Footnote of the Day
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.