Rise of the Robots: Technology and the Threat of a Jobless Future (30 page)

A Thought Experiment

To visualize the most extreme possible implications of Reuther’s warning, consider a thought experiment. Imagine that Earth is suddenly invaded by a strange extraterrestrial species. As thousands of the creatures stream off their massive spacecraft, humanity comes to understand that the visitors have not come to conquer us, or to extract our resources, or even to meet our leader. The aliens, it turns out, have come to work.

The species has evolved along a path dramatically different from that of human beings. The alien society is roughly comparable to that of social insects, and the creatures aboard the spacecraft are drawn entirely from the worker caste. Each individual is highly intelligent and capable of learning language, solving problems, and even exhibiting creativity. However, the aliens are driven by a single—and overwhelming—biological imperative: fulfillment comes only from performing useful work.

The aliens have no interest in leisure, entertainment, or general intellectual pursuits. They have no concept of a home or personal space, private property, money or wealth. If they need to sleep they do so standing in their workplaces. They are indifferent even to the food they eat, as they have no sense of taste. The aliens reproduce asexually and reach full maturity within months. They have no need to attract mates and no desire to stand out as individuals. The aliens serve the colony. They are driven to work.

Gradually, the aliens integrate into our society and economy. They are eager to work, and they demand no wages. Work, for the aliens, is its own reward; indeed, it is the only reward they can
conceive of. The sole cost associated with their employment is the provision of some type of food and water—and given this, they begin to reproduce rapidly. Businesses of all sizes quickly begin to deploy the extraterrestrials in a variety of roles. They start off in more routine, low-level jobs but rapidly demonstrate the ability to take on more complex work. Gradually, the aliens displace human workers. Even those business owners who initially resist replacing people with aliens eventually have little choice but to make the transition once their competitors do so.

Among humans, unemployment begins to rise relentlessly while incomes for those who still have jobs stagnate and even begin to fall as competition for jobs increases. Months and then years pass, and unemployment benefits run out. Calls for government intervention result only in gridlock. In the United States, Democrats call for restrictions on employing aliens; Republicans, lobbied heavily by big business, block these initiatives and point out that the aliens have spread across the globe. Any limitations on the ability of American businesses to employ the aliens would put the country at a staggering competitive disadvantage.

The public becomes increasingly fearful about the future. Consumer markets become deeply polarized. A small number of people—those who own a successful business, hold large investments, or have safe executive-level jobs—have been doing extremely well as business profitability has increased. Sales of luxury goods and services are booming. For the rest, it’s the dollar store economy. As more people are unemployed, or become fearful that they will soon lose their jobs, frugality becomes tantamount to survival.

Soon, however, it becomes evident that those dramatic increases in business earnings are unsustainable. The profits have come almost entirely from cutting labor costs. Revenues are flat, and soon they begin to fall. The aliens, of course, buy nothing. Human consumers increasingly turn away from any purchase that is not absolutely essential. Many businesses that produce nonessential goods
and services eventually begin to fail. Savings and credit lines are exhausted. Homeowners become unable to pay their mortgages; tenants fail to make rent payments. Default rates for home loans, business loans, consumer debt, and student loans soar. Tax revenues collapse even as demand for social services rises dramatically, threatening the solvency of governments. Indeed, as a new financial crisis looms, even the prosperous elite will cut back on their consumption: rather than expensive handbags or luxury cars, they will soon be more interested in buying gold. The alien invasion, it seems, has not turned out to be so benign after all.

Machines Do Not Consume

The alien invasion parable is admittedly extreme. Perhaps it would work as the plot for a really low-budget science fiction movie. Nonetheless, it captures the theoretical endpoint of a relentless progression toward automation—at least in the absence of policies designed to adapt to the situation (more on that in
Chapter 10
).

The primary message this book has delivered so far is that accelerating technology is likely to increasingly threaten jobs across industries and at a wide range of skill levels. If such a trend develops, it has important implications for the overall economy. As jobs and incomes are relentlessly automated away, the bulk of consumers may eventually come to lack the income and purchasing power necessary to drive the demand that is critical to sustained economic growth.

Every product and service produced by the economy ultimately gets purchased (consumed) by someone. In economic terms, “demand” means a desire or need for something, backed by the ability and willingness to pay for it. There are only two entities that create final demand for products and services: individual people and governments. Individual consumer spending is typically at least two-thirds of GDP in the United States and roughly 60 percent or more in most other developed countries. The vast majority of individual
consumers, of course, rely on employment for nearly all of their income. Jobs are the primary mechanism through which purchasing power is distributed.

To be sure, businesses also purchase things, but that is not final demand. Businesses buy inputs that are used to produce something else. They may also buy things to make investments that will enable future production. However, if there is no demand for what the business is producing, it will shut down and stop buying inputs. A business may sell to another business; but somewhere down the line, that chain has to end at a person (or a government) buying something just because they want it or need it.

The essential point is that a worker is also a consumer (and may support other consumers). These people drive final demand. When a worker is replaced by a machine, that machine does not go out and consume. The machine may use energy and spare parts and require maintenance, but again, those are business inputs, not final demand. If there is no one to buy what the machine is producing, it will ultimately be shut down. An industrial robot in an auto manufacturing plant will not continue running if no one is buying the cars it is assembling.
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So if automation eliminates a substantial fraction of the jobs that consumers rely on, or if wages are driven so low that very few people have significant discretionary income, then it is difficult to see how a modern mass-market economy could continue to thrive. Nearly
all the major industries that form the backbone of our economy (automobiles, financial services, consumer electronics, telecommunications services, health care, etc.) are geared toward markets consisting of many millions of potential customers. Markets are driven not just by aggregate dollars but also by unit demand. A single very wealthy person may buy a very nice car, or perhaps even a dozen such cars. But he or she is not going to buy thousands of automobiles. The same is true for mobile phones, laptop computers, restaurant meals, cable TV subscriptions, mortgages, toothpaste, dental checkups, or any other consumer good or service you might imagine. In a mass-market economy, the distribution of purchasing power among consumers matters a great deal. Extreme income concentration among a tiny sliver of potential customers will ultimately threaten the viability of the markets that support these industries.

