Using AI and the Internet of Things to Automate Consumption, Restore Capitalist Profits, and Sustain Middle Class Affluence Won’t Work

Consumption activities use up a lot of time, so increasing global consumption requires increasing total consumption time. This has mostly been achieved by steadily increasing the number of middle class consumers in the world-economy. Now, however, the world’s middle classes are not growing. Large numbers of middle class people are being displaced and impoverished by destructive weather events and weather trends associated with climate change, wars, geopolitical disruptions to global trade, and failing national governments. What is and has been happening is churn (some rising while others fall) rather than growth. This is a key crisis for the capitalist modern world-economy.

Consumption time is not increasing, so middle class demand for goods and services is not expanding enough to stimulate production growth. At the same time, automation of the production of goods and services is rushing ahead of middle class consumer demand. Consequently, capital is being diverted away from investment in new production assets. Instead, large amounts of capital are flowing into acquiring production and real estate assets that already exist and into gambling on things like cryptocurrency and shaky debt assets.[1] Increasingly, profits are derived from marketing and payment schemes that confuse and defraud consumers and from government subsidies (both direct payments and tax shelters and abatements).

With the number of middle class consumers in the world-economy no longer increasing, a potential way to increase middle class consumption is to reduce the time used up in consumption activities. This is where AI, the Internet of Things, automated payments, and home robots come in. Taken together, they can automate middle class consumption, freeing up time for more consumption activities. These services and their associated gadgets are presented to middle class consumers as conveniences and symbols of status, but for capitalists they are designed to accelerate the expansion of consumption by solving the consumption time problem and expand automated revenue flows into corporations.

Consumption activity has several components: learning about new things, deciding what to buy and when, using what has been bought (or, in the case of status wealth, displaying it), caring for what has been bought, and disposing of what is used up, worn out, damaged, or no longer wanted. Only some of these consumption activities have become more time efficient in recent decades. Credit cards, debit cards, and automated payments have speeded up paying for goods and services. Internet shopping and home delivery have saved travel time for middle class consumers, theoretically making it possible to buy more goods and services during a typical day than in the past. That still leaves the problem of caring for possessions, disposing of damaged, obsolete, and unwanted goods and services, learning about goods and services, and taking time to decide which to buy and which to avoid. Taking items to a Goodwill or a recycling center is very time consuming and ending an online service or getting a mistake corrected is often onerous and time consuming. Even with the Internet, researching a product is often time consuming and frustrating.

Automating all aspects of production has been much easier than automating consumption, so the production of goods and services has been forging ahead of consumption.[2] Now, capitalist investors are turning to AI, the Internet of Things, and home robots to move middle class consumption to a level of automation that can keep pace with production expansion. Home robots will automate disposal of damaged, worn out, and unwanted goods. Internet connected refrigerators can already order food items as needed and printers can order ink and toner supplies. AI reduces product and service learning time and further automates purchasing. It is already being used by people to do product and service research, decide on a brand and model, and with the consumer’s click of an icon or two, order the product and make the payment.

Automating middle class consumption seems like a plausible fix to the problem of inadequate demand that production automation has brought about. Seemingly, even with the growth of the world’s middle class populations plateauing, total consumption of goods and services should continue to grow as automation of consumption solves the consumption time problem. However, a couple of flaws in this fix are likely to be difficult or impossible to overcome.

First, automated consumption depends on automated payments and automated payments depends on the certainty of adequate and continuous (e.g., automated) middle class income receipts. Some elements of automated income are in place now in some countries – social security benefits, unemployment insurance, and direct deposit of earnings and other payments – but nowhere do these practices come close to providing the adequate and continuous incomes that fully automated consumption requires. In theory, this flaw could be overcome, but almost certainly will not be. Guaranteed employment and guaranteed income are anathemas to the world’s ruling classes.

The second flaw is far more insurmountable. The reason for increasing middle class consumption through automation is to make investments in production facilities profitable again. However, increasing the production of goods and services is already up against the limits inherent in the earth’s recycling and heat dissipation systems, most notably for the moment are the limits to recycling heat trapping carbon and other greenhouse gases and the limits to sustaining the diversity of flora and fauna. The consequences of our encounters with these limits are well documented and widely known. Automating middle class consumption can certainly help expand demand for goods and services and thus stimulate more production, but increasing production will assuredly accelerate the destruction of the very earth-system processes on which human life depends. The crises of capitalism will deepen. Destruction of the world’s middle class ways of life will continue.

[1] Recall that the financial crisis of 2008 was largely due to over investment in housing debt.

[2] Note the rapidity with which China has ramped up production of electric vehicles and U.S. tech companies are building data warehouses and ramping up AI use.

Future of Stock Market Investments and Jobs

Stock markets are places for investing money with the expectation that stock values will increase over time. If the values increase, a person can withdraw their money from the stock markets at a later date and realize a substantial increase in wealth. That increase in wealth is a share of the profits the companies listed on the stock markets are able to earn. Those profits, in turn, are dependent on the total increase in wealth that the whole economy has produced. Thus, the long term growth in stock market values depends on the long term growth of sharable real wealth.

