Who’s Reaping The Fruits of Technology?

August 25,2017, Ho Chi Minh City, Vietnam

Recently I have been debating with friends the question of who is reaping the benefits of technological advancement in the last decade or so. I argued that only the creators and their few employees and investors are reaping the benefits. My friends rightfully pointed out the many benefits that everyone enjoys. Both opinions are correct.

My friends reminded me that nearly everyone in the world can have a cell phone now, and that telephone and internet costs are very cheap. So are the costs of a lot of very helpful and enjoyable consumer appliances such as TV’s and computers. Many other appliances we previously used without the benefit of much technology, such as cars, refrigerators, heaters and air conditioners are not only cheaper to purchase, but with the help of advanced technology, can do their jobs better and far less expensively.

But here is my counter-point: What good is all this if you have only sufficient income to buy a few of the technological necessities, but not enough to provide decent housing, health care, education and other necessities for your family? While many costs have declined, the cost of housing and services such as health care and education have increased dramatically. Meanwhile, the wages of the middle and lower classes have been stagnant for decades now. An iPhone is a poor consolation prize for not being able to afford to go to the doctor or live in a decent home.

The benefits of employment in technology look very exciting if you are a young software developer, but not so promising if you are older, don’t have a college degree, and lost your traditional manufacturing job. As of 2015, only 32.5% of Americans over age 25 had achieved a Bachelor’s degree. College enrollment is dropping, with the primary reason being finances–the growing gap between wages and college costs.

And even if you do have a college degree, the outlook for an economy based on tech jobs pales in comparison to millions of manufacturing jobs lost. Apple employs 116,000, and Google 72,000. The brick-and-mortar employer Walmart employs 2.2 million, but tech companies need fewer workers than do legacy retailers and manufacturers. Amazon employs only 341,000, and with this force already does 1/3 the sales volume of Walmart.

A large part of the value of technology is in the market value of tech companies, which constitutes a major portion of market indices now. Larry Kudlow likes to argue that the working class of Americans also enjoy the benefit of stock ownership. But how significant can that be when the average net worth of the bottom 60% of the population is only as shown below? How much could they possibly earn on such modest capital?

Bottom 20 Percent -$6,029
Next 20 Percent $7,263
Middle 20 Percent $68,828

Both opinions are correct, but for each family the bottom line is what matters. I leave it to statisticians to calculate the plusses and minuses of lower cost items, higher cost housing and services, and stagnant wages, but I think it’s clear that the net result is bleak for the bottom 50% of our population,

Whatever you may think, one thing is clear: the voters who elected Donald Trump did so with great frustration over the failure of government to assure our economy continues to deliver enough good jobs. Frustrations with immigrants, foreign countries, people of other religions, etc., have in large part to do with fear that these folks have taken all the good jobs, a fear our President stoked with his rhetoric. He has yet to show any sign of focusing on the real issues and setting about to fix them.

To those who recognize this political reality, yet choose to dismiss it as not reflecting the very real and dire economic plight for this large segment of our working population, there is only one way to reconcile their views. They choose to regard those disadvantaged as largely a group of wastrels, who only want to live off welfare and do not grasp the reality that taking personal responsibility is the only and certain way to succeed in life. And that no one and nothing can be blamed for their plight, except themselves.


How to Reduce Inequality

August 25, 2017, Ho Chi Minh City

When we talk about “fixing” inequality, we need to be clear: the question is how to reduce or moderate inequality, not how to eliminate it.

Rather than using redistribution to achieve moderation in inequality, it would be a far greater achievement to actually redesign our form of capitalism in order to enable everyone to have a “good job,” eliminating the need for welfare. This is possible, but a radical undertaking.

In the absence of such a radical redesign, and within the current system of property rights, it is going to take much greater will on the part of citizens and their elected representatives than is evident today in the US to alter our redistributive policies such as to reduce inequality.

It’s not a problem of inadequate policy tools. Policy created the inequality, or at least enabled and exacerbated it, and policy can fix it. Our government has many levers to effectively and fairly moderate inequality if we can find the political will.

These levers can be divided into three broad categories: those which reduce the income or wealth of the rich, those which are used to redistribute government revenue in ways which will reduce inequality, and the law.

