Saturday, November 26, 2011

Mass disability goes mainstream: disequilibria and RCIIT

I've been chattering for a few years about the rise of mass disability and the role of RCIIT (India, China, computers, networks) in the Lesser Depression. This has taken me a bit out of the Krugman camp, which means I'm probably wrong.

Yes, I accept Krugman's thesis that the proximal cause of depression is a collapse in demand combined with the zero-bound problem. Hard to argue with arithmetic.

I think there's more going on though. Some secular trends that will be with us even if followed Krugman's wise advice. In fact, under the surface, I suspect Krugman and DeLong believe this as well. I've read Krugman for years, and he was once more worried about the impact of globalization and IT than he's now willing to admit. Sometimes he has to simplify.

For example, fraud has always been with us -- but something happened to make traditional fraud for more effective over the past thirteen years. I think that "something" was the rise of information technology and associated complexity; a technology that allowed financiers to appear to be contributing value even though their primary role was parasitic.

Similarly, the rise of China and India is, in the long run, good for the entire world. In the near future, however, it's very hard for world economies to adjust. Income shifts to a tiny fraction of Americans, many jobs are disrupted, people have to move, to change careers, etc. It takes time for new tax structures to be accepted, for new work to emerge. IT has the same disruptive effect. AI and communication networks will further limit the jobs we can take where our economic returns are equal or greater than the minimum wage.

I think these ideas are starting to get traction. Today Herman Gans is writing in the NYT about the age of the superfluous worker. A few days ago The Economist reviewed a book about disequlibria and IT

Economics Focus: Marathon machine | The Economist

... Erik Brynjolfsson, an economist, and Andrew McAfee, a technology expert, argue in their new e-book, “Race Against the Machine”, that too much innovation is the bane of struggling workers. Progress in information and communication technology (ICT) may be occurring too fast for labour markets to keep up. Such a revolution ought to be obvious enough to dissuade others from writing about stagnation. But Messrs Brynjolfsson and McAfee argue that because the growth is exponential, it is deceptive in its pace...

... Progress in many areas of ICT follows Moore’s law, they write, which suggests that circuit performance should double every 1-2 years. In the early years of the ICT revolution, during the flat part of the exponential curve, progress seemed interesting but limited in its applications. As doublings accumulate, however, and technology moves into the steep part of the exponential curve, great leaps become possible. Technological feats such as self-driving cars and voice-recognition and translation programmes, not long ago a distant hope, are now realities. Further progress may generate profound economic change, they say. ICT is a “general purpose technology”, like steam-power or electrification, able to affect businesses in all industries...

... There will also be growing pains. Technology allows firms to offshore back-office tasks, for instance, or replace cashiers with automated kiosks. Powerful new systems may threaten the jobs of those who felt safe from technology. Pattern-recognition software is used to do work previously accomplished by teams of lawyers. Programmes can do a passable job writing up baseball games, and may soon fill parts of newspaper sections (those not sunk by free online competition). Workers are displaced, but businesses are proving slow to find new uses for the labour made available. Those left unemployed or underemployed are struggling to retrain and catch up with the new economy’s needs.

As a result, the labour force is polarising. Many of those once employed as semi-skilled workers are now fighting for low-wage jobs. Change has been good for those at the very top. Whereas real wages have been falling or flat for most workers, they have increased for those who have advanced degrees. Owners of capital have also benefited. They have enjoyed big gains from the increased returns on investments in equipment. Technology is allowing the best performers in many fields, such as superstar entertainers, to dominate global markets, crowding out those even slightly less skilled. And technology has yet to cut costs for health care, or education. Much of the rich world’s workforce has been squeezed on two sides, by stagnant wages and rising costs.

In time the economy will adjust  -- unless exponential IT transformation actually continues [1]. Alas, the AI revolution well is underway and technology cycles are still brutally short.  I don't see adjustment happening within the next six years. The whitewater isn't calming.

[1] That is, of course, the Singularity premise, as previously reviewed in The Economist.

Update 12/3/2011: And how does the great stagnation play into this - Gordon's Notes: Ants, corporations and the great stagnation?

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