Summers participated in a panel, “Future of Work,” hosted by Hamilton Project at the Brookings Institue on February 19, 2015. Summers said, “the idea there are all these jobs and we just need to train people is an evasion of the problem, we need more demand!”
On the diagnosis, I want to make a confession of ignorance, make an observation, and express a worry.
First, my confession of ignorance is this, and I think it should apply to everybody who speaks confidently in this area: On the one hand we have enormous antidotal evidence and visual evidence of the kind that Erik marshals, and it points to technology having huge and pervasive effects. Whether it is in complementing workers and making them much more productive in a happy way–that’s one possibility–or whether it is substituting for them and leaving them unemployed–that is another possibility–it can be debated. But in either of those scenarios you would expect it to be producing a Renaissance of higher productivity. On the one hand we are convinced of the far-greater pervasiveness of technology in the last few years. On the other hand, the productivity statistics over the last dozen years are dismal. Any fully-satisfactory synthetic view has to reconcile those two observations. I have not heard them satisfactorily reconciled. This is something we have to figure out.
If you believe technology happens with a big lag and it’s only going to happen in the future, that’s fine. But then you can’t believe it’s already caused a large amount of inequality and disruption of employment today. That is a major puzzle, it hangs over this subject which I just want to put it out there for discussion.
Second observation, I think it is a mistake to think of the economy as homogeneous–as producing something called “output.” As we approach these issues, an aspect that doesn’t get enough attention is that sectors, through progress, work themselves into economic irrelevance. Let me give an example: the illumination sector, the provision of light. It has had about a ten-fold increase in its productivity every decade for a century. We now think of it as a trivial sector in the economy. No doubt we could continue to produce ten-fold increases in productivity every decade. But actually most of us want it to be dark at night. There are more Little League night games than there used to be. There are more parking lots lit more brightly than they used to be. Basically, what has happened is that illumination has become quasi-free. Whereas candle-making was a major industry in the 1800s, illumination is a trivial industry today.
We need to recognize that a sector that has rapid technological progress but of which the world can absorb only so much, becomes ultimately unimportant in the economy. Is that kind of thing relevant in thinking about the world? Here’s a fact that continues to astonish me. I concede there are a million measurement problems. But it is a fact. The way they compute the consumer price indices all prices were set to be an index of 100 in 1983. Consider two goods today: a television set, and a year at a University or I could use a day in a hospital. The consumer price index for the latter two categories is in the neighborhood of 600. The consumer price index for the former category is 6. There has been a 100-fold change in the relative price of TV sets and the provision of basic education and health care services.
If anybody is wondering why governments can’t afford to do the things they used to do, I just gave you a big hint.
If anybody’s wondering where most people are growing to be working in the future, I just gave you a big hint.
If anybody’s completely confident we will have rapid productivity growth in the future, they should be giving pause–because no matter how much productivity we have in agriculture or illumination, it doesn’t really matter for the aggregate economy. Increasingly, that’s becoming true of a larger and larger fraction of what it is that we produce.
Third, my worry: When I was an undergraduate at MIT, and in the 1960s, there was a whole round of concern about will automation displace all the employment? What I was taught as an undergraduate was that basically the people who thought it would, were a bunch of idiot Luddites. Obviously, there would be enough demand. It would work itself out. If people got more productive at making more, they would spend more, maybe we needed some transition assistance, but it would all be okay.
That is what I thought and what Bob Solow thought. And Bob Solow was a hero. And the other people were all a bunch of goofballs–that was kind of what I learned. I believed that for many years. I actually repeated it often. It has occurred to me that when I was being taught that about 6% of the men in the United States between the age of 25 and 54 were not working. Today, 16% of the men in the United States between the age of 25 and 54 are not working. It won’t be very different even when the economy is at full employment.
Something very serious has happened with respect to the general availability of quality jobs in our society. We can debate whether it is due to technology or whether it is not due to technology. We can debate whether it is the cause of dependence or whether it is caused by policies that promote dependence. But it is very hard to believe that a society in which the fraction of people–choose whatever your most prime demographic group is–who should be working in that group, in which the fraction of them who are not working, is doubling in a generation. Is that going to be a society that is going to function well, or function well without major social innovations?
I want to leave you with that concern. Whether you think it is due to technology or to globalization or to the mal-distribution of political power, something very serious is happening in our society…
I think the [education] policies that Aneesh is talking about are largely whistling past the graveyard. The core problem is that there aren’t enough jobs. If you help some people, you could help them get the jobs, but then someone else won’t get the jobs. Unless you’re doing things that have things that are effecting the demand for jobs, you’re helping people win a race to get a finite number of jobs…
Folks, wage inflation in the United States is 2%. It has not gone up in five years. There are not 3% of the economy where there’s any evidence of hyper wage inflation of a kind that would go with worker shortages. The idea that you can just have better training and then there are all these jobs, all these places where there are shortages and we just need the train people is fundamentally an evasion…
I am concerned that 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 they’ll 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. But, but, but, if we don’t just educate people more, what can we even do? What we need is more demand and that goes to short run cyclical policy, more generally to how we operate macroeconomic policy, and the enormous importance of having tighter labor markets, so that firms have an incentive to reach for worker, rather than workers having to reach for firms…
I think that the broad empowerment of labor in a world where an increasing part of the economy is generating income that has a kind of rent aspect to it, the question of of who’s going to share in it becomes very large. One of the puzzles of our economy today is that on the one hand, we have record low real interest rates, that are expected to be record low for 30 years if you look at the index bond market. And on the other hand, we have record high profits. And you tend to think record high profits would mean record high returns to capital, would also mean really high interest rates. And what we actually have is really low real interest rates. The way to think about that is there’s a lot of rents in what we’re calling profits that don’t really represent a return to investment, but represent a rent.
The question then is who’s going to get those rents? Which goes to the minimum wage, goes to the power of union, goes through the presence of profit sharing, goes to the length of patents and a variety of other government policies that confer rents and then when those are received, goes to the question of how progressive the tax and transfer system is. That has got to be a very, very large part of the picture. Two bonus quotes. First, someone immediately followed up that instead of the minimum wage, why don’t we just expand the earned income tax credit?…
If we had the income distribution in the United States that we did in 1979, the top 1% would have $1 trillion less today, and the bottom 80% would have $1 trillion more. That works out to about $700,000 a family for the top 1%, and about $11,000 a year for a family in the bottom 80%.
That’s a trillion dollars. I don’t know what the number is, but my guess is that the total cost of the Earned Income Tax Credit is $50 billion. Nobody’s got on the policy agenda doubling the Earned Income Tax Credit. The big, aggressive agendas are probably to increase it by a third or a half. So, I’m all for it, but we are talking about 2.5% of the redistribution that has taken place. So, you have to be looking for things and there’s no one thing that is going to do it. My reading of the evidence, it’s a fairly general evidence, is that while there may be some elasticity, the elasticity around the current level of the minimum wage is very low…