A Consumption River Pumped Dry

Does America need more Apple’s? Celebratory writers like Thomas Friedman in his book, “That Used to be Us” assert we do.  These writers apparently did not notice that high tech is not labor intensive.

That has some major policy implications.

Studies show that rapid growth of high technology businesses have not led to job growth as was the case with low tech industries of  the 19th and early 20th centuries.  21st century technologies tend to remove middle class jobs, not create them as MIT researcher David Autor has been pointing out (eg in this paper).  There are jobs for the few highly educated workers necessary for high productivity businesses, but by definition, not enough to hire the displaced middle class workers even if they were retrained with the exact skills needed.  Prior to this, such heretical statements got a person labelled a Luddite for doubting the theology that new technology always created as many jobs as it destroyed.    Researchers are not so sure any more that the “Luddite fallacy” is really a fallacy after all.  The Luddites may simply have been 200 years too early.

In today’s technology, just 300 employees at Twitter delver a product to 200 million users. What about high tech manufacturing? Same thing. In 2006, iPod employees in the US earned 7.5 billion in sales, but Apple paid back into the US economy barely 10% of that- $750 million in wages. (source)

While that profitability is good for Apple Shareholders, this is not so good for jobs in America. What it means is that companies can extract much more purchasing power from the economy than they return in the form of wages. Picture the purchasing power of consumers as a river. If all the companies along the river are taking more water out than they are returning, what happens?

That’s right. The river dries up. It is clear we cannot return to a housing price spiral to pump more purchasing power into the river. We need to attack the problem a different way.

At a macro level, we have a system wide market failure since businesses are not directly feeling the long term cost of refusal to return purchasing power to the Consumption river. The system incents businesses to drain the river as quickly and efficiently as possible through the wonders of high technology.  Using efficiency managers like Mitt Romney, successful businesses do it with progressively fewer and fewer workers than before. (NYMag article: The Romney Economy)

We have to go beyond gimmicks like inflating credit to address this underlying mismatch between how much stuff a worker can create versus how much stuff we can possibly consume. One idea is to treat the river of purchasing power as a public resource, and that companies not be allowed to pump more water out of the river than is going in.

In order to keep businesses healthy, the consumption river levels must be maintained.  They will either become regulated in this regard, or they will die from lack of consumers.  So which bitter pills do we choose:

  • Approach 1: Companies must retain sufficient employees to match their extraction of purchasing power. Companies are required to retain sufficient employees so that the river is resupplied with purchasing power in the form of wages. Nothing about the mechanism of enforcement is implied.  This could be a self regulated “privatized” structural mechanism, or an overt governmental intervention- aka a “socialist” regulatory scheme.
  • Approach 2: Redistribution.  Purchasing power is extracted from companies through higher corporate taxation and returned to the economy with public sector jobs- Better pay of teachers, long term infrastructure jobs.

The trend Autor observes applies to all OECD countries.  Are there other approaches for solutions to the Consumption river problem?

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About John JMesserly

Mostly harmless

Posted on 2011-10-29, in automation, David Autor, luddism, purchasing power, taxation. Bookmark the permalink. 1 Comment.

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