Badly Confused Economics: The Debate on Automation

February 09, 2017


The media have been filled with accounts in recent years of how automation is displacing workers and threatening the country with mass unemployment. Even President Obama even made a point of warning about the dangers of mass displacement from automation in his farewell address.

[Dean Baker| February 5, 2017 |Beat the Press]

This obsession is bizarre for two reasons. The first is a simple empirical point. In contrast to the concern about automation leading to massive displacement, in recent years the pace of automation has been extremely slow. Productivity growth, which is a measure of the rate at which workers are being displaced by technology, has averaged less than 1.0 percent annually in the United States over the last decade.

By contrast, it averaged almost 3.0 percent annually in the decade from 1995 to 2005. Productivity growth also averaged almost 3.0 percent annually in the long Golden Age from 1947 to 1973. This slowdown has not been restricted to the United States. Virtually every wealthy country has seen very slow productivity growth over the last decade. The United Kingdom even had several years of negative productivity growth. This is equivalent to workers were replacing robots: a situation where it takes more workers to produce the same amount of output.

So at a time when automation is proceeding at an extraordinarily slow pace we are seeing many policy types and politicians worrying about mass displacement from automation. That does not make a great deal of sense.

The other reason why the concern over automation seems misplaced is that it is directly at odds with how we talk about other areas of economy policy. To take an example that has recently been in the news, the Federal Reserve Board raised interest rates in the United States last month. It is widely expected to raise interest rates several more times in 2017.

The reason for raising interest rates is that the Fed is concerned that the economy is creating too many jobs. This will increase workers’ bargaining power, putting upward pressure on wages. A more rapid rate of wage increases will lead to more rapid inflation. To prevent this outcome, the Fed wants the economy to have fewer jobs.

But how can it make sense that, at a time when we are worried that automation is destroying a massive number of jobs, we also need the Federal Reserve Board to add to the job destruction by raising interest rates? If automation is leading to mass job destruction the Fed should not have to be worried about overly tight labor markets.

The same story applies to often repeated concerns about the demographics of an aging population. The standard story, which is repeatedly endlessly by the policy elite, is that we will have too few workers to support a growing population of retirees.

Apart from the basic demographics making no sense (we have always had a rising ratio of retirees to workers), the argument is 180 degrees at odds with the automation story. If automation is going to radically reduce our need for workers, then supporting a growing population of retirees will be no problem whatsoever. Incredibly, some of the automation scare story promoters simultaneously worry that we will have shortages of both jobs and workers.

In fact, the often voiced concerns about government deficits and debt also make no sense in the context of automation destroying jobs. What is the bad story if the government runs large budget deficits in a context where technology is hugely expanding our productive capacities?

The problem of budget deficits is supposed to be one where government spending is overburdening the economy, leading to either high interest rates, which crowd out investment, or runaway inflation. But if automation is hugely expanding our productive capacities then it should be able to accommodate the demand creating by large budget deficits. If automation is rapidly destroying jobs, the budget deficits should not be a problem.

There can be a story that automation shifts demand in the labor market, sharply reducing demand for less educated workers will increasing the demand for more skilled workers. This is theoretically possible, but there is no reason to believe that it describes the economy today or in the future.

While automation has displaced many jobs requiring less education it can also displace many of the most skilled workers. Developments in diagnostic technology are likely to make a skilled technician as good as the best doctor in assessing patients’ physical conditions.

Robots are likely to be able to perform surgery better than today’s best surgeons. And, with the Internet, there is no reason that any X-Ray or MRI scan should ever be read by a highly paid radiologist in the United States, as opposed to a much lower paid one in India. There is a similar story with lawyers and legal research and almost every other highly compensated occupation.

In short, there is no reason to believe that technology has any inherent bias towards destroying less skilled jobs while enhancing demand for the most highly skilled. It is likely to destroy jobs in both areas, although it is entirely possible that the most highly paid professionals will be able to use their power to block technologies that threaten their livelihood, as they have largely done thus far.

But of course this is not a problem of technology. This is a problem where privileged groups have the political power to be able to protect themselves from technology and the market. If President Obama and others warning of the threat of automation had made this sort of warning, they would be contributing hugely to the political debate.

As it is, their complaints about automation just work to sow confusion. It is very convenient for elites to blame the growth of income inequality on impersonal forces like the development of technology, but it is not true.

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  • Stan Sorscher
    The robot story has never made any sense. Suddenly we have robots! We’ve also had the cotton gin, steam engines, rural electrification, transistors, computers, the internet and Uber. Holy cow! Productivity has been going up since the Romans invented metal scissors for cutting hair and beards – maybe even before then. But now, …. those damn robots are changing everything. Really?

    I’m more worried that the employment relationship is disappearing and workers have lost bargaining power to claim a share of the gains they produce.
  • William Ryan
    Thank you Mr. Baker for your most prescient views on the truth of the matter on automation and technology and telling it like it really is rather than the usual one sided views. I greatly appreciate your candidness and objectivity. There are many moving parts to globalization that make it very complex and easy to make false assumptions that can easily lead to unintended consequences. There no doubt will be mistakes made but at least we are finally trying to do something about or future as it will be and should be a go slow learning process-policy. Any investor will tell you that you have to invest in the future to grow.