inflation

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Inflation: Who Matters?

There are times when you really don’t need to say much.  The facts make the argument for you.  At such times all that matters is that the largest number of people are aware of those facts and that at least some of them speak to the issues raised.

So to is with a small snippet of news I saw this morning.

I came to it via the New York Times.  The original report being in Business Insider.

Apparently Wall Street bonuses have risen 1,217% since 1985.  Quite what the significance of 1985 is I cannot tell, but the number itself seems to have the right feel.  Having seen a few of those years first hand I can attest to the pace of increase from an anecdotal perspective.

More importantly, if we applied the same rate of increase to the minimum wage over a similar period it would stand at $44 per hour and not the current rather pathetic $7.25.

Imagine the hullabaloo were we to advocate bringing the minimum wage into line with the extraordinary levels of largesse Wall Street lavishes upon itself.  We would be treated to endless, not to mention outraged, articles from well known economists attesting to the disastrous impact such ridiculously undeserved amounts would have on the economy.  Just thinking about the inevitable inflation, and its undoubted undoing of the very heart of our social fabric, would throw numerous professors of economics into fits of feinting and hysteria.

I mean: how could workers even consider such an obviously destructive thought?  How could they be so vain as to think they deserved such outrageous compensation?  What, on the margin, could possibly justify such vertiginous increases?  Where oh where is the value added?  To what measure of economic gain do we turn to measure the worth of such a revolutionary change?

The recently passed economic relief package that managed to squeak through Congress by the narrowest of margins had, in its original form, an adjustment to the Federal minimum wage.  The proposal was to move it up from the $7.25 level to $15, at which point it would provide a subsistence wage more in keeping with modern lifestyles.   By my very rough reckoning the shift from $7.25 to $15 would bring it into line with Wall Street circa 1994, maybe 1995.

The asymmetry between the reaction to discussions about the minimum wage and other wage levels — e.g. those Wall Street bonuses — is astonishing.  The puritanical vindictiveness with which the lower end of our wage scale is treated compares badly with the way in which the top end is talked about.  The inflationary impact of the one is dissected and brooded over in minute detail, whereas the other drifts past with little or no attention.  Why aren’t Wall Street bankers criticized for their very obvious contributions to inflation?  Where are the right wing media discussions of all the wasteful things a Wall Street banker might be tempted to use those inflationary gains on?  We are constantly being told that low wage workers would simply “waste” the increase on something as useless as an iPhone.

Even some of my more left leaning friends have a hard time supporting moving the minimum wage up to a subsistence level.  They ask how all those small businesses that thrive on the $7.25 wage level would react.  They ponder on all the failures that might follow from having to pay a subsistence wage.  What, oh what, will the poor business owners do?

Well, for one thing, they ought not continue to exploit the low end of our workforce.  For another they might try to invent a business model that both made a modest profit for themselves and supported their workers at a subsistence level at the same time.  Clearly, if so many of them are doomed by paying a subsistence wage, we have far too many businesses existing only because we subsidize them by keeping wage levels so low.  Worse, by subsidizing these failing business models, and by allowing them to pass along the benefits of their low operating costs to their customers in the form of artificially low prices, we have also passed along the subsidy to, inter alia, Wall Street bankers who benefit from those low prices.

By crushing the supposed inflationary impact of wage increases at the low end, we have moderated the inflationary impact of the overly generous increases at the other.

Ultimately, of course, this has nothing to do with economics.  Most of the modern research has shown that increases in the minimum wage do not have the impact that the textbook suggests it will have.  So the economics is neutralized.  No, this discussion of minimum wages is a social question.  It revolves around our attitudes towards certain types of work and to our sense of social worth that certain activities ought, or ought not, have.  It is about the status of work.

Given that the current onrush of automation might augment, rather than diminish, the number of jobs that fall into the lower end category I think we need a social re-think as to the value of such work.  This is particularly true when we consider that the more marginalized sectors of our community have a disproportionate representation in low wage work.  We, in effect, are marginalizing them twice.

