Technology turns reality on its head

Over the last decade, Americans have witnessed a breakdown of traditional industry boundaries. New industries are being created and existing ones restructured by the accelerating pace of technological innovation.

This shift is taking place in the context of a larger economic transition from the Industrial Age that began in the second half of the 18th century to the Information Age, fueled by revolutionary technologies such as the digital computer, the internet, and related information technology.

The increasing pace of technological change impacts human capital markets. Today’s children will grow up in a world unlike that of their parents, as technology transforms media, medicine, transportation and every aspect of how people conduct themselves.

The nanotechnology revolution and gene sequencing, which is just beginning, promises significant upheaval for a vast array of industries ranging from tiny medical devices to new age materials for earthquake resistant buildings. Recent service innovations include social media and online search engines that respond to voice commands.

Reality is getting complicated. Dealing with it will require taking some of the wealth created from the new industries and reinvesting it in skills development for displaced workers and rethinking policies about work and education.

Two things are certain: technological progress is relentless and accelerating, and today’s technology becomes outdated almost as soon as it can be brought to market. Consider the multiple models of smartphones introduced each year.

Advances in technology are causing disruptive changes in mature industries by introducing substitutes or altering the industry landscape by opening up whole new frontiers. For instance, revolutionary change in self-driving technology has enabled even companies such as Alphabet, the parent of Google, to enter the motor vehicle market.

Every major car company is researching and building its own version of a driverless vehicle, and industry observers are predicting they will have autonomous vehicles, internet-connected driverless vehicles without a pedal and steering wheel, on the road in five-to-ten years. The vehicle may turn out to be the ultimate mobile device.

Cutting-edge advances in artificial intelligence will have an unequal impact on livelihoods depending on which industries and individuals can create or adapt to these breakthroughs and which are left behind. They could be as consequential for labor as the agricultural and industrial revolutions that preceded it.

Two-and-a-half million people in the United States make their living from driving trucks, taxis, or buses and all are vulnerable to displacement by driverless cars. These jobs are just the tip of the iceberg.

For example, it is likely that children born today will never drive a car and may have a job in a career that does not yet exist. Robots have displaced manufacturing jobs in electronics, metal products, plastics, and chemicals with activities such as welding, painting, packaging and even operating heavy machinery.

These changes are disorienting and more than a little scary for the ordinary American already dealing with a sense of economic insecurity. Meanwhile, recent developments in robotics, artificial intelligence, and machine labor are automating work that is cognitive and non-manual. Robots are increasingly being used for a variety of tasks from precision agriculture to robotic surgery jobs that were largely immune from technological advances.

Automation will not happen overnight. It will take years to play out fully and will vary across industries, firms, jobs, and activities. But the time is now to come to terms with the uncomfortable reality that in the future, just a fraction of the population may have the talent and education to work alongside machines, while everyone else will bear the brunt of the changes.

These discontinuities raise important public policy issues about the social framework that makes sure those who are losing their jobs are able to stay afloat long enough to pivot to new opportunities and force us to rethink issues such as providing a guaranteed universal basic income. The future is arriving sooner than we thought and our country is unprepared.

Originally Published: April 29, 2017

US must confront the new realities

The 21st century has witnessed the death of the old world economic order and the birth of a new one. America remains the world’s military superpower but Brazil, Russia, India, China and others are challenging our economic pre-eminence.

The parade of 2016 presidential candidates will offer short-form solutions unconstrained by resource limitations. They will blame others and predict impending doom if they are not elected. And the political rhetoric will surely be accompanied by nostalgia for the golden economic age of the decades that followed World War II.

But America’s dominance in the decades following World War II was a function of unique circumstances. Europe lay in ruins in 1945. In the rest of the world, cities were shattered, economies devastated and people were starving. In the two years after the war, the vulnerability of countries to Soviet expansionism heightened the sense of crisis.

The postwar economy was quite successful by any standard. The American middle class enjoyed higher wages from the end of World War II until the mid-1970s. Real wages, after inflation, continually rose until 1973. But that was when the United States accounted for a disproportionate share of the global economy, nearly two-thirds of the world’s gold reserves, and the dollar was the world’s reserve currency.

Prosperity was the governing theme of the postwar era. During those years, gross domestic product grew 140 percent and real (inflation-adjusted) per capita income doubled. Living standards improved to the point where the large majority of Americans could describe themselves as middle class.

The United States made the economic recovery of Western Europe and Japan a national security priority. Two basic motives guided policy.

Primo, the United States was increasingly concerned about the ambitions of the Soviet Union that had imposed communist governments on Eastern Europe and their threat to Western democracies.

