Coming to Terms With Our New Economy

(Parts of this essay were cut from an earlier article, which I shortened to make a new one)

From Forbes: Why ‘The System’ Is Rigged And The US Electorate Is Angry

Then in the 1970s, something went wrong. It was as if a strange new economic disease began to infect everything. Firms focused more closely on making gains for themselves and stopped passing on gains in productivity to their workers.

Here is the chart, which I’m sure everyone has seen, that shows how real hourly wages have stagnated relative to productivity:

There are a few things to keep in mind:

1. Living standards have surged. Technology, as well as very tame inflation, has made many things cheap and affordable, compensating for the decline in real wages. If CPI-based inflation is close to zero, does it matter that real wages are also flat?

There is a positive side effect of automation: deflation. By increasing productivity and efficiency, technology acts as a deflationary force:

Think about computers: your price per speed and functionality in your computer has gone down every year since they’ve been invented.


Think about lighting your house. In the 1880s you would have to work for 15 minutes to pay for an hour of kerosene lamp usage.
Today you have to work for 1/2 a second to get an hour of reading light.

Ditto for cars. For clothing (as a percentage of your income) and even for food (as a percentage of your income – food costs have gone from about 20% of your income in 1969 to about 3% of your income. )

However, there is a caveat. As Scott Grannis and myself have noted, inflation/deflation is bifurcated, with services being more expensive despite durable goods (like electronics) being cheaper:

2. Entitlement spending is also surging – services such as medicare, education, welfare, social security, emergency room treatment.

3. Non-wage compensation has also surged. Companies are paying more in benefits such a healthcare.

4. Although we’re seeing a hollowing out of the middle, there also also been a gain in upper-income jobs.

It is true that Pew’s analysis shows that the number of households that fit within their categorization of middle class has shrunk by 11 percentage points since 1971 [from 61% to 50%]. It is true that the proportion of households that are classified as lower class has increased from 25% to 29%. But it is also true that the proportion of households that are classified as upper class has increased from 14% to 21%.

That is to say, part of the reason that the middle class is disappearing is that they are succeeding and jumping to the next bracket. And a greater number of them are moving up than moving down. Be wary of the assumption that the drop in the middle class is a sign of a crisis.

5. The evidence suggests there will always be new jobs despite automation, although of course like most things pertaining to economics there is no unassailable ‘law’ that says it must be this way. There are income opportunities that are stretch the imagination, inconceivable. For example, on YouTube there are hundreds of these ‘ASMR’ channels, and these video bloggers are quite popular, with tens of thousands or even hundreds of thousands of subscribers. It’s not music – it’s sound effects that are intended to be relaxing, and apparently there is a very large market for this that just a few years ago didn’t exist.

Niche service sectors and professional services will do better than manufacturing. For example, audio editing (to take advantage of the boom in pod casting), copy editing and audio book reading (to take advantage of the post-2008 writing boom), video editing (for Youtube), and so on. Also spyware removal and computer repair.

Professional, high-IQ services will thrive: doctors, lawyers, quants, programmers, etc.

The low-IQ service sector (clerical work, fast food, Walmart door greeter, etc.) will see growth, although the jobs won’t pay much.

But there will be a hollowing out out of overpaid, mediocre-talent jobs. The decline of manufacturing will continue. In today’s competitive, ‘average is over’ economy, you have to be exceptional or you will find yourself on the lower rungs of society.

I discuss automation and unemployment in more detail here.

Coincidentally, Reddit seems to agree with #1, in a recent ‘Shower Thoughts’ post that went massively viral: My standard of living is far greater than that of a king in medieval times.

Here is the most up-voted comment, which was also ‘gilded’ in approval:

I think people are taking OP overly literally saying that he doesn’t have the powers of a king.
What he means is that in our modern world we can eat food from almost anywhere we please, we have modern healthcare that can cure diseases that would have been fatal in medieval times, we can travel to other lands quickly and safely. All of this would have been out of reach for even the wealthiest people in medieval times.