Reducing the excess incomes and wealth driving up inequality starts with tax policy. Studies by Emmanuel Saez and others conclude that there is much room for increased income taxes on high incomes and wealth without destroying motivation. We could also use tax revenue management to motivate businesses to engage more in inequality-reducing measures. For example, for companies which pay their C Suite above a certain reasonable level vs their average employee salaries, there could be an added tax, or there could be a tax credit for those which do not, or both.

Similarly, we could use tax policy to incentivize corporations to invest in affordable housing in their communities. We could use taxes to encourage them to open their resources to new entrepreneurs–data, research, space, laboratories, etc. There is likely a proliferation of additional services of value which can be added to the present production of major companies without diminishing their existing opportunities.

In addition to providing corporate incentives, tax policy can be used much more directly on an individual level. In his now famous recent book Capital in the Twenty-First Century, Thomas Piketty recommends a wealth tax as the most effective way of dealing with inequality. It would ideally be global, so that the wealthy do not move to other countries to avoid the tax. Inheritance is a major component of growing wealth inequality.

The spending side of a government budget represents an array of levers to achieve reduction in inequality. At the top of the list is spending more on education. That’s because we have skilled jobs available for which our workers are not trained, and because the future of the US knowledge or digital economy is dependent on well-educated workers. The challenges of focusing on education for significantly increased government support are three: (1) There is little agreement as to what the future of education should be in programmatic terms. The pace of change in technology, as one major example, is confounding planners in preparing to educate children of the future. (2) Education takes a long time to pay off. If starting with the very young, the results may be 20 years in coming. This leaves a whole generation without benefit, unless there is a big program dealing with skills needs of adults without a college education. (3) No one trusts government to do anything well.

Education spending is the first step, but there are dozens of other ways to spend money that will not only reduce inequality, but help businesses and individuals across all income ranges. Infrastructure improvement is an incredibly important tool, one which benefits the poor as well as business and the wealthy. Why not?

There is also law as a tool. Greater pursuit and prosecution of corruption, shorter limits to patent protections, greater protections for workers vs. the corporation, and greater protections for labor unions are some of dozens (or hundreds) of changes that would make significant impacts on inequality in America.

It is right to acknowledge that none of the above solutions are likely to be put in place, and if any, it will likely be in an insufficient combination and force to make a major difference. Inequality is likely to continue to edge up, barring a radical comprehensive change, such as that which occurred as a result of WWII. Professor Walter Scheidel of Stanford argues that “war, revolution, state collapse, and deadly pandemics” are the only ways inequality can be reversed. My economics professor at SOAS in 2013, where I wrote a thesis on inequality, had the same opinion – revolution is the only solution. And, both good and bad, Dr. Scheidel expects none of these as likely to happen as in the past.

Some argue that increased economic growth will reduce inequality, but it hasn’t done so in past periods of strong growth. Government intervention in one of these or other ways will be required.

We have the highest level of inequality among developed countries, and it will inevitably continue to rise. We have abundant tools to reduce it, but we lack the political will to address it.




Good and Bad Inequality

August 14, 2017

Inequality can be either good or bad, depending.

Assuming behavior is ethical and legal, it is good for extra reward to go to those who work harder, are more creative, or take greater risks than the rest of us. The opportunity to earn extraordinary rewards is healthy and something we do not want to quash with taxes so high as to destroy the motivation to take risks.

It’s perfectly acceptable that there are people at every economic level. Every citizen can strive to achieve the high rewards if prepared to “pay the price,” which often involves very hard work and significant risks to sleep, health, relationships, and more.

It’s important for Liberals like me to endorse this kind of “good inequality,” because Conservatives often seem to think we only want socialism–everyone exactly at same income and wealth, with no motivation to try for more.

Please understand–we don’t want that.

In my view, bad inequality occurs in four major ways. First, if the behavior leading to greater income and wealth includes any of the following, it results in bad inequality: Corruption, immoral, unethical, or illegal behavior; using power to take advantage of laborers, purposefully capturing “rents” which are rightly deserved for labor, not for capital. How this is to be judged is not the purpose of this post, but it is often obvious.