The historical trend in sharable real wealth growth is strongly related to the long term growth in the consumption of energy by humans. It has also been strongly dependent on the ability of producers of wealth to discard waste cheaply and avoid paying for the damaging unintended consequences of expanding wealth production. For sharable real wealth to continue to grow, both the energy trend must continue and the downside costs to producing wealth must continue to be cheap. Energy production can certainly continue to expand, but the downside costs of using that energy to produce more sharable wealth are rapidly rising because managing climate change damage, resource depletion, ecosystem destruction, and popular anger is taking a bigger and bigger bite out of total wealth production.

If we are not already at the end of the era of expanding real wealth production in the world-economy, we are getting close. As a result, the stock markets have or are about to enter a cul-de-sac from which there is no escape in the foreseeable future. Middle class people around the world are making more and more demands on their governments to protect their wealth from extreme weather events, resource depletion, ecosystem destruction, and civil unrest, and to restore the wealth they have already lost to those destructive forces. In these circumstances, company profits cannot grow as fast as they did in the past unless real wealth production increases more rapidly or the demands from middle class people are not met. Accelerating wealth production also accelerates climate change, resource depletion, ecosystem destruction, and popular anger. It rapidly adds to the costs of managing all the damage, especially popular anger (via policing and military spending). On the other hand, assigning a greater share of the wealth being produced to meeting the demands of middle class people has to cut into the profits of the companies listed on the stock markets. Down either path lies the stagnation of profits and the resulting stagnation of stock values. Down either path are real losses for the world’s middle classes.

Various governments are grappling with this stock market cul-de-sac by coupling an immediate reduction in middle class and working class standards of living with promises of great times yet to come. In the U.S., the Trump administration is taking this short term fix to its extreme – inflicting immediate economic pain and possibly inducing a recession that will wipe out wealth for millions of middle class and near middle class families while calling the economic pain necessary medicine that will pay off handsomely for Americans.

Much of the wealth loss is showing up, and will continue to show up, in the deteriorating wages, benefits, and conditions of work. Attacking unions and reducing U.S. federal government jobs and programs is undercutting standards of work, workplace safety, wages, and benefits, all of which give companies more wiggle room for protecting profit rates for a while longer. So does reducing taxes and regulations on corporations and the wealthy. The Trump administration strategy may help corporations and investors avoid hitting the brick wall at the end of the stock market cul-de-sac for a few more years, but the collision is inevitable.

Are We In An Employment Bubble? Employment Growth in the U.S. Is Fueled By Debt Bubbles and Speculation Bubbles

SOURCE ITEMS

In most U.S. post-war business cycles, recessions were followed by above trend growth in output and employment. After the last three recessions, however, output and employment growth were sluggish. … This paper shows that each of the last three recessions coincided with a collapsing bubble in a category of private fixed investment: commercial real estate (1990-91), internet equipment (2001), and housing (2008-09).

From the Abstract, John Edwin Golob, Investment Bubbles and Jobless Slow-Growth Expansions: A Tale of Three Recoveries, Social Science Research Network, April 5, 2013.

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We have highlighted the two major subprime lending booms we’ve seen in that period — the subprime mortgage lending boom from 2003 to 2006, and the subprime auto loan boom from 2010 to 2014. … It appears that the key to boosting spending in the U.S. economy is subprime lending.

Atif Mian and Amir Sufi, Subprime Lending Drives Spending, House of Debt, June 13, 2014.

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Investors have grown hungrier for higher-yielding assets in far-flung parts of the world, even if they’re more volatile, as yields on junk bonds have fallen to new lows.

Lisa Abramowicz, Wall Street Clashes Over Emerging-Market Bonds as UBS Says Sell, Bloomberg, July 9, 2014.

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“It definitely feels like investors are getting overexuberant, and you can stay in overexuberant conditions for a while,” said Fred H. Senft Jr., director of fixed income and equity research for Key Private Bank in Cleveland. “But when it turns it will turn quickly and it will turn very ugly.”

Bob Ivry, Complacency Breeds $2 Trillion of Junk as Sewage Funded, Bloomberg, July 8, 2014.

COMMENTS

Households can take on more debt as their wealth increases. With more borrowed money, households can purchase more goods and services. Thus, we can get job growth from wealth growth.

But there is a hitch. The wealth growth that fuels job growth can be real or imaginary. When wealth growth is imaginary (speculative wealth bubbles), the new jobs created are unlikely to last. We saw this very dramatically in the housing bubble that preceded the financial crisis of 2008.

U.S. job growth in that era floated on a chimera. It crashed with the evaporation of the chimera.

Millions of people bid up home prices by buying them with the intention of holding them briefly and then reselling them for profit. But this could only work if, somewhere down the road, all of those speculatively purchased homes could be sold to families who wanted to buy them as homes, not investments, and who would pay the higher prices and could pay those higher prices with jobs and real incomes that would endure year after year for decades.

As everyone knew, job and income growth in the U.S. had already been compromised by outsourcing, growing competition from companies in low wage parts of the world, and other changes associated with globalization. There was no reason to believe the future of real job and income growth in the U.S. would be better, so there was no rational basis for housing speculation.

Why did it happen anyway? A good explanation is too many investors with too much money chasing too few real investment opportunities. Two decades of tax cuts for corporations and their wealthy owners (supply side economics) had pumped up the supply of investment capital far beyond the ability of the world economy to absorb it in productive ways. In addition, years of importing goods and services from China had turned China into holder of vast amount of investment dollars.

