The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (22 page)

A shift in the distribution of income to a power-law distribution would have important implications. For instance, Kim Taipale, founder of the Stilwell Center for Advanced Studies in Science and Technology Policy, has argued that, “The era of bell curve distributions that supported a bulging social middle class is over and we are headed for the power-law distribution of economic opportunities. Education per se is not going to make up the difference.”
²⁶

Such a shift disrupts our mental models for understanding the world. Most of us are used to reasoning by reference to a prototypical. Politicians talk about the “average voter” and marketing managers talk about the “typical consumer.” This works well for normal distributions where the most common value is near the average or, more formally, the mode and mean of the distribution are the same or nearly the same. However, the mean (or average) of a power-law distribution is generally much, much higher than the median or the mode.
²⁷
For instance, in 2009, the average salary for major league baseball players was $3,240,206, roughly three times the median salary of $1,150,000.
²⁸

In practical terms, this means that when income is distributed according to a power law, most people will be below average—say goodbye, Lake Wobegon! Furthermore, over time, average income can increase without any increase in the median income or, for that matter, without any increase in income for most people. Power-law distributions don’t just increase income inequality; they also mess with our intuitions.

*
If you’re a cynic, you might call it luck-biased technical change.

*
In 2011, families with incomes above $367,000 were in the top 1 percent in the United States, but of course, the average reflects people with much higher incomes than that. See http://elsa.berkeley.edu/~saez/saez-UStopincomes-2011.pdf

†
This is a characteristic of Power Law distributions, which we’ll discuss later in this chapter.

*
At least in his capacity as a courtroom lawyer. As an author or TV celebrity, he is benefitting more directly from the technologies of superstardom discussed in the previous section.

“The test of our progress is not whether we add more to the abundance of those who have much it; is whether we provide enough for those who have little.”

—Franklin D. Roosevelt

I
N
THE
LAST
FOUR
chapters, we’ve seen that the second machine age contains a paradox. GDP has never been higher and innovation has never been faster, yet people are increasingly pessimistic about their children’s future living standards. Adjusted for inflation, the combined net worth on
Forbes
’ billionaire list has more than quintupled since 2000, but the income of the median household in America has fallen.
¹

The economic statistics underscore the dichotomy of bounty and spread. The economist Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, brought our attention to the way productivity and employment have become decoupled, as shown in Figure 11.1. While these two key economic statistics tracked each other for most of the postwar period, they became decoupled in the late 1990s. Productivity continued its upward path as employment sagged. Today the employment-to-population ratio is lower than any time in at least 20 years, and the real income of the median worker is lower today than in the 1990s. Meanwhile, like productivity, GDP, corporate investment, and after-tax profits are also at record highs.

In a place like Silicon Valley or a research university like MIT, the rapid pace of innovation is particularly easy to see. Startups flourish, minting new millionaires and billionaires, while research labs churn out astonishing new technologies like the ones we saw in earlier chapters. At the same time, however, a growing number of people face financial hardships: students struggle with enormous debt, recent graduates have difficulty finding new jobs, and millions have turned to debt to temporarily maintain their living standards.

In this chapter, we’ll address three important questions about the future of the bounty and the spread. First, will the bounty overwhelm the spread? Second, can technology not only increase inequality but also create structural unemployment? And thirdly, what about globalization, the other great force transforming the economy—could it explain recent declines in wages and employment?

What’s Bigger, Bounty or Spread?

Thanks to technology, we are creating a more abundant world—one where we get more and more output from fewer inputs like raw materials, capital, and labor. In the years to come we will continue to benefit in the form of things that are relatively easy to measure, such as higher productivity, and things that are less susceptible to metrics, such as the boost we get from free digital goods.

The previous paragraph describes our current bounty in the dry vocabulary of economics. This is a shame and needs to be corrected—a phenomenon so fundamental and wonderful deserves better language. ‘Bounty’ doesn’t mean simply more cheap consumer goods and empty calories. As we noted in chapter 7, it also means simultaneously more choice, greater variety, and higher quality in many areas of our lives. It means heart surgeries performed without cracking the sternum and opening the chest cavity. It means constant access to the world’s best teachers combined with personalized self-assessments that let students know how well they’re mastering the material. It means that households have to spend less of their total budget over time on groceries, cars, clothing, and utilities. It means returning hearing to the deaf and, eventually, sight to the blind. It means less need to work doing boring, repetitive tasks and more opportunity for creative and interactive work.