Think of the travails of the past year and the impact of the pandemic.  Low wage workers were in the front lines because so many of their jobs were deemed “essential”.  They had to travel to and from work and risk exposure to the virus.  They maintained our supermarkets, care facilities, and so on.  They were affected by COVID in large numbers.  Wall Streeters, by comparison, have done very well.  Financial business flourished event during the pandemic.  Bonuses are up bu about 10% on the year.  And quite a few Wall Streeters managed to escape to their second homes in the hills or countryside and so have been far less affected by the virus.  Wall Streeters were never deemed “essential”.  They aren’t.  But they have sure been paid as if they are.

The attempt at passing a minimum wage hike to $15 failed.  It was too much of a leap for some of the more conservative members of the Senate to stomach.  They were concerned about the disruption such a leap in wage might have on the small businesses in their various states.

I have yet to hear what they think the impact the Wall Street bonuses might have had.

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Taxes: 1970’s Redux?

Taxes. What a problem.

I was going to start by saying something about our current national debate about taxes, but that would have been an untruth. We are not having a debate. Instead we are all sitting on the sidelines whilst the Republican Party desperately tries to cobble together a tax plan in order to fulfill one of the promises it made during last year’s election. That this would be the only major promise thus fulfilled we can ignore for now.

Instead, I think I will start with an observation I have made many times before: the American tax code is ridiculously complex and inefficient. It is also rigged, although the real extent of the rigging only comes into focus when we take a look at the budget that the tax code nestles within.

One of the sneaky ways that politicians of both parties communicate about government spending is to talk only in terms of programs funded out of revenues. That’s obviously a sensible thing to do. So we hear all about such-and-such a program costing $xx billion or trillion dollars which is invariably then presented as YY% of the total budget.

This is sneaky because it immediately creates a framework for conversation about programs and policies. In particular it opens up programs to easy public scrutiny and criticism of their expense. The most oft attacked programs — things like welfare and poverty amelioration activities — are easy targets when their cost is presented in clear dollar amounts or as shares of total revenues.

Indeed anything that is a line item in the budget becomes an easily understood and vulnerable target.

But here’s the really sneaky part:

There’s a distinct bias in the type of policies or programs that become separate line items in the budget. They tend to be things associates with low income voters, the young, the sick, and so on. Other policies get their funding in more roundabout ways so their cost is hidden from view and the public has a hard time focusing on them.

Here’s what I mean:

Tax expenditures are the big game in town.

The green bars on the left of the chart are revenues actually collected by the government. That’s the cash used to fund programs like defense spending which is shown as one of the blue bars on the right. It’s the central bar where the real action takes place.

Tax expenditures are the cost of loopholes in the tax code. They are a measure of the cash the government didn’t collect because of some program or policy that ended up being paid for by rigging taxes.

And they add up to an enormous amount of money each year. Just a quick look at the chart above shows that the loopholes in the tax code leak away enough cash to pay for both defense and Social Security with change left over.

Here’s a list of the biggest tax expenditures:

The biggest loopholes benefit the middle class and business. They are huge costs to the budget. And they are very difficult to locate in the budget because they don’t exist as cash expenditure.

Middle class critics can thus attack welfare spending because it’s explicit whilst remaining blissfully ignorant about how much they, themselves, also benefit from government largesse.

Which gets me to one more thing:

There’s a strangeness to the current tax conversation. It all seems so dated.

We are being told that we need a massive reduction in corporate tax burdens in order to boost profitability and encourage investment. But American businesses are already highly profitable: profits as a percentage of the total economy are high and have been rising. There is no evidence of a profitability problem. Plus, corporations are sitting on piles of cash. They are not so cash strapped that they are forgoing oodles of great investment opportunities. On the contrary, they seem to have no idea what to do with their cash. So they are reduced to shoveling it back to shareholders rather than investing in expansion.

The economy doesn’t look very supply side constrained when you take current profitability and cash hoarding into account. The problem seems much more acute on the demand side. Were there more demand all that cash could be invested in expansion.

And yet: employment is also doing well. Unemployment is fairly low, even given the very slow recovery from 2007/2008, and the tepid policy response since.

Inflation is also low. So too are interest rates.

So why the sudden urgent need to “reform” taxes to free up the economy and get it going again?

