Rise of the Robots: Technology and the Threat of a Jobless Future (10 page)

First, global trade directly impacts workers who are employed in the tradable sector—in other words, in industries that produce
goods or services that can be transported to other locations. The vast majority of American workers now work in nontradable areas like government, education, health care, food services, and retail. For the most part, these people are not directly competing with overseas workers, so globalization is not driving down their wages.

Second, although it may appear that virtually everything sold at Walmart is made in China, most American consumer spending stays in the United States. A 2011 analysis by Galina Hale and Bart Hobijn, two economists at the Federal Reserve Bank of San Francisco, found that 82 percent of the goods and services Americans purchase are produced entirely in the United States; this is largely because we spend the vast majority of our money on nontradable services. The total value of imports from China amounted to less than 3 percent of US consumer spending.
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It is undoubtedly true that, as
Figure 2.8
shows, the fraction of American workers employed in manufacturing has fallen dramatically since the early 1950s. This trend began decades before enactment of the North American Free Trade Agreement (NAFTA) in the 1990s and the rise of China in the 2000s. In fact, the decline seems to have halted at the end of the Great Recession as manufacturing employment has actually outperformed the job market as a whole.

Figure 2.8. Percentage of US Workers in Manufacturing

S
OURCE
: US Bureau of Labor Statistics and Federal Reserve Bank of St. Louis (FRED).
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A potent force has been very consistently eliminating jobs in the manufacturing sector. That force is advancing technology. Even as the number of manufacturing jobs has been steadily declining as a percentage of total employment, the inflation-adjusted value of the goods manufactured in the United States has dramatically increased over time. We are making more stuff, but doing so with fewer and fewer workers.

Financialization

In 1950, the US financial sector represented about 2.8 percent of the overall economy. By 2011 finance-related activity had grown more than threefold to about 8.7 percent of GDP. The compensation paid to workers in the financial sector has also exploded over the past three decades, and is now about 70 percent more than the average for other industries.
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The assets held by banks have ballooned from about 55 percent of GDP in 1980 to 95 percent in 2000, while the profits generated in the financial sector have more than doubled from an average of about 13 percent of all corporate profits in the 1978–1997 timeframe to 30 percent in the period between 1998 and 2007.
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No matter how you choose to measure it, finance has grown dramatically as a share of economic activity in the United States and, to a somewhat less spectacular degree, in nearly all industrialized countries.

The primary complaint leveled against the financialization of the economy is that much of this activity is geared toward rent seeking. In other words, the financial sector is not creating real value or adding to the overall welfare of society; it is simply finding ever more
creative ways to siphon profits and wealth from elsewhere in the economy. Perhaps the most colorful articulation of this accusation came from
Rolling Stone’s
Matt Taibbi in his July 2009 takedown of Goldman Sachs that famously labeled the Wall Street firm “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”
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Economists who have studied financialization have found a strong correlation between the growth of the financial sector and inequality as well as the decline in labor’s share of national income.
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Since the financial sector is, in effect, imposing a kind of tax on the rest of the economy and then reallocating the proceeds to the top of the income distribution, it’s reasonable to conclude that it has played a role in a number of the trends we’ve looked at. Still, it seems hard to make a strong case for financialization as the primary cause of, say, polarization and the elimination of routine jobs.

It’s also important to realize that growth in the financial sector has been highly dependent on advancing information technology. Virtually all of the financial innovations that have arisen in recent decades—including, for example, collateralized debt obligations (CDOs) and exotic financial derivatives—would not have been possible without access to powerful computers. Likewise, automated trading algorithms are now responsible for nearly two-thirds of stock market trades, and Wall Street firms have built huge computing centers in close physical proximity to exchanges in order to gain trading advantages measured in tiny fractions of a second. Between 2005 and 2012, the average time to execute a trade dropped from about 10 seconds to just 0.0008 seconds,
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and robotic, high-speed trading was heavily implicated in the May 2010 “flash crash” in which the Dow Jones Industrial Average plunged nearly a thousand points and then recovered for a net gain, all within the space of just a few minutes.

Viewed from this perspective, financialization is not so much a competing explanation for our seven economic trends; it is rather—at least to some extent—one of the ramifications of accelerating
information technology. In this, there is a strong cautionary note as we look to the future: as IT continues its relentless progress, we can be certain that financial innovators, in the absence of regulations that constrain them, will find ways to leverage all those new capabilities—and, if history is any guide, it won’t necessarily be in ways that benefit society as a whole.

Politics

In the 1950s, more than a third of the US private sector workforce was unionized. By 2010, that number had declined to about 7 percent.
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At the height of its power, organized labor was a powerful advocate for the middle class as a whole. The fact that workers were able to consistently capture the lion’s share of productivity growth in the 1950s and ’60s can likely be attributed at least in part to the negotiating power of unions during that period. The situation today is very different; unions now struggle simply to maintain their existing membership.

