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Wednesday, April 01, 2015

The Technological Roots of Income Inequality

I recently tweeted something that apparently resonated with a lot of people. Within just two hours, my tweet was seen by 60,000 tweeps.

The link goes to a wonderful Scientific American story by Nick Fitz called "Economic Inequality: It’s Far Worse Than You Think," which of course is all about American optimism and how it makes the average person vastly underestimate the amount of income inequality going on in the U.S. right now.

I hear relatively little discussion, though, about what's behind the income-inequality problem. Economists are debating it to death, of course, but they seem to lack the ability to see this in any kind of broader historical context. I mean a really broad context. Like an Industrial Revolution kind of context.

To me, a key piece of evidence is the following graph, various versions of which are easy to find on the Web:

If you look at inflation-adjusted earnings relative to productivity in the U.S., it's pretty obvious something happened in the 1970s. Productivity continues to increase but wages remain flat.

When wages are seen as a percentage of GDP:

Not coincidentally, the mid-1970s were also when the rich started to become the super-rich:

After whatever happened in 1975 happened, the wages that were supposed to go to ordinary people went into the pockets of the super-rich.


Golly me. I wonder what historic thing could have happened around 1975 to cause a major shift in the way the economy works?


Could it have been Congress passing the Metric Conversion Act?

The sinking of the Edmund Fitzgerald?

The birth of Angelina Jolie?

Or might it have been the introduction of mass-produced computers?

It took almost no time for computers to enter the workplace, and for resulting productivity gains to show up in the economy. (Actually, most economists predicted even bigger productivity gains, and many still debate why the gains weren't, in fact, enormously bigger. This is known as Solow's paradox.)

The Internet changed the game even further, of course, making it possible for category winners to grab huge market share at low cost, creating a winner-take-all environment in which there's Google, and then everyone else; Amazon, then everyone else; there's only one real winner in every category. There's only one YouTube, one Facebook, etc. (Yes, these companies have long-tail competition, but if you look at the market cap of a category leader next to its closest "competitor," there's no comparison, really.)

Internet economics have allowed companies like Google and Facebook to amass enormous fortunes. (Three of the five largest big-cap firms are tech giants.) Even old-school companies like Exxon and Johnson & Johnson have been transformed by technology, and most find they can produce far more product, with far fewer employees, today than in years prior.

The historic shift here is that digital technology has without question made it easier for companies to create value without as much reliance on grunt labor. This is analogous to the way mechanized agriculture enabled (or caused) millions to give up farming. Two hundred years ago, we were a nation of farmers. Now we're not.

Computerized technology is getting better and better at doing all the things that used to require human input, intruding, now, even upon service-sector jobs (even invasive surgery is done by machine), slowly pushing humans off the cubicle-farm, so to speak, relegating human beings (ironically) to some of the gruntiest grunt-work that machines can't yet do, like flip a burger and shove it in a bag and hand it to you, or write "race together" on a coffee cup, or greet people when they walk into WalMart.

What we have to wonder is what will happen when machines can do everything (in a "job" sense) humans can do. Most people who haven't thought deeply about this blithely assume that new types of jobs will keep being created, as they have been in the past; but the disconnect that happened in 1975 (go back up to the graphs), and the steady, ongoing crapification of jobs in the U.S., and the "jobless recovery" post-2008, plus the ongoing devaluation of human expertise caused by the Internet, should tell you that this time may be different. This time, when the farmers get pushed off the farm, there may be nowhere to go.

Albert Einstein, in 1949, presciently observed:
Technological progress frequently results in more unemployment rather than in an easing of the burden of work for all. [...] The result of these developments is an oligarchy of private capital, the enormous power of which cannot be effectively checked even by a democratically-organized political society.
If wages had kept up with productivity, after the introduction of computers, we'd all be making $90,000 a year today (or making what we make currently, while working just 15 hours a week). If machines exist to "ease the burden of work for all," as Einstein put it, we are not benefitting. We're still working 40 hours a week (more than that, in many cases). Productivity has gone up (and the value of human labor has gone down) due to the huge multiplier effects of digital technology; and the winners are pocketing the profits. It's that simple.

I, for one, will be keenly disappointed if this election cycle doesn't include some kind of discussion of wealth inequality. Many progressives favor taxing the rich, and/or taxing corporations (who are persons too, now), but I think that just sends money to the wrong place (the U.S. Treasury) without really fixing anything. The best way to tax the rich is to require an increase of wages. And we need to get more people working. In fact, we need a full-employment policy. Nothing less will do.

If we pay people more, and have more people working, the government will collect more tax and social programs will get funded, and everyone will be a lot less grumpy than if we sit around and argue about how to tax rich people.

These are hard problems, but we need to talk about them, soon, while there's still time; while we're still in control of the machines.

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  1. Nice post, but the wrong title. "Technological roots" implies that technology is somehow the cause of inequality. It isn't. It was the source of great wealth, as you point out, and increasing inequality is down to the structure of things that allows ridiculous overcompensation for a few while grinding-down and impoverishing many millions of others.

  2. I think you need to look at the term 'neo-liberal' to get a better context on this issue

  3. You are forgetting the Arab oil embargo and the end (until this year) of cheap energy.

  4. The actual problem is the tax system didn't change as rapidly as tech created massive inequality.

  5. Something else that I think played a huge roll in this was the dissolution of the Breton Woods system of foreign currency exchange. In 1971, Nixon announced that he was floating the US dollar. in 73, six of the G-10 nations basically abandoned all semblance of a backed currency and pegged their national currencies to the US Dollar value. Essentially the entire world's currency system at that point became nothing more than a game of numbers (not unlike monopoly money).

    That change allowed the already rich and powerful to exert even more influence and garner more wealth. It also allowed for wage "increases" that looked good to the common man but barely kept pace with the rampant inflation that the US$ underwent and is still undergoing. Those wage increases gave the illusion of rising income without actually giving any real increase in buying power or value.


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