Part 7 of 10: Some people say we shouldn’t do anything about technology taking jobs. Here’s the counterargument.

This is the seventh in a series of ten posts on the threat to jobs and growth from technology and online distribution, and what we might do about it. 

  • The first part summarises the argument
  • The second introduces the challenge.
  • The third looks at the threat to jobs from automation.
  • The fourth looks at the threat to jobs from online competition.
  • The fifth looks at what economic problems this might cause.
  • The sixth looks at the social and moral problems it might cause.
  • The seventh looks at some of the arguments against a policy response: are we really sure this is a problem? Doesnt technology always create as many jobs as it destroys? Surely there is nothing we can do?
  • The eighth explains why more education and training isn’t the solution to technological un and underemployment.
  • The ninth explains why more self-employment and entrepreneurship isn’t an adequate solution either.
  • The tenth looks at other solutions, and proposes a new one.

If there is a structural loss of middle jobs or total jobs, should politicians do anything about it?

The prospects of wasted education, worse health outcomes, and increased inequality are enough to horrify someone with social democratic instincts like me. But plenty of people will see those same trends and feel equally strongly that we can’t or shouldnt do anything about it.

And when they convert those feelings into arguments, here are some of the arguments they’ll use. 

1. Were not yet sure its a problem

As Ive set out in previous posts, the data is still coming in.

We know technology destroys middle jobs – American and European labour markets are hollowing out. We can see that rich countries like the US and the UK have growing skill unemployment, and that productivity, investment and median incomes have stalled relative to long term trend.

But will automation and online competition really kill so many jobs? Theres still room for reasonable people to disagree.

And, as a busy politician might add, voters are angry for plenty of reasons, but aggregate effects like ‘a hollowing labour market’ is just not something most people think about.

But this is silly. Such devil-may-care logic doesnt afflict political debate when discussing other risks, such as cybersecurity or nuclear threats. There is enough evidence to believe that we might have the beginnings of a serious problem, and it is politiciansjob to address possibilities as well as certainties.

The debate about the collapse of middle jobs and purchasing power is today in a similar place to where the political debate on climate change was in the early noughties.

Then, credible sources in the scientific community were concerned with it, some in policy circles knew about it, but it was still seen as a fringe risk. Hardly any politicians had started thinking seriously about what we should do.

Even though we arent sure we will face structural un or underemployment, we can be pretty confident that if it happens, the consequences will be dire.

Why wouldn’t we start thinking about it?

2. Technology could create as many jobs as it destroys

Technology doesnt just destroy jobs, it also creates them.

For all the lamplighters and lathmakers who have fallen into history, there are many more digital brand managers, graphic designers, and database managers. There are deodorant testing armpit sniffers. There is Shingy.

Over the last two centuries, jobs have come and gone, but the UK employment rate has fluctuated around a relatively fixed average, as this graph shows.

Dimsdale

Source: Speech by Andy Haldane: ‘Labour’s Share’

It might do in future as well. After all, there is no limit to what humanity might imagine or demand, so no limit to what the economy might have to supply.

No doubt supporters of the UK government would make this kind of argument. ‘Look’, they might say, ‘all this talk of a hollowing labour market is so much carping. UK unemployment just hit a ten year low. The employment rate is at its highest since records began. There will always be enough jobs.

I hope they’re right. 

But employment now only gives us one data point. The trend is more important.

And there are at least five reasons to think that this view about the future is too complacent.

1. As set out in post 2, this time, automation will affect mental work as well as manual work. Machines can increasingly learn, recognise patterns, sense, and be taught dexterity. All this is new in human history.

2. As set out in post 3, this time we are reckoning with online competition, often global, which puts unprecedented downward pressure on prices and margins, making it hard for existing industries to support as many jobs. This too is new in human history.

3. The industries of the future probably won’t create as many jobs as the industries of the past.

Martin Ford puts it well: “you can imagine lots of new industries: nanotechnology and synthetic biology – but they won’t employ many people. They’ll use lots of technology, rely on big computing centres, and be heavily automated.”

You can already see this trend at work. Take photography, for example. As Henrik Killander points out, at its pinnacle, Kodak employed more than 140,000 people; when Instagram was sold to Facebook in 2012, it employed 13.

It’s hard to find research indicating that technology creates lots of jobs, but it’s not hard to find research showing that it doesn’t. One study calculates that of all the new jobs created in the US in 2010, only a puny 0.5% were in industries which didn’t exist at the turn of the century. It looks more and more like new technologies create plenty of wealth but not much work.

I don’t think we yet know enough to say for sure that the new industries of the future will need fewer jobs than the industries of the past.

But one thing is for sure: business leaders look for the most efficient way to get the task done, and labour is a cost. If technology can do a better job than people, or the same job more cheaply than people, or both, they will employ fewer people. Nobody goes into business first and foremost to create jobs. If the industries of the future don’t need as many jobs as those of the past, fewer will be created.

Uber is a salutary example. It talks a good game about how much work it has provided to drivers around the world. But it is still working on replacing them with self-driving cars.

3. Higher unemployment which lasts for five, ten, twenty years is still an apocalyptic problem for the generation which experiences it.

Often people argue about technological unemployment as if it’s something that either will or won’t happen, forever. One side says employment will hold up – technology will create as many jobs as it destroys. The other side says this time it might leave us with fewer jobs permanently. But something else could happen: technology could destroy many jobs in the short run and create just as many in the long run, but give us five, ten, twenty years of transitional high unemployment. 

Long-term, high, but non-permanent unemployment has happened before. Whether or not it was because of technology, unemployment in Britain stayed above 10% from the early twenties until the beginning of the war.

In other words, even if the optimists are right that technology will create as many jobs as it destroys in the long-term, it can still devastate purchasing power, growth, and human potential for a generation.

4. Fewer middle jobs can still hurt demand and growth. The total number of jobs isn’t the only thing that matters. Getting enough money into enough pockets is important too. Even if technology creates as many jobs as it destroys, if the labour market carries on hollowing out – losing middle jobs – we can still expect a net loss of purchasing power, demand and wellbeing: security, status, opportunity, and development, because the rich spend a lower proportion of their income than everyone else.

