Saturday, July 20, 2013

The River of Purchasing Power Dries Up at Detroit

Frank Pasquale

If only Detroit were a big bank, Treasury officials would be working round the clock this weekend to save it. Alas, this city is no Citi. It lacks a "winning business model" (like lobbying and bonuses for key federal officials). So municipal bankruptcy is on the horizon.

Detroit was chronically mismanaged, and the victim of unforgiving political geography. But the decline of jobs there is also a bellwether for the rest of the country. As Juan Cole observes,
This rise of [robotized manufacturing] violates the deal that the capitalists made with American consumers after the great Depression, which is that they would provide people with well-paying jobs and the workers in turn would buy the commodities the factories produced, in a cycle of consumerism. If the goods can be produced without many workers, and if the workers then end up suffering long-term unemployment (as Detroit does), then who will buy the consumer goods? Capitalism can survive one Detroit, but what if we are heading toward having quite a few of them?
Martin Ford has made a similar point in his book "The Lights in the Tunnel." Some powerful, clarifying metaphors were at the heart of Adam Smith's and David Ricardo's work. Although they'd never be published in a contemporary economics journal, that style of thought is particularly useful now. Ford revives it with this counterintuitive characterization of overly capital-intensive industries as free riders:

Imagine that the mass market consists of a “river” of consumer purchasing power. Along the banks of this river are located industries of all types. When an industry sells a product or service to consumers in the market, it pumps purchasing power from the river. An industry also pumps purchasing power back into the river in two primary ways: first it pays salaries and wages to workers, and second as technology advances, the prices that the industry charges fall and this results in more money in consumers’ pockets. . .
At some point, the industries on the banks of our river will become too capital intensive (the machines they employ will begin to run themselves). Once this happens, they will collectively begin to pump more purchasing power from the river than they return to it. The river will begin to run dry. . . . Economists do not consider the market itself to be a public resource. However, I will argue that the market (or the collective purchasing power of consumers) is really the ultimate public resource.
Mainstream economists are prone to celebrate any reduction in the cost of a factor of production, including labor. But at some point the basic idea animating the "paradox of thrift" must be reckoned with. Endlessly pushing for lower wages only sets us up for a crisis of overproduction (and taxpayers subsidizing underpaid workers). Political economist Mark Blyth has imagined a future where only 15% of working age adults are needed to operate the machines that keep society running. Are the rest, "zero-marginal product" workers, to be consigned to zero income?

If many workers are indeed becoming obsolete, what should be done? First, there is a moral imperative to shift what work remains to assure the universal destination of a basic income sufficient for food, housing, communication, education, and health security. As long as the the richest 300 people on earth own more than the poorest 3 billion, there is certainly work to be done there. Cole offers a hopeful vision of where the bounty of automation may take us:
With robot labor, cheap wind and solar power, and a shrinking global population, post-2050 human beings could have universally high standards of living. They could put their energies into software creation, biotech, and artistic creativity, which are all sustainable. The stipend generated by robot labor would be a basic income for everyone, but they’d all be free to see if they could generate further income from entrepreneurship or creativity. And that everyone had a basic level of income would ensure that there were buyers for the extra goods or services.
That may sound a bit utopian. But even the editor of the Harvard Business Review is urging companies to pay workers more. Consider the alternative: what Frances Coppola calls a "demand-constrained economy:"
The efficiency gains from automating production tend to create an abundance of products, which forces down prices. This sounds like a good thing: if goods and services are cheap and abundant, people can have whatever they want, can't they? Well, not if they are unemployed and have no unearned income. It is all too easy to foresee a nightmare future in which people who have been supplanted by robots scratch out a living from subsistence farming on motorway verges (all other land being farmed by robots), while lorries carrying products they cannot afford to buy flash past on the way to the stores that only those lucky enough to have jobs frequent.
Coppola's "nightmare future" contains the seeds of another source of economic "growth:" namely, the rise of "guard labor" to stabilize distribution patterns. Homeland security contractor budgets have grown so fast that even top intelligence officials can’t get a handle on the total amount spent each year. Having catalyzed innovations like interchangeable parts and the internet, security spending now underwrites a de facto American industrial policy of developing the surveillance and risk classification industries.

In choices small and large, our institutions "bet on" (and make more likely) one future or another. Appointing Janet Napolitano as head of the UC system may well push us in the "guard labor" direction; a university president like Donna Shalala does more to promote Cole's vision. As cities like Detroit struggle, the wealthier suburbs around them need to consider: do we band together to try to build opportunity for future generations? Or do we withdraw into enclaves and neglect to provide even basic resources to those on the outside?

Image Credit: Diego Rivera, via Jason Paris.