The Anti-Economist — From the January 2014 issue

The Digital Revolution That Wasn’t

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For as long as there have been machines, there have been worries about their power to destroy jobs. The Luddites — early-nineteenth-century artisans who bitterly resisted the new textile machinery that was making them obsolete — are only the most famous example of workers who fought the mechanization of labor. A similar fight has played out many times since the beginning of the Industrial Revolution, over water mills and steam engines, electricity and the assembly line.

But no one today would wish away these technologies. That is because, over time, economies kept growing, jobs were created, wages rose, and prosperity was shared throughout the population. In the wake of the Industrial Revolution, human rights were increasingly — if never adequately — protected, democracy became more firmly rooted, and new inventions, from the automobile to the television, made daily life more pleasant for the vast majority of American workers. There is a simple economic explanation for why technologies that disrupt the labor force in one area tend eventually to benefit everyone: productivity. Increases in the amount of goods made or services delivered per hour of work generally lead to greater prosperity. Some jobs are eliminated, but more and better-paying jobs often replace them.

It should be noted that this trend requires government support through wage regulations, the protection of labor unions, and a social safety net of unemployment insurance, employment tax credits, and retirement and health-care programs for the elderly. But on balance, the Industrial Revolution was a natural experiment that proved one of Adam Smith’s central points: Rising productivity is the source of the wealth of nations. The founding of the United States coincided almost exactly with the start of the Industrial Revolution, so we are a nation that has always experienced this rising productivity. While we reached a true golden age in the 1950s and 1960s, when both productivity and wages rose unusually rapidly and unemployment remained low, increasing prosperity has been the norm for most of American history.

In the 1970s, however, productivity growth slowed down suddenly and significantly — and it did so just as the use of the computer began to sweep through business. Surely this invention, which so many have compared to the greatest breakthroughs of the eighteenth and nineteenth centuries, should have brought with it a surge in productivity. But this never came. After years of disappointment — in the words of the economist Robert Solow, the computer was everywhere but in the productivity numbers — the development of the Internet became the next great electronic hope. If individual computers had failed to deliver the expected gains, certainly networking them would.

The Internet caused the same short-term job disruption that all major technologies do. Amazon destroyed bookstores and other brick-and-mortar retailers, newspapers began to fold, and the offshoring of various routine jobs became much easier. But free-market advocates assured us that in the long term the lost jobs would be made up elsewhere, as they had in countless similar situations since the 1770s. In 1997, The Economist claimed that the “communications revolution” would produce “a change even more far-reaching than the harnessing of electrical power a century ago.” Businessweek, one of the most reliable outlets for New Economy boosterism, called the computer “a transcendent technology — like railroads in the 19th century and automobiles in the 20th. . . . Forget 2% real growth. We’re talking about 3%, or even 4%.”

For a little while, it looked possible. Productivity rose at about 3 percent annually between 1996 and 2005. In the late 1990s, hardware and software companies such as Intel and Microsoft helped add millions of jobs to the economy. Like the Ford Motor Company before them, these companies paid good wages. Even Walmart and other big-box retailers responded to productivity increases in the late 1990s by adding jobs. By 1999, the unemployment rate had fallen to just over 4 percent, its lowest point since the Sixties. But the boom subsided far sooner than New Economy advocates anticipated. Productivity growth had begun to fall by 2005, well before the onset of the Great Recession. Since then, it has averaged a mere 1.5 percent annually — a similar level as in the disappointing period from the early Seventies to the mid-Nineties — and it grew at closer to half a percent in 2011 and 2012. Productivity has grown at the average golden-age rate for eleven of the past forty years.

If we examine the data more closely, we can see how little new technologies have helped the United States return to the rapid growth that made it so rich. “Computers and related electronics, the rest of manufacturing, and information sectors have contributed around half of overall productivity growth since the turn of the century,” notes a recent report from the consulting group McKinsey & Company, “but reduced employment by 4.5 million jobs.” Walmart and copycat retailers also started shedding jobs while continuing to offer workers miserable wages and benefits. Outsourcing enabled manufacturers to reduce the domestic workforce and put pressure on the wages of those who remained. The result was that the economic expansion under George W. Bush from 2001 to 2007 saw the weakest growth in employment figures of any expansion since World War II.

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