And for me, this is the strongest counterargument to the boast that today’s low unemployment means there is no problem: boasting about how many jobs have been created but ignoring how much they pay is like boasting how many cans of beer you’ve got in the fridge but ignoring how little beer is left in each can.

Whereas permanent technological unemployment is a prospect, hollowing out is already happening.

I think we can be pretty confident it has depressed demand relative to trend: many more workers are on the minimum wage. Fifteen years ago, only one in fifty jobs were paid minimum wage; today it is one in twenty, and its predicted to be one in nine by 2020.

3. There is nothing we can do

Tyler Cowen, for example, believes that in the coming decades, the top ten to fifteen percent of workers whose skills will complement those of intelligent machines will prosper, and the rest will stagnate. In his telling, it’s inevitable.

A flippant way of putting the argument is: if driverless vehicles are going to kill driving jobs and 3D printing is going to kill factory jobs, then, with the best will in the world, theres not much any Minister for Work and Pensions can do about it.

I don’t buy this.

Market forces are shaped by laws, institutions, customs, and culture. They have, at various points in history, involved owning slaves, employing children, and letting multinationals negotiate their own tax rates. These things are inevitable until politics changes the rules. Not everyone will like the solutions, but that doesnt mean there arent any.

But if technology really does reduce jobs and work, isnt the solution just better education and training, skilling up?

In the next post Ill look at this argument.

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Part 8 of 10: Why more education and training won’t fix technological unemployment

This is the eighth in a series of ten posts on the threat to jobs and growth from technology and online distribution, and what we might do about it. 

  • The first part summarises the argument
  • The second introduces the challenge.
  • The third looks at the threat to jobs from automation.
  • The fourth looks at the threat to jobs from online competition.
  • The fifth looks at what economic problems this might cause.
  • The sixth looks at the social and moral problems it might cause.
  • The seventh looks at some of the arguments against a policy response: are we really sure this is a problem? Doesnt technology always create as many jobs as it destroys? Surely there is nothing we can do?
  • The eighth explains why more education and training isn’t the solution to technological un and underemployment.
  • The ninth explains why more self-employment and entrepreneurship isn’t an adequate solution either.
  • The tenth looks at other solutions, and proposes a new one.

If technology really does reduce jobs and work, isnt the solution just better education and training, skilling up?

This seems to be the conventional wisdom.

This solution comes in a number of forms: more money for schools, colleges, and universities, more and better apprenticeships and training, on or off the job. Perhaps an expanded scheme of career development loans and lifelong learning schemes.

When the Civil Service considers more automation and unemployment, this is what it recommends, for example here (p.21).

More and better education is a good thing in itself. But it wont fix the problem.

A good education, training scheme or apprenticeship will only mean a good job if there are enough good jobs out there.

If the problem is not enough middle jobs, the solution is more middle jobs. If the problem is not enough jobs, the solution is more jobs.

Larry Summers put it well:

If we allow the idea to take hold that all we need to do is: there are all these jobs with skills and if we can just train people a bit, then theyll be able to get into them and the whole problem will go away. I think that is fundamentally an evasion of a profound social challenge. The core problem is that there arent enough jobs.

That challenges a very ingrained mindset.

Parents are accustomed to waving their children off to schools or universities safe in the belief that their education means they can expect a good job. And yes, it will always help. But the bigger the hole where the middle jobs should be, the harder it will be for education alone to fix the problem.

And in one sense, more education and training is not helpful because it adds to the demand for middle jobs, and so bids down their salaries. Italy, Spain, the US, and the UK have all experienced rising skill unemployment because they have ever more skilled graduates chasing a dwindling number of skilled jobs. Germany hasn’t. As economist Dalia Marin put it: ‘in Germany, skill unemployment is low and did not increase between 2000 and 2012 precisely because education was advancing slowly there’.

This boils down to an uncomfortable trade off. In a country with a permanently lower proportion of middle skill jobs, should we prefer commensurately fewer skilled people to do them? Or an equal or greater proportion of skilled people, even if it means more people get stuck in jobs they’re overqualified for?

Anyway, if education and skills arent the answer, what about entrepreneurship? Surely if there are fewer jobs, more people are just going to have to create their own?

The next post looks at this argument.

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Part 9 of 10: Why ‘more entrepreneurship’ isn’t the solution to technological unemployment

This is the ninth in a series of ten posts on the threat to jobs and growth from technology and online distribution, and what we might do about it. 

  • The first part summarises the argument
  • The second introduces the challenge.
  • The third looks at the threat to jobs from automation.
  • The fourth looks at the threat to jobs from online competition.
  • The fifth looks at what economic problems this might cause.
  • The sixth looks at the social and moral problems it might cause.
  • The seventh looks at some of the arguments against a policy response: are we really sure this is a problem? Doesnt technology always create as many jobs as it destroys? Surely there is nothing we can do?
  • The eighth explains why more education and training isn’t the solution to technological un and underemployment.
  • The ninth explains why more self-employment and entrepreneurship isn’t an adequate solution either.
  • The tenth looks at other solutions, and proposes a new one.

I think my dad is worried about how worried I am about the future of work.

The other day he emailed me an article about the rise of self-employment in the EU, with the message: you could stop worrying about the future of work, as so many people are finding their own solutions!

And he is well qualified to say so; he started a small business in 1987 and has run it ever since.

Certainly, anyone who has created their own job or dreams of doing so probably cringes at the idea that the total number of jobs can fall. After all, if you have defined your working identity by making a job not taking a job, cant everyone? Isnt the solution to fewer aggregate jobs more self-employment, entrepreneurship, and enterprise?

The argument acquires a moral flavour if you add words like self-relianceand rugged individualism.’ If robots, technology, or online competition mean fewer jobs, wont people just have to pull up their socks and take some personal responsibility?

The argument also has a strong cultural aspect. We want to believe this. If an American ‘single mom’ working low-paid jobs with three kids can make it big with a mop head you can wring out without getting your hands wet, cant anyone?

I would never discourage anyone from trying.

But that doesnt mean the economy can automatically expect to rely on self-starters to keep the jobs numbers and aggregate demand stable, for three reasons.

