Technology, Globalization, and Social Tension

There has been a quiet jobs revolution in the USA, which has become more acute since year 2000. Recessions are having a bigger and bigger impact on jobs, and income inequality has risen to levels unseen since the 1920s. Roughly 50% of total market income goes to 10% of the population, which was also the case in the 1920s.

Half the population brings home about 30 000$ or less, while costs for education, health, and housing have risen constantly and significantly more than wages. Note that is a normal market mechanism: demand increased more than supply for these “goods and services”, so the price increased. We may fully acknowledge that this decentralized market mechanism works well to avoid allocative problems, but these markets are special, as they provide an edge for the ones who access them and cause self-reinforcing feedback loops that perpetuate and accentuate inequality of income and of opportunity (which is more serious).

Housing gives access to capital — the only physical capital most people will own in their life, health has a demand structure that makes people go bankrupt if they must (instead of dying or falling severely ill to the point of becoming dysfunctional), and education is fundamentally important to “make it” through life with a fighting chance because it is another important form of capital — human capital.

Note that this is NOT necessarily caused by “evil bankers and rich people.” The income gains made in the top-10% are not losses incurred by the rest of the population — it’s not a zero-sum game. The gains of technology and globalization simply “naturally concentrate” mostly in the top income brackets, but this phenomenon causes social tension and frustration. What is happening and what are the consequences?

The US economy is like an aging person who can’t recover from excesses as easily as before. Recessions are having a lasting negative impact on employment — it is taking increasingly more time to come back to the level of employment just before recessions, and even longer (if ever) to come back to the same employment rate. It is as if underlying structural changes “accumulate” during expansions and they all “come to fruition” during recessions and the sluggish recovery that follows.

It took 28 months to recover the initial employment volume in the 1981 recession… 32 for the 1990 recession… 48 for the 2001 recession… and 76 for the 2008 recession. Also, the proportion of people in a job relative to the working age population hit a peak in 2000 and has been going down ever since, and this is NOT driven only by demographics — it is driven by households struggling to adapt and falling from two to one income to finance the household, although demographics is a compounding factor.

Technology and inequality

Technology has exploded since the 1990s, especially telecoms and Internet, and at an even more astounding pace since about 2007. This has opened the doors to 3 related phenomena: 1) many things become scalable at close-to-zero marginal cost; 2) coordination of large scale and decentralized production becomes easier; 3) more work can be done by robots, computers, and machines (as well as cheap global labor).

Take Uber, for instance. This company is essentially doing the “same thing” as the local taxi service: matching an available driver with a person who needs a ride. The third party is the taxi call center doing the matching process and Uber does this better and more efficiently, with prices adjusting “live” depending on local supply and demand, and on availability and proximity of drivers found with geo-location enabled by telecoms… and VOILA! Barring technological complexity of the programming (which is impressive), the “call center” is global and you replace hundreds of taxi call centers by one that is global.

Facebook allows people to connect and stay in contact easily on a global scale and each extra Facebook user costs essentially zero. Netflix replaced your local video/dvd store… the “store” is now global. Airbnb operates on the same matching principle as Uber. Amazon replaced the local book store. WebMD and many other good information sources are helping people self-analyze their health problems with high quality information. How can we not mention Wikipedia? The examples are so plentiful that this subject could occupy a book all to itself. Once the “matching technology” is in place, it is no harder to produce 100 units as it is to produce 100 000 units and more…

The type of production in modern economies is also changing: there is proportionally more production done with “matching and coordination” technology and digital content, and less with “man hours” and physical content. This means that there are proportionally less “jobs” per unit of output and more technology-driven value, production, and consumption. Unit labor costs are falling dramatically in many industries due to scale effects, the global labor pool, and technology.

This has 3 effects: less employment income in proportion to total income, proportionally more capital income, and proportionally more “high-skill” employment volume and income (engineers, managers, specialists, etc.). In short: growth, income inequality, and no jobs for the masses of ordinary folks, and I am not deterred by the “low” official unemployment rates in many countries — details matter.