Second, if the amount of high remuneration is not correctly correlated to performance and contribution, it results in bad inequality. Just because a compensation committee of the board of directors decides the CEO’s salary, bonus, and stock options doesn’t mean it is correlated with the CEO’s actual contribution. It’s usually not right, in this writer’s opinion, if the CEO earns 331 times that of the average employee. Surveys show the public thinks CEO’s are vastly overpaid.. This writer thinks 100 times would be a good target for policy intervention, and that’s way above the level of the 1960s.

Third, it is bad for significant wealth to be obtained through inheritance. The kids didn’t earn it, didn’t take the risk. Inherited wealth promulgates bad inequality. There should be a modest limit to what can be transferred, and a high tax on the remainder. This means a wide variety of transfer mechanisms need to be removed.

And fourth, if the share of income and wealth attributed to the top percentiles of the populations is very high and the share for those in the bottom percentiles very low, inadequate to live a decent life, inequality has risen to a level which is dangerous to the society as a whole. This is bad, regardless of whether the wealth is earned fairly.

The US has all these characteristics at this time–much good inequality, but all the forms of bad inequality. The combined effect results in creating the fourth condition, with the highest inequality among highly developed countries. The negative effects of high inequality have been elaborated in previous posts.

This high level of inequality is not the result of the natural and inevitable progress of healthy capitalism. The march of technology and globalization has contributed to the growth of inequality. But of equal or greater impact has been the steady advance of conservative economic policies designed to benefit business and capital at the expense of workers. We have tools to moderate the impact of all these influences.

The Federal Reserve has an objective to manage inflation (which also affects inequality) within upper and lower limits. Similarly, there is a lower and an upper limit to healthy inequality. Inequality is an issue which requires management and needs moderation.

We should have a government objective to keep inequality within a moderate range.



Then and Now–So Different!

August 12, 2017, Da Lat, Vietnam

My childhood family in High Point, North Carolina was poor. My parents were high school grads who found their way from farms 20 miles south, to this small textile and furniture town, and both got jobs at the most prominent textile factory, Adams Millis. All four kids worked on our small truck farm at the North end of town, and for neighbors–mowing lawns, harvesting tobacco, washing cars, stacking produce at the local grocery store, whatever we could find. Starting wage for me was $.15 per hour at age 12. When I entered college on a scholarship, my wages were $.75 per hour in the reference library.

My parents were never able to save. Even with the harvest of crops on our small farm, their combined wages were barely enough to keep us in a used pickup and a beat up car, plus clothing and essentials.

This may seem really rough, but that wasn’t how it felt in those days. We were poor, but clearly far from the poorest in town. There were many like us. We always had transportation, decent clothes, school supplies, and plenty of good food. Dad raised pigs and chickens for meat and mother canned a lot of the summer crops to last us through the winter. We felt happy and secure. We had “enough.”

To supplement his wages, my father sold produce off the back of his pickup truck, sometimes in the African American neighborhood of High Point–and there, we could see real poverty.

There are three important differences between then and now:

  1.  We had advantages
  2.  Times have changed
  3.  Inequality has risen sharply

First, as children of the 50s and 60s in the US, my family was white and we were WASPS. Our hard working parents went to church, didn’t drink, and didn’t use drugs. We had support from friends and relatives in a crime free environment. We had decent public schools. But the makeup of our nation today doesn’t look like High Point in the 60s and 70s. What about the millions today who are not white, not WASPS, may not have solid parents, live in real poverty far worse than we experienced, and may be surrounded by criminals, drugs, and little in the way of support?

Second, times have changed. Although we were poor, the reality is that we had little doubt about opportunity at that time in the US. When I graduated, I knew there would be many jobs available to me, and only worried about how to choose the best one. IBM offered me a job and Citibank another. I took banking. My brother took Southern Bell. My sister took Sears Roebuck, and the youngest took the Trammel Crow real estate firm in Texas. We all had the possibility of long term employment. We all had benefits including health insurance.

Our careers spanned a rapidly changing jobs era in America. These days, even if you have a college degree, it’s not that easy to find a good job, or to keep it. With the cost of education outpacing wages by a wide margin since the 70s, many more cannot afford college. Good luck if you can’t get through college today! The triple forces of Conservative economic policies since Reagan, globalization, and technology have eviserated manufacturing jobs, which Trump tries in vain to restore. There was opportunity and mobility then.

