Fed Chairman Bernanke’s speech in Atlanta earlier this year focused a lot of attention on the debate about the forces that led to the current crisis. Was it primarily Greenspan’s low interest rates, or as Bernanke suggested, was a lack of regulation and oversight a more important issue? Nearly everyone seems to agree that the crisis was brought on by some combination of these factors. In other words, the current situation is viewed almost entirely in financial terms.
While there is no doubt that the financial meltdown was the proximate cause of the current recession, is it possible that a more fundamental cause exists? What if the housing bubble and the financial crisis were merely symptoms of something even bigger—perhaps of a structural shift occurring in the broader economy?
I’ve argued previously that advancing technology is likely to result in structural unemployment in the future. In fact, I think this is a trend that is already well underway. The last decade has been characterized by substantial advances in information technology and fairly dramatic increases in productivity. Average workers have seen stagnant or even decreasing real wages, while health care costs have been exploding. Until the onset of the current crisis, official unemployment numbers were low, but those statistics fail to capture underemployment, such as workers who are forced to work multiple part time jobs with no access to benefits.
Globalization, of course, gets much of the blame for the plight of average workers, but the reality is that advancing technology has a larger impact. Jobs are not just moving to China—they are being automated away completely. This is happening not just in the United States but in low wage countries as well. And it isn’t just in manufacturing; as I’ve pointed out previously, service sector and knowledge worker jobs are increasingly subject to automation as well.
As the dual forces of technology and globalization progressed over the past decade, I suspect it became pretty clear to most average workers that holding a job at the prevailing wage offered little hope for getting ahead. Recognition of that reality certainly played an important role in the politics that led to the creation of subprime lending programs. You can make a pretty strong case that the housing bubble was caused not simply by low interest rates but by widespread recognition that investing in a home represented perhaps the only viable hope for a typical American family to achieve any measure of prosperity.
The last decade also saw a massive shift away from consumer spending supported by wages toward spending supported by debt (much of it anchored to inflating housing values). That debt-enabled spending drove economic growth not just in the U.S. but, of course, in China and in the rest of the developing world as well. Was all this really caused by the Fed’s policy? Or was it fundamentally caused by advancing technology (as well as globalization) driving discretionary incomes down to a level where broad-based consumer spending became unsustainable without reliance on debt?
I think that is a very important question. Virtually all mainstream economists are focused on a financial solution to the current crisis involving some combination of monetary policy, additional stimulus and re-regulation. If it it turns out that the root cause of the crisis is really technology, rather than finance, those solutions will simply not be sufficient in the long run. Technology is relentless. Automation will never stop progressing, and no conventional financial or monetary policy can, by itself, address that issue.
In my book, The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future, I make the case that a basic shift is occurring in the economy. Technology is becoming autonomous, and job automation will invade virtually every employment sector. The result will be structural unemployment and declining wages for all but a tiny (and shrinking) elite. I think it is very possible that the beginning of that trend underlies the current crisis to a significant extent. I suspect that very few people will agree with me on this, but if I’m right, the implications are scary: it means that virtually everyone is focused on solving the wrong problem.
Martin Ford 
very good article, thanks this is very useful for me
I agree wholeheartedly with your points. I just listened to the radio link on the Speculist. I have been thinking this for along time, its been something that makes me uneasy to think about but relevant and important nonetheless.
I like your point about the housing crisis being related to people cynicalness of their own future. It was interesting, post 911, I was pretty negative, I thought the sheeit would hit the fan. I was massively wrong, it went the opposite way (sorta humbling). then people started buying homes, and equities did ok too, its sorta like a blow off top. It was counter intuitive, I was depressed, shouldnt everybody be? It was as if 911 had not happened. Was it simply cos Bush said to consume to fight Al Qaeda? Deep down, your argument, that people were indeed hopeless, especially about their careers, so they jumped to the “easy” money makes some sense.
Many smart people say it was a bubble, and like the Tulip craze is nothing new. Soros says it was massive leveraging for 25 years. Well, I think many things can be correct – and Soros is not a guy to bet against. His theories of reflexivity are interesting.
But I am happy I came across your views, I am an armchair investor and futurist and have been noting the dearth of futurist economics futures. They have mostly been pretty simplistic. But in most sci fi movies robots and automation make our lives simple- we all accept that automation will be here, so why the cognitive dissonance on the jobs arena? Maybe cos futurists and most technologists are not interested in economics, and most economists are pretty much just historical accountants.