Ideology, naturally, plays a part. Republicans always want to reduce taxes for the rich. It’s what they do. And, yes, there is merit in true tax reform to simplify the tax code and get rid of those loopholes. A lower tax burden is always an attractive policy for anyone concerned with winning the popular vote. The problem is that the current Republican tax plan seems designed to solve problems that existed in the 1970’s, not those of today.

Ideology also plays its part in framing the discussion around corporate goals. The drumbeat for short term increases in profits is so loud that it drowns out any sensible discussion about wider issues of corporate governance and financing. The shareholder value mantra long ago destroyed any alternative conception of corporate purpose and has contributed mightily to a sense of malaise in the workplace that then engenders urgency to do something. Yet that something ought not to be to pour more cash down the maw of managerial capitalism. It is not money well spent, and it encourages corruption within business and, by extension, in politics as lobbyists crawl all over Washington and subvert our democracy.

So here’s the thing:

If we have decent levels of employment; high profits; low inflation; low interest rates; and tons of investable cash, why are we discussing a tax plan that will do nothing for employment; might increase inflation; might raise interest rates; and will add to the tons of investable cash?

Why are we partying like it’s the 1970’s.

Why aren’t we simplifying the tax code, getting rid of the loopholes, and moving the tax burden upwards so that the folks who have the income to be taxed pay the taxes?

Ideology.

It is the 1970’s after all. Isn’t it?

 

 

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Interest Rates, Faith, and Democracy

What a pickle!

The Federal Reserve Board’s meetings have become a media event. The last few days – weeks if you want to be more inclusive – have been awash with media chatter and analysis about the probability that the Fed will, at last, raise interest rates. As a public service here are the pros and cons as seen through the eyes of the Economist:

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And here, in its entirety is a letter to the editor of the Financial Times just yesterday from someone called Thaddeus Walkowicz, who lives in East Hampton, New York:

Fed’s focus on creating jobs comes at huge cost to the rest of US society

“Sir, Although is universally described as the “smartest man in the room”, Lawrence Summers’ article on “neutral interest rates” (Central bankers do not have as many options as they think”, Dec 7) is simply a part of the nest chapter of trying to perpetuate failed Keynesian perspectives and a desperate attempt to institutionalize acceptance of “observations” that masquerade as policy-justifying “research”.

As developing countries grab a greater share of world gross domestic product through the provision of cheap labor, governments and central bankers of the industrialized west have resorted to “serial stimulus” to try to achieve historical levels of growth, almost as if their countries were entitled to the levels of growth. The accompanying monetary stimulus has driven down real interest rates, and these rates are now included as data points with the perverse circular narrative that the lower levels represent some form of appropriate “real rate equilibrium”. (This is indeed true if generational theft is an integral part of policy.)

Ignoring the theft of senior’s savings imparted by negative real interest rates, completely missing from Professor Summers’ article is any discussion about the effects Generation X’s and Millennials’ savings required for retirement, with the negative real rates and lower risk premiums on all asset classes, and more importantly what this means for current and future spending/growth.

It’s time to face the music: the simple reality, as harsh as it may be for those without marketable skills or even PhDs and for central bankers protecting an “intellectual” legacy, is that an overextended focus on job creation is not worth the long-term cost to the rest of society in terms of the continued upheaval of a free-market economy, one characterized by a fair, market-driven balance between lenders and borrowers.”

Wow.

Interest rates, faith, and democracy all bound up in one big spewing forth of anti-economics venom.

Tell us what you think Thaddeus.

It’s hard to know how to respond, but I want to pick out a few points.

First, Thaddeus clearly has a deep disregard for economics. In this I must admit he is not alone. Just yesterday Lars Syll referred to a book by Dani Rodrik and explained that Rodrik’s comments were more about economists than the substance of their work. Here’s what Syll said:

“There’s much in the book I like and appreciate, but there is also a very disturbing apologetic tendency to blame all of the shortcomings on the economists and depicting economics itself as a problem-free smorgasbord collection of models.”

This is what Thaddeus is saying too. Only with less precision. If we view economics as an array of models to be taken out and deployed whenever we wish, then we rapidly approach the “observations” that masquerade as policy-justifying “research” that Thaddeus dismisses rather contemptuously. After all such an array does start to look an awful lot like a whimsical toy-box full of goodies that an economist can take out and play with arbitrarily. What, a quizzical onlooker might well ask, determines which model we deploy? An examination of the facts? if so, which facts? What triggers are we responding to? What is our desired goal? The sad matter is that economics has many models for most occasions and the choice can, indeed, appear arbitrary.

