Saturday, October 2, 2010

The Technology-Driven Consumption Trap

This reflects my personal opinion, not the views of the SEC or its staff.
I just finished reading Robert Reich’s new book, Aftershock. The critical points of the book are well presented in his pre-publication New York Times op-ed piece. I will not be able to do justice to his work in a few sentences, but for those who don’t want to buy the book or click on the link, here goes:

The root of our economic problems is the ever widening income gap. The rich, who are laying claim to a higher and higher percentage of income, don’t spend as much of their income as do those down the income ladder, so demand for goods and services is dropping. The solution is to move income toward those who will spend more of what they earn, namely the workers who are producing all the goods. Put another way, we need to redistribute income so that those who produce can afford to buy what they are producing.

This is one of those “gee, I should have thought of that” sorts of arguments, a reasoned argument for income redistribution based not on some notion of fairness, but on economic results. Rather than the government priming the pump through fiscal measures, which is obviously a short-term solution, he argues that we need to change the structure of the system to shift income toward those who will consume.

But I would like to sketch a path for technology that makes this approach, income redistribution as a Keynesian solution of sorts, unsustainable, indeed a path that leads us to a land where no magic can return us to the economy we have enjoyed in the past. This path is one that takes two of the very problems Reich pinpoints and assumes they deepen. These two problems are, first, that the marginal propensity to consume drops with an increase in income, and second, that the contribution of labor to production declines over time.

Trend 1: Diminishing Consumption
Reich makes the point that someone whose income is hundreds of millions a year is not going to be able to spend more than a small fraction of it on consumption. If that money were instead given to, say, ten thousand middle-income families in chunks of $10,000 each, much more of it would go into the economy, spurring demand for production.

But what if the portion of income that goes toward consumption starts to go lower even as we move down the income ladder. That is, what if those at lower and lower income levels find they don’t need to spend as much of their income on consumption as they have in the past? I think this is what could happen if the current technology-driven trend of how people spend their time continues.

I wrote a post a few months ago, The Accidental Egalitarian, which made the point that with the increased focus on technology – where we spend more and more of our time on our cell phone, doing emails, watching DVDs and generally surfing the web – there is less of a difference between how the super rich and the reasonably well off spend their time hour by hour during their typical days. The point of that post was that in practical term the income gap is not as large as it might seem; that several orders of magnitude differences in income don’t make all that much difference in what these people do with their time. The point here is the corollary: those activities do not require much income.

If this trend continues, a redistribution of income will not spur the increase in spending that Reich suggests.

Trend 2: Diminishing Labor in Production
Let’s also say that the production to feed our demand can be developed with little labor input. This is already happening, not only because of improvements in production efficiency, but also because the sorts of things we want to consume are particularly well suited to capital-intensive production.

Suppose most of what we want to buy ends up being produced in factories run with robots, and maintained and operated by five or six engineers. (That doesn’t really have to be what is going on. It could be that the factory owner just says it is using robots, and is really employing five hundred workers in some third world country each making a few dollars a day. It will still seem to be the same, domestic labor demand will be lower even if we manage to push consumption up).

As this trend progresses, income redistribution will have a limited effect on increased employment because there will not be that many more jobs to be had.

In the Year 2025
Take these two trends to their extreme. We are in the year 2025. Because of advances in production technology, much of the path from extracting the required renewable resources through to the production and distribution of most of the items we demand can be accomplished with automated methods overseen by a small cadre of engineers. (At least that is what we are being told. But some blog posts are claiming that all we are doing is exporting wheat to pay for labor-intensive production in Africa. Africa, The New Asia®. It is hard to know who to believe anymore).

The main items we demand, beyond food, clothing and shelter, are the nth generation game systems. Computer games have progressed to the point where they are approaching the level of Nozick’s experience machine. They allow us to be anyone we want in whatever world we want, accompanied by whomever we want, all with full sensory feedback. If you think you used to burn a lot of your free waking hours with your jumping between email, video games, Facebook, and HBO back in 2010….

Speaking of HBO, movie-making software now allows us to make TV shows, even full-length movies at home that rival those that used to require live actors and teams of hundreds. The deflated profitability of journalism and then the music industry earlier in the century has now enveloped all forms of media. The entertainment industry has disappeared; it is all free, operated with the same open-source ethos that spelled doom for most commercial software enterprises over the past decade. Which also means no more advertising. We pretty much know what we want to buy, and depend on those in our FriendWeb™ (version 4.6) to guide us.

If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level. Given our evolved interests, most of us are spending a fraction of our income on consumption. There just isn’t a lot that we demand. What we do demand is cheap, and doesn’t require much of any labor to produce.

Or, doesn’t require production at all. For those who have the money to burn, demand is moving increasingly toward things that cannot be produced. Land, art, rare wines and Super Bowl tickets are being bid up to unthinkable levels. The major economic pastime that remains to differentiate the rich from the rest of us is picking new stuff to throw into the fray. The latest one is scholar stones from the Sung Dynasty. All that money has to go somewhere. But that only leads to a transfer of income from one well-to-do pocket to another without generating any production. Sadly for those grounded in the middle class, this means more of these things are moving out of reach. But no matter. It all seems silly and abstract to most of us, like the amusing eccentricities of the English upper class a century or two before. Maybe that is because we are no longer taunted by magazine covers and ads (because there are no magazines or ads), maybe it is because the demise of the entertainment industry has also led to the demise of the iconic celebrity, or maybe it is just that we don’t really care what those outside our circle of gamers are doing.

We are a society that basically eats, sleeps, works and then veges out. Not surprising, I guess, given that the tip of the spear of the economy, such as it is, are those same kids who a decade or two earlier were living at home with their parents after college, after graduate school – well, some still are. Though many of us now have our own prefabricated SmallHouse® (McMansions are a thing of the past; no one needs all that space, and, like mink stoles post-Mad Men, social norms regard these as the extravagances of a bygone era). That plus a car, food (the former rarely used, and both produced very inexpensively), our two-hundred dollar experience machine games, and we are happy as a clam.

I don’t know exactly how this economy works, but I can tell you that it is not working well. What are all of Reich’s workers doing for jobs now? Where is the money coming from for even this minimally consumptive society? What levers can we pull to get ourselves out of this stagnant economy, to reduce unemployment? We are approaching our second lost decade, and nothing seems to work. Not that most people care.

There used to be a lot written about the liquidity trap, where monetary policy can no longer function as a spur to economic recovery. Now it is all about the consumption trap creating similar limits on the ability of fiscal measures to push up employment and production.