Hedging the robot apocalypse

August 4, 2015 09:00 AM

James Pethokoukis was late to the party.

In April, The Week author modernized a question dating back to economist David Ricardo in 1814 and the Luddites’ chief worry about the automatic loom during the Industrial Revolution.

In the article, “Is the Internet killing middle class jobs?” Pethkoukis reignites an age-old debate on the role of technology in fueling unemployment.

The author explores a Harvard Business Review article by former Intel executive Bill Davidow: “The Internet Has Been a Colossal Economic Disappointment.” Davidow argues the Internet fueled widespread job displacement and spurred underwhelming job creation.

But before Pethokoukis concludes indecisively on the employment impact of disruptive technology, he paints a grisly future where average Americans and the 1% live under extremely divergent conditions.

“The Robopocalypse for workers may be inevitable,” he opens. “In this vision of the future, super-smart machines will best humans in pretty much every task. A few of us will own the machines, a few will work a bit — perhaps providing “made by man” artisanal goods — while the rest will live off a government-provided income.”

Pethokoukis’ title question recalls a two-century economic debate that is exhaustingly prone to theoretical over-examination. Because so little mainstream conversation on the capital-labor dynamic of technological waves and global trade exists, few have taken the first step to solving any problem: Admitting one exists.

So let’s move beyond the hypothetical dystopia, which reads like a bad Matt Damon film, explore solutions in today’s broader equality debate and give investors actionable investment insight on a misunderstood trend.

A long in the tooth debate

“Does technology kill jobs?” is a question locked in a theoretical time warp. 

If the robot owners vs. non-robot owners or capital/labor chatter sounds Marxist in nature, it’s because it falls in the narrative. The “M word” makes both free-market supporters foam and some liberal academics nervous by association.

That doesn’t mean the conversation should be ignored (see “Waves of innovation,” below).

The most recent wave of technological innovation to hit markets (5th Wave in graphic) has fueled globalization dramatically, again realigned the American workforce and established the base for the next innovation wave and associated jobs.

Society has bickered broadly over consequences after each technological era without advancing sustainable ideas to address any ensuing income divergence. Yes, economists have offered solutions — some good, some bad and some that would require turning society on its side — but politicians, unfortunately, make the final decisions.

Still stalled in debate

The primary concern for liberal economists appears to suggest that technology adoption increases productivity and societal wealth, but it also produces a widening income gap for those with the greater stake in the implemented technology. Inequality concerns seem to trump innovation’s benefits.

Paul Krugman says, “Smart machines may make higher GDP possible, but also reduce the demand for people — including smart people. So we could be looking at a society that grows ever richer, but in which all the gains in wealth accrue to whoever owns the robots.”

As society grows richer thanks to innovation, the pie expands, but the wealthiest tech owners take the largest share. Therefore, it appears that the median income, that middle 50th percentile, will make less money than the average of all Americans due to the skew of the economic distribution favoring tech owners.

Some have called for higher taxes on tech companies, investors and the benefactors of that wealth, which can be redistributed to lower income Americans, who would again buy the products created by the next generation of technology. Then, those profits will be taxed at a high level, and the circle of theory continues, except they ignore tax havens and capital flight (the latter two being matters that Larry Summers has addressed in his writings on the “Robopocalypse”).

Then, there’s the alternate take: Technological innovation raises society’s standard of living, but it comes at the cost of rising income inequality. If a new wave of innovation leads to greater efficiency, a workforce can shift to new skills, career paths and entrepreneurial endeavors.

Here’s the Bill Maher-ish way of mocking this argument: “Everything will be fine, trust us…we’re job creators. What do you mean you don’t know how to start a multinational company that has utilized public supply chain infrastructure paid for by taxpayers?”

This crowd loves to point out that America started as a nation of sustenance farmers, but because of substantial innovation, the country is now agriculturally self-sustainable while only relying on 1% of its population to feed its people. There was a standard of living boost for all.

Thanks to ag-tech innovation, Americans shifted into new careers. Cities formed as Americans moved to urban environments. New trades emerged under that First Wave of Innovation. We saw a boom in commerce, iron production and mechanization.