1. Most self-employed people dont make much money

In 2013-14 in the UK*, the typical self-employed person made roughly half the median wage of employees. (£210 per week (p.21) vs £385 per week).

And 2013-14 wasnt a one off. Since the turn of the century, the typical self-employed person has earned between two thirds and half of the median employee, as this graph shows.

The dotted lines – the medians – are the relevant ones here because the full lines – the means – are skewed by a few high earning self-employed contractors.

The red dotted line is median self-employed earnings, the green is employee earnings.

ResFound2

Source: The Resolution Foundation: ‘All Accounted For: the case for an ‘all worker’ earnings measure’

2. If jobs move from big companies to small ones, there would still be fewer middle jobs

Okay, you might say, so self-employed people don’t tend to make as much money as employees. But what about new companies which grow and employ new people? If middle jobs carry on disappearing, couldn’t new companies replace them?

I hope so. But it’s a risky bet. The conventional wisdom is that growth is driven by improvements in productivity, improvements in output per hour of work. Traditionally, bigger companies have been more productive than smaller ones; they have economies of scale and it’s easier for them to afford new technologies.

You can already get a sense of that when you look at the businesses in the UK today.

In the UK, most businesses are small, but the businesses with the most turnover are big. 99.9% of businesses employ under 250 people, but 53% of all the turnover in the country was made by the remaining 0.1% – the big boys.

Unfortunately, all other things being equal, that means that an economy-wide shift from employment in big companies to employment in small ones means an economy-wide shift from companies which make a lot of money to companies which don’t make nearly as much, from more productive big companies to less productive small ones.

That would make it harder for an economy of small companies to pay as much as an economy of big companies, putting downward pressure on pay, demand, and growth.

3. Self-starters would have to replace a lot of jobs

The Bank of England estimates that automation could threaten 15 million UK jobs in the next decade or two. If that turns out to be right, would self-starters be able to replace those jobs?

Maybe, but it would be hard.

Here’s a very rough and ready way of thinking about it. Britain, with its relatively entrepreneurial culture and ease of doing business, has 12.4 million people working in small businesses (firms with fewer than 50 employees).

Assume for the moment that all of the jobs at SMEs – companies with 250 or fewer employees – were safe. In other words, that the 15 million jobs lost to automation came from big companies with deep enough pockets to take on the labour-displacing technology first. Let’s also assume that the workforce stays the same size: perhaps net migration cancels out the effects of an ageing population.

In that scenario, the only way the employment rate could stay steady would be if self-starters or small companies created 15 million new jobs. That’s more than the 12.4 million they have created to date. That’s a big ask.

In reality, plenty of other things would complicate the picture. Perhaps the Bank’s estimate for jobs lost to automation could prove optimistic or pessimistic. Perhaps automation eats into the numbers employed by small companies as much as big companies. But in that case, self-starters would have to create even more jobs to keep the employment rate steady.

But I think we can be sure about two things.

Historically, most of the countries which have enabled the broad mass of people to get richer together are those which have produced a mass of middle-income jobs, like Germany or France in the decades after the war. One of the reasons poor countries are poor is because they tend to have a lot of self-employed people. I think about the people selling fruit, snacks, and trinkets in the streets. These jobs are better than nothing, but they’re not a strategy to bring a broad mass of people towards prosperity.

Secondly, if millions of people do move from being employees to self-starters, it would represent millions of self-starters who would prefer a job – a seismic cultural shift.

It’s not hard to see why most people who come out of education want a job: they want the certainty of regular pay, knowing when they can expect to pay off their student loan, build a credit history, get a mortgage, learn skills, not to mention security, status, structure, and the smaller things you take for granted when you’re an employee, like knowing there will be a Christmas party whether or not you organise it.

In short, even though an increase in self-employment and entrepreneurship would be good news, we shouldn’t expect it to maintain the employment rate, purchasing power, or demand.

But if more education and training or self-employment wont solve the problem of lower growth due to a big loss of middle jobs – what might? In part 10 Ill look at that.

*All these figures are British. But compared to most other European countries, Britain has a relatively good culture and environment for self-employment, so the argument is likely to hold for most countries.

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Part 10 of 10: If companies won’t create enough jobs, government should

This is the last in a series of ten posts on the threat to jobs and growth from technology and online distribution, and what we might do about it. 

  • The first part summarises the argument
  • The second introduces the challenge.
  • The third looks at the threat to jobs from automation.
  • The fourth looks at the threat to jobs from online competition.
  • The fifth looks at what economic problems this might cause.
  • The sixth looks at the social and moral problems it might cause.
  • The seventh looks at some of the arguments against a policy response: are we really sure this is a problem? Doesnt technology always create as many jobs as it destroys? Surely there is nothing we can do?
  • The eighth explains why more education and training isn’t the solution to technological un and underemployment.
  • The ninth explains why more self-employment and entrepreneurship isn’t an adequate solution either.
  • The tenth looks at other solutions, and proposes a new one.

The story so far: economists are beginning to think seriously about the possibility of technological unemployment – automation making an unprecedented number of jobs unnecessary.

Frey and Osborne calculate that 57% of the jobs in OECD countries are at risk. The Bank of England conclude that that would be equivalent to 15 million jobs in Britain and 80 million in the US.

Historically, technology has created as many jobs as it has destroyed. But I’m not sure it will this time, as I explained here.

The debate is beginning to move towards a discussion of solutions.

In moments of acute crisis, radical ideas suddenly dont look so radical any more.

If in 2007, Gordon Brown had proposed allocating 80% of the governments annual spending to private banks in loans and guarantees, everyone would have said he was bonkers. The year after, he did just that to stave off the financial crisis. The move received widespread support. The prospect of financial meltdown made the radical sensible.

If it happens, widespread technological un and underemployment would be a chronic problem, not an acute one; there would probably never be a crunch moment when it was clear how radical the solution might have to be.

Still, thoughtful centrists are beginning to conclude that if unemployment does begin to creep up to levels not seen in generations – say 15%, 20% – or the labour market hollows out in an extreme way, there is no private sector solution, and probably no solution that falls within the bounds of what is electable today.