Third, as I argue in previous posts, inequality matters. Inequality has skyrocketed while mobility has simultaneously declined. Even in those days. we were painfully aware that there were social classes to which we were not privileged in our small town. You might ask, so what, everyone has someone above them in income and class, right? Yes, right, and we Liberals have no interest in completely eliminating inequality–only in significantly moderating it.  While inequality/status was a mild depressant then, it is now colored in bold terms all around us. In previous posts, I cite studies which show the damaging effects of high levels of inequality. Those include physical and mental health, life expectancy, crime, drugs, and slowed economic growth, plus the obvious misery of those at the bottom.

If only the US of today was committed to everyone “having enough” as a social contract. That’s not adequate, as I have argued above, but we don’t even have that. We have something like a philosophy of responsibility for yourself. Translation: If you are out of work, it is probably your own fault and we only help (a little) those who demonstrate that they try hard. They can only demonstrate trying hard by actually finding work. Thus the earned income tax credit–you can’t get support if you don’t have income.

Isn’t it obvious that we need a re-vitalized and active government (you can choose Federal, State or Local, it’s all government) to address the future of work, community, shared prosperity, and inequality? Is there an alternative?

How Americans Lose Faith in Government–an Example

July 31, 2017, Da Lat, Vietnam

This post illustrates why so many have lost confidence in government, using the example of a happenstance disclosure of  what I found to be disturbing information, with no justification available from the government.

Only as a result of the escalating feud between Congress and Russia, caused by Russian hacking and interference in our election, have we learned the size of the US Embassy and Consulate staff in Russia. Apparently the number is 1,119. Putin now retaliates against additional sanctions by requiring a 744 reduction to a new level of 455.

I’m shocked to see how many people we keep in just one country, just for the Embassy and Consulate. I can’t imagine how/why it is necessary for us to have this huge contingent of employees there. I’m sure there are also other government agencies represented there. And, that doesn’t count the many employees of  the State Department in the US who are devoted entirely to Russian relations.

A search on the internet provides little in the way of justification, nothing in the way of expense. I only find we have four offices there, and there are departments involved with business, education and culture, visas and US citizen services. I am pondering the annual cost of maintaining our properties there, plus the employment costs of 1,210 staff, the cost of expatriate salaries, health care,  housing and support, after recognizing that a number of employees are local hires. I would venture a guess that the cost of the  US Embassy and Consulates in Russia exceeds $100 million annually. I wouldn’t be surprised it it is more, and I wouldn’t be satisfied if it is half that, still a huge annual expense.

To me, this revelation is the kind of thing that causes so many Americans to lose total faith in government to use our tax money effectively and efficiently. It causes me to wonder how many other Embassies and Consulates in how many other countries may be overstaffed and/or inefficiently spending our tax dollars.

Maybe we really need all these services in Russia and all these employees and this huge expense. But I’d like to see the justification.  How many Americans would be comfortable that we really need more than 1,000 people and attendant expense to provide these services in just one nation? What if the NY Times or CNN brought this to the attention of the voters? President Trump could have provided such justification for his proposed cuts in the State Department, which were far less than that required now by Putin, as it relates to Russia only. If that was available, maybe I wouldn’t have such heartburn over seeing these numbers, almost by accident.

I recommend an annual analysis of every government program which can be isolated to a given purpose or country (e.g., State Department, Russia), if the annual expenditure exceeds a certain level. This should include costs along with performance and efficiency analysis.  Since so many programs are large, we could start with a hurdle of $100 million, and then lower it gradually in future years. I would recommend the information be provided to the public by the CBO, and renewal of such expenditures be required of Congress annually. I can’t imagine a business which wouldn’t conduct such an examination and justification annually.

I have been a consistent advocate for fixing government, not starving it. I believe our country needs strong institutions to assure our survival and advancement. I will continue to argue for that. But contrary to the depiction many Conservatives want to paint of us Liberals, I do not condone inefficiency and waste.

We need a better managed government, well managed and transparent to citizens–better than under Barack Obama, and definitely better than so far under Donald Trump.

Postscript Aug 12: Now President Trump praises Putin for reducing Embassy staff in Russia! If this kind of reduction properly right sizes the staff, why didn’t Trump do it?