The precipitous decline in the power of organized labor is one of the most visible developments associated with the rightward drift that has characterized American economic policy over the past three decades. In their 2010 book
Winner Take All Politics,
political scientists Jacob S. Hacker and Paul Pierson make a compelling case for politics as the primary driver of inequality in the United States. Hacker and Pierson point to 1978 as the pivotal year when the American political landscape began to shift under a sustained and organized assault from conservative business interests. In the decades that followed, industries were deregulated, top marginal tax rates on the wealthy and on corporations were cut to historic lows, and workplaces were made increasingly inhospitable to union organization. Much of this was driven not by electoral politics but, rather, by continuous lobbying on the part of business interests. As the power of organized labor withered, and as the number of lobbyists in Washington exploded, the day-to-day political warfare in the capital became increasingly asymmetric.

While the political situation in the United States seems uniquely detrimental to the middle class, evidence for the impact of advancing technology can be found in a wide range of developed and developing nations. Inequality is increasing in nearly all industrialized countries, while the share of national income claimed by labor is generally falling. Job market polarization has been observed in a majority of European nations. And in Canada—where organized labor remains a powerful national force—inequality is rising, median household incomes have fallen in real terms since 1980, and private sector union membership has declined as manufacturing jobs have disappeared.
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To some extent, the question here is one of categorization: if a nation fails to implement policies designed to mitigate the impact of structural changes brought on by advancing technology, should we label that as a problem caused by technology, or politics? Regardless, there is little question that the United States stands alone in terms of the political decisions it has made; rather than simply failing to enact policies that might have slowed the forces driving the country toward higher levels of inequality, America very often has made choices that have effectively put a wind at the back of those forces.

Looking to the Future

The debate over the primary causes of the soaring inequality and decades-long wage stagnation that have developed in the United States is likely to continue unabated, and because it touches on intensely polarizing issues—organized labor, tax rates on the wealthy, free trade, the proper role of government—the dialogue is sure to be colored by ideology. To my mind, the evidence I’ve presented here demonstrates that information technology has played a significant—though not necessarily dominant—role over the past few decades. Beyond that, I’m content to leave it to economic historians to delve into the data and perhaps someday shine a more definitive light on the precise forces involved in getting us to this point. The real question—and the
primary subject of this book—is, What will be most important in the future? Many of the forces that heavily impacted the economy and political environment over the past half-century have largely played out. Unions outside the public sector have been decimated. Women who want careers have entered the workforce or enrolled in colleges and professional schools. There is evidence that the drive toward factory offshoring has slowed significantly, and in some cases, manufacturing is returning to the United States.

Among the forces poised to shape the future, information technology stands alone in terms of its exponential progress. Even in nations whose political environments are far more responsive to the welfare of average workers, the changes wrought by technology are becoming increasingly evident. As the technological frontier advances, many jobs that we would today consider nonroutine, and therefore protected from automation, will eventually be pulled into the routine and predictable category. The hollowed-out middle of the already polarized job market is likely to expand as robots and self-service technologies eat away at low-wage jobs, while increasingly intelligent algorithms threaten higher-skill occupations. Indeed, a 2013 study by Carl Benedikt Frey and Michael A. Osborne at the University of Oxford concluded that occupations amounting to nearly half of US total employment may be vulnerable to automation within roughly the next two decades.
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While accelerating information technology is nearly certain to have an outsized impact on the future economy and job market, it will remain deeply intertwined with other powerful forces. The line between technology and globalization will blur as higher-skill jobs become more vulnerable to electronic offshoring. If, as seems likely, advancing technology continues to drive the United States and other industrialized countries toward ever higher inequality, then the political influence wielded by the financial elite can only increase. This may make it even more difficult to enact policies that might serve to counteract the structural shifts occurring in the economy
and improve the prospects for those in the middle and bottom of the income distribution.

In my 2009 book
The Lights in the Tunnel,
I wrote that “while technologists are actively thinking about, and writing books about, intelligent machines, the idea that technology will ever truly replace a large fraction of the human workforce and lead to permanent, structural unemployment is, for the majority of economists, almost unthinkable.” To their credit, some economists have since begun to take the potential for widespread automation more seriously. In their 2011 ebook
Race Against the Machine,
Erik Brynjolfsson and Andrew McAfee of the Massachusetts Institute of Technology helped bring these ideas into the economic mainstream. Prominent economists including Paul Krugman and Jeffrey Sachs have likewise written about the possible impact of machine intelligence.
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Nonetheless, the idea that technology might someday truly transform the job market and ultimately demand fundamental changes to both our economic system and the social contract remains either completely unacknowledged or at the very fringes of public discourse.

Indeed, among practitioners of economics and finance there is often an almost reflexive tendency to dismiss anyone who argues that this time might be different. This is very likely the correct instinct when one is discussing those aspects of the economy that are primarily driven by human behavior and market psychology. The psychological underpinnings of the recent housing bubble and bust were almost certainly little different from those that have characterized financial crises throughout history. Many of the political machinations of the early Roman republic could probably be dropped seamlessly onto the front page of today’s
Politico.
These things never really change.