The problem for people with vast amounts of money is that they can’t spend most of it on consumer goods and services and they can’t just put it in a mattress. They have to invest it. When there is too much money for the existing investment scene, they have to invent new investment opportunities. A whole industry grew up just for the purpose of inventing investment instruments with pretty faces and questionable (sometimes nonexistent) substance. Front and center was the packaging of imaginary housing wealth.

Optimism about the economic scene is rising in the U.S. these days. Are we sure it is not rising on the surface of another speculative bubble? The relevant fundamentals have not changed since the early 2000s: The wealthy have even more wealth; taxes on corporations and the wealthy are still very low; neither U.S. nor global consumer demand are taking off.

Debt in the U.S. is growing again – but on what economic basis? That is the key question. Best bet: the job growth we are seeing now should not be trusted.

STEM Education Falls Short: The Problem is Too Few Jobs, Not Too Little Education

SOURCE ITEMS

According to new statistics from the 2012 American Community Survey, engineering and computer, math and statistics majors had the largest share of graduates going into a STEM field with about half employed in a STEM occupation. Science majors had fewer of their graduates employed in STEM. About 26 percent of physical science majors; 15 percent of biological, environmental and agricultural sciences majors; 10 percent of psychology majors; and 7 percent of social science majors were employed in STEM.

Census Bureau Reports Majority of STEM College Graduates Do Not Work in STEM Occupations, U.S. Census Bureau, July 2014.

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Since cohort-wage profiles display a similar pattern, these findings appear to fit with a strong increase in demand for cognitive tasks in the 1990s followed by a decline in the 2000s.

Paul Beaudry, David A. Green, and Benjamin M. Sand. The Declining Fortunes of the Young since 2000, American Economic Review, 2014

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The labor force is anticipated to grow by 8.5 million, an annual growth rate of 0.5 percent, over the 2012–2022 period. The growth in the labor force during 2012–2022 is projected to be smaller than in the previous 10-year period, 2002–2012, when the labor force grew by 10.1 million, a 0.7-percent annual growth rate.

Labor force projections to 2022: the labor force participation rate continues to fall, Monthly Labor Review, December 2013.

COMMENTS

We now live in a world economy in which economic processes and trends are global. Global economic growth is constrained and will continue to be into the foreseeable future. As a consequence, current patterns of investment, domestic and global, will not generate a sufficient number of jobs to produce anything near global full employment at living wages.

Economic activity in the U.S. does not constitute a separate economy, so U.S. economy policies cannot produce full employment and high wages in the U.S. while the rest of the world is stuck with high rates of unemployment and low wages. Investment follows profits. Profits are maximized by producing in low income places in the world economy and selling in high income places. Unfettered transnational flows of capital and commodities combined with preventing low-skill working people from easily crossing national boundaries in search of work gives the world’s investors the legal framework with which to manage the world’s labor supply to their advantage.

The Growing Skills Shortage: A Real Problem or A Politically Expedient Invention

SOURCE ITEMS

Employers have long complained that graduates do not have the skills they need.

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A study released in November by Eurofound, the research arm of the European Union, showed that despite the recession, almost 40 percent of companies reported difficulty in finding workers with the right skills, compared with 37 percent in 2008 and 35 percent in 2005.

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The issue peaked last summer, when PayPal’s chief executive in Ireland, Louise Phelan, stoked controversy by acknowledging that the company had recruited from 19 other countries for 500 positions in its operations center in Dundalk because of a lack of foreign-language skills among Irish nationals. This summer, Fujitsu, which employs 800 people in Ireland, revealed that it had had to hire most of its Ph.D.-level experts from abroad.

Liz Alderman, Unemployed in Europe Stymied by Lack of Technology Skills, New York Times, January 3, 2014.

COMMENTS

What is the right wage for a business facing stiff global competition: the lowest wage, of course! Note the last paragraph above. Apparently, PayPal and Fujitsu did get the workers they needed.

Let’s try another interpretation. The high tech jobs are created mostly in very large corporations. Those corporations recruit workers globally, regardless of where their operations are located. Note this paragraph from the same story:

“Multinational technology and social media companies kept investing, lured by Ireland’s ultralow 12.5 percent corporate tax rate and an English-speaking work force.”

It’s a possibility that corporate CEO’s are extremely unlikely to say to a host country like Ireland, “We like your low taxes here, but we can import cheaper workers from other countries — and we will.” Isn’t it very likely that the real issue for corporate leaders is that the hourly wages of educated workers in more affluent countries are not the lowest wages they can pay and still be successful?

My bet is that CEOs present the issue as a labor supply problem (skills shortage) as political cover and to shift the cause of high unemployment (even for well educated workers) onto the workers themselves and away from the corporations that are making the actual hiring and firing decisions. My bet is that the world economy actually has plenty of well educated and skilled workers, but the world’s corporations are producing too few jobs to employ them all. They just won’t ‘fess up.

What is really in short supply are jobs that pay decent wages by North American and Western European standards. Too much supply (of skilled workers) in a world of too little demand = falling wages. (Note the concessions the Boeing workers in Seattle, WA just made to keep their jobs!)

