Friday, January 9, 2015


In "Rise of the Machines (Part I) ..." I took a cue from economist Nouriel Roubini and wrote about the birth of the Third Industrial Revolution, the rise of the Silicon Valley, and how they have impacted the world we live in. Specifically, I pointed out how productivity and wealth creation has been surging because of technological advancements, but that none of these gains are trickling down to ordinary workers in the form of higher wages, or job security.

Because smart machines appear to both facilitate and terminate the functions of ordinary workers the wage gains made by labor in the first two industrial revolutions are slowly being degraded and lost.

Specifically, ordinary workers are watching as the financial gains they help generate today are gobbled up by those who either develop our new technologies, or who control and financially underwrite the larger economy. This reality helps explain why we are now living in an era where we can have a strong economy, a record setting stock market, record wealth creation, and growing GDP, but very few financial gains for ordinary workers who help increase our nations productivity.

This hasn't always been the case. There was a time when the compensation of ordinary workers kept pace with increased productivity.

So, what's happening?

In a few words, the rules of the economic game have been changed. But technology is only partially responsible for the weakened position of labor and stagnating wages we have seen over the past 40 years. The other part is political, and can be tied directly to state-led policies that have stripped labor of its bargaining power, and is now marginalizing its place in society. As I pointed out over a year ago, the case of Detroit goes far to help us see how this happened.

We'll get to the Detroit example after we discuss why Nouriel Roubini's "rise of the machines" apocalyptic prediction for ordinary workers is already in the works.

At the outset we need to acknowledge that current trends make it clear that future advances in technology will continue to primarily benefit those with money and high skill sets. What this says about the prospects of ordinary laborers, and the middle class, is not good.

Why keep the house cleaner around so long when the iRobot Roomba 880 can vacuum your floors for free? To be sure, there will always be service oriented work, but the number of laborers needed to complete a job will decline as machines do more of our menial work.

In fact, the amount of things we now do for ourselves - called "prosuming" - is considered so normal that we don't even think about how we have adapted to technology. We now pump our own gas. We do much of our banking at the ATM or on-line. We purchase products on the internet. We order uber drivers from our phones. We do so many tasks that once required considerable assistance from a middleman or service professionals that we're eliminating the need for low- and middle-skilled workers.

Put more simply, ordinary workers are being displaced by machines, which is pitting more and more workers against one another for fewer and fewer low- and middle-skill jobs. As wages stagnate and decline (and they have) middle-class Americans have had to cope with more work, while accumulating more debt.

While more debt is good for those in the financial sector in the short-term, it's not so good for society over the long-term.

The on-going displacement of workers by technology explains why economist Nouriel Roubini suggested that our modern economy is built on a "rather shaky foundation." Roubini's concern - as Franklin D. Roosevelt and the intellectual godfather of capitalism, Adam Smith, understood - is that if workers can't earn a strong income America will be left with an economy where only distressed consumers, debtors, and the wealthy can buy the products produced.

Suggesting that the U.S. will become dependent on distressed consumers, prosuming debtors, and a small group of extremely wealthy consumers to keep the economy going isn't some wild prediction on Roubini's part. It's already happened. People have been working and racking up debt in America because of stagnating and declining wages for some time now.

Think about the following for a moment.

According to data from the St. Louis branch of the Federal Reserve, because wages have stagnated or declined in America over the past 40 years, America's middle class lost about $1.215 trillion in wages during this time. Put another way, if wage gains from 1970 through 2010 had maintained the same pace that it did immediately after World War II through 1970 Americans would have had an additional $1.215 trillion in their pockets.

To make up for these lost wages, and to help make ends meet, American households became two-income families, saw breadwinners working two or more jobs, or began tapping into (or gave up on) savings. Worse, credit card use shadowed all of these developments.

This helps to explain why American households racked up almost $1 trillion in credit card debt right before the market collapsed in 2008.

Taking on almost $1 trillion in credit card debt came close to matching the $1.215 trillion in lost wages that Americans lost over the past 40 years. But it has turned America into a nation of debtors, while transferring trillions to the wealthiest Americans.

The economic fallout from the Third Industrial Revolution is clear: Productivity and wealth may be increasing but ordinary workers aren't seeing the same share of the wage gains that they saw in the immediate post-war era. The amount of debt and individual bankruptcy cases in America is just one of several examples of the economic fallout.

All of this is important to economist Nouriel Roubini because it confirms that technological leaps aren't necessarily making workers or nation-states better off in the long-term. But Roubini's analysis is incomplete. Technology is only one part of a larger problem. A very deliberate set of government policies in the United States have advanced a national race to bottom, which is also working against the interests of labor.