Worse, it can appear faith-based or ideologically driven.

Back to Thaddeus’ letter: I like the way he dismisses Keynes as being a “perspective”, or, rather, a “failed perspective”. He doesn’t even dignify Keynes as having produced a theory or the kind of model Rodrik talks about. That’s pretty low. But it fits neatly with a right of center narrative that markets are natural phenomena that we meddle with at our peril. Poor old Keynes might have thought he was saving capitalism from itself, but he doesn’t get many thanks from our capitalist class.

Just for the record: markets are social constructions that occasionally display “law-like” behavior, but they are profoundly human and thus exhibit all our human frailties.

I also like the”theft”  concept that Thaddeus tosses about. It’s clear that in his eyes low interest rates are a form of theft. With the aggrieved party being, presumably, anyone who is saving or has saved for retirement. That’s my best spin. I suspect though that underneath the surface Thaddeus is really making a statement on behalf of rentiers everywhere: how’s a good rentier to make a buck in this low rate environment?

Thaddeus also seems to have bought into secular stagnation. He doesn’t mention it explicitly, but the idea lurks behind his suspicion that central bankers are trying to pump up growth because it’s “almost as if their countries were entitled to the levels of growth”. Naughty industrial countries! Such entitlement. Only rentiers are allowed to have real entitlements.

Speaking of which: Thaddeus clearly holds every day workers in even more contempt than he does economists. His apparent reference to the days of growth being gone and to the speciousness of attempts to create jobs speaks volumes for his empathy for his fellow citizens.

The sad part Thaddeus is not alone. His lack of empathy is matched and often outdone by economists who have fallen foul of the “laws” of economics. If you believe – have faith in – in the natural nature of the economy and ignore its human origins, if, in other words, you tend to refer to people as “agents” or “units” or any other elision of their human reality, it is quite possible to look upon job creation as a false activity. What you are likely to be more focused on is the urgency of avoiding debasement of the currency and the preservation, at all costs, of faith in the value of the dollar. In other words the Fed needs to fight inflation, and not to worry about jobs. Especially for those “without marketable skills”,  as Thaddeus so amiably puts it.

When I read letters like this I wonder how it was that mainstream economics became so resolutely anti-democratic. Perhaps that’s too harsh. Perhaps it is just that the “natural laws” that drive the economy are so anti-democratic, and economists are simply swept along by their observation. In this narrative economists are only the bearers of bad news, constantly telling us that our lives are subject to the great machinery of supply and demand and not at all to human intentions and/or interventions.

I suppose that all this is simply my way of saying that when I approach that smorgasbord of models I look first for those that preserve democracy and tend to shun those that undermine it.

Which brings me all the way back to interest rates: yes, I think the Fed will raise them. No, I don’t agree – there’s too much downside risk. Yes, the Fed ought to focus on job creation – its the democratic thing to do! And, by the way, looking back into history we find that the so-called “normal” and thus higher rate levels rentiers are pining for are the exception not the rule. Low rates are here to stay.

Well that’s what some of the models say. As for the other models …

You see what I’m saying?

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Interest Rate Mania

People keep asking me about interest rates. I wish they would stop. The question always make me feel like mimicking Eugene Fama: rates are rates. They are what they are. Perfect reflections of whatever they meant to be reflections of. And so on.

Such amazing analytical insight is worthy of one of those pseudo Nobel prizes.

Seriously though: people do seem a little more concerned than usual. Why?

Because rates have been low for so long and don’t seem to have accomplished much for all that. I think it’s hard for some people – including quite a few prominent economists – to grasp why interest rates are mired in this near historically low trough. I would have thought the answer is obvious: the economy sucks.

It still sucks after all these years.

Let’s look at it through the eyes of the textbook – this doesn’t imply we all agree with the textbook, so please relax. What are we looking for? Something called the “natural rate”. Let’s set aside that there’s absolutely nothing “natural” about the economy simply because it is an entirely humankind construction reflecting the complex interplay of a zillion intentions and expectations. Economists love to pretend that there are such “natural” things in the economy and this so-called natural interest rate is one of them.

