Paul Krugman is Wrong about the Rise of the Robots http://econfuture.wordpress.com/2013/01/18/paul-krugman-is-wrong-about-the-rise-of-the-robots/
Paul Krugman has recently taken a keen interest in the rise of robots and automation — an issue that I have been focusing on since the publication of my book on this subject back in 2009.
In a recent post, Krugman says the following:
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.
I think there is a fundamental problem with this way of thinking: as jobs and incomes are relentlessly automated away, the bulk of consumers will lack the income necessary to drive the demand that is critical to economic growth.
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). Individual consumer spending is typically around 70% of GDP in the United States.
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 energy, 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. Think of on industrial robot being used by an auto manufacturer. The robot will not continue running if no one is buying cars.*
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 continue to thrive. (This is the primary focus of my book, The Lights in the Tunnel).
There is plenty of evidence that consumers are already struggling with the structural shift occurring in the economy. The years leading up to the current economic crisis were, of course, characterized by people consuming on the basis of debt rather than income. A just-released report shows that an ever increasing number of Americans are raiding their retirement accounts to pay current bills.
Does Paul Krugman really believe that it is possible to have a “society that grows ever richer” while a tiny number of robot owners hoover up more and more of total income — and the jobless masses consume the output by running up their credit cards or cashing in their 401(k)s?
The point is that the robot revolution is not just about income inequality. It will ultimately impact the sustainability of economic growth.
Innovation requires the existence of a market. New ideas will not receive the necessary backing if investors do not anticipate healthy market demand. A future with a dearth of viable consumers will be a far more zero-sum future. It will mean less of the type of innovation we associate with Steve Jobs — and more of the type you would find at Goldman Sachs.
One of the main points I make in my book is that I think we will ultimately have to treat the market itself as a kind of renewable resource. Jobs and wages have historically been the primary mechanism that redistributes income (and purchasing power) from producers back to consumers. Widespread reliance on robots and automation may ultimately cause that mechanism to break down — and that will be a threat to continued prosperity.
So what is the solution? In the long run, I think there will be no alternative except to implement direct redistribution of income. One possibility is a guaranteed minimum income funded by more progressive taxes (on the robot owners), and possibly by other sources (for example, a carbon tax).
It goes without saying that implementing such a solution would be an enormous social and political challenge. And it will intertwine with the other major problems we face. Meaningful action on climate change, for example, will become even more difficult in world where much of the population is increasingly focused on individual income continuity.
Make no mistake, responding to the impact that accelerating technology has on the job market could turn out to be one of the defining challenges for our generation.
* Not all robots are used in production, of course. There are also consumer robots. If you own a toy robot, it may “consume” batteries. However, in economic terms, YOU are the consumer — not the robot. You need a job/income or you won’t be able to buy batteries for your robot. Robots do not drive final consumption — people do.
Would I be wrong in thinking that if debt is to be prioritized it would be the Executive Branch through the Treasury Dept. that decides on the priority order as well as the manner of debt ervice payment? If that be the case the President in consultation with his staff could decide, for example, to pay debt service by issuing additional Treasury securities in the amount of that debt service. It isn’t without precedence for the Executive to renegotiate the value of government contracts. Some of those contracts, especially those with corporations in Republican territory, could be placed on a low priority status given that such contracts have a significant measure of profit built in which may not be a necessity for those businesses at the pressent time. Why wouldn’t the Executive determine that debt deriving from services to its citizens be given top priority? People are far more sensitive to the deprivations brought on by economic chaos. Healthy corporations prove to us every day that they have plenty of excess cash to get them through a tough period. They can divert some of that abundance from political giving and towards their own self support while the Treasury Dept awaits an improvement on the revenue side which would then allow those contracts to be fully paid. That’s what prioritizing is all about, deciding what comes first people or profits.
paul ryan is dumber than i thought…
no way we could prioritize funding less than 2/3rd of the bills coming due…receipts come in at different levels at different times of the month… & Brad Plumer notes that every day Treasury gets about 2 million invoices from government agencies, which are processed automatically “dozens of times per second”.
rjs I am just a little unconvinced by the Fratto/DeLong argument that boiled down to “dang it, even if we wanted to prioritize our computers are just too damn dumb”
Because anyone who examines Treasury debt and expenditure reports that reconcile all those fund accounts down to the penny a business day and a half later has to wonder.
Treasury balances Debt Held by The Public and Intragovernmental Holdings and their sum Total Public Debt and makes those sums public via a web application with a 24 hour delay, but damn it just have to pay invoices as they come in the door because fuck we are stuck in 1920 and abacuses
On a policy basis the “we are dumber than dog shit” actually works for me, my long term policy preferences are advanced exactly zero by the Feds honoring payments on programs backed by OAS, DI, and HI while denying benefits backed by SMI. But that just makes me complicit with DeLong and Fratto in trying to keep the Ship of State off the rocks.
But may just add up to virtuous liars. Because I suspect Treasury could prioritize if they chose to and this “my mainframe payable system ate my homework” is just convenient (and valuable) bullshit.