As I pointed out over a year ago, what's happening in Detroit helps explain why the rise of the machines is not the only challenge laborers face in America.

Contrary to what you've heard, the fiscal problems of Detroit, and the challenges that confront America, are not so simple, or the result of labor unions. The 79,500 Michigan jobs/workers that were displaced or shipped to China between 2001 and 2007 didn't happen because of mysterious "magic of the market" forces. Nor did Detroit's tax base suddenly disappear because of incompetent political leadership (though the incompetence didn't help).

Michigan's jobs and manufacturing picture worsened - as did the nation's - because of policies taken by the federal government over the past 30 years. These policies rewarded companies for shifting manufacturing jobs around the world.

When jobs leave so does the tax base. Pretty simple.

Now, someone reading this might be screaming at their screen right now that unions priced the American worker out of the global labor pool by demanding too much. Think again.

Germany produces twice as many cars as the United States. Their unionized auto industry pays workers significantly more than what the U.S. auto industry pays. Indeed, when you take out what it costs for health care (Germany has universal health care) we find that German auto workers make about two times what their U.S. counterparts earn, while benefits for German workers are substantially more rewarding (8 weeks paid vacation, free day care, etc.).

So, the big question is if German auto workers make far more than their U.S. counterparts, why is it that Germany hasn't experienced collapsing industrial cities like Detroit? Why is it that Germany - with its higher salaried auto workers - is seen as the key to Europe's economic stability, while the U.S. is still languishing in a 2008-induced market zombie walk?

While we could discuss how favorable legislation helped facilitate the financialization of America's economy (discussed in my next post on this topic) for now we'll concentrate on three other developments that help us understand what happened to Detroit, and America's manufacturing base.

The first development is pretty simple. For the longest time no one wanted to buy U.S. automobiles. Beginning in the early 1970s America's auto makers began producing crap. Remember the Gremlin? The Corvair? The Pinto? The Chrysler Imperial LeBaron Two Door? The AMC Pacer? The Chevy Chevette? This wasn't the workers fault. This one is on management. When auto manufacturers in America were forced to shut their doors jobs disappeared too.

The second answer is a bit more complex, but still relatively simple too.

Germany's constitution and social culture embrace unions, worker councils, and the right to strike. This helps shape Germany's union-management relations so that they are collaborative, as opposed to being adversarial (the case in the United States). It's the primary reason that Germany didn't experience wholesale layoffs in the auto industry after the 2008 market collapse (offering "extended vacations" instead). Unions and management worked together to keep people employed.

Finally, apart from producing crummy automobiles and going after unions, the United States has gone out of its way to encourage its auto industry and manufacturing base to leave, while doing little to protect American workers. Think about the following.

As I noted above, between 2001 and 2007 Michigan lost 79,500 auto jobs to China. This happened because of specific government policies, both here and in China.
1. Free Trade Agreements: The U.S. has entered into numerous trade agreements that facilitate moving manufacturing jobs overseas, especially to low paying regions of the world.
2. Currency Manipulation: China has been allowed to manipulate its currency, which enables it sell more goods in the United States.
3. Labor Rights Abused: China regularly suppressed labor rights, which lowers manufacturing wages by as much as 47% to 86%, and attracts manufacturers from the U.S. 
Throw in generous U.S. tax credits for business expenses - which include credits for shipping jobs overseas - and it's easy to understand why almost 3 million jobs in the United States were outsourced or were displaced by government policies between 2001 and 2007 (the German government, on the other hand, appears to have had a role in saving VW from a hostile takeover in 2008 by orchestrating the largest hedge fund loss in history).

By sending taxpayer funded trade representatives to negotiate trade deals, while ignoring currency and labor abuses, the U.S. government has effectively told Detroit and America's industrial base - and the middle class - we don't care about you. The end result is that millions of American jobs have been sent to countries all over the world.

Overseas profits and executive pay in the United States has climbed, but workers and America's middle class are left scrambling for what's left.

The interesting thing about these developments is that while negotiating trade agreements the private sector has been adamant about protecting proprietary rights and corporate patents. Forcing governments around the world to go after street vendors and protect intellectual property rights is part of our larger free trade negotiating position. Worker rights, however, are an entirely different matter.

Forced or slave labor? No problem, send the products here. 

Child labor? No problem, send the products here. 

Unsafe working conditions? No problem, send the products here. 

All of this has made it easier to go after labor in the United States.

To be sure, there's no doubt that German auto makers have shifted production over seas and now produce cars in China. But they don't do so as part of a larger policy goal to drive down wages in Germany. The idea that we're all in this together is rooted in Germany's historic approach to economics, and is not simply a shop floor poster in Germany.