What is it?

Well, that’s simple: it’s the rate of interest at which the economy settles into its Goldilocks comfort zone. Not too hot. Not too cold. Just right. This zone is what economists strive to maneuver the economy towards. It’s where they all imagine the economy with a gigantic happy face. People are employed. Wages are rising, but not so fast they induce inflation. Profits are good. Demand is strong enough to get businesses to invest, but not not over-invest. It is, as I said, a happy place. It’s just right.

So: how do we know what this natural rate is? Aah. That’s a tad more difficult. It depends. And therein lies the rub.

The natural rate of interest appears to be much lower now than in the past. This, so we are told, is because the potential of the economy is more limited and thus the in- and out-flows of investment are reduced. If you believe that the in- and out-flows are what gives rise to the natural rate – a big if – then a reduction implies a lower rate.

This simply begs the question: why is potential so much lower?

There are a few reasons proffered for this. A common one is that our current wave of technological innovation is simply not very good at translating into economic growth. At least when compared to waves of innovation in the past. This ineffectiveness of technological advance tends to bend the trajectory of growth downwards, which limits sales potential and thus reduces investment opportunity. This is the standard “stagnation” argument and is often touted alongside stern warnings about how this decline in potential also limits our ability to pay for all those entitlement programs we want for ourselves – the economy will be growing too slowly to generate the tax revenue to pay for them. Naturally this notion is attractive to anyone on the right who is inclined to dislike entitlements anyway. So we tend to get this from mainstream economists and their libertarian friends.

Another cause of a slowdown in potential would be demographics. It is often overlooked in our discussions of economics, but a growing population is associated with a growing economy. At least as we currently measure economic growth. The reason ought to be obvious: the more there are of us to buy stuff the greater the opportunity for profit, sales, and employment etc. So a faster growing population is closely associated with a faster growing economy. That and an equable climate, but that’s another question.

So a decline in the rate of population growth, and/or a shift into retirement and out of prime consumption mode of a large proportion of the population will slow the economy. Which is what we’ve witnessed in the past few years. So, no surprises if lower potential drags down the so-called natural rate of interest: the economy is simply settling into a lower state of activity.

Then there’s the stagnation of wages over the past few decades and the enormous rise in inequality. Not many economists want to talk about this: the distribution of income is something they are remarkably indifferent to. Their obsession with efficiency and inventing complicated models to show how we might achieve maximal efficiency precludes them worrying much about inequality. This is because their models, in order to squeeze that maximal efficiency out of the economy just assume inconvenient stuff like the distribution of incomes to be of no importance. And if you don’t go looking for something like that you won’t often find it.

In any case it seems fairly clear that the enormous redistribution of incomes upwards to the higher echelons of income earners has had a deleterious effect on economic potential. That is not potential as measured in terms of possible output, but as measured in terms of possible demand. You would have thought that in a world in which supply and demand are tossed about as inseparable twins, economists would look  at potential demand a little more carefully. But many don’t, so they also often forget to mention the downward influence of sluggish demand. I am afraid that the old, and foolish, Say’s Law still lurks in the backs of too many economic minds. If you redistribute incomes way from people who might spend that income and put it in the hands of people who are more likely to save it – they have already managed to buy most of the stuff they want so the extra cash is simply saved and not spent – what do you generate? A whole lot of “excess” savings. That is cash looking for a place to go. At the same time you have reduced the potential sales for business and so have reduced the demand for investment. That is to say you have reduced the productive places for all that cash to go.

The net result?

Lower interest rates.

Now the supply and demand for all that cash does not produce the interest rate. The supply and demand for investment does. And the supply and demand for investment is supposed to be a response to economics potential. So we are back where we started.

What does monetary policy have to do with all this?

Simple: monetary policy is designed to get interest rates to settle at the “natural rate”. This, of course, implies that the central banks have an idea of what economic potential is. Which is why we read so much at the moment about what the Federal reserve Board is thinking and about how the economy is doing and what it is likely to be doing.

So, when you ask about what interest rates are likely to do, you are engaging in a sort of mind reading exercise. You are really asking what the Fed is thinking.

