The US economy is confronting a number of serious challenges as it transitions from the industrial to the digital age. Two in particular have commanded our attention in the recent past: job creation, especially the kind of mid-wage, mid-skills jobs that’ve been particularly hard hit by technology and globalization; and the rising financial inequality between the rich and superrich, - the 1% and .1%, - and everybody else. Most everyone agrees that these are both important challenges, but of the two, which should be at the top of our policy priorities? The best discussion I’ve seen of this question comes from two excellent recent articles by Harvard economics professor Larry Summers, - former Treasury Secretary, Director of the National Economic Council, and President of Harvard.
The first article, The Inequality Puzzle, is his review of Capital in the Twenty-First Century by French economist Thomas Piketty. The English translation, published earlier this year, became a bestseller. Few scholarly books have received this kind of attention.
I’ve read a number of reviews but not the book itself, as I was frankly intimidated by its length and depth, - 700 pages of exhaustive facts-based, footnote-laden economic research. Generally, the reviewers’ opinions were influenced by their ideological leanings, with progressives liking it while conservatives were critical.
- “It is deeply grounded in painstaking empirical research.” Piketty and his collaborators have analyzed huge quantities of data and conclusively shown that the share of income going to those at the very top has risen sharply over the last generation.
- “Piketty provides an elegant framework for making sense of a complex reality.” His theories are bold and simple. If correct, they would represent a major contribution towards a theory of natural economic evolution under capitalism. And,
- “Piketty writes in the epic philosophical mode of Keynes, Marx, or Adam Smith rather than in the dry, technocratic prose of most contemporary academic economists.” The important issues he deals with should viewed in broad, societal terms, rather than in narrow numerical terms.
However, Summers believes that Piketty’s conclusions won’t stand up to the criticism of economists in the short run or to the test of history in the long run. Nor does he think that its policy recommendations are realistic and implementable. “I have serious reservations about Piketty’s theorizing as a guide to understanding the evolution of American inequality. And, as even Piketty himself recognizes, his policy recommendations are unworldly - which could stand in the way of more feasible steps that could make a material difference for the middle class.”
How can one praise a book while disagreeing with some of its key conclusions and recommendations? It depends on whether you are looking for answers to a very complex subject, or whether you feel that stimulating debate on important issues is itself a profoundly important contribution. “Books that represent the last word on a topic are important. Books that represent one of the first words are even more important,” says Summers.
Martin Wolf, chief economics commentator of the Financial Times wrote in his own review that “[the book] does not deal with why soaring inequality - while more than adequately demonstrated - matters. Essentially, Piketty simply assumes that it does.” Wolf also calls his policy recommendations “bold and obviously unrealistic.”
Summers takes these points a step further by bringing up the subject of jobs and income. “Why is inequality so great a concern? Is it because of the adverse consequences of great fortunes or because of the hope that middle-class incomes could grow again? If, as I believe, envy is a much less important reason for concern than lost opportunity, great emphasis should shift to policies that promote bottom-up growth.”
He adds that Piketty’s unrealistic recommendations “could stand in the way of more feasible steps that could make a material difference for the middle class. . . At a moment when secular stagnation is a real risk, such policies may include substantially increased public investment and better training for young people and retraining for displaced workers, as well as measures to reduce barriers to private investment in spheres like energy production, where substantial job creation is possible.”
Several weeks later, he reiterated that jobs should be our top policy priority in a Wall Street Journal article, - Lawrence H. Summers on the Economic Challenge of the Future: Jobs.
From time immemorial, the greatest economic problem had been coping with scarcity, as humanity could not produce enough to satisfy everybody. The problem has been changing in the US and other advanced economies, and possibly over time in most of the world. “The economic challenge of the future will not be producing enough. It will be providing enough good jobs.”
Agriculture, for example, employed over a third of American workers a century ago, but just 1%-2% today. At the same time, food is more abundant than ever. Obesity is a much more serious problem today than undernourishment. “Though global issues surely remain, the problems in American agriculture today no longer involve ensuring that food is available, but ensuring livelihoods for those who once worked in agriculture.”
85% of the global workforce was involved in agriculture in 1800. The Industrial Revolution then launched the transition from an agrarian to an industrial society. Since the steam engine in the late 18th century, we’ve had major waves of innovation every 50-60 years, including railroads, steel, electricity and heavy engineering in the 19th century; and automobiles, airplanes and telecommunications in the 20th century.
Each such wave was accompanied by periods of creative destruction, when older industries and jobs where displaced by the new technology-based innovations. Over time, these innovations transformed the economy, re-shaped the institutions of society, and ultimately lead to the creation of all kinds of new, more productive industries and many new kinds of jobs. Services, not agriculture, is now the largest workforce sector in the world.
“Previous technological innovation has always delivered more long-run employment, not less. But things can change,” is the tag line of an article on the future of jobs published earlier this year in The Economist. “Nowadays, the majority of economists confidently wave such worries away. By raising productivity, they argue, any automation which economises on the use of labour will increase incomes. That will generate demand for new products and services, which will in turn create new jobs for displaced workers. . . Yet some now fear that a new era of automation enabled by ever more powerful and capable computers could work out differently.”
Will new industries and job creation eventually follow as has been the case in the past? Could it be different this time around? What will happen if, as Marc Andreessen famously predicted, software will eat the world?
The machines of the industrial economy made up for our physical limitations, - steam engines enhanced our physical power, railroads and cars helped us go faster, and airplanes gave us the ability to fly. The machines of the emerging digital economy, are now making up for our cognitive limitations, augmenting our intelligence and our ability to process vast amounts of information. They are now being increasingly applied to activities requiring intelligence and cognitive capabilities that not long ago were viewed as the exclusive domain of humans.
“[T]here are many reasons to think the software revolution will be even more profound than the agricultural revolution,” writes Summers. This time around, change will come faster and affect a much larger share of the economy. Workers leaving agriculture could move into a wide range of jobs in manufacturing or services. Today, however, there are more sectors losing jobs than creating jobs. And the general-purpose aspect of software technology means that even the industries and jobs that it creates are not forever. . . ”
“So the challenge for economic policy will increasingly be generating enough work for all who need work for income, purchasing power and dignity. What will this require? The role of government was transformed to meet the needs of an industrial age by Gladstone, Bismarck and the two Roosevelts. We will need their equivalent if we are to meet the needs of the information age.”