Home > Uncategorized > Krugman and DeLong on Automation

Krugman and DeLong on Automation

Two notable economists have recently weighed in on the issue that I’ve been writing about extensively here: job automation and its impact on the future economy.

Paul Krugman links to a 1996 article in which he imagined a future where “information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing — indeed, replaced more easily than a lot of manual labor.”

That’s very much inline with what I think is likely to happen. In fact The Atlantic recently published an excerpt in which I talk about how a Radioligist’s job might be easier to automate than a housekeeper’s.

Brad DeLong seems less concerned:

I don’t see a problem with the number of jobs: I don’t see any reason that technological unemployment should be any more in our future than it has been in our past.

Really? Keep in mind that in the U.S. we need to create over a million jobs a year just to keep up with population growth. Within the next decade or so, I think it’s likely that millions of jobs in both low skill areas and high skill occupations are going to be increasingly susceptible to automation. If that happens, we’ll need to replace all those jobs while still keeping up with growth in the workforce. (And of course that’s on top of digging out of the massive unemployment hole we’re currently in).

As Krugman notes, one economist that has done extensive work in this area is David Autor of MIT. Autor co-authored a paper that looked at how computers have substituted for labor going all the way back to the 1960s and found that, as we might expect, routine and repetitive jobs are highly susceptible to automation. Autor has found that, as a result, the job market is currently polarized: A great many of the middle-skill jobs that used to support a solid middle class lifestyle have been automated—leaving us with high skill/high wage jobs that require lots of education and training and lots of low skill jobs with very low wages.

The problem I think we face in the future is that both the high-end jobs and the low-end jobs may erode quite rapidly as information technology advances. The key thing to understand here is that our definition of what constitutes a “routine and repetitive” job is changing over time. At one time a repetitive job may have implied standing on an assembly line. As specialized artificial intelligence applications (like IBM’s Watson for example) get better, “routine and repetitive” may come to mean essentially anything that can be broken down into either intellectual or manual tasks that tend to get repeated. Keep in mind that it’s not necessary to automate entire jobs: if 50% of a worker’s tasks can be automated, then employment in that area can fall by half. When you begin to think in these terms, it becomes fairly difficult to make a list of jobs that (1) employ large numbers of people and (2) are completely safe from automation.

If high skill jobs that require college degrees start getting substantially automated, that will threaten an important aspect of the social contract: if there’s anything left of the American Dream, it is  the idea that if you work hard to educate yourself, you’ll have a better shot at prosperity. If that promise comes up short, it may ultimately destroy the incentive for broad-based pursuit of education. There’s significant evidence that this may already be happening: one study recent study suggests that as many as half of college graduates are ending up underemployed.

So if the high skill jobs begin to evaporate, those people will have to turn to lower-skill or trade jobs. We may see people who might otherwise have pursed advanced education competing for jobs as plumbers or mechanics. Perhaps they’ll win that competition. But then what happens to the person who would have actually been a better fit for that job?

Since the middle-skill jobs are already gone, those who fail to find high skill positions will fall down the rungs and have to compete for lower skill positions. And yet a lot of these “jobs of last resort” in areas like fast food, retail and other service sectors are also going to be susceptible to automation (See this recent article in the LA Times: “Retail jobs are disappearing as shoppers adjust to self-service.”)

What happens to the workers who lose the low skill jobs? Well, they won’t have many options; by definition if they’ve been working jobs of this type for any length of time, they have no savings to fall back on. Safety nets for adults without young children are few. Many of these people will be headed for a tent city (video).

What about Consumption?

What neither Krugman nor DeLong seems to have thought much about is the impact that all this has on consumption. Rising unemployment and declining wages has to impact consumer spending and confidence—perhaps dramatically. As I’ve pointed out previously, falling wages will put a deflationary squeeze on households. This is because major fixed costs such as housing (mortgage or rent), health insurance, food and energy will not fall even as income does fall. This will leave average households with less and less to spend on discretionary items—and that likely means weak demand for any business producing a non-essential product or service. And, hey, that’s most of the economy. Those businesses, in turn will see increasing pressure to lay off workers or further automate.