Liberals and Conservatives Share an Outmoded Belief that Underpins False Hopes for Job Growth

ITEMS FOR YOUR CONSIDERATION

With five cameras, a sonar sensor that detects motion 360 degrees around it, and enough intelligence to learn tasks within an hour, Baxter is designed to work safely alongside humans and do simple jobs such as picking items off a conveyor belt. It’s also cheap enough, at $22,000 a unit, so that the investment math works: If Baxter performs three years of eight-hour shifts, it’s the equivalent of labor at $4 an hour … To teach Baxter a job, a human simply grabs its arms, simulates the desired task, and presses a button to set the pattern.

Brad Stone,Smarter Robots, With No Wage Demands, Bloomberg BusinessWeek, September 18, 2012.

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Anyone who endured Macroeconomics 101 was taught that recessions and depressions occur because of insufficient demand or from overproduction and a general glut of things that no one can buy. This explains the still popular Washington economic cure, which involves artificially generating more economic demand via federal outlays.

The opposite perspective emerges from Say’s Law (named after Jean-Baptiste Say): the proposition that supply creates its own demand when economies are unshackled.

Wayne Crews, Stimulating Demand Misses the Point, Forbes Magazine, September 26, 2011.

COMMENTS

Now that we are so far away from the trauma of 2008, experts generally agree that policies haven’t worked as expected – but they continue to hope that GDP growth will produce massive job growth. That hope is based on a shared belief that increases in GDP require equivalent increases in job growth.

The two sides offer competing formulas for stimulating GDP growth, but both rest on this belief. Liberals call for increasing consumer demand (demand side economics), which in turn should generate more investment and more jobs. Conservatives call for increasing investor funds (supply side economics), which in turn should increase hiring and then generate more consumer demand. Both formulas end up in the same place: high GDP growth and a low unemployment rate.

The key connection for both formulas is the belief that the production of commodities that will be sold in markets is primarily dependent on human activity. More production requires more human activity.

Well into the 20^th century this belief had considerable validity. It no longer does. Machine activities have replaced large portions of human activity in the production of commodities for sale in markets, and more machines are being brought on line every day around the world. Increasingly, machines are not only replacing physical production activities (like assembly line tasks), they are replacing information gathering and decision-making tasks.

In this context, the old formulas for job growth don’t work. A large amount of investment in buildings and machines produces only a tiny amount of job growth.

In the 21^st century, jobs must be created intentionally, not as a byproduct of investment growth or demand growth. Competing companies can’t do that kind of intentional job creation without putting themselves out of business.

Only governments can intentionally create jobs.

The Global Policy Crisis Keeps Growing Because We’ve Never Seen This Kind of World Economic Crisis

ITEMS FOR YOUR CONSIDERATION

But it is no accident that so many of the world’s economies are sputtering at the same time, or that so many people around the globe are angry. … One reason for the synchronized gloom, of course, is the synchronization of the global economy. … Rather, we are all, both together and apart, trying to figure out three big questions. … The first is how nation-states fit into a globalized world economy.

Chrystia Freeland, The three questions of global importance, Reuters, June 21, 2012.

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In an era of globalization, there are no innocent bystanders. There are certainly no oases of prosperity in the face of yet another major shock in the global economy. America’s growth mirage is an important case in point.

Stephen S. Roach, The Great American Mirage, Project Syndicate, June 27, 2012.

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The possible conclusions are stark. One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. The only other explanation is that even now, more than three years after the US financial crisis erupted, financial markets’ ability to price relative risks and returns sensibly has been broken at a deep level, leaving them incapable of doing their job …

J. Bradford DeLong, The Perils of Prophecy, Project Syndicate, June 27, 2012.

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If we are to thrive as a global community of almost 10 billion – the projected population by 2050 – these new models are not optional, they are an absolute necessity.

From the Introduction, Outlook on the Global Agenda 2012, World Economic Forum.

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As a world economic crisis developed in 2008 and lasted longer than most economists predicted, it became increasingly clear that beliefs about macroeconomics and macroeconomic policy needed to be thoroughly examined. … By the end of this fascinating conference, we knew that we had entered a brave new world and that the crisis is generating enough questions to fill our research agendas for years to come.

From the Preface: Olivier J. Blanchard, David Romer, A. Michael Spence and Joseph E. Stiglitz, In the Wake of the Crisis: Leading Economists Reassess Economic Policy, MIT Press, 2012.

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We are living in very unusual times,” said Mohamed A. El-Erian, the chief executive of Pimco, the world’s largest bond manager. “History may not be as reliable a guide as it’s been in the past.”

Jeff Sommer, Flights to Safety Can’t Hide the Dangers, New York Times, May 12, 2012.

COMMENTS

A significant number of economists and policy experts have wondered whether this global economic crisis is different – for two reasons: very few experts saw such a severe crisis coming and, even after absorbing that surprise, very few expected the crisis to be so resistant to policy interventions and to persist for so long.

