Confessions of a Free Market Economist

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent Gardner I’ve a weakness for dystopian literature (think Cormac McCarthy’s The Road). The premise of these books is a disaster thThe Roadat fundamentally alters the trajectory of the planet. The apocalypse is typically human-caused, some act that taps into our collective guilt about environmental degradation, warlust or technological hubris.

An economist’s dystopia is portrayed in Kurt Vonnegut’s Player Piano. Instead of a despoiled planet or some biological or digital monster, Vonnegut’s first novel portrays a society nearly bereft of work. Set at a thinly disguised General Electric (where Vonnegut once worked), World War III prompts an acceleration in automation, allowing the U.S. to win the war. A decade later, automation has become near total. The only people needed are the very best engineers, who spend their days seeking new efficiencies, displacing yet more human involvement. They’ve been freed from work—utopia, right?

Some have imagined that the end of work will open new opportunities for human creativity, but Vonnegut takes a darker view: If few of us are needed to run the machines, how do we distribute reward, the fuel of a market economy? At least in rough terms, economic reward is sized according to what others are willing to pay for what you or I offer in exchange. We’re willing to pay more for clothing that is better designed or more durable than for clothing of shoddy design and manufacture. We pay more for a new car than for a new suit. We also pay more for hedge fund managers than for social workers (yes, that’s a different column).

In Vonnegut’s workless “utopia,” the haves—the intelligentsia that runs the machines—support the have-nots, but barely. No one starves, but only a fraction of the population has meaningful work. The vast majority are relegated to soulless, “make work” employment. Robbed of purpose, the masses revolt.

A spate of excellent stories on the torrid pace of job-displacing automation have hit the mainstream media in the past year (see “A World Without Work” in The Atlantic or Rise of the Robots by Martin Ford). Repetitive work of any kind is at risk. Consider the law: Long a respected and well-paid profession, many practicing attorneys complain of repetition and tedium. Repetition is tailor-made for artificial intelligence (AI). And the news business? It takes little creativity to write the daily stock report or to report on routine events. AI stalks the news writer. TurboTax and H&R Block have deskilled tax preparation—even if you hire a tax preparer instead buying the software and doing it yourself, most preparers rely heavily on these tools.

Jobs at the low end of the skill spectrum remain at risk. New York’s decision to force an increase in wages for fast food workers seems likely to accelerate job loss. Kiosk ordering is replacing humans even at current wage rates. I recently ordered a burger at an airport food court and didn’t see a human being until the order appeared from the kitchen, as if by magic.

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When asked about the problem, economists traditionally point to history and argue that new professions will emerge to replace jobs lost to automation. But what if this time is different? Can the market system respond fast enough to forestall social collapse? I wonder.

We need to re-think our response to the problem. If automation forces humans to be more creative and responsive, then we need to focus on a policy response that empowers that response.

The old economy was built on “full time” work for a single employer. Flexibility is the new hallmark of the emerging economy. Let’s empower part time employment and independent initiative.

  • A major obstacle to this goal is employer-based health care. The Affordable Care Act addressed this problem in several ways but we can and should go further—no one should feel compelled to find “full time” work or remain at a particular job just to get health care coverage.
  • Social Security has vastly reduced poverty among the elderly, but few of us want to live on what Social Security provides. Defined contribution retirement plans, despite some disadvantages, remove the shackles binding workers to specific firms. Defined benefit plans should be made far more portable (reduced vesting periods, fair conversions to annuities, etc.). I know many employees in the public sector—where defined benefit plans dominate—who can’t afford to leave their jobs for fear of losing pension benefits.
  • The cost of child care is an obstacle to many. Let’s follow the example of many European countries and promote workforce participation by expanding subsidies for quality child care.
  • Education at all levels remains critical. Workers with the initiative to upgrade their skills need access to training opportunities that will keep them in the workforce.

Our consistent policy goal must be to encourage work, not dependence. Most families should participate in the labor force: We need a broad economic foundation to support the truly needy; our social fabric is stronger when most families participate in mainstream employment.

Cash assistance to the needy is often counterproductive: In 1996, during the Clinton Administration, we concluded that Aid for Families with Dependent Children was creating a dependent class of Americans and Congress chose to set time limits on cash assistance. Although enrollment in general cash assistance programs has shrunk, Social Security Disability Income seems to have replaced it: SSDI now enrolls 5% of eligible adults, recreating a dependent class. Perhaps it is time to revisit this program.

Ample evidence shows that extended unemployment insurance reduces workforce participation. Dare we all it “tough love” if we resist the temptation to provide extended unemployment insurance in times of recession? We know that the longer a person is out of the workforce, the less likely it is that they will ever return. Extended unemployment benefits can work against the long term interests of both society and the individual.

We can’t deal with the problem of job loss in ways that discourage work. Perhaps there was a time when we could simply subsidize workers whose skills had become obsolete. No longer. If the rate of job displacement accelerates, as seems likely, the sheer number of displaced workers will undermine the social compact and threaten social stability. We won’t let displaced workers starve, but the political and economic power of this economy’s winners will dictate a solution not unlike the bleak socialism portrayed in Player Piano.

Yet we cannot expect the displaced to fend for themselves in a constantly shifting marketplace. The workplace is evolving. Full time, semi-permanent employment at a single firm is the past, not the future. Our labor market policies have to evolve, too.

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