Former US Treasury Secretary Larry Summers, for example, says that in any solution, the tax and transfer system has got to be a very, very large part of the picture.

Robert Rubin, deregulating Treasury Secretary and Goldman Sachs veteran, wondered whether, if the forces of technology and globalisation continue to create rising inequality[there should be] increased redistribution to accomplish the broad objectives of our society?

Various solutions have been proposed.

The Directors of the McKinsey Global Institute suggest the marketisation of household work such as cooking, cleaning, and childcare.

Citibanks Chief Economist Willelm Buiter and Martin Ford suggest a minimum income for all.

There seems to be a consensus that the only policies which might work are radical ones.

I agree. If unemployment reaches unprecedented levels and stays there for a decade or more, one solution would be to create an enlarged sovereign wealth fund and use the dividends to create jobs.

It makes particular sense for the fund to buy shares in technology companies like Alphabet where profits are exceptional and job creation is low compared to the big companies of the past.

The Shareholder State

If millions of jobs are lost and not replaced over the coming decade, it will in part be because companies, understandably, see opportunities to make more revenue more efficiently from automation.

In this world, as long as demand holds, some firms, especially technology firms, would be extremely profitable. Already, six of the top ten biggest companies by market cap on US stock exchanges are tech companies.

This wealth is already taxed – a bit. But if  in the long term we find ourselves in a world of unprecedented long-term structural unemployment, states could also raise revenues by buying shareholdings in the companies which benefit the most from the automation and flat competition which displace workers. These shareholdings would form part of a sovereign wealth fund.

To an extent, this already happens.

In France, for example, the government manages over €100 billion worth of shares in over 70 French companies, including many of the most profitable and innovative companies in the country.

Alaska decided in the seventies to share out oil profits equally to each citizen. Each year since 1982, each Alaskan has received a deposit – sometimes of a couple of thousand dollars – into their bank account. 

There are already 73 sovereign wealth funds worldwide, many non-oil and gas. They are a good idea for many other reasons anyway. 

Renewable energy is also a particularly apt sector for state shareholding. The case that resources like the sun and the wind belong to every citizen is easy to make. As the Alaskan example shows, the decision on who is entitled to benefit from energy companiesrevenue is, ultimately, political.

Energy companies will counter that they take the risk so they deserve the revenue. But this is a norm, not a natural law. Statoil, the Norwegian oil and gas multinational, takes risk too, but it is still 67% owned by the Norwegian government, and contributes to the Norwegian sovereign wealth fund.

This sovereign wealth fund would be a means to an end of supporting demand and growth by creating jobs, by spending the dividends on job creation programmes. 

A New Deal for Jobs

The best solution to a loss of jobs is creating new jobs.

Thats what the US did when it was facing unprecedented loss of jobs after the crisis: the 2009 Recovery Act created or saved 1.6 million jobs a year for four years.

It spent $279 billion* putting people to work mending bridges, roads, and railways; building new trains and rail routes; cleaning property; retrofitting diesel engines to reduce their carbon dioxide output; making tap water safer to drink; improving schools; researching energy efficiency which led to progress on biofuels, more efficient batteries, superconducting wires and vehicles powered by natural gas. It paid the salaries of people working on wind, solar, and geothermal energy; improving hospitalsand surgeriesaccess to health information; building tens of thousands of miles of broadband lines, and training millions of people how to use it.

But the USA was not exceptional. Plenty of countries around the world also stimulated their economies, even if most didnt make direct job creation their primary objective. Economists now have plenty of evidence about what does and doesnt work.

Granted, dividends from a sovereign wealth fund would be unlikely to generate enough cash to fund public jobs on the scale the Bank of England research anticipates. Granted, there would be managerial hurdles. But the point here is to raise the idea.

The jobs which a new New Deal should create would depend on the political priorities at the time.

If it were being enacted in Britain today, I would suggest installing more residential and commercial renewable energy sources, training more carers to prepare for an ageing population, reducing waste and improving sustainability, shoring up flood defences, and building more houses**.

But my preferences arent the point. The point is we do not lack for work to be done.

Conclusion/TLDR

Technology and online competition could mean a net loss of millions of jobs and an unprecedented structural hit to purchasing power, demand, and growth.

The most authoritative research by Frey and Osborne calculates that 57% of the jobs in OECD countries could be at risk. The Bank of England concludes that that would be equivalent to losing roughly half the jobs in Britain today.

Its too early to say whether or not the worst case scenario will happen. We will have a race between the broadly ‘job-creating’ forces – the rising middle class in developing countries and cheaper stuff saving consumers money – and the ‘job destroying forces’ – automation and artificial intelligence and online competition pushing down margins.

But it’s not too early to say that we are heading for fewer middle jobs and more skilled workers doing less skilled jobs. Technological underemployment is with us today.

And surely this has contributed to some of what we’ve seen for the last few years: below trend investment and demand in the US and the UK, rising skill unemployment in some countries, and growth rising much faster for the richest than the majority.

Jobs are the main way money flows into the pockets of the vast majority of people.

If in the next decade or so we do get unprecedented technological unemployment, the consequences would be: lower purchasing power and growth, deflation, lower productivity, lower interest rates, worse health outcomes, increasing inequality, the decoupling of effort and reward, a pool of wasted education and skills, ever greater accumulations of wealth in the hands of the owners of the technologies and greater debt at the bottom.

It is sensible to start to think about how to plan for this possibility. Already, low long-term growth has led to calls for developed countries to take advantage of record low, in some cases negative, interest rates to borrow and spend more to stimulate their economies, such as this one from the OECD.

If it becomes clear that large scale unemployment and underemployment is dragging down demand and growth, the best solution is to create new jobs. As in the response to the global financial crisis, if companies wont, governments should.

One solution is a permanent new deal to support employment and growth, funded from a sovereign wealth fund, comprising shareholdings in the companies which benefit the most from the automation and online competition which displace workers.

——

*$279 billion was the part that went on discretionary spending which put people to work. Much of the rest of the total bill went on tax cuts or Medicaid and unemployment benefits.

**Absurdly, the UK has a shortage of affordable houses, 1.7 million people looking for work, and a shortage of construction skills – all at the same time.

