The main difference between Cowen and Mokyr, in regards to the future of the American economy, is tone and emphasis. Average is Over (henceforth AIO) is anything but techno-pessimism (Mokyr agrees, I think). In fact, it develops a framework to explain how the economy, and specifically the labor market, might develop and change as the capital base evolves to include more machines with more intelligence. Cowen has been regrettably misrepresented – while AIO is often framed as a book about income inequality it is actually a book about the changing nature of work. The impact on measured income inequality is secondary, although it makes for better marketing.
AIO emphasizes the human dimension of technological change, noting that the average American will struggle to deal with smarter machines. Many professions and skills are growing obsolete. Those workers who thrive will be those who can work with smart machines and add value to automation. Those who cannot do this will struggle. Both Cowen and Mokyr argue that this process is a net positive in the long run while accepting that creative destruction has a human cost in the short-run.
Getting Our Growth Checked Out
The podcasts of Mokyr and Cowen both forecast amazing technological growth, but differ on how that growth will impact the American economy and living standard. While Mokyr pounds the table for Tech as a near universal good, Cowen is more cautious with his optimism, and exhibits concerns about stratified social gains.Mokyr claims growth is just starting to rev up. Although entrepreneurs and gradual improvements aid growth, most growth comes from sudden breakthroughs in the hard sciences. His theory reminds me a lot of how football teams move the ball. Although an offense can extend a drive by stringing together small yardage gains, most yards come in bunches off one big play down the field.
A view of the Future
Tyler Cowen describes a future where computers/robots become capable of doing many, if not most jobs available today and do them better than the humans they will replace. A root canal or dental implant will be done faster, more accurately and less expensively by a robot than a human dentist. Computers’ proven superiority at games like Chess and Jeopardy is only the tip of the iceberg of the areas in which computers will outperform humans. At the present time, workers in small niche markets will be protected from competition by computers longer, because of the cost of programming computers to replace humans, but even these workers will not remain unthreatened indefinitely.
The winners of the first EconTalk essay contest comparing Mokyr and Cowen’s vision of the future are Dallas Weaver, Eric Mustin, and Scott Atherley. Rather than pick a single winner, I picked three, because each essay had something I really liked. Each author will receive a signed copy of my book, The Price of Everything plus a volume of Bastiat from Liberty Fund. You can read each essay using the links I’ve attached to the winners’ names above. I want to thank all of the people who took time to write. The essays were excellent and I had a tough time picking three. New contest tomorrow on the Pritchett episode.
My GMU Econ colleague Bryan Caplan offers yet another useful perspective on minimum-wage legislation – that is, legislation that makes it unlawful for anyone to work for pay who cannot persuade employers to hire him or her at wages at least as high as the legislated minimum. Bryan’s post explains the political cleverness of minimum-wage proponents who typically argue for phasing-in their desired increases in minimum wages. His post also explains that data on the employment consequences of phased-in (or announced-signifiantly-ahead-of-time) minimum-wage hikes might reveal these employment consequences to be smaller than they really are.
Here’s a slice from Bryan’s post:
If the minimum wage unexpectedly jumped to $12 today, the effect on employment, though relatively small, would be blatant. Employers would wake up with a bunch of unprofitable workers on their hands. Over the next month or two, we would blame virtually all low-skilled lay-offs on the minimum wage hike – and we’d probably be right to do so.
If everyone knew the minimum wage was going to be $12 in 2015, however, even a large effect on employment could be virtually invisible. Employers wouldn’t need to lay any workers off. They could get to their new optimum via reduced hiring and attrition. When the law finally kicked in, you might find zero extra layoffs, because employers saw the writing on the wall and quietly downsize their workforce in advance.
Bryan is correct. And not only might a minimum-wage hike that was anticipated not result in any observable layoffs at the time it kicks in, but also the unemployment rate of low-skilled workers might not jump noticeably or detectably as a result of the higher minimum wage. The reason is that, once employers anticipate the looming hike in the minimum wage, they then – before the actual hike - start trimming their workforces (probably mostly through attrition and reduced hiring). Some, perhaps many, low-skilled workers, discouraged by the increasing difficulty they face when searching for jobs, respond by dropping out of the workforce before the minimum-wage hike actually happens. By the time the minimum-wage hike does occur, the resulting increase in the measured rate of unemployment of low-skilled workers might well be genuinely small.
UPDATE: In a comment on Bryan’s post, Santiago points out the germane fact that
This would apply to Card and Krueger as well, the legislation in NJ was passed in 1990 but the increase didn’t take place until 1992.