Which, right now, seems to be a little confused.

There are few at the Fed talking about how weak the economy still is, about how employment is not strong, and how, therefore, the Fed ought to keep rates low. That is they think that by keeping rates low they can nudge potential back upwards and create room for more growth. After that, these folk argue, will come a time to raise rates.

But there is another camp, which sounds a lot more strident, which argues for higher rates sooner rather than later. These people – the so-called hawks – are those who believe we are on the precipice of rapid inflation, that the economy is about to heat up, and that employment is just dandy. They are arguing, in other words, that we are about to exit our Goldilocks state and enter into one that is overheated. So, they suggest, we need to act and foreclose such a possibility and raise rates. Perhaps as soon as this coming year end.

Which is right?

Well it depends on whether you think we are indeed in a Goldilocks state. You have probably guessed by now that I would err on the side of caution. Demand is weak. Too weak. Goldilocks be damned, things are still too cool. Raising rates might help those who make a living by owning assets, but it would harm those who live by working for a wage, and those people have been hammered enough by stagnant wages long enough.

So when you next ask me what I think interest rates should be, think twice. You really don’t want me to have to run through all this again simply to end up saying something really simple like: they need to stay low.

You knew that already.

 

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Automation and History

History always has something doesn’t it?

Here is John Aziz writing at Pieria:

“So what does that mean today, as we get caught up in this great new tsunami of technological innovation and Schumpeterian creative destruction?

It means that we shoudn’t really fear the process we are going through. Yes, technology destroys some jobs. But the historical record suggests that automation will free us up to do more interesting ones. For sure, nobody precisely knows the future. And — just as there was during the Great Depression, when the U.S. economy transformed from a predominantly agricultural economy into a predominantly manufacturing economy — there may be great dislocation and major bumps in the road (one possibility is rising inequality if the robots are heavily centralized, although many argue not, and I am on the latter side of the argument).”

There is no doubt that the current wave of automation is changing the economy. That change is both having an accumulating impact. There are about 260,000 ‘robots’ working in America right now. That number will rise to an estimated 700,000 over the next decade.

To understand the economics behind the surge in automation think of this example: the cost of an automatic spot welder was in the region of $182,000 in 2005. Right now that price has dropped to $133,000. By 2025 experts estimate the price will be $100,000. Clearly it will become ever more attractive to replace labor with machines. Moreover one estimate I read had the human cost of auto industry welding as $24 per hour, whereas the same job done by machine costs $4 per hour. Those kinds of cost advantages are irresistible. Obviously the shift towards automatic production will gather pace. These estimates are from the International Federation of Robotics, so they are biased, but the effects will surely be similar to those the IFR predicts.

So is Aziz correct to say that this is not something to fear?

I think he has a deliberately optimistic reading of history.

It’s fascinating to see how economists and people who write about the economy rely on highly selective history. We don’t have many similar events in history to go back and study in order to unravel the probable impact on the economy.

Aziz rather glibly suggests that all will be well. After all, he points to a study, by the auditing and consulting firm Deloittes, that show that innovation has produced more jobs than it has destroyed over the past 180 years. I should hope so. But the studies examples point to one of the problems we are having. It focuses on the elimination of a great deal of drudgery that used to be done by hand. Laundry washers have, for example, became quite a rare breed, especially as a proportion of the population. The switch of employment out of agriculture is, of course, an iconic example too.

Personally I have no doubt that automation has had a great social benefit since the start of industrialization. It is, in no short manner, a great force behind the freeing of women from their older and more traditional role as providers of unpaid housekeeping services. It has reduced those hard laboring tasks to a far more scarce list, and even then it has added enormous leverage to those laboring tasks that remain performed by humans. So this part of the claim by the optimists I do not dispute.

What concerns me, and what I don’t think people like Aziz focus on enough, is that we have run out of sectors we can shift labor about in.

The huge rise in automation in agriculture that drove so many people off the land created waves of discontent and dislocation, but eventually — during the Great Depression here in the US — that surplus agricultural labor was absorbed into the then burgeoning industrial sector. So not only did the economy benefit from rising productivity on its farms, but it produced higher paying jobs that enabled the newer working class to become upwardly mobile and aspire to something we have became to call the new middle class. The new jobs paid well enough to compensate for the dislocation of the prior automation. The economy took a step upwards.