Secondo, the United States believed stable, prosperous, democratic governments would serve as ramparts against Soviet expansion and bind these countries to us.

To restore Europe’s economic infrastructure, President Harry S. Truman signed what became known as the Marshall Plan in April 1948. Over the next four years the plan delivered $13 billion to modernize industry in 16 European countries. This funding, which translates into $103 billion in today’s dollars, enabled Europe to rejuvenate its domestic markets as well as export its way to economic recovery. By contrast, Afghanistan still can’t stand on its own after receiving about $110 billion in assistance.

The Marshall Plan along with cutting American tariffs by 35 percent to accommodate and promote foreign imports, which provided Americans with cheap foreign goods, supported the development of stable democratic governments in Western Europe. It also provided markets for American goods and services, a grand example of vendor financing.

The United States also developed and helped finance a comprehensive economy recovery program for Japan. The war had devastated the country and terminated almost all of its foreign trade.

It should not be overlooked that it was with America’s help that the world became a more prosperous and competitive place, which has indeed put downward pressure on wages as footloose companies take advantage of the information technology revolution to disperse supply chains contributing to the erosion of middle-class wages in the face of low-cost competition.

If America wants to maintain its status as the world’s economic superpower, it is time to jettison the addiction to past achievements and focus on new realities: The world is experiencing dramatic technological change and we face economic competition from millions of people around the world who are happy to work for a fraction of Americans’ wages.

We must get serious about issues that are the very foundation of American exceptionalism such as combating economic inequality and declining living standards for the shrinking middle class. If we don’t, Americans will have to drastically adjust their expectations about growth and opportunity and step back from our special place in the world.

originally published: July 4, 2015

Extreme wealth inequality threatens the nation

One of the salient characteristics of the last 20 years has been the unprecedented growth in income and wealth inequality, and the extent to which both have flowed to the proverbial1-percenters.

Market capitalism has generated enormous wealth, but the distribution of the spoils of capitalism has gone awry. While there are many ways to measure inequality, consider that in today’ s Gilded Age, the wealthiest 1 percent of American households enjoy a higher total net worth than the bottom 90 percent and the top 1 percent of income earners receive more pretax income than the entire bottom half.

Since 1979, 36 percent of all after-tax gains went to the 1-percenters; over 20 percent of those gains went to the top one-tenth of 1 percent of the income distribution.

The increasingly unequal distribution of income and wealth threatens not only the social fabric of American society but the economy as well. The mega-rich cannot spend enough to offset the lost demand that results from a shrinking middle class, which slows economic growth.

Growing inequality is making a lie of the American promise that this is a country where if you work hard, you can make it into the middle class. We are witnessing the hollowing out of the middle class; it is being mothballed like an old Navy ship. The last time that income inequality in the land of plenty was as profound as it is now was immediately before the 1929 stock market crash.

Right now, more than 8.4 million Americans are collecting either state or federal unemployment benefits and one out of every seven depend on food stamps, the highest share of the population ever to do so. A shrinking few claim a disproportionate share of the nation’s wealth at the expense of everyone else.

If we could identify a single culprit to blame for this mess, it would make for a good television drama. But the story of rising income inequality is more complex. None of the major explanations are exhaustive or definitive, and making sense of them is no easy task.

Some blame globalization, a process of closer integration between different countries and peoples made possible by falling trade and investment barriers, tremendous advances in telecommunications and  drastic reductions in transportation costs that have forced American workers to compete against the huge supply of low-cost labor in the developing world and contributed to the declining influence of labor unwns.

Others point to new labor-replacing technologies that threaten both unskilled and skilled workers, while they increase demand for a select few with highly specialized skills. They argue that American public education does not provide children with the advanced skills they need to compete in this new world.

Stated differently, the pace of technological advance has outstripped the educational system’s ability to supply students with the skills they need to utilize this technology, leading to outsized earnings gains for those who have such skill. This is the so-called college wage premium.

Over the past few decades, people in developed economies who were educated enough to take advantage of the technological advances won higher wages. Others got left behind.

Finally, there are those who contend that immigration policy worsens inequality. The mass influx of low-wage workers probably reduces global inequality at the same time it increases inequality within America by reducing the wages of hard-working, semi-skilled Americans.

Many pundits contend that we can reverse the deterioration of the middle class with a series of policies such as revising the tax code, making free trade fair, investing in America’s infrastructure, rethinking training and education and strengthening labor unions.

Perhaps America can deal finally with the divisive issue of inequality after having spent decades ignoring it, but hope is not a strategy. The only thing we can be certain of is that there are no quick fixes or easy solutions, and the longer it takes to address the problem, the more painful the cure will be.

originally published: November 30, 2013