Outsourcing to Robots

Farhad Manjoo asks, "Will Robots Steal Your Job?" and says, "You're highly educated. You make a lot of money. You should still be afraid."  This is a longstanding fear that increasing productivity will impoverish us all.  So far in the past century it has increased leisure time and raised living standards.  It is ironic that people are afraid that productivity growth could create massive unemployment AND that the growing future population of unemployed senior citizens is another future trend to be afraid of.  However, the fear of productivity is due to a serious potential problem: inequality.  The reason unemployment is a huge social problem is due to the inequality it creates and productivity growth does raise an important question:  Who will get the gains of the productivity increases?  Sometimes the gains of technological improvement go to labor (like in the past century), sometimes they go to the landowners (like agricultural improvements in past centuries), and sometimes they go to the owners of capital (like some kinds of industrialization which replaced skilled occupations with largely unskilled workers).  In the future, there is more potential for greater consumption to run up against inelastic natural resource constraints whether they are water, fossil fuels, or some mineral.  Then the gains could mainly go to the owners of scarce resources rather than to labor.  Intellectual property could create artificial scarcity which increases inequality. 
Productivity growth need not increase inequality.  The 1940s-1960s featured high productivity growth and high equality.  The 1970s-2000s featured lower productivity growth and higher inequality again. 

Impact of Trade W/ China On The US

“The China Syndrome: Local Labor Market Effects of Import Competition in the United States” (PDF) by David H. Autor, David Dorn, and Gordon H. Hanson. The Wall Street Journal
wrote about this and were widely interpreted as saying that trade with China has been bad for the US, but they didn't actually say that.  This is a case where a journalist wrote a story that is easy to misinterpret.  This is how they begin the story:

For years, economists have told Americans worried that cheap Chinese imports will kill jobs that the benefits of trade with China far outweigh its costs.
New research suggests the damage to the U.S. has been deeper than these economists have supposed. The study, conducted by a team of three economists, doesn't challenge the traditional view that trade is ultimately good for the economy. Workers who lose jobs do eventually find new work or retire, while the benefits from trade, such as lower prices, remain. 

I think that the WSJ intentionally made the research look provocative to make the story more interesting and it worked.  Yglesias:

I have to say that looking at the paper I don’t totally understand the fanfare the Wall Street Journal gave it. Here’s the abstract:

We analyze the effect of rising Chinese import competition between 1990 and 2007 on local U.S. labor markets, exploiting cross-market variation in import exposure stemming from initial differences in industry specialization while instrumenting for imports using changes in Chinese imports by industry to other high-income countries. Rising exposure increases unemployment, lowers labor force participation, and reduces wages in local labor markets. Conservatively, it explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment. Transfer benefits payments for unemployment, disability, retirement, and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers is one to two-thirds as large as U.S. gains from trade with China.

This is interesting and important work, but it doesn’t overturn David Ricardo or whatever’s in the introductory textbooks. It says that imports from China create a broad-based consumer surplus and concentrated losses for producers of import-competing goods. The interesting empirical finding here is that the scale of the impact is really large. Some countries (Iceland, Israel, Denmark) are small so it’s always been obvious that international trade is very important to them but the traditional analysis of postwar America was that international trade just wasn’t that big a deal for the United States. But China is a huge country and it’s growing rapidly, so the scale of the trade impacts is much larger than we’ve traditionally seen.

Peak Oil

Early Warning:

Following up on yesterday's post of global oil production per capita, the above graph shows oil consumption per capita for an illustrative selection of countries around the world (along with the world line in black for comparison).  You can see that the developed countries all had peak consumption in the 1970s, fell in the early 1980s, then were flat for a while and began declining again.  In Europe, that second decline began in the mid 90s and has been gradual.  In the US it started in 2005 and has been rather abrupt.

...To see the developing countries more clearly here's the same data with the y-axis blown up:

India, China, and Brazil have all been growing their per-capita consumption rapidly in recent years, unlike the West.  China and India still have considerable distance to go before reaching the world average, however.

Broadly speaking then, the developed countries have been cutting per-capita oil consumption and will be doing so further, in order to make room for consumption in the more rapidly growing economies of the developing world.  There are two ways for these cuts in consumption to happen: use oil more efficiently in the economy, or have less economy.  Since 2005, in the US, we are mainly taking the second approach.

 Econobrowser:

 Although it is true that global production did not fall between 2005 and 2010, it is also accurate to observe that it did not grow very much, rising only 2.2 million barrels/day (which represents 2.6% of 2005 levels) over these 5 years. Over these same 5 years, China increased its consumption by 2.5 mb/d. Thus, although the world did produce more, everybody in the world outside of China had to make do with less.

Total global oil production, in millions of barrels per day, annual 2002-2010 (data source: EIA).

...Suppose I was trying to convince you that you are a mortal being, and your counterargument was, "but that's what you said in 2005, and I didn't die then! You said it again in 2007 and 2009, and each time you were wrong. Why should I believe you this time?"
Perhaps acknowledging one's own mortality is a similar proposition to embracing the possibility that global oil production need not continue to rise forever.
In any case, I was not among those who claimed that the peak would arrive by Thanksgiving 2005, nor 2007, nor 2011. But I am among those who did claim, and still believe, that the slow rate of increase in annual oil production over the last 5 years has caused significant economic problems for countries like the United States.
Moreover, if having been wrong in the past were a valid reason to disregard everything someone says, it might be wise to ponder these words that Daniel Yergin wrote in 2005:

There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day -- from 85 million barrels per day to 101 million barrels a day -- a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.