The 19th century Luddites’ worry about the economization of labor in the textile industry ultimately eased when workers shifted to non-automated sectors. Afterward, the hypothesis of “technological unemployment” was dismissed and dubbed the Luddite fallacy.

Future waves of innovation followed, and with each the conversation about “technological unemployment” evolved. Two centuries later, the argument over how to handle consequences of each wave, from income distribution to new skills training for the next generation of workers, is still taking shape, except, of course, on Capitol Hill.

But widespread tech advancement during the past 20 years has been dramatic. So many industries at once have automated or digitized that some 21st century critics’ arguments on technological unemployment make today’s current joblessness levels ever more difficult to ignore.

New technologies have radically altered many industries. Due to population size, economic factors like housing that anchor workers to local economies and the incredible consolidation of industry due to computers and the Internet to streamline processes, displaced jobs have not been replaced by the “jobs of the future” at an acceptable pace. These are views by authors and IT engineers Marshall Brain and Martin Ford in their 2009 book The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future.

Some economists have predicted that robots and automation in the future could displace 80% of today’s current jobs. If that’s the case, it’s time for investors – and anyone who fears the robots are coming for his job – to prepare accordingly.

Let’s assume that the Robot Apocalypse is upon us, and current American jobs are going to vanish. Let’s suppose that the truck driver, which is the most popular job in many states, is being replaced by automated supply chains and driverless vehicles. Let’s have a real discussion about how to approach this situation from a different angle.

What ideas won't work?

Assuming that Davidow is correct about the Internet’s lack of job creation, recent proposals to close the wage gap aren’t going to stop the Robot Apocalypse and artificial intelligence from swallowing the jobs of today. Ideas to address the effects of automation fail to complement initiatives to reduce the growing income gap between the rich and the poor.

For example, to address the growing wage gap, Berkeley economist Robert Reich has suggested a number of redistributive proposals that President Barack Obama has re-coined as “Middle Class Economics.” If anything, these ideas might accelerate Middle Class erosion because of the incentives of replacing human workers with technology.

Reich proposes plans to raise minimum wages and allow low-wage workers to unionize. This might be a short-term fix in theory, but Reich’s solutions only provide incentives for greater technological displacement among low-wage employees over the medium- to long-term.

Vice reported in November that in the U.K. “Jobs paying less than £30,000 ($46,470) are nearly five times more likely to be lost to automation than jobs paying over £100,000 ($155,00).” The low-wage jobs that are now booming in the service sector, including servers and retail employees, and other positions like administrative support, transportation and manufacturing are the most susceptible to automation, according to research from Oxford University’s Carl Frey and Michael Osborne.

Raising the cost of labor through wage mandates will accelerate the financial argument to replace humans over the long-term (unless you raise the costs of technology).

Reich also proposes a huge public investment in infrastructure. That includes fixing roads and bridges, boosting Internet infrastructure to improve user access in remote or disadvantaged areas and improving our power and water systems. While that would be a significant one-time investment—a throwback to New Deal policy prescriptions—it again sets up conditions for an acceleration of job-displacement in the future. The reason: Taxpayers would be investing in the very infrastructure on which the robots will operate. (Remember, trucking jobs will be threatened by automated supply chains.) A broad short-term fix might be politically favorable, but they fail to address the broader long-term labor-capital dynamic of today’s technological revolution. 

Finally, Reich returns to an old progressive favorite: Raise taxes on the wealthy to pay for his plans. 
That includes making the payroll taxes, one of the most labor-intensive costs that businesses face, more progressive.

Raising the cost of human capital justifies technological adoption or doing more with fewer workers. Higher wages through government fiat favor artificial intelligence and robots, which will be more cost effective, never take days off from work, do not require government-mandated healthcare and are statistically less prone to error than a human counterpart.

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About the Author

Garrett Baldwin is the Managing Editor of the Alpha Pages and the Features Editor of Modern Trader. An author and Baltimore native, he earned a BS in journalism from the Medill School at Northwestern University, an MA in Economic Policy (Security Studies) from The Johns Hopkins University, an MS in Agricultural Economics from Purdue University.