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Part 1 of 2: How Do The Public Understand Economics – And Why It Matters

This is the first of a two-part post. This part looks at why it’s worth studying how the public understand economics, and the second looks at a few things we know about how they do.

Economists have begun to take an academic interest in how non-economists think about the economy.

At first this might sound like a snide dig at economists – a profession seen as hyper-rational turning its intellectual firepower on the persistent question of why non-economists are so irrational. But actually, it’s a very good idea. In a new paper, ‘How laypeople understand economics’, Professor David Leiser of Ben Gurion University and Zeev Krill, a senior researcher at the Israeli ministry of finance, review the literature on the topic, and in doing so compile a good case that what the public understands about the economy has its own economic consequences.

Its message is interesting both to economists and anyone who’s in the business of communicating it.

So – what exactly is the point of studying how the public understands the economy?

Financial literacy

Most prosaically, there is the question of whether we know what we’re doing when we buy financial products. It turns out many of us don’t:

“Recent research has documented great gaps in the ability of savers to manage their savings, due to lack of basic financial knowledge (Lusardi & Mitchell, 2011)”.

Which is an issue, given that:

“recent changes in the labor market, growing availability of debt vehicles like credit cards, and recent pension reforms, in particular the shift from Defined Benefits to Defined Contributions plans, have placed the onus of financial management on the individual consumer.”

This is timely. In Britain, individuals are being given more freedom to spend their pension as they want. This raises the possibility of greater pensioner debt at exactly the time when economists – like Dr Gertjan Vlieghe of the Bank of England’s Monetary Policy Committee – are beginning to recognise that higher debt levels have macroeconomic effects.

Economics Relies on Assumptions about how People React

Many policy recommendations are based on assumptions about how people will respond. But what if their responses are different from economists’ expectations because they understand the economy differently? If economists are recommending policy, they might need to take that into account. 

Take inflation. As the authors put it,

“inflation is perceived as something bad that befalls prices and money: money is worth less, prices are higher. Its consequence is a lower value of the local currency and devaluation.”

Take a scenario where a central bank cuts rates to generate inflation. Now imagine that the public hears of the cut, assumes inflation will follow, worries that their money will be devalued, and concludes they had better save more in nominal terms to stabilise their saving in real terms. If this aggregate saving is large enough to put downwards pressure on consumption and demand, then the cut will produce less inflation than expected. It would take a bigger cut to generate the level of inflation than the Central Bank had expected.

In other words, public perceptions can make monetary policy harder to get right.

Bad for Democracy

An uninformed public can have political consequences.

The paper quotes Philip Inman’s argument that

“when people consistently misunderstand economic debate, it ‘stagnates into discussions between small elite groups over small differences behind the backs of an increasingly disillusioned and unrepresented public. This … is a grave threat to our democracy”

Economists seek solutions, politicians seek votes

I’m sure some people will look down on this kind of research, arguing that academics should be advancing the frontiers of knowledge, not putting their energy towards studying people whose understanding falls well short of them.

But I disagree. Social sciences are not like natural sciences where the pursuit of knowledge is just an end in itself. They also hold out the prospect of being a means to change society through policy.

In democracies, that only works when the policies social scientists recommend can be enacted. But even when social scientists agree on a policy change, politicians will only do it if there are votes in it, and there will only be votes in it if enough people think it needs doing. So to have policy enacted, economists will sometimes find themselves getting stuck into the messy arena of public debate and public understanding.

In short, public misconceptions can severely dampen social scientists’ ability to make themselves useful.

The paper gives the example of pensions. Retirement funding, it points out, is often:

“actuarially untenable, due to a combination of increased life expectancy, lowered return on investments, and demographic changes. In responsibly run countries, this concern requires certain policy changes. The consequence is often that members of the public, who do not understand how pension funds function, feel they are being cheated of their hard-earned rights”.

It also makes the implicit argument that the better the public understand economics, the more likely it is that politicians will. It mentions President Erdogan of Turkey rallying against the governor of the Bank of Turkey for cutting interest rates. Why? Because no matter what econ 101 says, he believed a rate cut would reduce inflation.

(Nor is this example designed to belittle Turkey; Ted Cruz wants to put the US back on the gold standard).

So how do the public understand economics? I’ll look at that in the second post.

Vintage Woodcut Orange

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Part 2 of 2: How Do The Public Understand Economics – And Why It Matters

This is the second of a two-part post looking at a paper, ‘How laypeople understand economics‘ by Professor David Leiser of Ben Gurion University and Zeev Krill. The first part looks at why it’s worth studying how the public understand economics, and this part looks at a few things we know about how they do.

Leiser and Krill show that a good deal of public understanding of economics is based on cognitive shortcuts.

Good begets Good

In a 2014 study, Dräger, Lamla, and Pfajfar used data collected over years by the University of Michigan Survey of Consumers, which asks thousands of people each month about what they expect to happen in the economy.

In defiance of the Phillips curve – the conventional wisdom that unemployment is inversely related to inflation – two thirds of the respondents expected inflation and unemployment to increase together.

This was consistent with a pattern which emerged through the results of other surveys too: people tend to divide economic news into good and bad, and assume that good news causes more good news, and bad news causes more bad.

As explained in the previous post, most people see inflation as bad, because it means their money is worth less. Unemployment is also seen as bad, and so the two are judged to be likely to come at the same time. The authors comment that this system won’t necessarily get you the right result, but it does enable you to answer just about any macroeconomics question.

Metaphor

Much public understanding of economics is based on metaphor. The metaphors we use, of course, determine how we see the problem and the solution. A financial crisis can be seen as a ‘burden, a crime, other people’s suffering, an injustice, an opportunity and a looming threat, an illusion and the doings of fate’. The foreign exchange market can be characterised as ‘a bazaar, as a machine, as gambling, as sports, as war, as a living being and as an ocean.’

And this determines what policy is seen as appropriate.

For example, take manipulation of the foreign exchange market. Should policy try to make the FOREX market fair? If you see it as like sports, you’re likely to say yes. If you see it as like war you’re more likely to say ‘good luck with that’.

Intentionality

But the main way people understand the economy is not as a complex interlocking system of cause and effect, but as the result of the deliberate acts of individuals. The authors call this ‘intentionality.’

