Rise of the Robots: Technology and the Threat of a Jobless Future (33 page)

The third major problem is that deflation makes debt unmanageable. In a deflationary economy, your income may be falling (assuming you’re lucky enough to have an income at all), the value of your house is likely falling, and the stock market may well be falling. Your mortgage, car, and student loan payments, however, are not going to fall. Debts are fixed in nominal terms, so as incomes decline, borrowers get squeezed and have even less discretionary income to spend. Governments likewise run into trouble because tax revenues plunge. If the situation continues, eventually loan defaults are likely to soar and a banking crisis may well loom. Deflation is really not something we should wish for. History suggests that the ideal is a mildly inflationary trajectory where incomes grow faster than consumer prices, making the things we want to buy more affordable over time.

Either of these two scenarios—households squeezed between stagnant incomes and rising costs, or outright deflation—has the potential to eventually unleash a severe recession as consumers cut back on their discretionary spending. As I suggested previously, there is also the risk that the unfolding technological disruption could fundamentally change consumer spending behavior as more and more people come to quite rationally fear the prospect of long-term unemployment or even a forced early retirement. In such an event, the short-term fiscal policies typically adopted by governments to combat an economic downturn, such as increased government spending or one-time rebates to taxpayers, might not be especially effective. These policies are intended to inject immediate demand into the economy in order to “prime the pump” in the hope of initiating a self-reinforcing recovery that will lead to increased employment. However, if new automation technologies allow businesses to
meet this increased demand without hiring many workers, then the impact on unemployment might well be disappointing. Monetary action by central banks would suffer from a similar problem: more money might be printed, but in the absence of hiring there would be no mechanism to get more purchasing power into the hands of consumers.
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In short, conventional economic policies might do very little to directly address consumers’ fears about their long-term income continuity.

There is also the risk of a new banking and financial crisis as households are increasingly unable to make payments on their debts. Even a relatively small percentage of bad loans can put a great deal of stress on the banking system. The 2008 financial crisis was precipitated when borrowers who had taken out subprime loans began to default en masse in 2007. While the number of subprime loans
soared during the period from 2000 to 2007, at their peak they still constituted only about 13.5 percent of the new mortgages issued in the United States.
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The impact of those defaults was, of course, dramatically amplified by the banks’ use of complex financial derivatives. That risk has not been eliminated. A 2014 report by a coalition of bank regulators from the United States and nine other developed countries warned that “five years after the crisis large firms have made only some progress” in addressing the risks associated with derivatives, and that “progress has been uneven and remains, on the whole, unsatisfactory.”
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In other words, the danger that even a localized increase in loan defaults could set off another global crisis remains very real.

The most frightening long-term scenario of all might be if the global economic system eventually manages to adapt to the new reality. In a perverse process of creative destruction, the mass-market industries that currently power our economy would be replaced by new industries producing high-value products and services geared exclusively toward a super-wealthy elite. The vast majority of humanity would effectively be disenfranchised. Economic mobility would become nonexistent. The plutocracy would shut itself away in gated communities or in elite cities, perhaps guarded by autonomous military robots and drones. In other words, we would see a return to something like the feudal system that prevailed during the Middle Ages. There would be one very important difference, however: medieval serfs were essential to the system since they provided the agricultural labor. In a futuristic world governed by automated feudalism, the peasants would be largely superfluous.

The 2013 movie
Elysium,
in which the plutocrats migrate to an Eden-like artificial world in Earth orbit, does a pretty good job of bringing this dystopian vision of the future to life. Even some economists have started to worry about this scenario. Noah Smith, a popular economics blogger, warned in a 2014 post of a possible future in which “a teeming, ragged mass of lumpen humanity teeters
on the edge of starvation” outside the gates that protect the elite, and that “unlike the tyrannies of Stalin and Mao, robot-enforced tyranny will be robust to shifts in popular opinion. The rabble may think whatever they please, but the Robot Lords will have the guns. Forever.”
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Even coming from a practitioner of the dismal science, that’s pretty bleak.
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Technology and a Graying Workforce

Every industrialized nation has a population that is growing steadily older, and this has led to many predictions of a looming worker shortage as the baby boomers reach retirement age and drop out of the labor force. A 2010 report authored by Barry Bluestone and Mark Melnik of Northeastern University predicts that by 2018, there may be as many as 5 million unfilled jobs in the United States as a direct result of the graying workforce and that “30 to 40 percent of all projected additional jobs in the social sector”—which the authors define as including areas like health care, education, community service, arts, and government—could “go begging unless older workers move into them and make them their encore careers.”
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This is obviously a prediction very much at odds with the argument I’ve been putting forth in these pages. So which vision of the future is correct? Are we headed toward widespread technological unemployment and even more inequality, or will wages finally begin to rise again as employers scramble to find working-age people to fill available jobs?

The impact of retiring workers in the United States is fairly mild compared to the genuine demographic crises faced by many other
advanced countries, especially Japan. If the United States and other advanced countries are indeed headed toward widespread labor shortages, we might expect the problem to become evident in Japan first.

