Spoons: For Eating From the Trough of Growth, or for Digging a Pointless Hole?

Man Digging Hole in Ground

Today, prominent economist Paul Krugman posted an op-ed on the negative impacts of technology and productivity gains on the economy. Krugman claims that the economy is “deeply depressed” and that this can be primarily attributed to two sources: (1) losses of jobs due to technology driven productivity gains and (2) monopolists capturing all the profit for themselves.

For his second point,  Krugman cites as evidence that “recent college graduates had stagnant incomes even before the financial crisis struck.” Unfortunately, this dismisses the work done by Hanushek and Helpman that has revealed that quality of education is the key, not number of years of education. The fact is quality of education has fallen over time at both the primary and tertiary levels, while quantity has increased specifically at the tertiary level. As of a 2006 study, among U.S. college seniors, just 34, 38 and 40 percent were proficient in prose, document, and quantitative literacy, respectively. Therefore, the average wage that a college graduate receives should be dropping in real terms. It’s not about power-struggles, it is about lack-of-skills.

Krugman goes on to claim “that technology has taken a turn that places labor at a disadvantage” particularly leading to job losses. This is an increasingly common assertion from the left: somehow today’s technology is different than that in the past that succeeded in raising incomes over the last century. The basis of Krugman’s argument stems from an interpretation of Erik Brynjolfsson and Andrew McAfee’s recent book Race Against the Machine; where he claims “that many of the jobs being displaced are high-skill and high-wage; the downside of technology isn’t limited to menial workers.”

But productivity gains don’t lead to long-run job losses, rather they lead to higher wages. The McKinsey Global Institute and the Australian Productivity Commission show clearly that increases in productivity lead to economic growth.  Likewise, as we show in Embracing the Self-Service Economy, automation and higher productivity do not reduce overall number of jobs but do raise GDP. To the extent that technology is automating high wage jobs now more than it did in the past is all to the good, as it means that goods and services that depend on higher wage labor (e.g, legal services, health care, etc.) now become more affordable. Productivity has always been good, is good and always will be good, whether it is to make low, middle or high wage jobs more productive.

Krugman’s neo-Luddite worries bring to mind the story of economist Milton Friedman when he was visiting:

“an Asian country in the 1960s and visiting a work-site where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”

Do we want to regress or progress? If we “build canals” faster using modern technology, it will allow for more books, cars, haircuts, vacations and other goods and services the workers freed up by better canal technology can now make. Rather than blame technology for today’s high unemployment, Krugman should look to the real cause: declining manufacturing output and a failure of U.S. international competitiveness. Oh, but this would require Krugman to admit that he was wrong when he stated earlier this year that competitiveness is a “dangerous illusion.” Better to blame innovation.  In Krugman’s world, workers would have spoons, but they’d be better off because of higher government spending.

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About the author

Justin Hicks joined ITIF in June of 2012 as Senior Economic Policy Analyst. Prior to joining the ITIF as Senior Economic Policy Analyst, Justin Hicks finished his Ph.D. in Economics at the University of California, Merced. His research focused on potential spillovers of cooperative R&D in the international setting as well as the impact of funding on R&D productivity in universities. In his current research, he looks to identify the effect of trade policy on the flow of ideas and home-country R&D productivity. His primary expertise lies in using applied microeconometrics to identify causal relationships using large data-sets. Prior to receiving his Ph.D., Justin achieved a M.A. in economics and a B.A. in Business economics from the University of California, Riverside.
  • http://www.ivpcapital.com/blog Michael Elling

    Our economic growth and productivity are tied to our information networks. While all appears rosy on the surface, we’ve slowed the pace of growth and productivity recently relative to what it could be. That’s because as we’ve remonopolized the bandwidth sector over the past 15 years. Pricing disconnected from moore’s and metcalfe’s laws about 10 years ago. So while bandwidth performance/price has improved 6-10% annually, it is far below the 30-50% we had come to expect in competitive markets in the 1980s and 1990s from the above mentioned laws. Therefore, depending on where one is in the Infostack, broadband performance should be 20-150x better than it is. Google Fiber in KC is the best example of this. That matters when our information economy is shifting to the cloud and lack of low-cost, efficient, ubiquitous access retards our real growth and increased productivity across all segments of society. What got us here was the competition in the 1980s and 1990s, not the resurgent monopolies. They in fact may the be the ones to blame.