Forcing the American worker to compete with laborers who have few protections and can't defend themselves in a global undermines the moral justification of capitalism - the idea that if you work hard you can get ahead. It also defeats the spirit of market economies that we fought two wars in the 20th century to promote.

At the end of the day, as I wrote almost two years ago, if we wanted to protect and demand global labor rights we could. But we don't. Instead we encourage firms in the United States to go abroad and then dismiss the needs of labor, which helps explain what happened to Detroit and what's happening in America.

Racking up almost $1 trillion in credit card debt becomes much easier to understand once we see the bigger picture.


The economic fallout from the Third Industrial Revolution is real. People are losing jobs, while low- and middle-skilled workers are encountering more competition for the work that they do. Technology is pushing this along by creating magnificent labor saving devices. Still, as we saw above, technology alone is not the only culprit for falling wages and job instability.

The experience of Detroit (and Germany) makes it clear that the U.S. government has embraced a series of domestic and foreign policies over the years that have undermined labor's bargaining position, and America's broader wage picture. The ability to send American jobs overseas so easily today is not simply a function of mysterious market forces led by technological advancements. An aggressive post-war trade policy, built around the American-led Bretton Woods institutions, is what made globalization possible. 

For those who study international relations or American foreign policy - and to be blunt about it - what we've experienced is Pax Americana empire building, with a mercantilist twist. There are no "free markets" here.
The wealth that has been created as a result of these dynamics - increased productivity, labor displacement, and aggressive trade policies - has been phenomenal. Just over the past 10 years global GDP has gone from $43 trillion to $77.6 trillion. The distribution, or the trickling down, of this wealth around the world and in America has not comported with the promise of free market enthusiasts. 

What's worse are some of the claims that are made to explain why "the makers" of wealth are far more deserving than "the takers" who push for higher wages. Among their arguments, as I noted in an earlier post on inequality, is that the top 1 percent of wage earners (and their congressional sychophants) believe their income gains are "earned" because - if we are to believe their argument - they are smarter, harder working, and more deserving, among others. End of story.

Conversely, if your income and financial situation have stagnated or worsened - as is the case with America's middle class - it's because you are not smart enough, hard working enough, and less deserving. At the same time, many are viewed as whiners and moochers.

Both assumptions are simply not true.

Let's make this real simple. The rich aren't getting richer simply because of productivity gains made possible by technology. The rich are getting richer because of state sponsored globalization (Bretton Woods/Treaties), state supported outsourcing (tax inducements), a string of market bailouts, artificially cheap money, legislative favors that include tax gifts, deregulation, and many other state-led developments that have nothing to do with being harder working or smarter than middle-class Americans.

Put another way, as I point out in my book, the state creates the conditions under which wealth is created. The fact that it's not trickling down to ordinary workers is also on the state.

As I pointed out in "The Rise of the Machines (Part I) ..." the technological ecosystem created in California didn't happen simply because entrepreneurs and capital magically merged together. The state created the conditions for a unique set of developments to find critical mass in the Silicon Valley. Just as we couldn't marvel over the gifts of athletes until we had organized sports and built stadiums, we couldn't have benefited from the gifts of Robert Noyce and Steven Jobs if the state had not created the conditions for market entrepreneurs to prosper. 

Unfortunately, over the past 40 years the United States has moved in an ideological direction that no longer recognizes the mutually beneficial relationship between states and markets. We have chosen, instead, to focus on the market myth of the frontier rugged individualist.

This ideological shift has created a safe environment for favorable legislation and political gifts to play big hand in determining how much of market profits trickle down to the workforce. Wealth creation and wealth accumulation at the levels we see today are not simply a result of technology driven increases in productivity, as economists like Nouriel Roubini suggest. 

In fact, making technology the primary culprit in putting people out of work, or pushing wages down, is too facile. Worse, it provides "market cover" - and a convenient excuse - for larger politically motivated commercial and trade policies that have done so much damage to the prospects of ordinary workers, and the middle class, over the past 40 years. 

We need a new cooperative agreement between the state, workers, and industry - coupled with a new social structure of innovation that helped build the Silicon Valley - that reflects how markets really work. Without it, the wealth gaps and stagnating wages we see today will continue apace.

The Third Technological Revolution will not bring promised benefits, as promised by Ronald Reagan and other "supply-siders" over 30 years ago, as long as the productivity and new wealth associated with the rise of the machines doesn't "trickle down" to the middle class. 

- Mark 

P.S. I have a "Rise of the Machines (Part III) ..." piece in the works that explains how our changed world economy, built on the back of the technological revolution, has enthroned financiers. These developments will make things much more difficult for workers, and the middle-class, around the world. 

I'll post on this here, with a link, at a later date.

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