Many of the largest companies in terms of employee count are NOT those with the highest incomes or the highest market capitalization. The value is either created with relatively few executives and armies of “ordinary people” (Wall-Mart, Home Depot) or with relatively few “exceptional employees and executives” (Google, Intel). The middle is thin and could be at risk of more “thinning” going forward.

The scalability not only decreases the value of ordinary labor, it increases the value of high-performance CEOs and other high-level labor. With scale effects and global supply chains, good top-level executives that have a strategic talent and vision can harness MORE production from an ever-increasing set of available global resources due to better telecoms and coordination. This means that corporate income naturally rises due to its rising marginal value (which has nothing to do with merit or hard work, by the way).

So, if CEO “A” makes a difference of 3% (increases profits by 3%) and CEO “B” increases profits by 4%, CEO B has a relative marginal value advantage of 1% of profits. If annual profits are 10 billion, 1% of 10 billion is 100 million… CEO B is a bargain at 20 million! This has always been true for high-level executives, but it is exacerbated by technology-enabled scale effects in global markets, because profits increase due to the scale of the market and the falling costs of production.

These SAME “star effects” exist in many markets: professional sports, finance, high-level executives, pop starts, star academics and teachers, etc. In fact, even in things you don’t suspect, these effects exist: we all want the best photographer, painter, plumber, electrician, accountant. Better information on Internet allows us to access these people, and their market value increases. Who wants 4-star labor when there are 5 stars readily available? Who bothers with 3-star movies on Netflix when you have a seemingly infinite supply of 5-star ones?

It used to be the case that a pop singer or professional sports athlete would earn income due to presence in front of a live audience. Then it went to more people with television, which increased the market value of star performers… then Internet, YouTube, social networks, and communication technologies made everything global. The same talent and essentially the same performance are now available to and demanded by… the world!

Imagine the marketing/brand value of being associated to such stars? Imagine the impact of winning the Super Bowl or any other “big” win? Scale effects. Top-level athletes and artists now have bigger impacts on their organizations due to mass media and technology-enabled scale effects. This increases their marginal market value, which again pumps up their incomes… and adds to income inequality, because the everyday Bob still does the same old job in the same old way.

Global capital looking to park somewhere

The rise of income inequality brings with it an important consequence: lots of money looking for returns. High-income earners don’t park their money under the mattress. If you give 1000$ to a 40k-per-year worker, he is likely to spend most of it, because he is cash strapped. If you give 1000$ to a millionaire, it will all go straight to savings… and into housing or financial assets such as stocks and bonds.

The rise of high-income funds looking for returns combined to massive central bank liquidity worldwide since 2008 have increased the income base of financial firms and experts. The base of income is not the flow of global income — it is the stock of massive accumulation of savings and central bank liquidity floating around in global markets.

So again, the same “scale effect” happens here, but for different reasons: the same return (e.g. 5%) gives much larger income to competent and strategic financial experts and financial institutions who do not need to be large armies to manage more funds. The flood of global low-interest central bank liquidity since 2008 also allows for massive leverage, which again contributes to a “ratchet effect” on financial service incomes and risk-tolerating financial experts and traders. This also adds to high-incomes and exacerbates income inequality, without large-scale job creation.

The global reality of capital, labor, and all other markets has also caused asset inflation, including in art and housing. You now have “global cities” in almost all countries of the world and the “housing market” of large cities is now more a financial market than anything else.

In Canada, Vancouver and Toronto have been flooded by global capital looking to park wealth in a safe asset, and real estate is now essentially simply another “stock market” in a different form. This obviously prices out the normal “domestic workers” from these markets, as is normal when a resource has global demand with a limited supply (the city area), which is the case of any “global city”, from Toronto to Vancouver to New York, Paris, or Sydney. All the better if there is Rule of Law, social and political stability, and AAA federal bonds to make everyone feel safe and cozy.

This global asset inflation may have prevented a full-blown depression with asset deflation and the long period of negative wealth effects that would have happened, but it does “boost” specific classes of income earners disproportionately and fuels more inequality. This cocktail of ingredients has added to the already-charged vibe of political and social tension in many countries, notably in the USA. Clap and share! Regards.Pascal Bedard.