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On Krugman's Epiphany
Paul Krugman is one of the leading “names” in economics today. There are reasons for his stature. He’s got a Nobel Prize, he’s an academic at a leading University, he writes for the NY Times, and not a week goes by without him being on some TV show or another. If you asked the average guy on the street to name an economist, there’s a good chance the answer would be - “Krugman”.
PK has been having a slow motion epiphany over the last month. He has posted four articles on a topic since December 8. (Link, Link, Link and Link) He has identified a “phenomenon” that is occurring in the US economy. This new, powerful force that he has stumbled upon, is keeping him awake at night. Clearly, PK is troubled by what he has uncovered. His words:
“It” has really uncomfortable implications. But I think we’d better start paying attention to those implications.
Are you worried yet?
PK drives home the point that what he has uncovered is not now in mainstream economic thinking. He admits that even he missed the signs that something was amiss in the world of modern economics:
Not enough people (me included!) have looked up to notice that things have changed.
Okay. What is it that PK has found hidden deep below the economic rocks that is causing him such fits? Grab onto your seats - this is big. PK has observed, for the first time in his economic career, the simple fact that technology has reduced the role of labor in the economy.
That’s PK’s epiphany? He just came to that conclusion in the last month? I’m thinking, “What planet has this guy been living on the past 10 years?” But then I realized PK has not been living on Mars, he’s been living in Princeton; amongst the Ivy.
Has PK not gone to a new mechanized distribution center like FedEx, UPS and Amazon have? Does he not know that it takes less printers to make the NYTs these days? Has he not been to a modern assembly plant that makes things with robots? How could he have missed the notion that technology was reducing the demand for human labor all these years? The only way that this could have been missed is if PK had his eyes covered and his head in the sand. He had this to say about his big new "find".
Mea culpa: I myself didn’t grasp this until recently. But it’s really crucial.
Forget about why PK has not connected these very important dots over many years; focus on why he's crapping in his pants over his new awareness. It’s simple math. Take two examples A) where Labor = 60% of GDP and B) Labor = 50% of GDP. If GDP = $16T, then A = 9.6T and B = 8T.
The problem is that Social Security (SS) taxes Labor at 12%. The difference between A and B ($1.6T * 12.4%) means that SS ends up with $200 Billion less in annual revenue.
PK went off and pondered his “discovery”. He did the A and B math, then he wrote:
If payrolls lag behind overall national income, this will tend to leave those programs underfunded
Duh….
Then PK went on to really stir the pot by suggesting that the Congressional Budget Office (CBO) was using a rosy long-term estimate for the critical Labor/GDP percentage in its projections. PK says:
CBO could very easily be quite wrong here, and will indeed be very wrong if the rise of smart machines plays out
What’s dawning on PK is that his vision of the future does not take into proper consideration the role that technology has today, and will play in the future, on labor employment. What he's looking at is a structural change; one that can’t be altered. He’s coming to the conclusion that Social Security doesn't “work” when there are not enough workers paying into the scheme. This is a remarkable conclusion from the most liberal economist out there.
Move on a few days and PK does some more deep thinking. He now realizes that the current expectations for future revenue for SS are unrealistic. He knows that the lines will cross more quickly than is now anticipated. He understands that this is a here-and-now problem, but he also has grasped that this is also a 75-year problem. So he comes up with a plan; simple yet elegant. He wants to tax the robots.
There would be no problem, at least in economic terms, by adding revenue (to SS) from dedicated taxes on capital income.
No problem? PK thinks it’s okay to charge 12% FICA taxes on a robot. OMG!
Actually, I don’t think that PK really believes that taxing investments in manufacturing technology is a good idea. The fact is, it’s a terrible idea, and PK knows it. If you want an economy to grow, and be globally competitive, you create incentives (tax breaks) for capital investment; you don’t create disincentives. Period.
I suspect that PK is slowly recognizing that he has put himself in a box. He has come to conclude that SS, as it is currently configured, is not viable. The villain is technology that reduces the long-term demand for labor. His solution, not surprisingly, is more taxes. But there is not a chance in 100 of taxes on capital investments to support SS (nor should there be).
PK is walking a plank, he’s getting close to the edge. When he goes over, he will bring with him a bunch of other liberal economists that believe that the SS “miracle” can be sustained. In his latest missive on this topic PK promises:
I’ll be writing more about this in weeks to come
I can’t wait.