The crisis is different this time – because it is embedded in a confluence of historical developments that the world has never seen before. It involves the following developments:

Global climate change is damaging agricultural, tourism, fishing, and other weather sensitive industries, forcing producers to invest in very costly efforts to move and/or modify productive activities

The scale and scope of global production is running up against absolute resource limits, substantially curtailing practices that once were common and allowed market based productive activities to increase at low cost:
- discovering easy to extract oil, natural gas, and mineral deposits
- opening up frontiers (territories not organized under western models of political authority) to invading waves of farmers, miners, loggers, entrepreneurs, and investors
- adapting to dwindling fish stocks by fishing farther from shore and deeper
- finding and harvesting virgin forests
- abandoning aging and polluted cities, rivers and lakes (increasingly costly to maintain) to build newer cities in regions where rivers and lakes are untarnished

The centuries long era of incorporating the world’s territories and peoples into the western system of nation-states and coercing and bribing the world’s peasants, tribal peoples, and unpaid family and community workers into labor and consumer markets has come to an end; this has all but eliminated one of the primary ways in which the growth of demand for goods and services generally kept pace with the growth of productive capacity
The global spread of advances in productive technology, which entails the substitution of machine energy for human energy and machine thinking for human thinking, is slowing the growth of demand for goods and services by reducing opportunities to gain income through work.

This confluence emerged in recent decades and has permanently damaged the capacity of the world economy to generate the large pulses of consumer demand that historically called forth the productive investment responses that produced pulses of demand for labor. The pulses of demand for labor increased wages and moved families from the ranks of the poor into the ranks of the middle class. Over the longer term, more wealth was also pumped into the hands of the people at the top, preparing those people to respond to the next pulse of consumer demand.

Today, there is no mechanism for generating that heartbeat of economic growth. The confluence of forces has damaged both phases of the cycle.

On the demand side, the first response to the confluence was a massive increase in global debt levels. Debt growth sustained the growth of demand. However, debt growth had to come to an end.

Today, with global debt levels very high and with global corporations wielding enormous political power in the world economy, it is not politically feasible to generate a Keynesian pulse of global consumer demand (either by massively expanding global debt levels or by redistributing a large amount of wealth from the affluent to the have-nots). But, even if the world economy’s leaders did find a way to generate a large pulse of consumer demand, it would largely fail to restart world economic growth.

On the supply side, the productive investment responses to a large pulse of consumer demand can no longer produce the employment and income gains that they produced in the past. The ratio of machine energy to human energy in the world economy is so high now that demand for labor would not increase sufficiently to drive up global wage levels to the degree that was the case in the past. Moreover, and more importantly for the long run, increasing the production of goods and services in the context of a world of resource limits that are becoming more difficult to overcome will drive up consumer prices. Whatever wage gains are realized will be offset by a higher cost of living..

From time to time in the history of the capitalist world economy, its magic has faltered and then been restored. This time the magic will sporadically flicker on for a while here and there in the world economy, but it will not be restored. Something else will happen.

The Rapid Global Deployment of Increasingly Smarter Machines Overturns Traditional Economic Policy Assumptions About Employment Growth and Income Distribution

ITEMS FOR YOUR CONSIDERATION

Last week Amazon, the online retailer, announced it was buying a robot maker called Kiva Systems for $775 million in cash. … Kiva Systems’ orange robots are designed to move around warehouses and stock shelves.

Or, as the company says on its Web site, using “hundreds of autonomous mobile robots,” Kiva Systems “enables extremely fast cycle times with reduced labor requirements.”

Nick Bilton, Disruptions: At Amazon, the Robot World Comes a Little Closer, New York Times, March 25, 2012.

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The value of the global industrial robot-system market will double to $41 billion by 2020, according to an estimate by Christine Wang, an analyst at Daiwa Capital Markets in Hong Kong. Global unit sales last year jumped about 30 percent to a record 150,000 units, the IFR said.

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Reuter, the Kuka CEO, said higher wages in China make investing in robots a simple trade off.

“It comes down to the question: at what cost can a robot do the job more efficiently?”

Richard Weiss, Kuka Robots Invade China as Wage Gains Put Machines Over Workers, Bloomberg, April 12, 2012.

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This is the potential of the “Internet of Things”: billions and billions of devices and their components connected to one another via the Internet. 50 billion devices by 2020, according to companies like Ericsson.

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The basic building block of the Internet of Things is machine-to-machine communication (M2M), devices equipped to communicate without the intervention of humans.

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Large scale M2M users may offer their services dozens of countries, selling the same devices globally.

Rudolf Van der Berg, The Internet of things, OECD Insights, January 31, 2012.

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IBM says Watson’s skills — interpreting queries in natural language, consulting vast volumes of unstructured information quickly, and answering questions with a defined level of confidence — can be applied to many industries. It has already sold the technology to WellPoint Inc. (WLP), the U.S. insurer, and Citigroup Inc. (C), and expects to generate billions in new revenue by 2015 from putting Watson to work.

… Martin Kohn, IBM’s chief medical scientist, said in an interview. Using Watson “we have access to much more information than we could possibly accomplish by reading on our own, or even 100 people reading.”

Beth Jinks, IBM’s Watson to Help Memorial Sloan-Kettering With Cancer, Bloomberg, March 22, 2012.

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There is reason to believe that code kernels for the first Turing-intelligent machine have already been written.

“Two revolutionary advances in information technology may bring the Turing test out of retirement,” wrote Robert French, a cognitive scientist at the French National Center for Scientific Research, in an Apr. 12 Science essay. “The first is the ready availability of vast amounts of raw data — from video feeds to complete sound environments, and from casual conversations to technical documents on every conceivable subject. The second is the advent of sophisticated techniques for collecting, organizing, and processing this rich collection of data.”