I will buy your book for sure, this is one of the most important topics on Earth.
Many may not understand your point, but it is 1000% 1000% 1000% correct!!!! The only additional observation I would make is that the phenomenon is not new; the depression in the 1930s was mainly caused by the massive technological progress of the 1920s. Really, the 1990s were a repeat of the 20s, with the exception that the impact of the 20s advances (radio, mass production of automobiles) were far greater than recent advances. In fact, since the technological revolution began in the mid-1800s, the economy has been subject to massive advances that obsolete wide swathes of workers.
I couldn’t agree more with the points you are making. I see no serious objections to them, in fact my only problem with them is they don’t go far enough!
I think the phenomenon you are describing has been at work since the early 80’s. But it’s been ignored because the bulk of the effect has fallen on the bottom 2 quintiles of the income spectrum hardest. The Big Lie has been that if those lazy bums would just go to college everything would be alright.
This ignores the fact there has never been enough seats in colleges to educate that many people, never mind that sending more people to college won’t change the basic makeup of the job market (more degrees= more degreed burger flippers).
Forget about conservatives and libertarians. They are intellectually and ideologically INCAPABLE of any response to this other than assert it can’t happen, or suggest a ‘solution’ which is some version of taking in each others laundry. It’s only now, that the problem is becoming one for the higher income quintiles that the issue is gaining any traction at all.
I’ve had very similar thoughts, you can actually explain most of the economic events of the last thirty years in terms of increasing computer technology:
Prior to 1980’s:
-Labor is crucial to all aspects of the economy. As the economy grows, it is bounded by how many people are available and newly created wealth is spent on labor. Technology almost always acts as a complement to labor.
Early 1980’s recession
-Like previous recessions with one crucial difference, companies find that they are able to substitute computers in the place of human labor for a number of positions. The economy recovers, but the labor market takes noticeably longer. Companies find they have additional revenue to spend on capitol instead of labor
1980’s
-Computers increase in capabilities and slow the growth of the labor market
-The cost of information has been decreasing for some time, but its decrease accelerates
-The lower cost of information allows an increasing number of entities into the media market, forcing individual entities to increasingly put a (consciously or not) slant on their information to capture parts of the market
-Traditional information sources begin losing customers to the new sources
Mid 90’s
-Information cost reaches zero spurring a massive boost in economic innovation, particularly electronics and new information mediums and spurs one of the fastest economic expansions in American history
-The expansion is across all sectors of the economy and cannot but help taking labor with it, despite massive investments in technology
-A large number of companies are started with a crucial flaw – their business modal (if it exists) is predicated on information having a cost
-The amount of information available explodes, but the signal to noise ratio plummets due to the cost filter being removed. Good ideas and bad ideas spread too quickly for them to be evaluated effectively
-Traditional information sources continue to lose customers to new sources
2000-2003
-It becomes increasingly clear that the modals for many of the new companies created during the boom are untenable and investors rapidly flee
-Bubble pops, but most damage is in new industries and the recession is shallow
-Economy turns around quickly, but labor market recovery takes even longer than before due to massive productivity gains achieved through automation
-Investors and companies begin putting their capitol gained during the boom and through lower labor costs into ‘safe’ investments, notably real estate
Mid 2000s
-Real estate values skyrocket as more and more capitol diverted to it
-Banks increasingly make loans on the expectation that incomes will increase substantially
-Massive amount of financial innovation as banks look for new ways to give and ensure credit
-Banks adopt new innovations without any idea of their efficacy to get ahead of their competitors
-Financial institutions issue and swap so much credit and assets that they lose track of who owns what
-People displaced from low skilled jobs by automation put significant downward pressure on the labor costs of the service sector
-The service industry takes advantage of the large amount of credit and low labor costs to massively expand their operations and overshoot demand
-Traditional information customer loss reaches a critical level and they begin attempting to reinvent themselves, but they are too late as other sources have already claimed their potential markets
2007-Present
-As the number of defaults grow in the real estate sector, it becomes increasingly clear that the income assumption is incorrect
-Investors flee from the sector and credit dries up, defaults skyrocket
-Financial institutions realize they have no idea what they actually own and that their assets don’t cover the credit they’ve issued
-Financial institutions fail and the entire sector, the heart of the economy, is devastated
-Massive economic downturn as credit slows across the economy and plummeting demand causes companies to fail
-Burned during the real estate boom, surviving banks shy about issuing credit
Great article! I really learned a lot from this post. Thank you!
again u… Great Article