Notes:
- PK is quite right that the CBO's assumptions regarding Labor’s share of future GDP are optimistic. I’m sure that the folks at the CBO read PK’s criticism. I doubt they were too happy about it. The question is, what will CBO do, now that a Nobel has challenged a basic assumption it uses? If the CBO were to re-gear its computers to reflect a lower long term role of labor in the economy, it would create a massive hole in America's entitlement programs.
- It’s going on five years now that I’ve been writing about SS and the CBO. There must be a few hundred articles of mine in the ether on these two topics. Again and again I’ve said the same thing. The assumptions are not realistic, the numbers do not add up when realistic assumptions are used, the outcome will not be what is now anticipated, and there will be a disappointment when reality sets in. Sorry PK.
Maybe I should get a Nobel, that, or maybe PK shouldn't have one…..
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News flash: the majority of humans on this planet have never even made a fucking phone call, let alone operate a computer (let alone know what he fuck "mainstream" means).
It is doubtful that Krugman is stupid. He is, after all, living pretty high in the tree; and so it is the case for all those who work for TPTB. Lying (human deceit) makes money, stupidity does not (unless one figures that someone working for TPTB is stupid for doing so, which is an entirely different argument).
> News flash: the majority of humans on this planet have never even made a fucking phone call [...]
I call bullshit on that. E.g., : http://mobithinking.com/mobile-marketing-tools/latest-mobile-stats/a#sub...
This technology is commonplace where pk has lived his whole life. The premise of your remark is false as it assumes another context that isn't relevant. He's a useful idiot and he knows it. I think the way you make it matters more because you reveal your character in the process of making your money, and in the spending, not in the having.
"Gold isn't money?" That's a tough one, got me there. Would I trust this guy? Would you? I definitely wouldn't take a class with him.
This is a 500 year old economics argument. You can trace the "technology is destroying labor" bullshit back to the end of the 18th century.
http://www.fee.org/files/doclib/20121116_EconomicsInOneLesson.pdf
Starts on page 36. "The Curse of Machinery"
I promise Krugman will come up with some "Spread the Work" scheme to save social security.
Don't fall for this economic fallacy, Bruce. It's really exceptionally terrible reasoning.
There are not a lack of things to do in the world. There is a major disincentive for both people to work and businesses to hire right now. It has to do with a combination of labor laws and payroll taxes.
Of course technology isn't destroying labor. The MAJORITY of humans on the planet labor intensely, mostly in direct contact with the land.
And when "economies of scale in reverse" starts descending we'll see more of the "upper-crust" of human civilization doing the same...
The labor share goes down not due to robots, but due to outsourcing to China for cheap labor there. Foxconn employs about 1 million people and they mainly work for US companies. Labor don't move. Capital and goods do. That's the secret sauce for profit. Now the capital is gradually moving to Africa. It will last as long as it lasts. US workers will suck. Robots are factors, but someone has to build the robots.
"Robots are factors, but someone has to build the robots."
Food, Shelter and Water. I don't see "Must Build Robots" in here...
I worked for an international manufacturing company that was US-based, I've got a CLUE about about manufacturing. I SAW ROBOTS BUILDING ROBOTS!
A handful of humans being employed, yeah, that'll make everything better.
It's a big fucking sucker play and most here are sucked into it. The "Left" is screaming for bringing back jobs. The "Right" wants less restrictions on these automated factories (perhaps not calling it directly- usually couched in words denigrating the Chinese [pretty much chanting the propaganda that the corporations want chanted]). Meanwhile tensions over resources (and debt levels) will create trade wars that'll result in those US-based corporations high-tailing it back to the US; you see, they KNOW that the worm is turning, they are, as usual, one step ahead of the idiot crowd, programming everyone to accept big tax breaks so that they can keep their levels of profits up for their handful of owners. Those who will get to control the robots will be paid handsomely, probably WAY more than most. That's how the Praetorian Guard live. Meanwhile, those who are waiting for jobs will perish...