Every product and service produced by the economy ultimately gets purchased (consumed) by someone. In economic terms, “demand” means a desire or need for something—backed by the ability and willingness to pay for it. There are only two entities that create final demand for products and services: individual people and governments. (And we know that government can’t be the demand solution in the long run). It all comes down to individual people buying stuff.

Of course, businesses also purchase things, but that is NOT final demand. Businesses buy inputs that are used to produce something else. If there is no demand for what the business is producing it will shut down and stop buying inputs. A business may sell to another business, but somewhere down the line, that chain has to end at a person (or a government) buying something just because they want it or need it.

This point here is that a worker is also a consumer (and may support other consumers). These people drive final demand. When a worker is replaced by a machine, that machine does not go out and consume. The machine may use resources and spare parts, but again, those are business inputs—not final demand. If there is no one to buy what the machine is producing it will get shut down. So if we automate all the jobs, or most of the jobs, or if we drive wages so low that very few people have any discretionary income, then it is difficult to see how a modern mass-market economy can survive that.  (This is the primary focus of my book, The Lights in the Tunnel).

Some people (like CEOs of global corporations, for example) might argue that it is somehow ok to undermine broad-based consumption in the United States, because the rising consumer class in China and other emerging economies will pick up the slack. Aside from the fact that, as an American, I don’t find that very appealing, I’m very doubtful of that argument for a few reasons: (1) Chinese manufacturing will automate and may do so much more rapidly than was the case in the US because they simply have to import the technology, not invent it.  That will make it hard for China to create enough new jobs as millions of workers continue to migrate from the countryside to cities. (2) China is still highly dependent on exports and the US is a vital market. A major decline in consumption here will cause unemployment in China, and that will make it very difficult for the Chinese to rebalance their economy toward more domestic consumption. This is something they have been talking about for years but can never seem to pull off . If the average Chinese sees increasing unemployment and an uncertain future, it’s just not going to happen, and the Chinese economy will remain dependent on exports and infrastructure investment.

In general, I think this is a problem that a great many people should be giving serious consideration. Information technology continues to accelerate:  the impact will be here long before we are ready. The fact that the first line of Krugman’s post is “And now for something completely different” should give you some idea of how much attention this issue is getting from professional economists.

Categories: Uncategorized
  1. Jane
    March 7, 2011 at 3:40 pm

    (And we know that government can’t be the demand solution in the long run)

    We do? Why? I’m asking as a lay person. There is a tremendous *need* for human care – social work, education (because it makes life better, regardless of income), health care (including mental health care), and simple things like cooking and cleaning, which have been automated as much as they can be and need to slide back to less efficient, more environmentally sound methods. And then it would be great if people could have more free time as a bonus from all this automation, when in fact people with jobs are working longer and longer hours. But without the government taking money from the winner-take-all sector and using it to pay people to provide human services, and to enforce limits on how the rest of the work is organized (minimum incomes, maximum hours, benefits), how can that happen? Why can’t we use the government to turn these incredible technologies into a better life?

    • Martin Babicek
      March 11, 2011 at 3:54 pm

      That is not working because the “winners-take-all” forms governments, governs political parties through sponsorship and lobbying. They simply do laws for themselves, ensure their own wealth and safety. As long as system works, nothing is wrong for them. That’s precisely the point of those debates. They must know that system can fail. If they will not know, we all are in serious trouble because it takes a lot of time to change anything.

  2. March 7, 2011 at 3:51 pm

    Thanks for an excellent look at why a rising economy may not mean more jobs. What worries me is that our political leaders, on both sides of the aisle, aren’t paying addressing this.

    As you say, we have lost the middle class jobs, if we lose the high-paying jobs, the country is in trouble. We need planning and foresight to think about what comes next.