They describe a study of public perceptions of the causes of the financial crisis in the USA, Germany, France, Russia, Israel and Sub-Saharan Africa. Across different countries, respondents tended ‘to attribute the responsibility for the crisis to moral, cognitive, and character failures of individuals, rather than to systemic features of the economy’.

People are more likely to see the crisis in terms of moral failures, stupidity, deliberate negligence, lax regulation and supervision than the failure of a system.

And this is surely an important lesson for anyone arguing to change that system: most people, in most places, don’t think there is a system. That is not to say that it can’t be explained. Only that it needs to be.

I’m pleased to see the public understanding of economics beginning to get some scholarly attention, and I’m sure there will be plenty more useful insights from this area in future.

Vintage Woodcut Sliced Orange

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British Politics is now Immigration vs Inequality (December 2014)

Needless to say, the opinions expressed here are mine alone.

Two topics are competing to be the Big Arguments of our times: immigration and inequality. They are starting to suck most other issues in British politics into their orbit. Here’s why inequality will win. 

Blair called it a Big Argument. Others talk about narratives or frames. But the point is similar: in politics, if you can tell a story that seems to explain most of what’s going on, you’ve got a better chance of shaping the debate and winning the day.

So it was, for example, that Blair did his best to make the 1997 election about underfunded public services, so that by election day every hospital wait and leaky school roof felt like a symptom of eighteen years of Tory rule. And Cameron did his best to make the 2010 election about the deficit. It works because, as neuroscientists like Drew Westen and linguists like George Lakoff remind us, we’re wired to notice and care about only those facts which support what we already believe. Most of the time, the facts that don’t bounce right off. That’s why Guardian articles don’t tend to change Telegraph readers’ minds, and vice versa. If you have a Big Argument and you successfully use it to change the story and show how the facts support it, you’ve got a better chance of winning peoples’ votes.

Since the last election, not one but two themes have emerged: immigration and inequality. They’re now competing with each other to explain most other domestic issues. You can see them bubbling up in the political rhetoric, in comments on articles below the line and in conversations in homes and pubs around the country.

The immigration drumbeat has got ever louder with the rise of UKIP, and it was given a boost when Lynton Crosby told David Cameron to talk about it to try to win back their supporters. We all know the familiar notes by now – crowded island, pressure on public services, immigrants holding pay down and pushing house prices up – and how it often comes with unsavoury mutterings about crime, the EU, benefits tourism, human rights, Muslims, foreignness, change. Its standard bearer in British politics is, of course, Nigel Farage.

It’s a similar story with inequality. You know the familiar proof points here as well: living standards, energy and train prices, zero hours contracts, bankers’ pay and financial scandals, food banks, perhaps even the fact that the average FTSE 100 executive is paid 130 times that of their average employee. Its drumbeat has got louder in recent years too, driven by Barack Obama’s calling inequality the defining challenge of our time, the Pope’s saying similar, Pikettymania. Each year, IPSOS Mori asks people what they think is the most important issue facing the country. This year, more people said poverty and inequality than at any other time since they started asking about it in 1997. Inequality’s standard bearer in British politics is Ed Miliband. His zero-zero speech was his clearest statement about that yet.

Of course, concerns about immigration aren’t confined to the right and those about inequality aren’t confined to the left. But in the last few years immigration has given the right power, energy and a unifying theme, as inequality has done on the left.

Evidence

But there is one significant difference between them: evidence. Most of the most common fears about immigration don’t survive contact with it. Most of the most common fears about inequality, though, emerge enhanced. In our current national debate, the dangers of immigration have been overstated, but the dangers of inequality understated. As a cause of other problems, immigration has been overdiagnosed, inequality underdiagnosed.

And that matters in the long-term because while today’s news cycles might be full of immigration-related fear, pumped up by Kippery electioneering and Tory pandering, they probably won’t be two or three years down the line; a populist panic can’t survive on hot air alone unless it points to some genuine problems that can be fixed. But when politicians and policymakers try to respond to peoples’ worries about immigration, they tend to find that it’s not a straightforward thing to do. Many of the things people fear the most are myths. No policy can fix a mirage.

With inequality, it’s the opposite: many of its consequences are real, measurable, harmful, and worsening.

Immigration

Let’s take immigration first.

The actual fears about it are real, of course. If you’re disorientated to hear so much Farsi on the bus, see so many Polish shops on your street, or if you just feel in your gut that the England you knew is now no more and you never had a say in it, politicians should have the decency to hear you out.

And yes, some of the things people fear about immigration are real problems: caste discrimination, for example, and job displacement in certain places and sectors, as Ed Miliband has said.

But most just aren’t. And that argument deserves a hearing too.

I know stats don’t win hearts and minds, but they’re a handy way to set some boundaries of rational debate. So, to take a sample: do immigrants automatically get a council house? No. But can they jump the queue for one? No. Is the British population now 31% immigrants and 21% Muslim, as people seem to think? No, and no. The figures are 13% and 5% respectively.

Do EU immigrants take British jobs on aggregate? No. There have been many studies on this, and when the Civil Service did a study of the studies it concluded that “there has been little evidence … of a statistically significant impact from EU migration on native employment outcomes.” Is the problem that one more job for a foreigner means one less job for a Brit? On aggregate, no. The average immigrant is more likely to start a company than the average UK national, so immigrants probably create many more jobs than they fill.

What about benefit tourism, the hordes of foreigners crowding onto planes to milk our benefits system? Funnily enough, the European Commission recently asked the government to give evidence – any evidence would do – that benefit tourism was a real problem. They couldn’t. Instead, they countered that the Commission was ‘placing too much emphasis on “quantitative evidence.”’

What we do know is how many Brits and non-Brits apply for a National Insurance number, and the House of Commons Library has tried to use those figures to work out where benefit claimants come from. It turns out that the vast majority – 92.6% – of people of working age who claimed benefits this year are British, and just 7.5% not. And what about the tax credits? 84.8% of claimants in 2013 were British, just 15.2% not. The idea of a mass influx of benefit tourists is just a lie.