Inequality and Consumer Spending: The Evidence So Far

In 1992, the top 5 percent of US households in terms of income were responsible for about 27 percent of total consumer spending. By 2012, that percentage had risen to 38 percent. Over the same two decades, the share of spending attributed to the bottom 80 percent of American consumers fell from about 47 percent to 39 percent.
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By 2005, the trend toward increased concentration of both income and spending was so obvious and relentless that a team of stock market analysts at Citigroup famously wrote a series of memos intended only for their wealthiest clients. The analysts argued that the United States was evolving into a “plutonomy”—a top-heavy economic system where growth is driven primarily by a tiny, prosperous elite who consume an ever larger fraction of everything the economy produces. Among other things, the memos advised wealthy investors to shy away from the stocks of companies catering to the rapidly dissolving American middle class and instead focus on purveyors of luxury goods and services aimed at the richest consumers.
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The data demonstrating the American economy’s decades-long march toward ever-increasing concentration of income is unequivocal, but it contains within it a fundamental paradox. Economists have long understood that the wealthy spend a smaller fraction of their income than the middle class and, especially, the poor. The lowest-income households have little choice but to spend nearly everything they manage to bring in, while the truly rich would likely find it impossible to consume at a similar rate even if they tried. The clear implication is that, as income increasingly concentrates among the wealthy few, we should expect less robust overall consumption. The tiny slice of the population that’s hoovering up more and more of the country’s total income simply isn’t going to be able to spend it all, and that ought to be obvious in the economic data.

The historical reality, however, turns out to be quite different. Over the three and a half decades between 1972 and 2007, average spending as a percentage of disposable income increased from roughly 85 percent to more than 93 percent.
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For most of that period, consumer spending was not only by far the largest component of American GDP—it was also the fastest growing. In other words, even as income became ever more unequal and concentrated, consumers managed to somehow actually increase their overall spending, and their profligacy was the most important factor powering the growth of the American economy.

In January 2014, economists Barry Cynamon and Steven Fazzari, of the Federal Reserve Bank of St. Louis and Washington University in St. Louis respectively, published research that delved into the paradox of increasing income inequality coupled with rising consumer spending. Their primary conclusion was that the decades-long uptrend in consumer spending was powered largely by increased debt taken on by the lower 95 percent of American consumers. Between 1989 and 2007 the ratio of debt to income for this vast majority roughly doubled from just over 80 percent to a peak of nearly 160 percent. Among the wealthiest 5 percent, the same ratio remained relatively constant at around 60 percent.
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The steepest increase in
debt levels tracked closely with the housing bubble and easy access to home equity credit in the years leading up to the financial crisis.

That relentless borrowing on the part of nearly the entire American population was, of course, ultimately unsustainable. Cynamon and Fazzari argue that “financial fragility created by unprecedented borrowing triggered the Great Recession when the inability to borrow more forced a drop in consumption.”
⁵
As the crisis unfolded, overall consumer expenditures plunged by about 3.4 percent, a collapse in consumption unmatched during any recession since World War II. The spending decline was also especially long-lived; it took nearly three years for overall consumption to return to its pre-crisis level.
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Cynamon and Fazzari found a marked difference between the two income groups both during and after the Great Recession. The top 5 percent were able to moderate their spending by drawing on other resources during the recession. The bottom 95 percent were essentially tapped out and had little choice but to cut back dramatically. The economists also discovered that the subsequent recovery in consumer spending has been powered entirely by the top of the income distribution. By 2012, the top 5 percent had increased their spending by about 17 percent, after adjusting for inflation. The bottom 95 percent had seen no recovery at all; consumption remained mired at 2008 levels. Cynamon and Fazzari see few prospects for a meaningful recovery among the majority of consumers and “fear that the demand drag from rising inequality that was postponed for decades by bottom 95 percent borrowing is now slowing consumption growth and will continue to do so in coming years.”
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In corporate America it has become increasingly evident that, when it comes to domestic customers, all the action is at the top. In virtually every industry sector that caters directly to American consumers—from home appliances to restaurants and hotels to retail stores—the mid-range is struggling with stagnant or declining sales, while companies that target top-tier consumers continue to
thrive. Some business leaders are beginning to recognize the obvious threat to mass-market products and services. In August 2013, John Skipper, the president of ESPN, the cable and satellite sports network that ranks as the world’s most valuable media brand, said that income stagnation represented the greatest single threat to the future of his company. The cost of cable TV service in the United States has soared by about 300 percent over the past fifteen years, even as incomes have remained flat. Skipper noted that “ESPN is a mass-product,” and yet the service could eventually be out of reach for a large fraction of its audience.
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As America’s largest retailer, Walmart has become a bellwether for the middle- and working-class consumers who flock to its stores in search of low prices. In February 2014, the company released an annual sales forecast that disappointed investors and caused the stock to drop sharply. Sales at established stores (those open for at least a year) had fallen for the fourth quarter in a row. The company warned that cuts to the US food stamp program (officially known as the Supplemental Nutrition Assistance Program) as well as increases in payroll taxes were poised to hit hard at low-income shoppers. About one in five Walmart customers rely on food stamps, and evidence suggests that many of these people are stretched to the point where they have virtually no discretionary income.