… is from page 234 of the late William Niskanen’s 2002 essay “The Intellectual Case for a Free Market Economy,” which is reprinted as chapter 22 in the valuable 2008 collection of some of the best of Niskanen’s writings, Reflections of a Political Economist (footnote omitted):
The primary moral case for a free market economy is that most economic decisions require the consent of all those with the affected rights. No one has the authority to dictate an outcome at the expense of another party, unless both parties have previously agreed to a contractual relation that grants this authority in specific cases. Freedom is an implicit moral value, because the concepts of good and evil have no moral meaning in the absence of choice. A free market economy, in summary, maximizes the conditions in which we are “free to choose.”
The second moral case for a free market economy is that it is more consistent with our inherent moral nature, probably a consequence of our genetic heritage. Most of us have a limited amount of caring, often specific to family and friends. Many of us are tempted to use threat to get our way unless the economic system sufficiently penalizes threat to make make exchange a more rewarding relation. A free market economy minimizes the necessary use of threat and reduces our dependence on caring in routine economic relations.
Here is President Obama’s summary of what happened to economic life in America after the late 1970′s:
As values of community broke down, and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage. As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither. And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce. We took on more debt financed by a juiced-up housing market. But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.
And the result is an economy that’s become profoundly unequal, and families that are more insecure.
Let’s take it a sentence at a time:
As values of community broke down, and competitive pressure increased, businesses lobbied Washington to weaken unions and the value of the minimum wage.
I don’t know whether community values broke down, whatever that means but there was some competitive pressure on American companies from increased foreign trade. That was generally a good thing. But unions weakened because the economy was changing. Service jobs continued to grow and outside of the government, service jobs aren’t unionized. The President suggests that the whole thing was a nefarious plot by business to exploit workers. Is that true? Union workers as a percentage of the private sector work-force has fallen steadily since WWII. It did fall more quickly starting in the late 1970′s but it has continued to fall through Democratic and Republican Administrations. Is that all the power of lobbying?
Inflation eroded the value of the minimum wage. I assume the President means to say that businesses lobbied to keep the minimum wage from being increased to offset the erosion of inflation. That’s true. I think that was good or low-skilled workers, but let’s ignore that for now.
As a trickle-down ideology became more prominent, taxes were slashed for the wealthiest, while investments in things that make us all richer, like schools and infrastructure, were allowed to wither.
This is a combination of a deception and a lie. Tax rates were reduced for all Americans in the 1980′s. But of course the rich (and lots of non-rich) pay more in taxes today than in 1980. Confusing rates and amounts is convenient. But the next line is just wrong. Investments in schools and infrastructure were allowed to wither? Please. That’s just not true.
Capital outlays for education were about $20 billion in 1980, measured in 2011-2012 dollars. In 2008 the number was $71 billion. A tripling is not withering. In 2010, the most recent data, the number is $58 billion showing the effects of the recession. But no withering.
But the infrastructure is really bizarre. Here’s one measure from the CBO:
Notice that withering? Yeah, I missed it, too.
And for a certain period of time, we could ignore this weakening economic foundation, in part because more families were relying on two earners as women entered the workforce.
I don’t know about the “ignoring” part, but women did start working more. They also got divorced a lot more so single women started working more. So the proportion of households with two earners is now LOWER than it was in 1980. Not a lot lower. But lower.
We took on more debt financed by a juiced-up housing market.
I think he has causation backward there or at least he’s ignoring some simultaneity.
But when the music stopped, and the crisis hit, millions of families were stripped of whatever cushion they had left.
And the result is an economy that’s become profoundly unequal, and families that are more insecure.
Yes, the distribution of earnings and wealth is less equal than it was in 1979 or 1980. But what’s the cause of it? Lots of things, but few that are mentioned by the President. Increasing the power of unions and the minimum wage are the wrong ways to make things better. How about improving our lousy school system in America’s inner cities?
George Packer at the New Yorker explains why the economy is working poorly:
In other words, as Steven Greenhouse reported in a bleak post-Thanksgiving article, too many Americans now work low-paying jobs—for example, stocking inventory and ringing up merchandise in big-box stores like Walmart and Target—to have enough purchasing power to boost sales. Americans are too poor to stimulate economic growth.
Not sure I’d call that reporting. I’d call it theorizing. It’s a strange theory. It is what might normally be called a tautology. Saying that Americans are too poor to “stimulate economic growth” is really just another way of saying growth is low. But the theory behind this idea is that if Americans were paid more, then the spending would stimulate more spending and that in turn would create growth that would allow the higher salaries to be paid. That somehow, the growth of low-paying jobs means less growth for the economy.
How would that work? How would the act of paying people more make the economy more productive? How would paying people more be a way to get more from less? Do people really believe that the difference between good economic times and bad economic times is when low-paying jobs pay too little and growth is held back?
I don’t understand Keynesian economics.
Check out this EconStories song that John Papola wrote. He had the right idea: