Technology, Globalization, Consumer Spending and Purchasing Power — Some thoughts

I’ve arguing here that automation technology (as well as offshoring and globalization) is likely to depress wages and lead to significant structural unemployment in the coming years. One of the most common criticisms of my argument is that I am “not thinking like an economist” and that I’m viewing things in terms of dollars, rather than in terms of purchasing power.

Here’s part of a comment that James D. Miller, an economics professor at Smith College, made in response to one of my previous posts:

Non-economists (even when they are very smart and well-studied) get in trouble when they consider trade issues in terms of dollars (“everyone could work for a dollar an hour?”) It’s better to think of wages in terms of what you could buy. In a world with hyper-productive robots you could buy lots of stuff if you could work at a task for say 1,000 hours that saved a robot 10 seconds of time.

So the basic idea here is that although automation may result in very low wages in dollar terms (as well as high unemployment, since we do still have a minimum wage), things won’t be so bad because the efficiency of production will increase dramatically and everything will be really cheap.

To see the problem with this, view this graph at Visual Economics showing how consumers spend their incomes. The graph makes it immediately clear that consumers spend the lion’s share on their incomes on things like housing, insurance, health care, transportation and food.

“Hyper-productive robots” are not going to lower anyone’s mortgage principle, and interest rates surely cannot go much lower. Nor can rents adjust too far downward without threatening the landlord’s mortgage. The same is true of insurance. The reality is that the most of the average consumer’s budget is based primarily on asset (and debt) values—and not directly on how efficient the economy is at producing goods and services. Food and energy prices are likewise unlikely to adjust downward. Expenditure categories that might see falling prices as automation progresses, such as apparel, entertainment and miscellaneous represent a tiny fraction of the average budget, and in many cases prices have already been minimized by globalization.

The only way to have expenditures fall in line with wages so that consumers could maintain their standard of living would be to have asset and debt values collapse. And that, of course, would be catastrophic for the financial system. Asset values in the United States reflect the basic assumption that we are going to continue to have a vibrant mass-market economy and a first-world living standard. You cannot have third-world wages with first-world asset values. That is the reason that countries like Thailand prohibit foreigners from buying property and driving values beyond the reach of their population.

As wages fall and unemployment rises, the average consumer is going to be squeezed by the fixed costs that cannot adjust downward. Mortgage defaults would soar and discretionary consumer spending is likely to plummet.

A recent article in U.S. News noted that spending is already heavily concentrated among high income consumers:

The top 10 percent of earners account for 22 percent of all spending, for instance, according to Moody’s The top 25 percent of all earners account for 45 percent of spending. The bottom 50 percent of earners, by contrast, spend just 29 percent of all the money in the consumer economy.

As job automation (and globalization) drives down wages and creates structural unemployment, these numbers will become even more concentrated. At what point does this become unsustainable? In an environment with extreme financial stress due to loan defaults and falling asset values, can the wealthy few really drive consumer spending indefinitely? Recent history shows very clearly that when fear is pervasive, rich people stop buying as well. So where will consumer spending come from?

11 thoughts on “Technology, Globalization, Consumer Spending and Purchasing Power — Some thoughts

  1. As a person who creates technology for a living, I can guarantee you that the pace at which technology is created is far outpacing the ability of society to adapt. Technology advances exponentially versus time. Changes that took 100 years in the past are taking 10 years now. That will become one year. It will become less.

    90+% unemployment is a given.

    We are even destroying our own jobs, and not by outsourcing, but by our own hands. And it doesn’t even require artificial intelligence.

    Today’s darling technology is Cloud computing, something Google, Microsoft, Salesforce and Amazon are pouring billions of investment into and making billions more in return.

    But Cloud computing makes systems engineers, systems administrators, network engineers and network administrators totally useless. These people, who were highly paid and in great demand, are rapidly disappearing from the workforce, on the order of thousands of jobs lost per month.

    Software engineers destroyed these jobs. It seemed like the right thing to do at the time. No one considered the consequences.

    High level jobs are not immune to the forces of technology. Technology doesn’t care whose job it takes. It will take most jobs. And it cannot be stopped.

    The pace of technological change is exponential. It will overwhelm the ability of any society to adapt.

    I believe what mainstream economists miss is the power of that exponential curve.

  2. I disagree with that comment. I think the pace of technological change is slowing. The most world-altering changes occurred in the mid 1800s to early 1900s (electricity, telegraph, flight, etc). Everything since then is mostly refinements of the basic advances.

    Having said that, the commenter is still right that we have a mismatch in the pace of technological change (and associated job destruction via better automation) and society’s ability to adapt. Realistically, the middle age middle manager automated out of a job in sales is not going to retrain to be a genomic bio-engineer.

    I think with each major wave of advancement (eg 1920s, 1990s), huge swathes of society will be permanently washed out of the employment force. We will have to wait for the next generation– their children– to enter the workforce with the new skills necessary to again move forward.

    The solution, for the last 150 years at least, is government work. The unemployed move into government-created positions. I can safely predict that as technology advances, we will not have 90% unemployment, but we could have governments employing 50, 60 or even 70% of the workforce.

    1. Gary, are you talking about technological basis for society (as in “agricultural society” then “industrial society”) when you suggest technological change is slowing? the waves of technological change are coming faster and bigger than ever before. (examples? 1. Rice University researchers have discovered thin films of nanotubes created with ink-jet printers offer a new way to make field-effect transistors (FET), the basic element in integrated circuits. 2. Dr. Joachim Storsberg of the Fraunhofer Institute for Applied Polymer Research IAP in Potsdam-Golm created the first artificial cornea, which has been successfully trialed and has been in use now since 2009. 3. A japanese research team has found a material (titanium oxide) that could be used to make a low-price super disc with data storage capacity thousands of times greater than a DVD.) those are all from today, before 3pm, each of them is a potential game changer for very big groups of people. Robotic technology, bioengineering (first synthetic bacteria a few days ago), and nanotechnology, each of these have been enabled by the information revolution (which allows you and I to communicate via this blog), I expect to see as much change in the next 20 years as we’ve seen in the past 100.
      There might be some very temporary slowdown of technology as companies slash their research budgets during our current economic slowing.

  3. Call me crazy or out of the topic but what I know is that automation in any area affects an work in the sense of eliminating more jobs for more people.

    I’ve seen that since I was at school.

    Well, I was just thinking.


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  4. In a world with hyper-productive robots you could own some of them, make them work for you – and then you might have enough money to pay off your mortgage.

    1. But how would you buy the robot?

      An industrial robot, with all of its support systems, can easily cost more than $250,000. Each replaces about five people because people need time off, so payback time is about 2 years, which is reasonable for a capital expenditure.

      The average price of a house in the US is about $250K. Your robot would cost the same.

      So, you’d be paying 2 mortgages. With no job.

      If you think the cost of the robot would drop over time, look at cars. Car prices remain pretty stable over time because the car manufacturers put more and more stuff in the cars to compete with each other on features that buyers want, and these features increase over time. In a “modern” household, the family car has more computing power than the iPads and iPhones and laptops in the house. This feature competition will continue and car prices will remain stable. This will most likely be the same case with robots.

      Besides, what would that robot be doing? The factories can afford their own robots. They don’t need you to buy one for them. So, you’d be competing directly with a billion other people with their own robots, making… what?

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