The manifestations of progress are all based at least in part on digital technologies. When combined with political and economic systems that offer people choices instead of locking them in, technological advance is an awe-inspiring engine of betterment and bounty. It is also an engine driving spread, creating larger and larger differences over time in areas that we care about—wealth, income, standards of living, and opportunities for advancement. Some of these trends (particularly rising inequality) are also visible in other countries. We wish that progress in digital technologies were a rising tide that lifted all boats equally in all areas, but it’s not.

Technology is certainly not the only force causing this rise in spread, but it is one of the main ones. Today’s information technologies favor more-skilled over less-skilled workers, increase the returns to capital owners over labor, and increase the advantages that superstars have over everybody else. All of these trends increase spread—between those that have a job and those that don’t, between highly skilled and educated workers and less advanced ones, between superstars and the rest of us. It’s clear to us, from everything we’ve seen and learned recently, that all else being equal, future technologies will tend to increase spread, just as they will boost the bounty.

The fact that technology brings both bounty and spread, and brings more of both over time, leads to an important question:
Since there’s so much bounty, should we be concerned about the spread?
In other words, we might consider rising inequality less of a problem if people at the bottom are also seeing their lives improve thanks to technology.

Income inequality and other measures of spread are increasing, but not everyone is convinced this is a problem. Some observers advance what we will call the ‘strong bounty’ argument, which essentially says that a focus on spread is misleading and inappropriate, since bounty is the more important phenomenon and exists even at the bottom of the spread. This argument acknowledges that highly skilled workers are pulling away from the rest—and that superstars are pulling so far away as to be out of sight—but then essentially asks, “So what? As long as all people’s economic lives are getting better, why should we be concerned if some are getting a
lot
better?” As Harvard economist Greg Mankiw has argued, the enormous income earned by the “one percent” is not necessarily a problem if it reflects the just deserts of people who are creating value for everyone else.
²

Capitalist economic systems work in part because they provide strong incentives to innovators: if your offering succeeds in the marketplace, you’ll reap at least some of the financial rewards. And if your offering succeeds like crazy, the rewards can be huge. When these incentives are working well (and
not
doing things like providing huge, risk-free rewards to people taking inappropriate risks within the financial system), the benefits can be both large and broad: innovators improve the lives of many people whose purchases, in aggregate, make the innovator rich. Everyone benefits, even though not all benefits are the same.

The high-tech industry offers many examples of this happy phenomenon in action. Entrepreneurs create devices, websites, apps, and other goods and services that we value. We buy and use them in large numbers, and the entrepreneurs enjoy great financial success. This is not a dysfunctional pattern; it’s a beneficial one. As economist Larry Summers put it, “suppose the United States had 30 more people like Steve Jobs—. . . . [W]e do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.”
³

We particularly want to encourage it because, as we saw in chapter 6, technological progress typically helps even the poorest people around the world. Careful research has shown that innovations like mobile telephones are improving people’s incomes, health, and other measures of well-being. As Moore’s Law continues to simultaneously drive down the cost and increase the capability of these devices, the benefits they bring will continue to add up.

If the strong bounty argument is correct, then we have nothing significant to worry about as we head deeper into the second machine age. But is it? We wish that were the case, but it’s not. As we saw in chapters 9 and 10, the data are quite clear that many people in the United States and elsewhere are losing ground over time, not just relative to others but in absolute terms. In America, the income of the median worker is lower in real dollars than it was in 1999 and the story largely repeats itself when we look at households instead of individual workers, or total wealth instead of annual income. Many people are falling behind as technology races ahead.

Some proponents of the strong bounty argument believe that while these declines are real, they’re still less important than the unmeasured price decreases, quality improvements, and other benefits that we’ve been experiencing. Economists Donald Boudreaux and Mark Perry write that:

Spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today. . . [and] the quantities and qualities of what ordinary Americans consume are closer to that of rich Americans than they were in decades past. Consider the electronic products that every middle-class teenager can now afford—iPhones, iPads, iPods and laptop computers. They aren’t much inferior to the electronic gadgets now used by the top 1% of American income earners, and often they are exactly the same.
⁴

Perry adds that “thanks to innovation and technology . . . all Americans (especially low-income and middle-income groups) are better off today than in any previous period.”
⁵
In the
National Review
and elsewhere, Scott Winship of the Brookings Institution has made similar points.
⁶

These are intriguing arguments. We particularly like the insight that the average worker today is in important ways better off than his or her counterpart in earlier generations precisely because of the bounty brought by innovation and technology. For anything related to information, media, communication, and computation, the improvements are so large that they can hardly be believed in retrospect, or anticipated in advance. And the bounty doesn’t stop there: technological progress also causes cost and quality improvements in other areas, such as food and utilities, that may not seem high-tech on the surface but actually are when you look under the hood.