However, class envy plays a major role, as someone on Reddit astutely points out:

Many/most people are more concerned with relative status than absolute progress. This makes evolutionary sense. My genes want to make copies of themselves and this is more driven by where I stand in comparison to everyone else than how high my standard of living is.
When people discuss income inequality, this is the factor driving their concerns. Because it’s a deep-seated emotion, people frequently do not realize relative status is the reason they care about inequality. They then engage in motivated reasoning and generate alternative reasons, like the rich are taking from the poor. While the stated reasons for being concerned with income inequality are frequently illogical, the underlying sentiment that causes them is not.

Bernie ‘wealth spreader’ Sanders’ whole campaign is about pitting the poor against the rich. Rather than celebrating wealth creation and technological progress, the left wants to take away the fruits of labor from the most productive, fanning the flames of class warfare.

I’m sure you’ve heard this Marxist slogan, ‘From each according to his ability, to each according to his needs’. Although communism promises to end scarcity, the result is an abundance of nothing. Everyone is equal, but worse-off as a result. Without incentives, there is no production.

But that doesn’t mean capitalism isn’t entirely shielded from criticism, which is that capitalism, especially in the increasingly competitive winner-take-all post-2008 economy, requires a lot of debt, effectively making it ponzi-like in nature. To succeed in post-2008 capitalism, due to the exorbitantly high costs and competition, you need to convince someone to write you a blank check, and then that ‘someone’ also needs funding from someone else, ad infinitum. As opposed to multinationals that can borrow at next to nothing, borrowing costs for small businesses are too high and the failure rate is also very high, leaving the entrepreneur financially ruined. The implosion of the banking and housing sector in 2008, and, in 2014, the implosion of the energy sector, brought to light the risks associated with debt and leverage. But capitalism still works and is the best of all alternatives. This is because while the failure rate is very high, as are the initial costs, the expected value over many iterations is still positive.

And from the New York Times: What’s Our Duty to the People Globalization Leaves Behind?

What is often forgotten or ignored are all of the people globalization helps lift up. By several estimates, free market capitalism has pulled over a billion people out of poverty.

To quote Peter Nixey:

In addition to that, in the the last 50 years the world has become a much better place to live. Health, wealth and education are up across the board. That’s happened because our economies are more efficient and effective. The people who run the businesses that drive those economies have benefitted proportionally. Is it really such an issue if a few people get rich so a lot of people can wealthy?

No, it’s not a major issue, and many Americans agree. Online, it’s a different story, and it seems like everyday there are at least a couple articles about wealth inequality and tangentially related topics of capitalism, technology, and globalization…that just goes to show how important of an issue it is to many people (online that is). Offline, it’s not really such a big debate. Sports, news, and celebrity gossip tends to dominate offline discourse. The economy is an issue that affects everyone, and solutions to problems are hard to come by, and that’s probably why it’s such a heated debate, with participants ranging from economists to average people.

However, as I discuss in Paul Graham: Economic Inequality and The Refragmentation, there are no obvious or simple solutions to people who are displaced/disenfranchised by globalization and or automation, and none without major limitations. We’re probably going to be seeing more ‘gig’ jobs, more entitlement spending, and a lower labor force participation rate. As mentioned before, cheaper goods offsets lower real wages, since globalization helps keep costs low by exporting inflation. Historically speaking, and as I explain earlier, new jobs tend to be created to replace obsolete ones, and globalization may also spur job creation. Simply getting rid of globalization may introduce more problems than it solves.

Maybe we need to come to terms with the fact that the meritocracy is one stratified by IQ, with some having the cognitive potential to produce more merit than others, and those smarter people will tend to rise to the top socially and economically, too…But in return, we (average people) get new technologies, job creation, and higher standards of living owing to the creations of the cognitive and financial 1%.

Boris Johnson is right in that the economy has been ‘shaken’ and all the ‘high-IQ cornflakes’ are rising to the top of the ‘cereal box’ that is analogous to the economy. The outrage by the left over his comments was predictable, as million of people want to believe they have free will instead of having their fate largely determined by a number, IQ. That doesn’t mean we need to do away with merit or get mad, but instead offer economic conditions for everyone to succeed within their cognitive limitations. You can’t raise society and the economy by chopping down the smartest, the most successful, which is what Paul Graham was getting at in his essay. Class warfare is analogous to Animal Farm where the uprising makes things worse for everyone. People who are rich should not have to prove they are sufficiently empathetic to the poor. There’s a saying, ‘offence is taken, not given’.