I participated in a fascinating and slightly unsettling event last week. The Hamilton Project, an American think tank founded in 2006 to promote “public investment, a secure social safety net, and fiscal discipline,” convened a group to discuss “The Future of Work in the Age of the Machine“. Because Erik Brynjolfsson and I wrote a book on this topic we were asked to be part of the on-stage conversation. Erik was on the first panel, titled “the future of jobs,” and I was on the second, which dealt with the future of business innovation.
We were joined by a roll call of America’s economic and policy all stars (I won’t name-drop here because the list would be too long). And over the course of the morning’s discussions the thing that became clear to me is that things are not very clear at present. In other words, the economy’s behaviour is puzzling these days. No matter what you think is going on, there are some facts — important ones — that don’t fit your theory well at all, and/or some important things left unexplained.
For example, if you believe that technological progress is reshaping the economy (as Erik and I do) then you’ve got to explain why productivity growth is so low. As Larry Summers pointed out on the first panel, strong labour productivity growth is the first thing you’d expect to see if tech progress really were taking off and reshaping the economy, disrupting industries, hollowing out the middle class, and so on. So why has it been so weak for the past 10 years? Is it because of mismeasurement? William Baumol’s “Cost Disease” (the idea that all the job growth has come in manual, low-productivity sectors)? Or is it that recent tech progress is in fact economically unimpressive, as Robert Gordon and others believe?
If you believe that tech progress has not been that significant, however, you’ve got to explain why labor’s share of income is declining around the world. Since the turn of the century the labor share of income — essentially the amount of GDP that gets paid out in wages — has dropped significantly not only in high wage countries (which could be explained by outsourcing), but also in most low-wage countries including China, Mexico, and India. It’s very hard to account for this pattern without telling a story that involves technology becoming both cheaper and more capable over time.
On the second panel of the Hamilton event John Haltiwanger brought up another deep puzzle: why are economic dynamism and fluidity in decline? Entrepreneurship and new business formation have been dropping for a while now in America (Silicon Valley’s present frenzy is an exception, not the rule), and people are moving around less than they used to, both geographically and professionally. This is not good news, and it’s also not obvious how to fix it. There doesn’t appear to be any single main culprit. Instead, Haltiwanger described the situation as “death by a thousand cuts.”
There are plenty of other important puzzles. Why has the middle class stalled out? Why is social mobility so low (and was it ever really all that high?)? Net household wealth is supposed to be roughly equal to accumulated production minus consumption and depreciation, so why have these measures diverged so much in the new millennium?
The good news is that great puzzles like these draw in smart, tenacious, and innovative people to work on them. The bad news is that we need solutions to them yesterday. We need wise new approaches and policies to meet the challenges of the second machine age, and we can only formulate them if we understand well what’s going on. So let’s get to work on that…
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