So far, however, the Japanese economy offers very little in the way of evidence for broad-based labor shortfalls. There are certainly shortages in specific areas, most notably for poorly paid elder-care workers, and the government has also expressed concern about a possible shortage of skilled construction workers as the country begins preparation for the 2020 Olympics in Tokyo. However, if workers were generally in short supply, the result ought to be increased wages across the board, and there is really no evidence for this. Since its real estate and stock market crash in 1990, Japan has experienced two decades of stagnation and even outright deflation. Rather than generating jobs that go begging, the economy has produced an entire lost generation of young people—referred to as “freeters”—who have been unable to find stable career paths and often live with their parents well into their thirties and even forties. In February 2014, the Japanese government announced that 2013 base wages, adjusted for inflation, had actually fallen about 1 percent, matching a sixteen-year low that occurred following the 2008 financial crisis.
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Generalized labor shortages are even harder to find elsewhere. As of January 2014, the youth unemployment rates in two of Europe’s most rapidly graying countries, Italy and Spain, were both at catastrophic levels: 42 percent in Italy and a stunning 58 percent in Spain.
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While those extraordinary numbers are, of course, a direct result of the financial crisis, one is nonetheless left to wonder just how long we have to wait before the promised labor shortages begin to put a dent in unemployment among younger workers.

I think that one of the most important lessons we should take from Japan echoes the point I have been making throughout this chapter:
workers are also consumers.
As individuals age, they eventually leave the workforce, but they also tend to consume less, and
their spending skews more and more toward health care. So while the number of available workers may decrease, demand for products and services also declines, and that means fewer jobs. In other words, the impact of retiring workers may turn out to largely be a wash, and as seniors reduce their spending in line with their falling incomes, that may well become yet another important reason to question whether economic growth will be sustainable. Indeed, in those countries—such as Japan, Poland, and Russia—where the population is actually in decline, it seems likely that long-term economic stagnation or even contraction will be difficult to avoid since population is a critical determinant of the size of an economy.

Even in the United States, where the population continues to grow, there are good reasons to worry that demographics will depress consumer spending. The transition from traditional pensions to defined contribution (401k) plans has left a great many US households in very fragile circumstances as they approach retirement. In an analysis published in February 2014, MIT economist James Poterba found that a remarkable 50 percent of American households aged sixty-five to sixty-nine have retirement account balances of $5,000 or less.
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According to Poterba’s paper, even a household with $100,000 in retirement savings would receive a guaranteed income of only about $5,400 per year (or $450 per month) with no cost-of-living increases, if the entire balance were used to purchase a fixed annuity.
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In other words, a great many Americans are likely to end up depending almost entirely on Social Security. In 2013, the average monthly Social Security payment was about $1,300, with some retirees receiving as little as $804. These are not incomes that will support robust consumption, especially given that Medicare premiums currently amounting to about $150 per month (and likely to increase) are deducted.

As in Japan, there are sure to be worker shortages in specific areas, especially those tied directly to the aging trend. Recall from
Chapter 6
that the Bureau of Labor Statistics projects about 1.8
million new jobs by 2022 in elder-care-related areas like nursing and personal-care aids. However, if you juxtapose that figure against the 2013 research done by Carl Benedikt Frey and Michael A. Osborne of the University of Oxford, suggesting that jobs comprising about 47 percent of total US employment—roughly 64 million jobs—have the potential to be automated within “perhaps a decade or two,”
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it seems very difficult to argue that we are headed toward a significant overall shortage of workers. Indeed, rather than counteracting the impact of technology, the aging trend coupled with rising inequality may well be poised to significantly undermine consumer spending. Weak demand could then unleash a secondary wave of job losses affecting even those occupations not directly susceptible to automation.
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Consumer Demand in China and Other Emerging Economies

As inequality and demographics combine to dampen consumer spending in the United States, Europe, and other advanced nations, it seems reasonable to expect that consumers in rapidly growing developing countries will help to pick up the slack. These hopes are directed especially at China, where astonishing growth has led to many predictions that the Chinese economy will become the world’s largest, perhaps within the next decade or so.

I think there are a number of reasons to be skeptical about the idea that China and the rest of the emerging world will become primary drivers of global consumer demand anytime soon. The first problem is that China faces a massive demographic shock of its own.
The country’s one-child policy has been successful in limiting population growth, but it has also resulted in a rapidly aging society. By 2030, there will be well over 200 million senior citizens in China, roughly double the number in 2010. More than a quarter of the country’s population will be sixty-five or older—and more than 90 million people will be at least eighty—by 2050.
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The rise of capitalism in China resulted in the demise of the “iron rice bowl,” under which state-owned industries provided pensions. Retirees now have to fend largely for themselves or rely on their children, but the collapsing fertility rate has led to the infamous “1-2-4” problem in which a single working-age adult will eventually have to help support two parents and four grandparents.

The lack of a social safety net for older citizens is probably one important driver of China’s astonishingly high savings rate, which has been estimated to be as much as 40 percent. The high cost of real estate relative to incomes is another important factor. Many workers routinely save more than half their incomes in the hope of someday putting together the down payment for a home.
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Households that are stashing away such an enormous share of their incomes are obviously not doing a lot of spending, and indeed, personal consumption amounts to only about 35 percent of China’s economy—roughly half the level in the United States. Instead, Chinese economic growth has been powered primarily by manufacturing exports together with an astonishingly high level of investment. In 2013, the share of China’s GDP attributable to investment in things like factories, equipment, housing, and other physical infrastructure surged to 54 percent, up from about 48 percent a year earlier.
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Nearly everyone agrees that this is fundamentally unsustainable. After all, investments have to eventually pay for themselves, and that happens as a result of consumption: factories have to produce goods that are profitably sold, new housing has to be rented, and so forth. The need for China to restructure its economy in favor of domestic spending has been acknowledged by the government and
widely discussed for years, and yet virtually no tangible progress has been made. Googling the phrase “China rebalancing” brings up more than 3 million web pages, nearly all of which, I suspect, say roughly the same thing: China’s consumers need to get with the program and start buying stuff.