  3. March 7, 2011 at 4:03 pm

    “When a worker is replaced by a machine, that machine does not go out and consume. The machine may use resources and spare parts, but again, those are business inputs—not final demand.”

    – You sure do make weak arguments. While the machine does not go out and consume, it’s owner sure does. And as we move towards a more automated society, more and more citizens need to own capital in order to get by.

    The government could do this by making capital gains taxes progressive — they already are somewhat (5/15/25 percent under the Bush capital gains tax structure). But the government could form it in such a way that the effective capital gains tax rate for low and middle income citizens is negative. The government could also make contributions to the capital account for all Americans as well to get them started.

    • Martin Babicek
      March 11, 2011 at 3:03 pm

      Yeah, “could” is the right word, and as I know it doesn’t mean “will”. Not without a lot of starvation, poverty, deaths and probably civil war (at least to some extent). Rich makes laws.

  4. March 7, 2011 at 5:10 pm

    What Jane said.

  5. March 7, 2011 at 5:44 pm

    I believe this is the fundamental issue that is currently facing our country and will become much more apparent with each passing year. There has to be a way to turn all this automation into better lives for all. But a serious crash of the current economy will need to happen before people realize this.

  6. March 7, 2011 at 7:58 pm

    This problem seems to boil down to a variation of the Paradox of Thrift: It’s okay for a few to withdraw their money from a bank, but catastrophic if everyone does at the same time.

    How do you convince CEOs that their individual bit of labor saving, which is economically beneficial to them, will be disastrous when most CEOs act this way?

    I don’t have an answer to that other than Toqueville’s “self interest rightly understood” which—along with three bucks—will buy you a latte at Starbucks.

    • April 23, 2011 at 12:56 pm

      Tom Cammarata :This problem seems to boil down to a variation of the Paradox of Thrift: It’s okay for a few to withdraw their money from a bank, but catastrophic if everyone does at the same time.

      Yes, it’s a tragedy of the commons scenario, but in this case the trick is to coordinate the use of the commons, i.e., the job market. “Will work for food, etc.” is a technology. It’s an efficient one because it allows work to do two things: make stuff and entitle people to stuff. But if working is no longer needed to make stuff, it no longer works as a technology for entitling us to get stuff.

      On the other hand, we are a long way from NO ONE having to work. So I agree with David O’Leary: We should not reject automation, but figure out how to exploit it for all. I think Doc Frankie asks the right question (below), but the answer, I think, is not to escew jobs but to develop norms for holding them and laws that support those norms. Competition and the incentive to innovate are too important to throw away by overturning comptitive capitalism. But (i) wealth should not be allowed to concentrate so much as it does now, and (ii) fewer people working shorter careers (not less intensely during those careers) should be the social norm. Mandatory public service early in life, early retirement, one earner per family – these are norms that would accommodate an automated future. Otherwise we end up like those fat folk on the WALL-E cruise ship.

      I don’t believe that the rich can fill the consumption gap, no matter how long their yachts or numerous their cars. It’s like taxing the rich to balance the budget – the idea won’t scale. And automation is best at mass producing the things that people of more moderate means use. Unless Automation creates more things more cheaply for more people, it will not be tolerated.

      We had concentrations of wealth like this before. Tool around Newport, R.I., and see how the rich once consumed. What is Versailles if not consumption by the super-wealthy? And then came the legislators or worse and the bungalows and palaces became museums. As they should, from time to time.

      I’m new to this blog, and I’m delighted to have found it via some Googling off of Seeking Alpha. The shift of the American economy to capital intensity, first from globailization and then from automation, is the organizational challenge of our lifetimes, and, thanks to automation, and Moore’s law, it will play out faster than we can imagine. And maybe faster than we, or our democracy, can cope with We are cursed to live in interesting times.