From personal experience, I once worked at a facility that made cutting tools. When I started, a cell of five people would make 6,000 cutting tools in 12 hours. (about 100 tools per person per hour)
Once that job was automated, 2 people would produce 14,000 cutting tools in 8 hours. (about 875 tools per person per hour)
Our peak employment at that facility was about 450 people working 7 days per week. At the end, we had about 40 working 5 days per week.
Even with advances like that, the company still found it cost effective to move to a low cost country, and the tools still retail for what they did when they were made in the USA, and still cost more than the competitions tools, but they decided to focus on "Brand" and no so much quality like they once did......
I really hear you. Seems like a losing battle to bullshit people about brand image.
Eventually people turn the package over and say, "OH, this shit's made in China too!" and then they'll feel cheated and never buy that brand again.
It is rather sad how many people still buy the tools of my former employer and are surprised when they notice the Made in China on the package AFTER they purchase it.
The name brand is on the blade of the tool, but not the made in U.S.A that once was below the name.
In print ads, the old made in USA tools are often still shown, but once you get to the store shelf, it is all full of made in "low cost country X" product at the made in USA pricing points.
The downward slide began in 2001 when they went with lean manufacturing and Just In Time inventory.
When they closed our facility, we were told that they could not compete with foreign made product at our non-union, $16 per hour level of compensation including benefits package, in spite of the stellar advances they made in productivity, and shedding about 400 people in 6 years time.
When they mentioned $16, we all looked at each other like "Really? I thought we were only getting $10 to 12 (depending on job class)"
And that's why nobody buys Sony's crap anymore too.
I worked for them when they really were a good company with a good product. Back in the 80s.
But before the 90s rolled around, they had already started moving their production from Japan to Taiwan. Quality suffered because even though the Taiwanese workers were probably every bit as motivated as the Japanese, they hadn't done it before.
But eventually, the new kids become as good as the previous kids. And by the next generation, the kids of the previous kids will have to start from scratch if the jobs were ever to magically reappear.
And to help things along for the new kids, the marketplace has come to expect crappier and crappier quality anyway, because products continue to be so damned inexpensive, feature for feature.
PK Is wrong again. Technology has increased employment over the years making people more efficient. The efficiency creates even more products and innovation. Technology has increased everybody's quality of life. The numbers of workers has decreased because of government. We would be living like Kings if not for the government
"Technology has increased everybody's quality of life."
Everybody's?
Are you talking about the 7+ billion of humans on the planet, of which 4+ billion live on $3/day or less?
Automation is great. Gives us the ability to drop bombs on poor folks thousands of miles away so that our corporations can sweep in and make life better for them! well, the ones that are left alive that is...
I am not going to bother trying to explain this to you - because you won't get it
We already live like kings. Just think about what life was like 100 years ago. Or 1000.
Christ, what a bunch of ingrates. I don't thank government, but I really appreciate how well we fat assed Americans live right now.
And I think we all will appreciate what we have here and now, about 20 years from now.
Couldn't agree with you more.
In another year or so (can't be too much longer given the looming forces of contraction) we'll start to get a good look at what "economies of scale in reverse" means.
I could agree with you more, but won't.
The problem is not the robots.
Automation, i.e. technological progress, makes products less expensive.
The robots should make products less expensive for those on social security.
Real prices should gradually decrease.
This should compensate for the decreased contributions to social security from labor.
The problem is that the Government inflates the currency, adds needless regulations and squanders resources which results in higher prices.
Don't blame technological progress.
Government "squanders resource," and YOU don't?
I'm fine with eliminating govt, but let's be clear that doing so won't magically mean that we can have perpetual growth on a finite planet. It's been finite physical resources that have enabled "technological progress."
"Automation, i.e. technological progress, makes products less expensive."
Ever wonder whether there's a breaking point here? Again, if no one is employed but robots just who can afford to purchase these "less expensive" products?
No, it's VOLUME that's made products less expensive. Automation has helped produce volume. If you don't understand the logic here then automate something and sell very little volume and let me know how that works out.
When "economies of scale in reverse" hit real hard we're going to get this very important point.
"Real prices should gradually decrease."
PRICES are meaningless. It's AFFORDABILITY that matters. Again, if you don't understand this logic then I direct you to go visit places where the overwhelming majority of humans live, places where "less expensive" products isn't something that is in most of these folks' lexicon.
Nature creates some incredibly elegant, complex, structures.
