Every month, the benchmark nonfarm payroll employment numbers are reported by the U.S. government and every month Bill McBride at Calculated Risk puts out a comprehensive post analysing the figures. The post (or rather posts) invariably include the following two graphs (click on either graph for a larger image):
Both graphs suggest that there is something about the current recovery that is different; in other words, the jobs are just not coming back at the rate they used to after past recessions.
In 2011, a much-discussed short book by Erik Brynjolfsson and Andrew McAfee of MIT called “Race Against the Machine” was published. Most of the book was serialised in The Atlantic and you can read it here, here and here. In this book (basically an extended essay), three theses were floated as to what was taking place with employment. In short, we could be experiencing either a) a Great Recession, b) a Great Stagnation or c) a Great Restructuring.
The Great Recession thesis is that we are merely seeing an extended cycle: a typical balance-sheet recession after a bubble. Once banks, corporations and households have repaired their balance sheets, we will get back to business as usual. In closet support of this thesis, McBride has taken to linking his payroll posts to the graph below put together at the Oregon Office of Economic Analysis (an article providing background to the chart is here). The chart (click for larger image) shows the hard road to recovery after a financial crisis; but the main point is that there is—eventually—a restoration of normality (except, perhaps, in the special case of demographically challenged Japan).
The Great Stagnation thesis is that advanced by Tyler Cowen in his book “The Great Stagnation” and most recently by the esteemed growth economist Robert Gordon in a much-discussed paper published in September 2011 (here). They argue that all the low-hanging fruit of easy technology driven productivity gains have been used up and so we should get used to lacklustre growth from now onward.
Brynjolfsson and McAfee, in contrast, argue that we are purely going through a Great Restructuring of Schumpeter-style creative destruction brought on by the digital revolution. The book has a relatively optimistic conclusion that is missing in The Atlantic articles; that is, while we are in for some relatively short-term employment market mayhem, the new world promises both unparalleled opportunities for entrepreneurialism and what they call ‘combinatorial innovation’ between man and machines; basically, after a period of turmoil, the majority should emerge richer. The darker side of this thesis—which they do consider but don’t run with—is that inequality explodes and demand is destroyed as the masses become destitute (Marxism redux).
Various journalists have picked over these ideas, but by far the general conclusion has been that we should all look on the bright side of life. Jeremy Warner, writing in The Telegraph is typical:
You have to be of a peculiarly pessimistic frame of mind to think the march of technology is going to end up doing us more harm than good. That’s not been the experience to date.
Given that this blog is titled “The Rational Pessimist”, you would be forgiven for thinking that I would immediately assume a counter position to Warner. But my argument is a little more subtle. I think an extremely high probability risk exists that climate change will transform our lives (or at the very least our children’s lives) going forward. Further, resource constraints (including energy) pose a major risk.
As for technology, in my opinion a significant risk exists that technology continues to do what it has been doing recently; that is, a mix and match of employment destruction and median income reduction. Moreover, I think workers in the professions should not be too sanguine that they can out-run the median: the fulcrum point between standard-of-living winners and losses is going to rise ever higher in percentile terms—in short, the winners enclosure is growing ever smaller even as it gets fabulously richer.
So, unlike Warner, I don’t think people should make life choices based on the assumption that we are just experiencing a re-run of the 1970s: when things looked terrible but then got better.
After another five years or so, we will get some answers to this debate. For example, in the Oregon Office of Economic Analysis chart above, employment will break to a significant new low when the U.S. hits a new recession (which none of the other comparative countries in the chart have witnessed) or it won’t. If you have placed your spending and debt decisions on the optimistic outcome and the pessimistic outcome arrives, then what are the implications for your household finances?
The prudent man and woman should make decisions based in terms of risk and hedge their bets; and the big risk now is that the future will, in a variety of ways, look nothing like the past.