  7. Vineet
    March 7, 2011 at 8:18 pm

    Hi Martin,

    I did read your book partly and find your ideas interesting. I think one thing you are missing from your arguments to support your hypothesis is that more & more companies are getting integrated to form bigger & more global firms. With economics of scale lesser workers are needed. With recent advances in technology it is becoming easier to accelerate this integration and cut down more workforce. And integration has its effect not only on production/service jobs but also on arts, education & sports. With social integration, Soon there will be time when only few people will be global star performers in there respective fields and people will no longer be aware of any local talent. These star performers will be extremely rich and rest will no longer compete.

    Vineet

  8. Luke Ho-Hyung Lee
    March 8, 2011 at 1:43 am

    Hello Martin,

    I totally agree with you, but I think you have missed something very important in your ruminations about the economy. Let me ask you directly: What is the real cause of the current economic crisis? Do you think it is the job automation? Or, roughly, the advances of information technology? If you say “yes”, I would strongly suggest you see this article: “Overcoming an Economic Sisyphean Task – Or, the Tr…” http://t.co/u9gSsI8 The development of the Modern Information Age made possible by the Digital Revolution and the Internet has unquestionably brought major changes to the market and to society as a whole. What is less widely acknowledged is that changes in the market process that were intended to increase its efficiency actually worsened employment conditions. I believe this is the real cause of the current economic crisis. I hope we will have a chance to discuss more on this.

    Luke

  9. Doc Frankie
    March 8, 2011 at 6:01 am

    Nary a word on the most important consequence of this excellent post: The need to redefine what is a job…and the assumption that everyone should have a “job” to live.

    I mean, if automation replaces millions upon millions of jobs everywhere, are we going to stay stuck in our old thinking of “gotta work for the money” if work is nonexistent?

  10. Matt
    March 8, 2011 at 8:13 pm

    I’ve said it before and I will say it again: if robots really take the lion’s share of every job sector (manufacturing, medicine, law, education…) doesn’t this also mean that the so-called large fixed costs of housing, health care, and education will prove not so fixed? Making housing is just a kind of manufacturing. You’ve already advanced excellent arguments as to why the medical sector (and its closely allied legal component) will see personnel replaced by machines. In the long term capitalism dies from its own drive for efficiency rather than revolution, since once production is done by a closed loop of machines workers have no need to buy from capitalists and capitalists have no need to employ workers.

    Will raw materials even retain value? There’s enough thorium and uranium in bedrock to give any nation the domestic energy reserve equivalent of Saudi Arabia. If nuclear reactors, chemical plants, mining facilities and all the rest can be built and run by machines, the relative value of ore and fossil fuel deposits plummet too.

  11. March 8, 2011 at 8:42 pm

    If the risk premium for additional capital investment in an automation technology goes negative driven by a shrinking market then additional investment will not take place. This slows the pace of diffusion and diffusion is dependent upon a stable or growing market. Your argument is that the pace of change is so great that these financial feedback loops don’t have time to enforce market discipline in the short run but in the long run they have to function to restrain additional investment and therefore slow diffusion. You could think of this as the “Luddite Theorem”.

    • Martin Babicek
      March 11, 2011 at 3:32 pm

      I don’t think it’s true. If you are owner of business, what do you have to do for suviving of your firm in hard times when demand is going down (because wages of employees of other firms went down due to automatisation)? You will have to fire people and automate more quickly than competition or shut down business at all (and surprisingly fire people🙂. And I think that “Luddites” were right, after all no hand weaving loom survived his times. Only now we are speaking about all human working, not only one area. Robots for ISS (and General Motors, by the way) are capable of everything what can human do physically. Watson from IBM is capable to do decision processes on real world data.

      • March 12, 2011 at 11:31 pm

        Martin,

        There are two feedback loops that constrain the worst scenarios. The first is the financial feedback to further investment that I showed above. The second is that the market value of a widget produced by robots and other automation will fall because any economic profits will be wiped away by competition. This fall in price will lead to more investment opportunities elsewhere and more disposable income for other purchases. This relentless process is called economic growth.

