the standard models are blind to by assuming the economy behaves symmetrically to both inflation and deflation.

My Lord wrote:
Mar 8th 2011 8:41 GMT

At the expense of is somewhat strong, but the same globalization policies that have benefited the top have not the middle, while the tax cuts have benefited the top nearly exclusively.

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