Paul Graham: Economic Inequality and The Refragmentation

Tech VC heavyweight and hugely influential blogger Paul Graham posted two new essays:

Economic Inequality

The Refragmentation

These essays are almost the same in that they deal with trends and paradigm shifts affecting post-2008 America, specifically about society, capitalism, start-ups, and wealth inequality.

The meta-discussion is almost as interesting as the topic itself. These essay went hugely viral, getting hundreds of comments and votes each. It helps they were written by Paul Graham, who is very influential, but also the subject matter itself: economics as it pertains to post-2008 America, which squares with the ‘great economics debate’* that is raging online now.

Related: The Great Debate: Automation, Jobs, Wealth Inequality, Basic Income, Post Scarcity

Economics is a social science, which means, to some extent, it affects everyone, allowing anyone to participate in the debate. Wealth inequality touches everyone, including the rich, who are often blamed for wealth inequality.

People have observed how much thing have changed in this ‘new era‘ we find ourselves in, and they want explanations as well as solutions: like how to find work without much job experience, how to not get fired, how to make money without a traditional job, how to find meaning in life, and so on. The explanations for why or how the economy has changed are easy to elucidate, but solutions are harder to come by. Such solutions, if they exist, may not be what people want to hear.

The trend, I predict, is that wealth inequality will become almost the same as IQ inequality. IQ is more much important today than a generation ago in influencing individual economic outcomes. 100 years ago in an economy dominated by manual labor, the difference between a 90 IQ and 120 IQ wasn’t that important, but now it is.

The reality is that people are failing behind because of low IQs in an economy and society where intellect is becoming increasingly valued, as I explain in The Great Decoupling.

To repeat myself, people are falling behind because of low IQs and the winner-take-all economy that enriches some, but doesn’t leave a whole lot for everyone else. Today’s hyper-meritocracy is amplifying the socioeconomic ramifications of individual cognitive differences such that a person with an IQ >110 is much more likely to succeed than someone with an IQ <90, whereas decades ago the disparity wasn't so obvious. Yeah, It's a well-worn argument, but it's probably the most applicable, succinct answer I can think of. As long as we keep asking the same questions (why is there so much inequality, etc..) there's no reason why the answer should suddenly change.

The solution, on the other hand, is harder than the explanation because you have to account for incentives and politics. Too much welfare and the incentive to work is gone. A solution that is too 'radical' may be roadblocked by politics. No one really knows the best solution, and that's why this is such a big debate. So many people realize that this is one of the most pressing issues of the 21st century. How are we going to develop a compromise or solution that handles automation-related jobs loss and inequality. Some propose a basic income; others want redistribution; others wants more spending on education, and so on...

Another problem is ‘mass education’. The skills taught in school, which a couple generations ago were good enough to get a decent job, have become saturated. In the early 20th century, a much smaller percentage of the population could read and write proficiently; now (percentage-wise) many more can:

In the past thirty years, literacy rates have surged in the developing world, possibly creating downward pressure on wages for many jobs that involve writing and numeracy. The solution is that economic forces create more jobs (to keep up with the supply of educated labor), the result being a sort of homeostasis, which was stable until recently, but now equilibrium may have broke – the result being too many educated people and not enough jobs.

Literacy rates and real wages rose together, until the latter peaked in the early 80′s. The early 80′s may have been ‘peak school’, but we’ve possibly reached the point of diminishing returns.

However, ‘real compensation’ has also surged, suggesting that employers are making up the difference in more benefits:

Perhaps education needs to be reformed, with more emphasis on teaching skills that employers are seeking. Teaching the kids to code could be a start, but then you run into the limitations imposed by the Bell Curve (coding is hard). Segregating the smart kids to learn high-ROI skills like STEM is a good idea, but then certain people will complain about discrimination. Public schools spend inordinately more money on special education than on the gifted, even though both are represented equally on the Bell Curve – what a waste.

This passage from “Refragmentation” stood out:

In the early 20th century, big companies were synonymous with efficiency. In the late 20th century they were synonymous with inefficiency. To some extent this was because the companies themselves had become sclerotic. But it was also because our standards were higher.

Huh? His memory must have stopped in 2000 at the peak of the dotcom bubble. Everything has become much more efficient (both in the stock market and in corporate america) and competitive, with droves of college graduates applying for jobs that can be completed by high-school dropouts.

The 2008 recession gave employers a great excuse to thin the herd, and keep it thin long after stock prices and earnings made new highs. There were too many people being overpaid to do jobs that could otherwise be automated, outsourced, or simply eliminated.

Today the low-paying service sector dominates, as the labor force becomes bifurcated with the ‘creative class’ or ‘cognitive elite’ on one extreme everyone else on the other. In spite of visas and outsourcing, STEM still offers the best career prospects:

There is also a small hump in the middle for cushy government jobs, which pay well, have a lot of benefits, and many don’t require much intellect or education to attain.

As for wealth inequality, most people understand it’s an unavoidable byproduct of capitalism and economic progress. People who produce more economic value, directly or indirectly, tend to make more money. That’s why wealth inequality as a political issue is never a winner, because people want to help each other get rich, not tear each other down by waging class warfare. Also the argument that high wealth inequality is bad for the economy – as opposed to just neutral – is tenuous at best. Rather than attacking job creators with higher taxes and regulation, a better approach is to create economic conditions that are conducive to job creation.

The ‘endgame’ is that a lot of these people who are treading water will continue to draw government aid, hence having a negative or near-negative effective tax rate, meaning that they consume more in benefits than they produce in economic value. The welfare state will continue to expand.

However, the good news is that utility due to new technologies is surging, allowing workers to get more ‘bang’ for their buck, even if real wages stay stagnant. Technology and globalization act as deflationary forces, making many things cheap and abundant. In the 50′s, for example, a worker had to save for months to buy a black and white TV that only had a handful of channels; nowadays, a middle low-income worker can buy a considerably better TV with just two weeks’ worth of income.

I discuss these trend in more detail in the three-part “capitalism & crisis” series:

Post-2008 Capitalism: A Guide, Post-Labor Capitalism, Collapse can wait

and some more here The Hivemind, Immigration, and IQ

* There are three ‘great debates’ raging online right now: Gamergate vs. SJWs, a ‘digital’ twist on the age-old left (SJWs) vs. right (gamers) divide; the second debate is about to economics – specifically about job loss, wealth inequality, basic income, and automation; and the third is about college, STEM vs. liberal arts, and whether college is necessary or not.