  12. finsovet
    March 12, 2011 at 7:41 pm

    Loved the article. It does not take a Nobel prize to see that jobs are scarce, riots – in abundance! Technological advance adding the heat for sure. We are all pushed into creativity and entrepreneurship – old good 9 to 5 jobs are over.

  13. Steven Adler
    March 14, 2011 at 2:49 pm

    This argument has some truth to it but it also assumes too much. The US Economy is not closed. However, most American minds are rather closed. Only 11% own a passport and there is still a large number of Americans who have never been on an airplane, traveled outside their own State, and have only the most jingoistic understanding of the rest of the world. There are 6 billion people who live far below our living standard. They aren’t charity cases. They are markets for our goods and services. In even the poorest countries there are pockets of wealth that purchase American goods and services. Cambodians live on less than $5 per day, but there are lots of American goods sold all over the country.

    Automation at home will imperil middle class lifestyles if we don’t end our ignorance of foreign cultures and become an export nation. But that’s a choice not an ultimatum.

    • April 23, 2011 at 5:08 am

      Steven Hales :
      Martin,
      There are two feedback loops that constrain the worst scenarios. The first is the financial feedback to further investment that I showed above. The second is that the market value of a widget produced by robots and other automation will fall because any economic profits will be wiped away by competition. This fall in price will lead to more investment opportunities elsewhere and more disposable income for other purchases. This relentless process is called economic growth.

      “More investment opportunities” and “more disposable income” applies to individuals who are still employed in jobs that pay above baseline salaries, or employed at all. This group of people will dwindle as a result of automation, thus negating the effect of reduced prices. Also, let’s not forget that competition does not actually create optimum prices for consumers, often the cash freed up from reducing “excess costs” (i.e. firing employees, replacing them through automation) often gets pocketed by CEOs and other executives in the form of massive bonuses. This would explain how the the middle and lower classes have been enjoying lower standards of living even as the economy has been growing: because the wealthiest percentiles have been siphoning all the “gains” made from “efficiencies” (firing), outsourcing and automation.

  14. Martin Babicek
    March 16, 2011 at 7:51 am

    Steven Hales :
    Martin,
    There are two feedback loops that constrain the worst scenarios. The first is the financial feedback to further investment that I showed above. The second is that the market value of a widget produced by robots and other automation will fall because any economic profits will be wiped away by competition. This fall in price will lead to more investment opportunities elsewhere and more disposable income for other purchases. This relentless process is called economic growth.

    By my opinion, the financial feedback will lead only to capital concentration, that means several big fully automated firms managed by AI, with automated distribution worldwide, for the lowest costs. And for the second argument: Which income do you have on mind? The income of unemloyed 50% or the income of employed 50% which wage will be on minimum due to big unemployment? And as you said about fall of economic profit, capital owners income could not be as big as one might think either. I already read prediction of 60% unemployment for 2030, and I can easily imagine that on similar basis as what happened in US in 2009, only somewhat bigger. Another concern is that in the environmet of shrinking possible occupations we must cope with population explosion, next billion people every few years.

    • March 16, 2011 at 2:36 pm

      Let’s start at the beginning. If there is demand destruction from extreme automation then that leads to a fall in output. A fall in output causes more unemployment which can cascade into a further fall in demand and more unemployment until the economy descends into a steady state of high unemployment and lower output. From this nadir you would expect a gradual improvement as resources are redeployed to their most efficient uses. Prices in this scenario would be extremely depressed and we would be experiencing general deflation. Also, in this scenario wages would also fall and might fall below the cost of the original automation. It might begin to make sense to deploy labor utilizing techniques in production.

      There are so many feedback loops that would hinder the appearance or sustainablity of a “jobless” future that it is almost pointless to argue this point further.

      My view is that humans will always have “work” to do. And extreme automation will lower costs generally but not reduce overall employment humans just won’t do what machines can do better. If we have more resources to deploy to other ventures we will find something to do.