But surely, the nativists argue, immigrants take up school places and hospital beds? But they don’t just go to hospital and send their kids to schools. They also work in them and fund them through taxes. In fact, immigrants pay more in tax than they cost, so fewer immigrants means worse-funded public services: even fewer school places and hospital beds. That, or higher taxes.

What about rising house prices? Plenty of intelligent people believe that they’ve shot up because so many new immigrants want to buy them. But again, the evidence just isn’t there. The research on skilled immigrants from outside the EU found that even after five years in Britain, most are still renting. Even when they bought, they were only likely to have added 1% to house prices over five years. And even if they did push up house prices, it’d be another argument for building more houses. After all, the price of mobile phones, package holidays and other things hasn’t shot up because so many more immigrants are buying those, because supply just adjusts. But housing is different: in the short-term, housing supply can’t adjust so that everyone who can afford one gets one (let alone adjusting so that everyone who needs one gets one). Government – especially local government – needs to get involved to see that more houses are built.

The nativists are probably on strongest ground with the claim that immigrants have held down real wages: here at least the evidence is mixed. But immigration isn’t the main culprit. After all, real median wages have stagnated or fallen in the USA, Japan, and across the Eurozone. There are many reasons for that: productivity hasn’t improved enough, competition from globalisation has held wages down and moved jobs abroad, technology has replaced jobs, there might be a shortage of good investment opportunities, certainly there’s a political culture of weak labour bargaining power. Maybe all of them. But the bottom line is that we don’t know that immigration is the cause, but we do know that inequality is the consequence.

When you try to pin the problems of immigration down, most of the time you find yourself chasing shadows.

Inequality

Inequality, on the other hand, is a policy problem. And once you start to recognise the symptoms, you see that it’s as underdiagnosed as excessive immigration is overdiagnosed. Many will counter that it’s a wonk’s issue. But even if nobody’s talking about it in the pub, nobody in the pub would turn down a payrise.

It’s worth pausing here to get David Cameron’s argument out of the way first. He says inequality isn’t rising because the gini coefficient – the economist’s traditional measure of inequality – is the same now as it was in 1986. But that misses the wood for the trees. Firstly because the big picture is that inequality has risen roughly from Thatcher’s election until the banking crisis. Then it stopped – but not because anybody got better off, but rather because real wages fell while the safety net protected the poorest. It is now rising again and is expected to continue to rise. These years of stagnant wages are a blip in the trend towards rising inequality. Secondly because this blip isn’t thanks to what his government has done, but despite it: his budgets have overwhelmingly taken from the poor and given to the rich. And thirdly because Cameron ignores inequality of wealth, let alone the kinds of inequalities of opportunity and power which any self-respecting meritocrat should really care about.

The long-run trend is that the rich are getting richer much, much faster than everyone else. And, like immigration, inequality is sucking other issues towards it.

That includes the familiar inequalities, like life expectancy, crime, literacy, health. To quote a recent Leader of the Opposition, “research by Richard Wilkson and Katie Pickett has shown that among the richest countries, it’s the more unequal ones that do worse according to almost every quality of life indicator.” That was David Cameron, in his 2009 Hugo Young lecture. He went on to recognise that inequality made more of a difference to these things than GDP per capita. (Cameron talked the talk. If Miliband wins, he’ll walk the walk).

It also includes issues of living standards. Complaints about energy bills, train ticket prices, even the rent, aren’t just about rip off prices and greedy rent-seeking. They’re also symptoms of the inequality of this growth: earnings at and around the median haven’t kept pace with earnings at the top for a decade, as the Resolution Foundation has documented. Between 1994 and 2010, the poorest 50% of households’ share of national income after taxes and benefits went down while the top 1%’s went up. Clearly, the problem goes back a long way. Real median wages remain stagnant or worse.

And the symptoms of that trend can be brutal. When we says that one in five families in Britain bring in less than £423 a week, that one in five families can’t afford a day trip to the seaside, that more than 100,000 people a year have to get into debt just to pay for a family funeral, or that most teachers say they see kids coming into school too hungry to learn, the problem isn’t just poverty, as some inequality deniers want to argue. It’s also a problem of inequality of growth. The gains from growth – because there have been plenty – have mainly gone to those who already earn the most.

But the main reason why the inequality drumbeat is likely to carry on getting louder in the coming years is because there are so many other issues which turn out to be about inequality when you scratch beneath their surface.

Why, for example, is the economy reviving so sluggishly compared to previous recessions? A big part of the problem is weak demand. Real disposable income fell between 2007 and 2013. Consumption per head fell between 2005 and 2013. Too many people don’t have enough money to spend.

There are many reasons for that. But with that backdrop, is it any wonder that it’s harder for business to find good investment opportunities, or that shops are struggling to find customers? No wonder, for example, Tesco is losing out to discount retailers when their customers have got less money in their pockets. This didn’t used to be a problem. Demand deficiency never affected the headline growth figures back when growth translated into rising wages. If you’re wondering why the economy is recovering so slowly compared to past recessions, a big part of the answer is: inequality of growth.

It’s a similar story with low interest rates. Many older, richer people with savings are wondering why it’s taking so long for interest rates to rise. But here again, it’s inequality of growth that’s to blame: if incomes were rising decently at and below the median, chances are we’d have enough inflation for rates to have risen by now. And it’s a similar problem with bubbly asset markets. Inequality of pay growth causes restrained interest rates, which causes a higher chance of bubbles, which means a higher chance of a crash.

And then there is everything else that inequality makes more difficult. Closing the deficit, for example. In the last year or so, it’s beginning to dawn on some on the right that the reason why it’s so hard to close the deficit is because so many of the new jobs are so low paid that they bring minimal tax into the Treasury. Complaints about the government not closing the deficit boil down to complaints about the government not doing the kind of reforms – like more and better training and apprenticeships – that encourage better paid jobs.

Then there are tax credits. They were always designed, lest we forget, to top up the income of the low-paid. And they do. But the money comes from the exchequer, so each new lower paid job helps deficit reduction less than each new higher paying job. Encourage companies to raise wages, and you don’t just dent the inequality of growth, you also make it easier to close the deficit.