Brandon Keim, Artificial Intelligence Could Be on Brink of Passing Turing Test, Wired, April 12, 2012.

COMMENTS

The prevailing U.S. policy approach to creating jobs and distributing income reflects the traditional optimism of economists about long term employment and income distribution trends. It treats employment growth and the widespread distribution of income through private sector payrolls as beneficial side effects of economic growth that require little attention from government. The primary concern for government is providing optimal conditions for private sector investment.

The general optimism of economists about employment and income distribution includes a specific optimism about the impact of technology driven productivity growth. Economists generally acknowledge that the implementation of new production technologies reduces the demand for labor in the industries in which those technologies are introduced. But, they go on to argue that the workers who are displaced (or their children) find work in new industries (also created by the new technologies). The net result is greater wealth for society and no permanent upward trend in unemployment.

Assumptions Underlying This Optimism Are Obsolete

In the past, this logic worked fairly well in the U.S. Today, however, three key assumptions underlying this logic are violated in the real world.

The first assumption is that technological innovations will not be implemented faster than displaced workers can retrain for and find alternative work in emerging industries. This assumption is no longer operative because unprecedented efficiencies in research and development fields, unprecedented fluidity of capital flows, and unprecedented levels of global competition are generating employment displacement and new skill requirements faster than human institutions can respond.

The second is that global market institutions will always evolve fast enough to keep the global capacity to consume growing as fast as the global capacity to produce grows. The expanding role of debt financed consumption in the growth of global markets in recent decades and the prolonged duration of the financial and economic crisis that began in 2008 because of the tightening of credit show that this assumption is at least questionable.

The third assumption is that machines can displace only a small portion of human work activity. This is no longer true. Recent years have brought businesses massive increases in computing power, lower cost high capacity information storage, and computer programs that use highly sophisticated computational algorithms. These hardware and software advances are now being deployed to mimic an expanding range of human work activities.

Job Creation and Income Distribution Must Become Direct Goals of U.S. Economic Policy

If the assumptions on which economists rest their optimism about employment growth and income distribution are now obsolete, then public policies that succeed in stimulating private sector investment growth are unlikely to produce the employment growth and income distribution outcomes needed by the majority of people. Creating good jobs and implementing policies that widely distribute incomes must become direct goals of government policy making, rather than secondary goals.

To continue with the current focus only on providing optimal conditions for private sector investment will only bring us more of what we now have: declining middle class incomes, more families living in poverty, and too much wealth owned and controlled by too few people.

U.S. Job Growth is Becoming Increasingly Vulnerable to Economic Troubles That Develop Almost Anywhere in the World Economy

ITEMS FOR YOUR CONSIDERATION

“’There is a separation between the United States economy and stock prices,’ said Russell Price, a senior economist with Ameriprise Financial. He said in 2008, a lot of the market momentum came from sales growth overseas in emerging markets, and a weaker dollar that helped profits.”

Christine Hauser, S.&P. 500 at Highest Close Since ’08, New York Times, February 24, 2012.

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“Globalization is one factor driving up profit for companies in the United States. According to a March 2011 paper by the Bureau of Economic Analysis, foreign earnings represented 40 percent to 45 percent of total profit between 2008 and 2009, against around 20 percent in the 1980s.”

Martin Hutchinson, U.S. stock bubble is in profit, not value metrics, Reuters Breakingviews, March 5, 2012.

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A recent Standard & Poor’s study found that 50 percent of sales by companies in the S.&P. 500-stock index are outside the United States. Interestingly, the report also found that these companies paid more in foreign taxes than to the United States government. ”

Steven M. Davidoff, Tax Policy Change Would Bring Cash Piles Abroad Back Home, New York Times, August 16, 2011.

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“China’s economic growth may further slow in the first quarter to 8.5 percent, from 8.9 percent in the fourth quarter of 2011, with the potential risks of a sharper global deterioration and a sudden domestic property downturn raising the government’s concerns about policy changes, a senior economist from the State Council’s think tank said on Thursday.”

Chen Jia, Economic growth could slow further, China Daily, March 23, 2012.

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“After a decade in which GDP rose by at least 9% a year, it slipped back to ‘only’ a bit above 8% by the end of last year, according to the OECD. For the next decade, the OECD forecasts annual growth will hover at around 7%.”

Brian Keeley, How Slow Will China Go?,OECD Insights, March 21, 2012.

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The difficulties in the euro area have affected the U.S. economy. … In addition, weaker demand from Europe has slowed growth in other economies, which has also lowered foreign demand for our products.

Ben S. Bernanke, The European Economic and Financial Situation, Testimony Before the Committee on Government Oversight and Reform, U.S. House of Representatives, Washington, D.C., March 21, 2012.

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A main indicator of business sentiment in Europe unexpectedly fell deeper toward recession territory Thursday, compounding concerns about the global recovery after signs of slowing manufacturing in China.

…

The survey of purchasing managers in the Chinese factory sector, released by HSBC, showed that activity declined in March for the fifth consecutive month, as the Chinese economy felt the pain of feeble global economic activity.

China has become a major market for European products as varied as heavy machinery and luxury goods, so a slowdown there worsens problems in Europe.

Jack Ewing and Bettina Wasserner: Indicators Fall in China and Europe, New York Times, March 22, 2012.