Dissecting what went wrong with that prediction is a topic for another occasion. I believe it was based on a careful, thoughtful analysis, and provides an interesting case study in some of the challenges facing anybody who tries to make these kinds of predictions. But I do feel that the meme of "don't listen to the peak oil nuts, because they've always been wrong before" should have gotten a bit tiresome at this point. ...I submit that meeting the growing global demand for crude oil over the last five years has posed significant challenges for the world economy. And those who worry that the next 5-10 years might be like the last should not be dismissed as crackpots.

Industrial Policy Is About Picking Industries, Not Companies

Prestowitz: 
S+B: Starting with his role as an advisor to the secretary of commerce in the Reagan administration in the 1980s, and progressing to his current position as founder and president of the Economic Strategy Institute in Washington, D.C., Clyde Prestowitz has been a consistent voice on the importance of manufacturing in economic competitiveness....

PRESTOWITZ: ...There are two kinds of global companies. In the United States, the purpose of the corporation is primarily to provide optimal returns to shareholders. This leads to a focus on optimizing short-term results. In continental Europe and most of Asia, the state charters the corporation and gives it a lot of specific benefits; in exchange, the corporation provides benefits to society. This leads naturally to embracing a coherent industrial policy....

S+B: What do you mean by a coherent industrial policy?
PRESTOWITZ: There’s a lot of misunderstanding about this. It’s associated with pre–World War II Britain and France, whose governments supported particular companies as national champions. People assume it means having governments pick winners and losers.
Look instead at countries like Singapore, Sweden, Taiwan, Germany, Korea, Switzerland, Finland, and China. They’re all very different; some are democratic, others are authoritarian. The Finns and Swedes have strong labor unions, whereas unions in Taiwan and Singapore are weak. But all these countries are economically successful for the same reasons. First, their governments focus on being competitive by promoting selected high-value-added industries, with a long planning horizon. Second, they have a high level of coordination among the government, labor unions, and business management, in investment decisions, wages, and inflation rates. They don’t pick winning companies; instead, they build a consensus on what each of them has to do to contribute [to building a vibrant industry]. Compared to other countries that have taken a more laissez-faire approach, their performance is far superior.

Summers memo - Wikipedia, the free encyclopedia

Read the whole thing. It is remarkable ethics.

Wikipedia, the free encyclopedia: "I think the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that."

Manufacturing Is Key to Growth

Economist Debates:

Take the case of the Netherlands. Unbeknown to most people, it is world's third largest agricultural exporter, despite having little land (it has the world's fifth highest population density). This has been possible because the Dutch have 'industrialised' agriculture by, for example, deploying hydroponic agriculture (growing plants in water) that uses computer-controlled feeding of high-quality chemicals—something that would not have been possible if the Netherlands did not have some of the world's most advanced chemical and electronics industries. In contrast, despite being the world's second most high-tech exporter (measured by the share of high-tech products in manufactured exports), the Philippines has only $2,000 per person income because it makes those products with other people's technologies.

Ricardo Revisited?

NewAmerica.net, Baumol and Gomory:

In a world in which productivities are often not fixed by nature but are often acquired we have shown the following possibilities:

That the economic development of a trading partner can be harmful to the home country. Although the effect of that development starts good, it ends badly.
That there is a dominant and dominated relation possible between two countries, a relation that is good for the dominant one and bad for the dominated one.
That a country can attain a dominant position only by having an undeveloped trading partner. This can occur naturally if the trading partner is simply there in an underdeveloped state, or the underdevelopment can be brought about by mercantilist actions that destroy industries.
There is inherent conflict not only between a nation in a dominant position but between that dominant partner and the interests of a two-county world.
While a country cannot gain a dominant position by building up its industries, it can avoid a dominated position and assure a good outcome by developing a particular subset of its own industries and not allowing them to be destroyed.

It is possible that the United States and China were in the dominant and dominated position some time ago. We should recognize that China’s evolution away from that state can be harmful to the United States. Furthermore we can observe that China’s gain has been accompanied by the disappearance or at least decline of a number of our industries. We need to be cautious because, as these standard models show, there is a distinct possibility that this situation can even lead to significant loss through deindustrialization in an initially prosperous economy.

 There is a grain of truth here, but It isn't time to write of the Ricardian model.  In the Heckscher-Ohlin model, the 'dominant' country benefits from trading with 'dominated' countries because the capitalists get the benefits of cheap labor.  As productivity grows in 'dominated' countries, our capitalists have less advantage over them which would simply reduce trade if everything else were homogenous (which it is not), so there is no real problem in the Ricardian and Hechscher-Ohlin models.  The real potential problem is outside of those models.  The problem would be if the US specializes in industries which do not grow in productivity and/or demand in the future and the formerly 'dominated' countries do specialize in these industries.  China in particular is specializing in manufacturing which has traditionally been the sector with the very highest productivity growth, so that is a good sector to specialize in for developing future productivity and wealth and the US may lose out by losing relative manufacturing capacity to other countries.  The oil industry has been seeing declines in productivity for decades, but demand is price inelastic and is income elastic and demand grows as global incomes grow and so that sector has a bright future despite its declines in productivity.  The US used up most of our cheap oil a long time ago, and we have been a net importer for 40 years, so this is unlikely to be a bright spot for the US.