      • April 23, 2011 at 6:20 am

        “Also, in this scenario wages would also fall and might fall below the cost of the original automation. It might begin to make sense to deploy labor utilizing techniques in production.”

        Another alternative is that the super-rich ‘ownership classes’ who control the automated factories and services take up larger and larger slices of the demand pie, buying 40 Lamborginis, 50 mansions, etc.. And I think we’re already seeing this with the escalating excess of the wealthiest 1% in the US who actually *do* own 40 sports cars and many, many houses.

  15. Kristof
    April 20, 2011 at 4:22 pm

    Automation will decrease the cost of living. Goods a services will get less exspensive to produce and in turn product/service will be less expensive to obtain. I dont want to say government, but it is conceivable that an organization could start to provide basic services at no cost, because it would cost them very little to provide.

    Bread for example, if the planting, harvesting, milling, and baking of wheat is accomplished from start to end automatically by highly effeceint machines (and after the intial cost of those machines were paid for) the production of wheat would be a fraction of today’s cost. What reason would there be that bread wouldn’t be available to everyone, work or no work.

  16. April 22, 2011 at 5:15 pm

    ” I don’t see any reason that technological unemployment should be any more in our future than it has been in our past.”

    Why people who “don’t any reason” open their mouths intsead of their eyes is one of the unsolved mysteries of the universe.

  17. April 22, 2011 at 5:20 pm

    I meant “Why people who ‘don’t see any reason’ open their mouths intsead of their eyes is one of the unsolved mysteries of the universe.”

    [Sorry to repeat, but there’s no preview, and I forgot to check the notify box the first time around.]

  18. Jules A
    August 20, 2011 at 4:28 am

    In all of the discussion on this topic (including Mr. Ford’s book), there seems to be no mention of “who” will actually be “doing” all of this automation. As automation becomes more complete and sophisticated, won’t there need to be a rise in the “automation” industry as well to keep up with the rising demand of automation needs? Who will fix/service all of the machines, robots that break down, the computers, the networks that need building, maintaining, the servers that need backup, etc. etc. Or, will automation be “automated” in the end? My point here is that automation doesn’t come for “free”, and new business opportunities/jobs in this arena will surely rise as well. But just not fast enough to keep up with the lost jobs in other areas for sure…

  19. December 28, 2011 at 10:50 pm

    It worries me that in all of this discussion you havent questioned the assumption “We ~have~ to create more jobs” … To me full unemployment is a goal, why have mankind do that which robots can? All that mankind should be doing is that which robots/AI cannot do (or cannot do better than mankind)… I say this because we only get one life and we shouldnt waste it “working hard” at things that could be automated.

    Take for example dishwashers… The household dishwasher has caused nearly total “Unemployment” by people in the home washing their own dishes.. Is this “Unemployment” good or bad? Of course its good! No longer does mankind have to waste an extremely finite resource (your life) on something so meaningless and mundane. Cosimilarly I’d argue that anything that a machine can do, it should do, because machines are extremely “renewable” and “durable” (i use quotations because they’re not exactly that) …

    The real issue is how can the capitalists justify their wealth once they do nothing for it, simply just for owning? I think once labour is removed from the production cycle it will become extremely clear how unjust an unequal division of wealth is. When no labour is going into the mix its hard to say “I worked harder so I get compensated better”.. (Which is a load of shit anyways, I am almost certain that 99% of SE asia works harder and produce more goods than everyone I know, yet those same asians only make like $2 an hour) …

    Anyways.. hopefully someone reads this🙂

  1. March 7, 2011 at 4:44 pm
  2. March 7, 2011 at 7:03 pm
  3. March 8, 2011 at 8:13 am
  4. March 9, 2011 at 2:53 am
  5. March 13, 2011 at 5:33 pm
  6. June 6, 2011 at 8:59 am
  7. October 22, 2011 at 7:31 pm
  8. October 29, 2011 at 9:51 pm
  9. June 27, 2013 at 10:22 pm
  10. September 23, 2014 at 5:36 pm

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