COMMENTS

U.S. job growth is becoming more vulnerable to economic troubles that develop beyond the borders of the U.S. because U.S. corporations increasingly earn their profits in multiple regions of the world economy, perhaps not even primarily in the U.S. This trend can be expected to continue as high end manufacturing, investments in science and technology, and populations of affluent consumers continue to grow in Brazil, Russia, India, China, South Africa (referred to as BRICS) and spread to more countries.

The global distribution of U.S. corporate profit centers links economic troubles elsewhere in the world economy to U.S. job growth in two ways: through the impact of those troubles on the investment decisions of U.S. corporations and through their impact on incomes of older Americans.

Adverse Impact on Corporate Investments in the U.S.

With their economic interests spread across the world economy, economic troubles outside as well as inside the U.S. reduce the funds U.S. corporations have to invest anywhere. Wherever economic troubles arise, U.S. corporations are largely free to distribute losses across multiple parts of their worldwide operations in whatever combinations they deem most profitable.

The U.S. is very likely to get a share of investment losses, even those losses that originate outside the U.S. This is likely for at least two reasons:

In recent years rates of return on investments have generally been higher in some of the emerging economies than in the U.S., so U.S. corporations are unlikely to favor the U.S. over all other countries in which they have operations.
With an eye to future possibilities, U.S. corporations may even respond to shrinking profits outside the U.S. by shifting funds from the U.S. to economically troubled regions to maintain political favor, increase the productivity of operations in those regions, and/or finance takeovers of weaker competitors.

A reduction in the flow of investments in the U.S. almost necessarily slows job growth.

Adverse Impact on Spending by Older Americans

Economic troubles outside the U.S. can have an adverse impact on spending by all Americans, but the adverse impact on spending by older workers and retirees is particularly direct. Moreover, the size of the impact is growing as large numbers of baby boomers transition out of the labor force. (The Pew Research Center estimates that about 10,000 people now turn 65 every day. )

Older Workers. Older workers see retirement coming, so they are likely to increase investments for retirement. Those with families are also likely to try to build investments to leave their children.

Increases in investment activities link the spending behavior of older workers directly to economic troubles outside the U.S. because decisions about how much income to invest are influenced by stock market trends. And those trends are tied to profits earned by U.S. corporations outside the U.S. as well as those earned in the U.S.

To reach a given financial position, higher stock market returns translate into being able to keep more income for spending. Lower returns translate into having to reduce spending and invest more income. (In this regard, it is important to note that the majority of older workers are at the highest income plateau they will reach in their working lives, so investment increases must be offset by spending reductions.)

By lowering the rate at which stock values increase, troubles outside the U.S. reduce spending in the U.S. Less spending translates into slower job growth.

Retirees. The link between economic troubles outside the U.S. and the spending behavior of retirees is even stronger.

Retirement brings a partial or complete shift to sources of income that are quite dependent on trends in corporate profits and stock values – social security, pensions, and government programs that supplement incomes (e.g., Medicare, Medicaid, assistance with food, transportation, and housing costs). Pensions are directly funded by corporate profits and stock values. Social Security and other government programs are funded by revenues partly derived from taxes corporate profits and taxes on individual earnings on stock portfolios.

Thus, through their adverse impact on corporate profits and stock values, economic troubles outside the U.S. reduce spending by U.S. retirees and government spending on behalf of retirees. Slower job growth necessarily follows.

The Longer View

Most economists keep looking for a much needed shift to a sustained high rate of job growth in the U.S. It probably will not come.

As things now stand, the world economy is chronically unsteady, plagued by sporadic outcroppings of economic troubles (that are mistakenly defined in terms of national boundaries rather than in terms of the world economy). U.S. job growth is dampened by this global and revolving economic troubles account and will be dampened further as U.S. corporations spread their operations to even more regions of the world economy.

This state of things is more likely than not to continue indefinitely, unless the world’s nations do a much better job of managing the world economy as a whole and the U.S. government does a better job of managing investments in the U.S.

Too Many Well Educated Workers: a Global Problem and a U.S. Policy Dilemma

SEVEN ITEMS FOR YOUR CONSIDERATION

Data source: Global Education Digest 2009: Comparing Education Statistics Across the World, UNESCO Institute for Statistics, 2009.

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Data source: Global Education Digest 2009: Comparing Education Statistics Across the World, UNESCO Institute for Statistics, 2009.

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“Companies no longer need to divide their skills strategies between high-cost ‘head’ nations employing-high skilled, high-waged workers, and ‘body’ nations that are restricted to low skilled, low waged employment. This change has come about via a combination of factors including the rapid expansion in the global supply of high skilled workers, in low-cost as well as high-cost economies, advances in information technologies, and rapid improvements in quality standards in emerging economies, including the capability to undertake research and development.”

Phillip Brown, Hugh Lauder, and David Ashton, Education, globalisation and the knowledge economy, Teaching and Learning Research Programme and Economic and Social Research Council, September 2008.

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“Unemployment is running at 14 percent and record numbers of people are emigrating in search of work. … Ireland’s pitch to China was its usual combination of low corporate tax rates, a well-educated work force of English speakers and ready access to the European Union’s market of 500 million people. The country’s technological skill, particularly in agribusiness and education, was also emphasized.”