Mind you the entire process of absorption took a full one hundred years if we go back and start the clock running at the start of industrialization. Not only this: along the way there were enormous political and social changes that made the end result — a generally higher level of prosperity — possible. This brighter future was not, contrary to the sunny arguments of the libertarian economists, a result of the magic of the marketplace, but was, rather, the result of generations of activism and social protest that eventually put in place truly democratic institutions to mitigate that more dire consequences of capitalism. It is no accident that modern democracy is a much newer arrival on the scene than is modern capitalism.

As a side note: it was the success of the fight for democracy that forestalled the Marxist historical narrative. It is one of modern history’s great ironies that the only full implementation of Marxist thought took place not in the context of an industrial proletariat, which is where Marx taught it ought to take place, but in the context of a backward agricultural underclass, which is where marx considered it near impossible. But that’s a different discussion.

The advent of a new age of machines enabled the launching of what we know as modern capitalism. And its first notable consequence was to benefit a rise in returns on capital. It was this early history of industrialization that Kuznets so famously captured in his eponymous curve.

But since Kuznets we have observed an enormous shift backwards. Not only has inequality risen to near historic levels, but there has been a decided bias towards returns to capital once more.

And one force creating this unfortunate result must be automation. The very thing that Aziz so happily embraces.

What we now need to think about is where the new surplus of labor — those being made redundant by the current wave of automation — will end up. When we look at the American economy the answer is obvious: that labor has to be absorbed in the service sector which currently accounts for about 80% of all employment.

Here’s the issue: the service sector covers a very wide range of activities, from those remaining laundry washers to brain surgeons. Along the way it includes the hairdressers and bartenders that the Deloitte study highlights. It also includes the engineers, designers, and sundry bloggers that Aziz says he would prefer to be rather than those old fashioned laundry washers.

The problem is that many of theses jobs produce lower income than the manufacturing or industrial jobs being displaced by automation. So the new history is radically different from the older history.

Whereas the old displacement eventually created a more prosperous and plentiful middle class, this new displacement may not. Indeed if we take the studies of people like David Autor and his co-authors at MIT seriously, it certainly will not. At least any time soon. Worse as the pace of innovation accelerates automation seems to be working its way up the income scale. Not only are traditional blue collar jibs being automated, but many previously secure white collar jobs are going under also. The result is that we are experiencing a huge bifurcation in society unlike that of the last wave of automation. That last wave consolidated society around a fairly prosperous median. This wave is dividing society into two very different levels. The bulk of people are finding themselves compressed between stagnant wages and rising costs, with automation a major factor in the wage compression. Whilst, at the same time, a much smaller group benefit from the wages flowing to their skills.

At present I don’t see the older coalescence around a happy median recurring. This wave of automation is far less democratizing than the last.

As we fumble about trying to make sense of our contemporary economy, I recall David Hackett Fischer’s book “The Great Wave”. It’s a history of prices, and it has relevance to today.

Here’s a quote regarding what he calls the Medieval Price Revolution of 1180 – 1350:

“Men of wealth were able to profit by the price-revolution in many ways. Powerful Italian merchants, for example, obtained laws that allowed them to insist on being paid in gold florins or ducats which held their value, but permitted them to pay wages and taxes in silver coins which were much debased. As a consequence, rich merchants grew richer, and the poor sank deeper into misery and degradation.

This growing gap between returns to labor and capital was typical of price-revolutions in modern history. So also was its social result: a rapid growth of inequality that appeared in the later stages of every long inflation.”

Does this not apply to the past few decades?

In his conclusion Fischer lambastes free market thinkers for their myopia. They use too short a historical framework. And they attribute magic falsely to their revered market systems. Other forces grind more slowly and more deeply.

Are we at the end of another long inflationary cycle? Is history rhyming again?

The point of all this is that each of Fischer’s long price cycles ended in social and political disruption. Each cycle rose and fell for its own reasons — ours may well be the automation Aziz lauds — but each also had similarities. The tension between labor and capital being one.

Is the trend towards populist politics an early signal of that tension placing too great a strain on our modern world? I think so.

Indeed, I am certain of it.

 

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