Persuading nature to produce three-bedroom homes instead of trees, or a sailboat instead of a conch shell, should be doable.
Man mimics nature, he's on his way to directing nature.
How much does a seed cost?
Your statement shows the understanding of a purchasing manager, not a manufacturing guy.
Volume purchasing agreements of incoming goods reduces the material INPUT costs but not labor costs.
Only by reducing the number of heads on the manufacturing floor do you really reduce costs to the levels of the 3rd world competition. Thus you need automation.
Automation also increases quality if its done right and reduces scrap if its accompanied by automated inspection like machine vision.
Happens to be a subject rather dear to me...
Have you bought a CPU lately? There are some things you can't make without automation, regardless of volume. We buy ASICs at my company. They are expensive, buy we couldn't build our product without them. We are the only buyer of these custom pieces (low volume)
Let's have robots make everything then most people would have the option not to work. We could force a few people to be slaves to operate the robots... while the rest of us sit around watching porn and fucking
Government is the beneficiary of this globalization/outsourcing/global competitiveness BS. Corporation has a lot money to donate to campaign for all kinds of political jokers, and they suck out a lot money of the labor shares. Take a look around, the politicians now live like celebrities, and they think they earn every penny they spend. Bernanke prints a lot money, but the money doesn't stay here, it goes to other countries for their development. Our unemployment does not improve much.
Damned good thing Nobel whining "economists" aren't licensed or insured by the state, why, the state could go bankrupt from listening to them!
duplicate post:
t is my long held experience that technology increases the number of staff and the cost of staff hence raising tax revenues IN GOVERNMENT DEPARTMENTS - I suggest the other very large miss in the employment numbers is the assumption about those employed in the GOVERNMENT SECTOR.
my rocket science says that the GOVERNMENT SECTOR has increased in volume and value (and taxes).
problem is, there are no productivity measures available for state, local, federal or military services and as these take an ever increasing slice of the cake in a mobocracy, these measures become increasingly relevant.
for me, i will just go on comparing the size of government expenditures on employment and pension benefits LESS TAX with the alternative cost of benefits and food stamps.
bleh.
IMHO, I would put the beginning of the down-trend far earlier than 2000.
Looking at the chart, I see the secular down-trend begin around 1985 (pick your catalyst) with a transitory spike in the late 1990s as anyone who could fog a mirror IPO'd a .com start-up.
The suggestion is that the long-term trend from ~1985 did represent a replacement of labor by technology. The temporary in-flux of labor into the tech industry didn't finally shake out until some time in the mid-2000s, and now we are back on trend.
Hopefully, we'll hit the new equalibrium level soon....
There are about thirty percent of the population who will never be competent to do more than basic repetitive tasks.
The future is to employ them as servants or just give them money for nothing when robotic factories produce everything
we need to cull about 6.8 billion people.
We need to remove the loaded gun called government from the hands of 6.9+ billion monkeys.
This is why you need MORE THAN thirty percent of the population in government jobs.
HOW DARE THE AUTHOR SUGGEST WE TAX THE CORPORATIONS ( I MEAN ROBOTS), THE SAME FACISTS CORPORATE FAMILY ( I MEAN SHARE HOLDERS, Koch brothers incorporated Jamie Dimon, ykelelee playing coopter Buffett, GE, Defense companies, included etc.etc)
After all Rumneyhood said corporations are people too, just not Latino people!
Agreed Tax the hell out of the corporations after all they dont work they use robots!!
Sure, and who do you think ends up paying all of those corporate taxes anyway? Sales tax only. Taxing US corporations only increases consumer costs and disadvantages them internationally. Sales taxes tax all consumption which is far better than taxing production and can be made progressive to shelter the poorest without incentivising unemployment.
I agree, Oldwood, that corporate taxes are passed through to the consumer, and I agree that taxing consumption is better than taxing production. But if consumption (sales) taxes are to "be made progressive to shelter the poorest," let us first do away with the personal income tax, requiring all who want sales tax relief to apply for it -- meaning supply proof of (lack of) income -- leaving everyone else alone.
After all, were we not a vastly freer, yet vastly more egalitarian, nation before the implementation of the personal income tax? And has it, along with central banking -- both of which were instituted in the same year (1913) -- not fueled the class warfare, the loss of freedom, the middle class destruction, and the monetary corruption that have since brought our nation to ruin?