The reason so many issues are likely to be pulled into the orbit of inequality is because so many turn out to be a symptom of it. Take housing affordability. Sure, it’s mainly a housing supply problem, but it’s exacerbated by a ‘too-many-salaries-not-rising’ problem: rising house prices would be less of a problem if incomes were rising with them.

Take the issue of London pulling away from the rest of the country: the Spectator devoted a cover story to the issue, written by one of George Osborne’s advisers, back in 2012. That’s really a right wing magazine writing a cover story about the growing divide between the rich part of the country and the rest.

And those on the right who are outraged by such a high percentage of the tax take being paid for by the rich should note that it’s not mainly fiscal drag or tax rises that are doing it, it’s the rich earning that much more than everyone else. Or as we like to call it: inequality.

Inequality even distorts the meaningfulness of the GDP figures; the more unequal we get, the less important GDP becomes. After all, the only reason anyone really cares about GDP is as a rough and ready proxy for how well off we are as a country. But when the labour market begins to split into two lumps of the high paid and the low paid – as it is increasingly doing in developed countries around the world – then GDP doesn’t really work as a proxy for our how well we’re doing as well as it used to. Median salaries become more representative.

And then there’s wealth. For the last thirty years, house prices have gone up about four times faster than wages. That skews incentives. After Cathy Colston left her senior job at Boots, she got into buy-to-let property investment. Within four years, she was able to replace her salary. Meanwhile, a third of us don’t even have one house, let alone a portfolio. This isn’t the kind of property-owning democracy Margaret Thatcher had in mind. We all know that being a buy-to-let landlord isn’t actually harder work than helping to run Boots, much as we know it’s not actually harder work collecting the rent from the Duke of Westminster’s land than, say, cleaning his house. But we turn away from these thoughts because they remind us of the unpalatable fact that in a world where assets return that much more than work, reward is ever less commensurate with skill and effort. When owning returns so much more than earning, the happy idea that work is the best way to get on in life begins to look hopelessly naive. Having assets becomes the best way to get on in life. Work is just for those who don’t yet have any. And that, it seems, is the way we are going.

I don’t blame Ms Colston for choosing to do up houses over helping Boots sell pharmaceutical products: those are her incentives. But I do blame a tax system that compounds those incentives. And that is what this means for British politics: if we’re serious about tipping the balance back away from wealth and towards work, then the case for taxing income weakens and the case for taxing wealth strengthens. It shouldn’t be a surprise that some polls find 72% support for the mansion tax.

But in the end, none of these are the biggest charges I’d lay against inequality. Because perhaps the most corrosive things inequality does are exactly the three things the nativists accuse excessive immigration of doing.

They say it changes the look and feel of our towns and cities. But inequality does too: each year there are more Ferraris on the streets, more bearded men poking through the bins.

They say immigration changes how we relate to each other, but inequality does too: each year that more of us live in gated communities or have to sleep in doorways we risk becoming a little more numb to the extremes, a little more likely to dismiss them as the way of the world.

And they say immigration changes our sense of who we are. Well, I say inequality changes who we are.

I didn’t used to give too much thought to inequality. Not because I didn’t see it, but because I just felt it had two big arguments on its side: firstly that it might be ‘fair’ inequality: some people work harder or have more valuable skills than others, so of course they end up richer. And secondly, that the medicine – whatever we did to reduce inequality – might well be more harmful than the disease.

But the crash made me think again. It showed that many of the best paid people in the country weren’t actually so talented or skilful or wise or smart: all those long hours and that incredible brainpower turned out to be dedicated to running financial institutions into the ground. And that’s not their problem, it’s our problem: it brought on a recession in which we all suffered and blew a hole in the public finances that we’re all paying for. That’s not fair inequality. It’s dumb inequality.

Because inequality changes who we are by changing our incentives: what we think it’s worth dedicating our lives to, the skills we collect, the careers we choose and so the people we become. Any vocation where pay rises more slowly than it does in finance becomes a little less attractive each year. And finance itself – such an important tool when managed right – with its PPIs, its LIBORs, its FOREX scandals, its bubbles and bailouts – becomes the ultimate choice; a pied piper enticing those who would otherwise devote their ambition, talent, energy, and time to engineering, say, or medicine, public service, or entrepreneurship, towards the big money instead. If this is the disease, maybe the medicine’s not so bad.

Conclusion

But even if you accept that immigration is something of a panic in search of a problem, and inequality the other way round, you still might simply think that there’s nothing we can do to disrupt rising inequality. And I’m not about to tell you I’ve got a blueprint under my arm. 

But this much I know.

The first step is to win the argument. It will need all the real stories and lived experience we can throw at it. Most inequality deniers normally speak from self-interest: either because they fear they’ll lose out from policies to remedy inequality, or because they’ve somehow staked their identity on arguing that it’s not a problem and are too embarrassed to change their minds.

But the tide is turning. The old arguments that inequality is inevitable, useful, or benign are rapidly losing ground. Case in point: for decades, right wing economists have confidently asserted that redistribution normally impedes growth. In April, the IMF threw them into disarray by pointing out that that assertion had never actually been grounded in good, comparable, cross-country data. When they used a new, bigger dataset which covers “as many countries and as many years as possible,” they found that apart from in extreme cases, “redistribution appears generally benign in its impact on growth.” That’s a massive deal. It’s an evidence-based stake through the heart of the argument that the medicine is always worse than the disease. Slowly but surely, the burden of proof is moving towards those who want to do nothing about inequality.

Secondly, it should be pretty clear by now that the government spending of the Blair years was a palliative, not a fix. It didn’t do much about the underlying trends towards greater inequality. Spending has its place, but it’s the structural changes like changing the tax system, the minimum wage, and better training that do the heavy lifting. If and when people get round to defining ‘Milibandism,’ I think this idea should be seen as one of its starting points.

Third, wealth and income gains don’t trickle down by themselves. You only get them by bargaining for them, and bargaining structures matter.

But let’s not forget that inequality has been brought down before, after the war. Reasonable people can debate the best way to deal with it in a modern, open economy. But each year that pay is stagnant, good jobs remain scarce, and demand remains deficient is another year that inequality inches towards beating off immigration to become the central issue of British politics.

And then the real work can begin.

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