Douglas Dalby, Ireland Makes Pitch to Official From China, New York Times, February 20, 201.

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“More people are losing the same gamble as a 33 percent jump in U.S. graduate school enrollment in the past decade … runs headlong into a weaker job market.”

Janet Lorin, Trapped by $50,000 Degree in Low-Paying Job Is Increasing Lament, Bloomberg, Dec 7, 2011.

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[IBM] stopped providing a geographic breakdown of its employees in 2009. At the end of 2008, U.S. staff accounted for 115,000 of its 398,455 employees, according to its annual report that year.

Beth Jinks, IBM Cuts More Than 1,000 Workers, Group Says, Bloomberg, February 28, 2012.

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“Tech drives the economy, but it doesn’t drive employment. ‘We are a 100-person company and we serve 50 million people. That kind of leverage has never existed before,’ said Drew Houston, co-founder of the start-up Dropbox, a service that stores and shares digital files.

Nick Bilton, Disruptions: In Davos, Technology Moves Center Stage, New York Times, January 29, 2012.

COMMENTS

The assertion that a major impediment to economic growth and reducing unemployment and underemployment is a mismatch between the knowledge and skills most workers have and the knowledge and skills corporations are seeking is repeated often in the media and is widely accepted as true. Thus, calls for investing in the higher education programs that will create a workforce with the newer and higher end knowledge and skills the corporations want are also common.

The policy experts who make the skills mismatch assertion base it on reports by business leaders that they have a hard time filling certain positions. Unfortunately, those policy experts make the mistake of generalizing from a sample of workforce recruiting situations that is not at all representative of the larger population of U.S. recruitment situations.

Three reasons shortages of high end workers are not representative:

They are almost always geographically localized, concentrated in particular industries, and relatively short term
They evolve and move from place to place, but they never disappear; they develop when and where innovation is successful and reflect the nature of the innovation
On an ongoing basis, they account for only a small part of the overall demand for high end workers.

Those policy experts also make the mistake of drawing artificial national and sub national boundaries around workforce recruitment activities, ignoring the fact that a growing proportion of the world’s corporations, including smaller domestic corporations now recruit globally. (And new evidence shows that corporations, not small businesses, account for the bulk of job creation and job destruction — see Floyd Norris, Small Companies Create More Jobs? Maybe Not, New York Times, February 24, 2012. )

The Global Problem

For the world economy as a whole, the salient shortage is the other way around: high end workers face a shortage of opportunities to put their educations and skills to work in good jobs (living wages and adequate benefits, safe working conditions, socially beneficial products and services). And this mismatch between the supply of high end workers and the demand for their knowledge and skills is getting worse.

The key factors:

Global demand for highly educated workers is growing very slowly because the world economy as a whole is growing very slowly;
The global supply of highly educated workers is increasing rapidly as nations, states, provinces, and cities invest in education as a way of competing for the business investments that generate good jobs
Businesses of every size and in every economic sector pursue competitive advantage by investing in newer technologies than can now do the kinds of communications, evaluation, and decision-making work that most college educations prepare people to do.

Education is a good in and of itself, but global investing in higher education will not solve the long term problems of high unemployment and declining wages and benefits in the world economy. Public investments in education address the supply side of the global labor market equation, but unemployment and underemployment in a world with an expanding population of workers, including well educated workers is fundamentally a demand side problem.

U.S. Public Policy Dilemma

Again, education is a good in and of itself, but more U.S. investments in higher education will not pay off in better jobs and growing incomes for U.S. workers. The reasons are tied to extensive U.S. engagement in the world economy:

Investments in higher education produce high end workers who become part of the global supply of high end workers; the skills and knowledge of those workers are available not only to U.S. corporations but to the competitors of U.S. corporations
Those investments also put more downward pressure on high end wages and benefits in the U.S. because they add to an already excessive global supply of high end workers available to U.S. corporations
Investments in programs that increase the demand for high end workers (big government investments in transitioning to green energy sources is often proposed) don’t increase demand only for U.S. high end workers; not only do U.S. corporations outsource work and recruit lower cost workers from other countries, so too do government agencies.

U.S. workers will get more employment opportunities and wage growth from investments in higher education only if the global demand for high end workers is brought into balance with the global supply. U.S. policy makers, acting alone, cannot cause this to happen. A much higher level of global management of investments in higher education, investments in job creation programs, and investments in income supports for working people whose labor is not needed is required.

A good model for this is offered by federal government management of the supply and demand for workers in the in the U.S. 1950’s and 1960’s.

In those decades, federal investments in higher education increased substantially, but it also made large investments in job creating programs – notably, investments in the development of military technology, in an ambitious space program, in research across the spectrum of intellectual fields, in new regulatory programs, and in community jobs programs. It also expanded income supports for workers not easily absorbed into the labor force because of disabilities, age, and skill limitations.

Thus, while higher education investments increased the demand for high end jobs, other government investments increased the supply of high end jobs, low end jobs in both the public and private sectors, and moderated the overall demand for jobs.

U.S. policy makers could and should lead in implementing this model for managing labor force development in the world economy as a whole. That would serve the interests of U.S. working families. But they cannot even fully participate in such an effort because American voters believe strongly in American exceptionalism and have an associated strong dislike for multinational government institutions (and for government involvement in economic matters in general). And that is a real dilemma.

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