Whoever downed me has some 'splainin' to do.
I didn't junk you, and I'm favorable to eliminating the income tax--which the Founding Fathers specifically detested and proscribed--altogether. But what the Dems and Repubs are fighting over begins with a false premise; namely, that government is not quite Big Enough, never ever Too Big, and all we need to do is decide how to support our present size of government and rate of growth without raising taxes TOO much.
That can't be done. As the real private-sector economy continues to stall, the statists in charge are expanding government at an exponential rate to make up the difference and Hide The Depression. Until the real economy comes back to health and grows vibrantly, tax revenues will continue to fall farther and farther from matching the exploding federal budget. Obama asked Congress for $3.88 Trillion for fiscal 2012; about TWICE federal revenue. The only thing that makes this appear possible is that the Fed is quietly buying MOST of current Treasury run-rate.
The only solution if for the statists to give up and admit that Big Govt is a failed concept and willingly roll back the size of govt until we can afford it. That ain't gonna happen; they'll take us over the edge to anarchy first, so they can justify putting the nation under martial law and invoking all those juicy Executive Orders that have been piling up against the day.
The man or whatever (can't tell by his voice) is a traitor. He can pretend he is stupid for some but more people each day are catching on to the traitors. Arrest him for treason before he gets away.
I love PK's comment: "The real gotchas should come on people who stick with their ideology no matter how badly it performs in practice." Hey Paul, how's that Keynesian thing working out for you?
I haven't read krugman's NYT column for a couple of years now... all he does is endlessly flog the dead horse 'we just need to spend more to get out of this'
Fuck off Paul. It's spending that got us into this bloody mess!!!
Only Luddites believe that technology reduces labor demand.
If our culture employed servants the way they do in Latin America (with a small housekeeper bedroom in even the tiniest apartment) then there is plenty of employment.
The problem is our labor and personal liability laws.
We could set up a fund for workers comp and unemplyment insurance for servants.
A friend of mine observed once that we are one of the few cultures that routinely puts the servant class on disability
Domestic service was the largest employer in the UK prior to WW1, i.e., even at the pinnacle of the British Empire and its industrial prowess it needed manservants, chambermaids, cooks and butlers to maintain full employment.
Perhaps it should also be noted that domestic service goes a long way to improve the employability of the underclass by introducing them to upper middle class speech, etiquette and behavior that they are not exposed to in public housing and inner city schools.
Oi. That's right - just follow the worms.
Fuckin' eh!
It also introduces them to the concept of "getting buggered senseless".
Not to mention "ball washers"! (thanks to Louis Black)
it is my long held experience that technology increases the number of staff and the cost of staff hence raising tax revenues IN GOVERNMENT DEPARTMENTS - I suggest the other very large miss in the employment numbers is the assumption about those employed in the GOVERNMENT SECTOR.
my rocket science says that the GOVERNMENT SECTOR has increased in volume and value (and taxes).
problem is, there are no productivity measures available for state, local, federal or military services and as these take an ever increasing slice of the cake in a mobocracy, these measures become increasingly relevant.
for me, i will just go on comparing the size of government expenditures on employment and pension benefits LESS TAX with the alternative cost of benefits and food stamps.
bleh.
Newsflash: There are no robots currently available that are capable of filling bullshit into the heads of young debt slaves while residing in pseudogothic ivory towers covered in ivy.
My brother spends a lot of time in Princeton. (He makes money off the locals.) You never met such a group of highly educated dumbasses. For them, reality has no meaning.
Academically Adrift: Limited Learning on College Campuses: "The book's authors, Richard Arum, a professor of education and sociology at New York University and director of education research at the Social Science Research Council, and Josipa Roksa, an assistant professor of sociology at the University of Virginia, drew many conclusions from their research, perhaps the most shocking of which is that 36 percent of students demonstrated no significant gains in critical thinking, complex reasoning and written communication over four years of college."I wonder what percentage PK has taught.
http://www.insidehighered.com/news/2011/01/19/experts_note_limits_of_report_that_says_college_students_aren_t_learning
There aren't a plethora of mandates about what must be provided to "hire" technology. Ending the ceaseless meddling in the labor market would bring things back into line. DUH.